While planning for what happens to your estate after you die is important, it can be mystifying because of all the “legalese” contained in the planning process.
Knowing the terminology associated with estate planning will give you a better understanding of what your estate documents provide and who is involved along the way.
Here are fifteen common terms you should be familiar with when navigating your estate planning documents.
Fifteen essential terms to know in estate planning.
Will
Also known as a “Last Will and Testament”, a will is a document that outlines how you want your assets to be distributed after your death. You will also name a “personal representative” to handle your affairs (i.e., distribute your assets to beneficiaries, pay debts). If you have children, a will is where you will name a guardian to care for your kids after you die.
Trust
A trust is a legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries. Trusts can provide control and privacy while avoiding probate. For a deeper dive into wills and trusts, check out this blog post.
Revocable Living Trust
A living trust is a trust that’s created while the person creating it (the grantor) is still living. A trust that’s revocable is able to be changed. Contrast this with an irrevocable trust which is less common and used primarily as an estate tax tool.
If you put together a trust for you and your family, it’s likely a Revocable Living Trust.
Probate
Probate is the court-supervised process of distributing a deceased person’s assets according to their will (or according to state law if they didn’t have a will). A probate court will validate the will and name the personal representative (or executor) to handle the deceased person’s affairs.
Because probate can take time, cost money, and is somewhat public, some people include a trust in their estate plan to avoid this process.
Personal Representative/Executor
While you will often see these terms used interchangeably, a personal representative is named in the will as the personal responsible for carrying out the deceased person’s wishes. They manage the probate process, pay debts, and distribute assets to the beneficiaries.
Beneficiary
A beneficiary is the person (or organization) named in a trust or will to receive a deceased person’s assets.
Grantor
A grantor is the person who establishes a trust and transfers their assets into the trust.
Trustee
A trustee is a person (or entity) appointed to manage and administer a trust. They have a fiduciary duty to act in the best interest of the beneficiaries.
If you put together a trust, you (and your spouse, if married) are likely the trustees of your trust. When you die or are incapacitated, your successor trustee(s) takes over. Note—the successor trustee isn’t the beneficiary (although they could be one and the same). The successor trustee is charged with managing the trust going forward.
Financial Power of Attorney
A Financial Power of Attorney (POA) is a legal document that grants another person (or multiple people) authority to make financial decisions on your behalf. Powers of attorney are only valid while you are still living.
Most people put together a POA to allow someone to act on their behalf if they are incapacitated or unable to make decisions. Because of this, it’s a good idea to provide your bank and other financial institutions your Financial POA in advance so they can review it and let you know if they have any special requirements.
Healthcare Power of Attorney
A Healthcare Power of Attorney (POA) is a legal document that grants another person (or multiple people) authority to make healthcare decisions on your behalf. Powers of attorney are only valid while you are still living.
In Arizona, a completed and signed Healthcare POA can be filed with the Arizona Healthcare Directives Registry so that healthcare providers can access your forms when needed.
Living Will
A living will is a document that outlines your preferences for medical treatment and end-of-life care if you’re unable to communicate or make medical decisions.
Together, a living will and healthcare power of attorney form what’s known as your “Advance Directives”. In Arizona, a completed and signed living will can also be filed with the Arizona Healthcare Directives Registry.
Estate
An estate refers to everything owned by someone at the time of their death. This includes property, bank accounts, investments, and personal belongings.
Intestate
When someone dies without a will, their estate is considered “intestate”. State law (through the probate process) determines how their assets will be distributed.
Estate Tax
Estate tax is a tax imposed on a deceased person’s estate. This is colloquially known as the “death tax”. However, most people won’t be subject to estate tax since the current exemption amounts are so high–$12.92 million per person in 2023.
Gift Tax
To make sure that someone isn’t avoiding future estate taxes by transferring their assets to beneficiaries while still living, a gift tax is imposed. Gift tax is applied on the person giving the gift if the value of the gift exceeds certain thresholds. Since the gift tax is often misunderstood, we wrote a blog on it.
What does your estate plan say?
I know people who have put together their will and trust but are confused by the legal jargon. If that’s you, use this article as a cross reference as you skim your documents.
If you still need to put together estate planning documents, schedule an appointment with one of our estate planning advisors. We make the process easy with our online questionnaire.
