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Estate Planning Terms You Need to Know

The first step in planning for what will happen to your assets when you die is mastering some key estate planning terminology and concepts. Here, the Texas Society of CPAs offers a brief explanation of some of the most frequently used estate planning terms.

ADMINISTRATOR - The individual or institution appointed by the probate court to oversee the settlement of the estate of a person who has died without a will.

BENEFICIARY - An individual designated to receive the principal and or income of an estate or trust.

BEQUEST
- Property given as a gift under the terms of a will.

CODICIL – A properly signed, written addition or other change to an existing will.

DURABLE POWER OF ATTORNEY – A written legal document that allows an individual to designate another person to act on his or her behalf during the creator’s lifetime. Most powers of attorney grant powers to deal with the person’s property. A durable power of attorney remains in effect even if the person who created it becomes disabled or incapacitated. This durable power of attorney ceases to exist upon the death of the individual granting the power.

ESTATE TAX - A tax imposed at a person’s death on the transfer of most types of property that is calculated on the total value of the estate. This is sometimes called the “death tax.”

EXECUTOR - The person or entity named in a will to carry out the provisions of the will. More than one executor can act together. In some states, this person is called the “personal representative.”

FEDERAL UNIFIED CREDIT - A federal tax credit that offsets gift and estate tax liability.

FIDUCIARY - An individual or institution legally responsible for acting in the best interest of another party. Trustees and executors are examples of fiduciaries.

GIFT TAX - A tax on the transfer (during the donor’s lifetime) of property worth more than $14,000 per year to another person. The gift tax must be paid by the donor. There is no tax liability for the donee.

GIFT TAX ANNUAL EXCLUSION - The first $14,000 (indexed for inflation) in gifts that an individual can give tax free to as many people as he/she chooses during a calendar year. A husband and wife together can give $28,000 to each person. This is generally known as the “annual per donee exclusion.”

GUARDIAN - An individual legally appointed to act in loco parentis for a minor or to act on behalf of a person incapable of taking care of his or her own affairs.

HEIR - A person(s) entitled by law to receive assets from the estate of a person who has died if no will existed.

INHERITANCE TAX - A state tax based on the value of property and on the status of the beneficiary to whom it passes.

INTESTATE - The term applied when a person dies without a will.

LIVING WILL - A legal document in which an individual states his or her wishes regarding medical treatment and life-saving interventions in the event of exigent medical circumstances such as a terminal illness or accident; and/or appoints a healthcare proxy to make healthcare decisions on the individual’s behalf. The more common legal term is an “advance healthcare directive” or “durable power of attorney for healthcare.”

POWER OF ATTORNEY - A legal document that gives one individual the authority to act for another. See “durable power of attorney” and “living will.” This authority ceases upon the incapacity or death of the individual granting the authority.

PROBATE - The court process for determining the validity of a deceased person’s will and governing the distribution of the estate’s assets.

TRUST – A legal, fiduciary relationship, usually established in a written document, in which an individual or institution (the trustee) holds and manages property for the benefit of another (the beneficiary).

RESIDUAL ESTATE - The portion of the estate that remains after all administrative expenses, taxes, and specific bequests have been paid.

UNLIMITED MARITAL DEDUCTION - A rule permitting spouses to transfer an unlimited amount of assets to each other, while alive or after death, without federal income or estate tax implications.

WILL - A legally executed document that directs how and to whom a person’s assets will be distributed upon death. A will may also designate a guardian to handle the affairs of minor children.

CPAs emphasize that by developing an estate plan you decide who will receive shares of your assets, who will manage your estate and who will care for your children. Without one, you relinquish the decision-making to the default provisions of state inheritance laws. Take the time now to familiarize yourself with the various aspects of estate planning and begin the process by meeting with your CPA and attorney.

Copyright, The American Institute of Certified Public Accountants