FAQ’s/Glossary

Who Needs An Estate Plan?

Quite frankly, everyone needs an Estate Plan, especially if you are married and/or have children or other family whom you care about. Sorry to say, but it is inevitable that each of us will at some point die. Quite possibly, we’ll be ill and hospitalized or under long term care for a period of time before we pass. It is critically important that our affairs are in order long before hand; because medical choices WILL be made for you if you are unable,  and your assets will be distributed to someone when you pass, and someone will have to look after your children if they are still minors.

What If You Don’t Have An Estate Plan?

You may not realize this, but everyone does already have an Estate Plan of sorts. It has been created by the State in which you live and designed to accommodate everyone as equally as possible. This means it is very likely not going to cover your specific set of circumstances and family dynamics as you would prefer. For example, the laws of your state may dictate that your assets be equally divided amongst your surviving children and spouse. That might be okay for you, but what if you know you need to leave more for your spouse so they can properly retire or maintain the house payments, etc? Or what if you know that leaving any of your children a large lump sum of cash at this time is not a wise decision? By taking a little bit of time to write down the choices and decisions which you prefer, you can avoid mistakes like these and rest assured your family is properly covered.

Isn’t a Will Good Enough?

A Will is a good document to have, and it is certainly better than having done nothing. A Will does properly spell out your choices and decisions regarding the distribution of your assets, what it doesn’t do, however, is actually enable the proper transfer of your assets. The result is additional time and money being spent by your family while they deal with the circumstance called Probate.

Why Probate? The avoidance of probate and the accompanying lengthy administration of the estate that could otherwise be avoided is one of the main reasons people establish estate plans. The question arises as to why probate should be required of a decedent’s estate when his Last Will & Testament made very clear what he wanted to accomplish concerning the final distribution of his property? The answers to this question are myriad, but essentially, when a person dies with assets in his name alone, he has become a decedent property owner and a deceased person is obviously unable to transfer property to a living person. A court of law must therefore step in on behalf of the decedent and transfer his property for him.

Probate Needed for Ownership Transfer. After proving the authenticity of the will (if one exists), the primary purpose of probate is to transfer, or actually “retitle,” assets in the name of the decedent’s personal representative (PR) so that the PR can then, in turn, transfer or title assets into the names of the decedent’s heirs and beneficiaries. This retitling of assets – first to the decedent’s PR and then from the PR to the decedent’s heirs – requires an operation of law that can only be accomplished through a probate court.

Problems with Probate. Probate can entail detailed paper work, filings, hearings, appraisals, attorney fees, PR fees, court fees, lengthy holding periods required by law, and the like, all of which can require a substantial amount of time and resources to process. Probate fees and time factors will likely increase even more when ancillary probate becomes necessary for real property located in a state other than the decedent’s domicile. The bottom line is that probate impacts the family’s finances and it requires a certain amount of time and attention by everyone involved. In addition, privacy is forfeited in the probate process because, by law, probate is deemed a public matter rather than a private concern.

Glossary

Administration. The process of collecting and managing all of a decedent’s property so that the decedent’s creditors are paid to the fullest extent allowed by law and the remaining property, if any, is turned over to the heirs or beneficiaries.

Adverse Party. Any person having a substantial beneficial interest in a trust who would be adversely affected by the exercise/non-exercise of another beneficial interest holder’s power with respect to the trust. A person having a power of appointment over trust property is deemed to have a beneficial interest in the trust (and thus “adverse” to the other beneficiaries). A related party to the grantor, such as the grantor’s spouse, is generally considered to be subservient to the grantor, and therefore a non-adverse party.

Ancestor. A person related to the decedent in an ascending lineal line (i.e., parents, grandparents).

Beneficiary. The person who receives equitable title to trust property and thus the right to benefit from that property according to the settlor’s instructions. The beneficiary may also be called the donee or the grantee. Beneficiary is also a generic term for a person who receives property under a will or POD arrangement (or trust), regardless of whether it is real or personal property.

Bequest. Essentially a “gift” of personal property in a will.

Codicil. An addendum to an already existing will. It must be executed with the same formalities as a will to be effective.

Corporate Trustee. A corporation empowered by its charter to act as a trustee, such as a bank or trust company. Corporate trustees, because of the regulatory oversight to which they are subjected, are often held to higher fiduciary standards than private trustees and, therefore, a corporate trustee is often the best choice to hold the office of independent trustee.

Collateral Relative. A person related to the decedent, but not in a lineal line. (Siblings, nieces, nephews, aunts, uncles, and cousins).

Corpus. A legal term for the principal or capital of a trust, as distinguished from the income to a trust.

Descendant. A person related to the decedent in a descending lineal line. (Children and grandchildren).

Devise. Essentially a “gift” of real property through a will. A person who receives the devise is a devisee.

Distributable Net Income (DNI). DNI characterizes and limits income that will be taxed to the beneficiaries, if distributed or required to be distributed, rather than to the trust. It is the taxable income of the trust, including fiduciary accounting income modified, however, by generally excluding dividend distributions, personal exemptions, capital gains and losses, extraordinary dividends, and taxable stock dividends, while including tax-exempt interest.

Executor. The person designated in the will of (generally) a testate decedent to administer the estate.

Fiduciary. Essentially another name for an administrator or trustee of a written trust instrument having duties and responsibilities to safeguard trust assets and invest the same, as a prudent man would do, for the ultimate benefit and well being of the beneficiaries of the trust.

Giftee. A person who takes constructive receipt of and takes title to a gift from a (living) giftor/transferor; also referred to as a donee or transferee.

Giftor. A person who makes a (lifetime) gift by transferring title to a giftee; also referred as a donor or transferor.

Heir. An heir is essentially a person entitled to take an inheritance. It can also mean a beneficiary under intestate succession laws. A person who is living cannot have “heirs,” as such. One may be an heir (i.e., inherit from a person who dies intestate), but one cannot have heirs. Persons who would be heirs are actually presumptive heirs or heirs apparent. At common law, heirs refers to people who take land, while the term next of kin refers to people who take personal property.

Independent Trustee. A trustee who has no equitable interest, as such, in the corpus or principal of a trust and is neither an adverse or non-adverse party to the grantor. Thus an independent trustee can theoretically administer the trust without partiality. A prime example of an independent trustee is a corporate trustee who may be granted broad powers for administering a trust in a fashion that would otherwise be deemed as receiving a general power of appointment over the trust if such were granted to a trustee who was also a beneficiary of a trust (i.e., a non-independent trustee).

Intestate. A legal term for dying without a will. The phrase the intestate refers to the person who dies without a will.

Intestate Succession. Passage of property when the decedent dies without a valid will.

Legacy. In legal terms, it is a gift of money in a will. A person who receives the legacy is called the legatee. A legacy is a type of bequest.

Life Estate. A legal arrangement whereby the beneficiary (“life tenant”) is entitled to the use of or the income from a particular property during his lifetime. Upon the death of the life tenant (beneficiary), the property will go to the holder of the remainder or reversionary interest. This could be the person who created the life estate or another person.

Non-adverse Party. Anyone not an adverse party. A person, such as a spouse, who is nonadverse to the grantor and who has a certain relation to the grantor of a trust is termed a “related or subordinate party.” Such party is considered to be subservient to the grantor in most instances with regard to the exercise of power over the trust unless a preponderance of the evidence indicates otherwise. Thus, a non-adverse party could be deemed as an alter-ego of the grantor of a trust and thus under the grantor’s de facto control.

Non-probate Asset. An asset of a decedent that passes via a means other than under intestate succession or through a will. Typical non-probate arrangements include joint tenancies with rights of survivorship and contracts, such as life insurance policies, retirement plans, and accounts with financial institutions that provide for the payment of funds directly to designated beneficiaries at the death of the owner (e.g., joint accounts with survivorship rights and pay on death accounts).

Personal Representative. Generic term for the person in charge of administering the estate of a decedent, whether devised in trust, through a will, or through intestate succession.

Power of Appointment. A right given to an individual to exercise some form of control over the disposition of property from a trust or an estate. The power may be very broad or limited depending entirely on the terms of the document.

Principal. The property conveyed in trust form. The principal is also referred to as the trust corpus, trust estate, or trust res.

Probate. In a broad sense, probate refers to the entire process of administering (or transferring assets of) a decedent’s estate. In a narrow sense, probate means to prove a document or oral declaration to be the decedent’s valid will.

Probate Asset. An asset that passes to a decedent’s beneficiaries through a court procedure by either intestate succession or a valid will.

Reversionary Interest. A future interest in land arising by operation of law whenever an estate owner grants to another a particular estate, but does not dispose of the entire interest. An example of a reversionary interest is an interest in property that reverts back to the grantor of a life estate after the life tenant dies.

Settlor. A person who creates a trust by transferring the property to the trustee (fiduciary of the trust) and imposing duties on the same. The settlor may also be referred to as a trustor, grantor, creator, or donor.

Situs. The location (or jurisdiction) where a trust is to be administered. Generally, but not always, the trustee needs to be located in the state of the situs of the trust.

Testator/Testatrix. A person who dies with a valid will. The term testator refers to a male and the term testatrix refers to a female. Modern usage merges both terms to testator, regardless of gender.

Trust. A legal agreement allowing for a property conveyance to occur whereby the property owner divides title to the property into legal and equitable interests and imposes fiduciary duties on the holder of the legal title (the trustee) to deal with the property for the benefit of the holder of the equitable title (the beneficiary).

Trustee. A person who holds legal title to trust property received from the settlor with a fiduciary duty to divide and manage that property according to the settlor’s instructions and applicable trust law.