Estate Planning: A Terminology Deep Dive
Estate planning documents are chockfull of terms and concepts that may feel archaic and convoluted.
They are used because they often have very specific legal definitions and are “terms of art” that courts are more likely to accept as intended in your documents. That means there will be less confusion should a question be raised as to interpretation of your documents, which ultimately means that your intent is more likely to be carried out with less cost and bureaucracy.
Let’s take a stab at demystifying some of the concepts you may read in your estate plan. As always, if you need specific advice as to your own circumstances, speak with a trusted lawyer.
A-B Trust
An A-B trust is a type of living trust that is jointly created by a married couple. To be distinguished from a disclaimer trust, in an A-B trust the trust must split into two parts on the first spouse’s death – the “A” trust for the surviving spouse (also known as the “survivor’s trust), and the “B” trust consisting of the deceased spouse’s portion of the estate (also known as the bypass trust or decedent’s trust). After the death of the surviving spouse, the remaining assets of both trusts generally pass to the heirs and beneficiaries. This type of trust is generally used to minimize estate taxes when other mechanisms to do so are not as viable. It is generally not widely used because the “B” trust becomes irrevocable after the first spouse’s death, the surviving spouse will often have very limited access and control over those assets, and other options often exist to minimize estate taxes.
Agent
One of the roles in an effective estate plan, the agent (sometimes also called an attorney-in-fact) is the person you name in a power of attorney to act on your behalf.
Attorney in fact
See “Agent”
Beneficiary
The person you name in a will or a trust to receive your property or income at death is a beneficiary.
Bypass trust
Also sometimes referred to as a “decedent’s trust”, this type of trust is an irrevocable trust created after the death of a spouse as part of an A-B Trust.
Codicil
This is a legal document that amends a will and is usually read together with the original will.
Conservator
A person appointed by a court on behalf of an incapacitated person to manage their property and/or the person themselves is a conservator.
Decedent
A dead person.
Decedent’s Trust
Also sometimes referred to as a “bypass trust”, this type of trust is an irrevocable trust created after the death of a spouse as part of an A-B Trust.
Disclaimer
The legal process by which a person waives their inheritance so that it passes to others according to the terms of a will, trust, or under state law.
Disclaimer Trust
A disclaimer trust is a type of living trust that is jointly created by a married couple. Upon the death of the first spouse, the survivor has the option to disclaim ownership of some assets – to give up part of the estate – and have those assets be split into a separate trust. To distinguish from an A-B trust, this type of trust merely gives the survivor the option to split the estate rather than requiring that division.
Estate Tax
The Federal government, and some states, impose a tax on the value of what gets transferred on death. This estate tax, also known as a probate tax, is a tax against the dead person’s assets, and so results in less transferring to your heirs and beneficiaries. California does not have its own estate tax.
Estate Tax Exemption Amount
See “Unified Tax Credit”
Executor
The person you name in your will to carry out your wishes is your executor. California law allows you to name pretty much whomever you like as long as they are 18 or older. Along with naming an executor, you would normally name one or more successor executors – people who would step in if the primary person could not serve. Naming young adults is generally not ideal for these roles. Naming “co” roles (two people to act together) can likewise be problematic. We are also not fans of naming banks for these roles, although a private fiduciary can be uniquely equipped to handle the job. Whomever you name, they should be responsible people who know their limits, who will seek advice when necessary, and question such advice when doubtful. Their role kicks in during the worst of times, so they need to be able to work even while grieving, stressed, and under pressure from family and creditors. Clients often name as executor the same person they name as their overall successor trustee in their trust (when they have a trust).
Fiduciary
A person, or a company, named to manage assets or make decisions. They include trustees, executors, and agents under powers of attorney.
Funding a Trust
When you sign your new trust, your job isn’t quite over yet. Since trusts generally govern only the assets that are properly titled in its name, you must still take steps to transfer your assets to your trust if you want those assets to be governed by the trust rules and avoid probate. This process is called “funding”. For example, you would go to your bank and retitle your account into the name of your trust.
Grantor
Also sometimes referred to as the “settlor” or the “trustor”, this is the person who created the trust and put assets into the trust. When you are our client and ask us to prepare for you an estate plan that includes a trust, you are the settlor/grantor/trustor.
Guardian
Generally a person named to act for a minor, making decisions on their behalf and managing their property.
Gift Tax
This is a federal tax that applies if you transfer property to another person and get nothing (or less than full value) in return. It is a tax on you – the person making the gift. The IRS provides for an annual exclusion amount that varies year to year – this is the amount every person is allowed to give annually an unlimited number of recipients without any federal gift tax and without any reporting requirements.
Heir
When there is no will or trust, or when these documents fail, this is the person or class of people entitled to receive assets from your estate under state law.
Health Care Directive
A document that names an agent to make decision about your health, either immediately or upon your incapacity. It can address everything from choices about pain medication, whether you want information shared with your family, to when life sustaining measures should be discontinued. This document is sometimes called a power of attorney for healthcare, or a living will.
Intestate Succession
This is the way state law dictates your assets should be distributed if you die without a will or trust.
Irrevocable Trust
This is a type of trust that once created, generally cannot be amended or revoked by the grantor (the person creating it). The only exceptions to this rule are usually very narrow changes done with court authorization, or through specialized powers granted under state law.
No Contest Clause
A provision in a will or a trust that limits or prevents the ability of someone who is a beneficiary to challenge the document.
Portability
In estate tax, this is a process used by a surviving spouse to use their deceased spouse’s unused unified tax credit to help reduce or eliminate taxes.
Pour Over Will
This is a type of will that is normally used with a revocable living trust to pass all your property to your trust at death.
Power of Appointment
This is a power you give to someone else (called the “holder”), usually in your trust or will, to appoint, or give, your assets to a class of people upon a certain eventuality. If the power is broad enough, the value of the property may be subject to federal estate tax as part of the holder’s gross estate.
Power of Attorney
Simply stated, a power of attorney is a legal document that gives someone else (usually called an agent, or an attorney-in-fact) the power to act on your behalf. For a more detailed discussion, see the blog post What documents are usually included in an estate plan? (wait for live to link post)
Private Fiduciary
A fiduciary in the context of estate planning is someone you name to take charge of your finances and property when you can’t do it yourself. They can be family members or friends. A “private fiduciary”, on the other hand, is a professional you name to that role. They are regulated under California law, and generally must have a license that requires them to have passed a state exam and background check, met specific education or training requirements, and adherence to ongoing education, reporting, and ethical requirements. Attorneys and CPA can serve in this capacity, and they do not require a separate license.
Probate
The court process that starts with the determination if a will is valid upon your death (or handles the case where you die without a will) and culminates in distribution of your property to the rightful heirs and beneficiaries, is called probate. Through numerous steps in between, the court appoints an executor (or an administrator if there is no will), figures out who are your heir or beneficiaries, determines what your estate is worth, and confirms that all your debts have been taken care of. It is generally a very expensive and time-consuming process easily avoided with a properly drafted trust.
Probate Tax
See “Estate Tax”
Residue
Whatever property is left in your estate after making special gifts of specific property and money, and after paying your taxes and expenses, is called the residue.
Settlor
Also sometimes referred to as the “grantor” or the “trustor”, this is the person who created (or “settled”) the trust. When you are our client and ask us to prepare for you an estate plan that includes a trust, you are the settlor/grantor/trustor.
Special Needs Trust
Trusts come in various flavors, and one unique type is the special needs trust, also known as an SNT. The SNT allows a disabled person who is eligible for public assistance benefits (like Medi-Cal) to maintain such eligibility despite having assets that would otherwise make them ineligible for those benefits. If you plan to leave an inheritance to a person who is receiving public assistance benefits, or is likely to receive such assistance, we will discuss drafting a SNT into your will or living trust so that upon your death, that inheritance will remain protected.
Spendthrift Clause
In a trust, this provision is intended to generally limit the ability of creditors from reaching money that you left to your beneficiaries. For instance, if you left inheritance to your child, and upon your death your child was going through a messy divorce, this provision would help the trustee direct the money for the needs of your child, rather than to the soon-to-be-ex-spouse. The provision would also help prevent your child from using their inheritance as security to get loans and prevent their creditors from putting liens or judgments on the trust assets.
Tangible Personal Property
Your property that can be touched – like furniture, household possession, and art – is tangible person property.
Testamentary Trust
As opposed to a living trust, which is created while you are alive, a testamentary trust gets created only on your death. The provisions of this type of trust are written into your will, rather then in a separate trust instrument and go into effect only after probating your will.
Trust
Very broadly speaking, a trust is a fiduciary relationship usually formed in writing where you give another party (known as a trustee) the right to hold title to property and assets for the benefit of another. Trusts can generally be revocable, or irrevocable. The “classic” trust created as part of an estate plan is usually a revocable living trust. For a more detailed discussion, see the blog post What documents are usually included in an estate plan? (wait for live to link post)
Trustee
The person named in a trust to follow the directions laid out in that trust is the trustee. In a living trust, normally you name yourself (if married, together with a spouse) to act as such trustee. Upon incapacity or death, the role then passes to a successor trustee that you also often name in advance. The trustee has a multitude of roles. They act as a fiduciary, ensure that the trust rules are followed, account for and invest the property and funds in the trust, ensure that those assets are used for the rightful beneficiaries according to the trust rules, keep records of transactions, make decisions and use their discretion within the limits set out by the trust so that they are aligned with your wishes, follow the law as to required notices and filings, and account to – and communicate with - beneficiaries. We usually have the same thoughts as to who is best as a successor trustee, as we do for naming an executor, and indeed they are often the same people – “co” trustees are generally to be avoided, as are bank and similar institutions, although private fiduciaries can work well. They likewise should be responsible people who know their limits, who will seek advice when necessary, and question such advice when doubtful. They should be able to work even while grieving, stressed, and under pressure from family and creditors.
Trustor
Also sometimes referred to as the “grantor” or the “settlor”, this is the person who created the trust. When you are our client and ask us to prepare for you an estate plan that includes a trust, you are the settlor/grantor/trustor.
Unified Tax Credit
Although there is a federal estate tax imposed on transferring assets at death, and a federal gift tax imposed on transferring assets while you are alive, there is a corresponding dollar amount that you can give while you are alive and at death before any tax applies. The unified tax credit combines these two concepts and is sometimes known as the estate tax exemption amount.
Will
In its most basic form, a will is a document that meets very specific state legal requirements for the passing of your property at death. For a more detailed discussion, see the blog post Decoding Your Estate Plan.