The best way to start preparing for your legacy is to learn the most important estate planning terminology. Whether you're planning for yourself, your spouse, or navigating through a relative's estate, it can feel overwhelming at first. But fear not. By the end of this article, you'll have a much clearer picture of what estate planning is all about.
After all, anything that may at first seem difficult gets easier with knowledge, application, and practice. So let's decode the key terms of estate planning. These definitions will prepare you for taking the proper steps to ensure your beneficiaries will be in good hands.
Estate Planning Terminology Essentials
Estate plan: A comprehensive and legally structured arrangement that outlines an individual's or entity's wishes and instructions regarding the management, distribution, and disposal of their assets, properties, and liabilities after their death. In simpler words, it's a set of documents that ensure your assets get into the right hands after you die. Commonly included documents are a last will and testament, power of attorney, advance directive, and trust(s). Learn all the estate planning basics here.
Will: A document that explicitly outlines a person's preferences for how their assets are distributed after death. It can also designate guardians for one's children and desired end-of-life arrangements. Learn about the differences between wills vs trusts here.
Durable general power of attorney (POA): A legal document that grants someone the authority to make a wide range of financial and legal decisions on behalf of another person. They permit actions on behalf of a person who has become incapacitated or is unable to make decisions.
Advance health care directive: This is a legal document that outlines an individual's preferences and instructions for medical treatment and care in case of illness or incapacitation. It acts as a guideline on how to handle their healthcare needs if they can no longer able to communicate. Instructions can include organ donation, life support, final-care funding, and other end-of-life wishes. Equivalent terms include living will, advance directive, medical directive, personal directive, and advance decision.
Trust: A legal fiduciary relationship that allows a third party to manage assets for the benefit of beneficiaries. The terms are set by the creator of the trust. Trusts can help save time, avoid probate and court fees, and reduce estate taxes.
Even More Estate Planning Terminology
Estate tax: Tax imposed on the value of a person's assets and property at the time of their death. It is to be paid by the estate before assets are distributed to heirs and beneficiaries. Specific tax rates and exemptions can vary by jurisdiction. See historical federal estate tax exemption amounts here.
Gift tax: A tax on the transfer of any type of property (including money) by one individual to another while receiving nothing, or less than full value, in return. See the historical gift tax exclusion amounts here.
Legacy planning: Similar to estate planning, the focus of legacy planning is to lay out future arrangements in the event of one’s death or incapacitation. Where it differs is in its personal nature surrounding one's values and morals. For example, a legacy plan can specify arrangements for charitable giving. It can also address family-related concerns such as education, childcare, and business succession. A legacy plan is typically set up in conjunction with an estate plan.
Irrevocable Trust: A permanent legal arrangement where the creator relinquishes control over assets and cannot easily alter or revoke the trust's terms without beneficiary consent.
Revocable trust: A flexible legal arrangement where the creator can modify or dissolve the trust and retain control over assets during their lifetime.
Personal property: Refers to movable assets that individuals own. Examples of personal property include furniture, clothing, electronics, vehicles, and other tangible possessions excluding real estate or real property.
Probate: The legal process of validating a will, settling debts, and distributing a deceased person's assets under court supervision. It can be time consuming, costly, and public.
Schedule of assets: A detailed list of an individual's properties, investments, and other valuable items. It is beneficial in legal and financial contexts such as estate planning or probate proceedings.
Additional Estate Planning Terms You Should Know
Now that you know the most commonly used terms in estate planning, let's learn some more.
Annuity: A financial product that provides regular payments to an individual for a specified period. Terms dictate if the money pays out immediately or in the future. Annuities are often a form of retirement income or an investment strategy with fixed or variable terms. Keep in mind that annuities are illiquid and are subject to withdrawal penalties. Read the 5 benefits of annuities.
Codicil: Legal document used to make amendments, additions, or changes to an existing will, while keeping the rest of the will intact.
Conservatorship: A legal arrangement in which a court appoints a responsible individual or entity to manage the personal and financial affairs of someone who is unable to do so themselves due to incapacity or disability. Britney Spears made headlines when details of her conservatorship came to light in the documentary Britney vs Spears. She was ultimately freed from it in late 2021. Not all conservatorships have such controversial and negative undertones, however. They can cover people of all ages including children with special needs or adults with certain mental illnesses.
Custodial account: A financial account created for a minor that is managed by a designated adult custodian. The adult has full control until the minor reaches a certain age or becomes legally able to manage it themselves.
GRAT: A Grantor Retained Annuity Trust, is a financial planning tool that aims to reduce estate tax liabilities. A GRAT allows the grantor to transfer assets while retaining regular annuity payments for a specified period.
People And Entity Related Estate Planning Terminology
Next, let's explore estate planning terminology that revolves around people, titles, entities, and the roles they play.
Beneficiary: A person or entity designated to receive assets, benefits, or rights from a trust, will, insurance policy, or other financial arrangement. A beneficiary, aka an heir, may inherit cash, assets, or both. Note: you can alter your list of beneficiaries at any time if the need arises. Just be ready to file the proper paperwork to make any updates official.
Conservator: A court-appointed individual or entity responsible for managing the affairs and assets of someone who is unable to manage their own affairs due to incapacity or disability.
Decedent: An individual who has passed away.
Fiduciary: A person or entity entrusted with a legal and ethical duty to act in the best interests of another party. A fiduciary is responsible for managing assets or making decisions on their behalf. Some examples of people with fiduciary roles include lawyers, financial advisors, insurance agents, executors, and accountants.
Grantor: A grantor is a person who establishes and funds a trust. They transfer assets and specify the terms of how they should be managed and distributed by a trustee for the benefit of beneficiaries. Other equivalent terms for grantor include trustor, settlor, trust creator, creator, and trustmaker.
Trustor: An individual who creates a trust and transfers assets into it to benefit beneficiaries. See grantor above for synonyms.
Trustee: Person or entity responsible for managing and overseeing the assets held within a trust. A trustee ensures a trust's assets are used for the benefit of the beneficiaries according to the trust's terms.
Some Final Terms To Know On Estate Plans
Here are some final terms to round off our glossary of estate planning terminology.
Intestate (Intestacy): This refers to the situation where a person dies without leaving behind a valid will. As a result, the distribution of their assets will be handled according to the inheritance laws in their jurisdiction.
Living trust: A legal arrangement that allows an individual to transfer ownership of their assets into a trust during their lifetime. It offers the flexibility to manage and use the assets as the grantor (creator of the trust) sees fit. This arrangement also facilitates the efficient distribution of assets to beneficiaries after the grantor's death, bypassing the probate process.
Joint tenancy: A form of property ownership where two or more individuals hold equal shares in a property. If one owner passes away, their share automatically transfers to the surviving owner(s).
Special needs trust: A legal arrangement designed to manage assets for the benefit of a person with disabilities. It is designed to ensure their financial well-being without jeopardizing their eligibility for government assistance programs.
Next Steps For Estate Planning
Congratulations on learning this thorough list of estate planning terminology. Having a solid grasp of these important definitions will make the next steps of your legacy planning that much easier.
Estate Planning offers a comprehensive framework to protect your assets and provide for your loved ones after you're gone. In addition, having an estate plan can help you can rest easier.
Address your financial, legal, and healthcare matters proactively. Estate planning provides peace of mind and a valuable legacy for generations to come.
If you enjoyed this article on estate planning terminology, here are some additional articles to explore.
- How Do Millionaires And Billionaires Avoid Estate Taxes?
- Three Things I Learned From My Estate Planning Lawyer Everyone Should Do
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This glossary of essential estate planning terminology is a Financialsamurai.com original article. Thanks for reading!
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