Estate Planning Glossary
A will, also referred to as a testament, is a document by which a person indicates how their estate is to be distributed upon their death. The real and personal property a person owns makes up their estate.
A medical directive is a legal document that explains a person’s wishes regarding medical treatment in the event they become incompetent or unable to communicate. A medical directive is also called a living will because it is executed with the formalities necessary for a will.
A trust is an asset-management device in which an individual (the Grantor) conveys specific property to another person (the trustee or administrator) who then holds and controls the asset for the benefit of a third party (the beneficiary). Trusts may be set up to benefit individuals or entities, such as schools or charities. The rights and obligations of the trustee and beneficiaries are set forth in a written trust instrument. A trust is referred to as revocable when the Grantor reserves the right to terminate the trust and recover its property at any time. Irrevocable trusts cannot be terminated by the Grantor once created. In most states, trusts are deemed irrevocable unless the Grantor indicates otherwise.
An estate tax, also known as a death tax, is a tax imposed on property that is transferred by will or by intestate succession (laws that apply to property distribution when an individual dies without a valid will). In 2001 President Bush passed the Economic Growth and Tax Relief Reconciliation Act, which resulted in sweeping but impermanent changes in federal tax law. The Act is scheduled to be repealed at the end of the year 2010, but President Bush has already promised that he will seek to make its provisions permanent. An estate planning attorney can help clients anticipate and plan for changes under the 2001 Act.
Estate taxes, otherwise known as death taxes, are imposed on a decedent’s estate both at the federal and state levels. An estate planning attorney can assist in reducing estate-tax liability through the preparation of wills, trusts, insurance policies, and other legal arrangements.
A guardian is a person appointed by the court who is given the legal authority and assigned a duty to care for another’s person, affairs, and sometimes property. A guardianship usually arises because an individual is unable to care for him/herself due to infancy, incapacity, or disability.
A conservator is a person appointed by a court to manage the estate or affairs of someone who is legally incapable of doing so.
A Nuptial Agreement is an agreement entered into between a man and woman in contemplation of marriage. A Nuptial Agreement usually addresses the property acquired by each before and during marriage and lists the rights each will have to that property in the event of death or divorce. A Pre-Nuptial Agreement is entered into prior to marriage. A Post-Nuptial Agreement is a contract entered into between a husband and wife after marriage and generally involves the parties’ rights to property. Nuptial Agreements are no longer exclusively for the rich and famous. There are many reasons and situations in which Nuptial Agreements may be appropriate, such as protecting a family business, protecting assets from future claims, and providing support for a spouse in need. A legal advisor can provide couples with a framework for discussing the economics of a marriage and can help them in deciding if their marriage would benefit from a Nuptial Agreement.
A power of attorney is a legal document that grants someone the authority to act as agent for a person who is unable to care for him or herself (‘Grantor’). A medical power of attorney allows a third party to make healthcare decisions for the Grantor. A power of attorney that authorizes an agent to handle business transactions on behalf of the Grantor is usually referred to as a general power of attorney. A durable power of attorney is one that remains in effect even after the grantor becomes incompetent. In Michigan, Medical Powers of Attorney are revocable as long as the Grantor is competent.
A trust is revocable where by the Grantor reserves the right to terminate the trust at any time and recover the trust property and any undistributed income. Revocable living trusts can be a useful estate planning tool in that they may be used to bypass the probate process if properly drafted. It is important to note that only property that is titled in a trust will avoid probate. Revocable trusts also offer more privacy than Wills because the trust usually do not become public records at the Grantor’s death, unlike the case with Wills.
A gift tax is a tax imposed on an individual (the donor) who transfers property gratuitously and voluntarily. Estate planning attorneys can help clients leverage their gift-giving ability in such a way as to minimize transfer taxes imposed on the gifts.
Administration of a person’s estate occurs after the person dies. It refers to the process by which the decedent’s property is collected, maintained, and distributed among heirs, beneficiaries, and creditors. The property is distributed according to the decedent’s wishes as expressed in a will or through intestate succession law if there is no will. After a person dies, an estate is opened by any interested person by filing an application to administer the estate. The probate court then appoints an estate representative (also known as executor or fiduciary), who is responsible for administering the decedent’s estate and accounting to the court for that administration.
A trustee is appointed to administer the business affairs of a trust, also referred to as managing or supervising a trust. A trustee has the responsibility to reasonably handle a trust’s affairs in the best interests of its beneficiaries. A trustee’s powers include some of the following powers:
A private foundation is a fund established and supported privately rather than publicly. They usually exist to advance charitable or educational purposes, and are generally exempt from taxation.
A family limited liability company is a limited partnership that exists between family members. A partnership is where two or more persons jointly own and carry on a business for profit. A limited partnership allows for a hierarchical structure with two types of partners. General partners are those who manage the day-to-day operations of the company, and are personally liable for the company’s debts. On the other hand, limited partners have very little power or authority in running the business, but are liable only for the amount of their investment.
Estate planners can assist clients who wish to pass a family business to their children in saving taxes when doing so. A common estate planning device is the family limited partnership, which may help achieve significant estate and gift tax savings for donors. When a parent establishes a partnership, he/she receives partnership interests in exchange for tax-free contribution of property to the partnership. This type of organization not only achieves significant tax savings for the parent, but allows the parent to retain control over the underlying assets and distribution of benefits to the children (donees).
Elder law refers to the part of the law that deals w/ issues affecting the elderly. These include such issues as estate planning, retirement benefits, social security, age discrimination, and healthcare.
Less common situations may arise that require special arrangements in terms of estate planning. Unmarried couples must take extra steps to ensure their testamentary wishes are fulfilled because the law doesn’t provide them with the same protections it provides to married couples. These same precautions apply also to same-sex partners. For example, under intestacy laws, a surviving spouse will automatically receive a portion of the deceased spouse’s estate, even if his/her spouse died without leaving a will. But this same protection is not provided to unmarred couples, who instead must provide for this in a will, trust, or other contractual arrangement that lists the rights and responsibilities of each partner (i.e. cohabitation agreements). Unmarried couples would also benefit from using beneficiary designations (such as in life insurance policy, IRA, bank accounts) and other nonprobate arrangements as a means of providing financial security for the surviving spouse. The benefit here is that the property transfers automatically upon death, thus preventing adverse relatives from interfering with property distribution. Other legal devices set up to protect domestic partners’ rights are the mutual durable and medical powers of attorney and mutual guardianships. The durable ensures that if one partner for whatever reason becomes incapable of handling his/her business affairs, the other partner is the only individual designated with the authority to look after those duties. The medical power of attorney works the same way, but it applies to the authority to make medical decisions on behalf of a sick partner. Mutual guardianships ensure that if one partner becomes sick, the other one can take of him/her.
On of the goals of special needs trust is to allow parents of disabled children to ensure their children are take care of after the parents are deceased. A special needs trust often enables the Grantor to appoint a trustee to hold property for the special needs of the disabled child and without disqualifying him or her from government programs. To receive Social Security Administration’s Supplemental Security Income Benefits ("SSI"), a disabled adult cannot hold more than $2000.00 in assets excluding an automobile and a home. SSI benefits must be spent on food, shelter, and clothing expenses and are usually around $400.00 a month. To prevent disqualifying a disabled person from certain government benefits such as Medicare and SSI the beneficiary is not required by law to exceed certain asset and income benefits. A Special Needs Trust prevents problems that could occur by giving a family member, friend, or relative assets intended for the care of the disabled person. A special needs trust also ensures that your disabled child is taken care of and the money is spent on the disabled child after you are know longer able to. The special needs trust lets SSI benefits pay for food, clothing, and shelter so that the funds in the trust can be used to enrich the disabled child’s life. The special needs trust funds could be used for vacations, video games, grooming supplies, etc. It is important to choose a trustee that you feel will adhere to the requirements of the trust and take good care of your disabled child. A special needs trust can be funded through a will or gifts from relatives and friends directly to the trust instead of to the disabled child to prevent disqualification for SSI benefits. Special needs trust money can also be spent for final funeral and burial expenses.
Estate planning attorneys create strategic plan developments that are specifically designed to meet each client’s particular needs and circumstances. Some examples of circumstances that may benefit from strategic planning include large estates. Individuals with substantial assets should look into tax planning in order to minimize or eliminate estate taxes upon death. Older couples, who are well established and whose children are all grown up, should utilize strategic planning in order to ensure that the surviving spouse is provided with financial security in his/her remaining years. Strategic planning also will ensure that the rights and testamentary wishes of unmarried couples, including same-sex partners, are protected and followed at death. These are just a few examples of the type of client-specific strategic plan developments estate that planning attorneys engage in.
Giving to charity not only lends a helping hand to important causes, but it can also provide clients with tax-saving opportunities. In order to qualify for tax deductions, the Internal Revenue Service requires that charitable gifts be made to organizations that operate for religious, charitable, or educational purposes. Charitable transfers can be made either during one’s lifetime or upon death. Transfer upon death bypass probate and go directly to the designated charity. Both types of transfers reduce one’s estate, thereby reducing estate taxes. Lifetime charitable transfers have the added benefit of income tax deduction. Those who have substantial assets to donate may want to think about setting up a charitable trust. This option allows the donor to retain the right to use the gifted asset or income from it until death. In a charitable trust, the charity is the trustee of the trust, and thus manages and invests property contained therein to produce income for the donor or any designated beneficiaries. Pooled income trusts are designed especially for those individuals who are of modest means but who still wish to donate to charity. The charity itself sets up this type of trust. It accepts donations from anyone who wishes to donate and pools them into one big fund. The charity then invests the pooled donations in order to provide income for its donors, similar to a mutual fund.