Estate Planning Terminology 101:
You hear the words thrown around all the time. "Estate Planning," "Wills," "Trusts," "Guardian," "Power of Attorney," and so on. There are many great resources available on the internet that go into great detail about these and other terms, but what do they really mean?
Below are a list of terms that we come across often and a short, non-legal, description of each. While the descriptions are mostly correct, these are not legal definitions and do not substitute the advice of an attorney. Rather, they are our interpretation of the words to help our clients better understand what the words and documents mean.
Let us know if there are other words or concepts you would like learn more about. We update this list based on requests from others.
Estate Planning Terminology 101:
Avoiding Probate: for many families, there exists a desire to avoid probate because they want to (1) save time, (2) remain private, and (3) save money. They do this through the use of trusts, beneficiary designations, and transfer/payment on death designations. These tools are typically private documents and do not have the same requirement to be “published” as a Will does.
Beneficiary: this is the person, or persons, who are either (1) the recipients of gifts under the terms of a Will, or (2) the recipients, and for whose benefit, trust assets are being held by a trustee in a Trust.
Beneficiary Deed: a Beneficiary Deed is a type of deed that allows a living owner of real property to name a beneficiary (or multiple) of the real property. There are some strict rules on when and how these deeds must be recorded in order to be effective, but they can be great tools in conjunction with other estate planning tools to help avoid having a large asset pass through probate.
Beneficiary Designation, Transfer on Death (TOD), and Payment on Death (POD): these three tools are perhaps the most frequently misguided and forgotten about estate planning tools. Properly structuring these designations can help avoid having to probate that particular asset; which can be a huge cost savings for your heirs. Understanding how property passes under the law, or in a particular contract (life insurance or bank account), will help you make a wise decision on these designations. Some common designations include: outright to spouse, outright to adult children, or transfer into trust (which then controls distribution and is sometimes preferable over outright gifting).
Capacity: there are different levels of legal capacity required for various actions. For example, legal capacity to create a Will or Trust (aka Testamentary Capacity) requires that at the time the document is signed (executed) the person (1) understands the ordinary affairs of her life, (2) understands the general nature and extent of her property, (3) knows the persons who were the natural objects of the bounty (heirs), and (4) can intelligently weigh and appreciate her obligations to those persons and knows she is giving the property to the persons mentioned in the document.
Disability Insurance: an often overlooked asset that many people simply don’t have enough of, particularly small business owners and professionals. An individual’s estate plan and goals can become severely diminished or completely wiped out if they suffer an injury or illness. Statistics suggest nearly ½ of the population will suffer from a long-term disability (6+ months) during their working years. Disability insurance will supplement your loss of income and hopefully save you from the need of dipping into retirement savings.
Estate Planning: is the general category of law that focuses on family and property. It is the act of implementing tools for the transfer of wealth and assets, as well as protection for minors, during incapacity or after death. It can be as simple as a beneficiary designation or as complex as creating trusts in an effort to protect assets, avoid probate, and pass a legacy. Most people will benefit from putting a plan in place, and no, it isn’t just for the wealthy. Learn More.
Executor (aka Personal Representative): the Executor of your Will is the person you nominate to handle your probate estate. This person will hire an attorney to file the Will and open the “Probate Estate”, manage collecting assets, file an inventory, and eventually create a plan of distribution for the court before paying off creditors and distributing assets to beneficiaries.
Grantor: this is the person making a trust and they are also sometimes called the Trustor or Settlor. Typically, the Grantor is also the person who transfers most, if not all, of the assets into the Trust.
Health Care Directive (“HCD”) (aka living will, advanced directive): this tool is completed by individuals who have a desire to express their wishes regarding medical care if they become incapacitated and are not likely to recover. Common decisions include whether the medical team should withhold or withdraw artificial nutrition, radiation therapy, chemotherapy, and many other procedures.
Health Care Power of Attorney (HC-POA): this tool resembles the HCD recently discussed. The main difference between the two is that under the HC-POA, the Grantor gives her power to make medical decisions about her own treatment to an agent, or proxy. The HCD and HC-POA can be used separately, or in conjunction with one another, and it should go without saying that the Grantor should make the agent aware of their health care desires.
HIPAA Waiver: a relatively new tool that allows a Grantor to give another, the agent, power to receive, review, and discuss the Grantor’s medical information with a medical provider or hospital. Typically this waiver will be included in your Health Care Power of Attorneys and/or Health Care Directives, but sometimes it is also a good idea to include it in a trust or as a stand-alone document.
Intestacy: a fancy legal term that describes what happens to a person’s stuff if they pass without a Will or estate plan. Every state has different rules and it is important to be aware of how these rules may impact your overall plan, just in case something “slips through the cracks.” In Missouri, this distribution is controlled by Chapter 474, RSMo.
Joint Ownership: joint ownership of an asset or account can be a wonderful tool to help transfer property; but there are also many hidden dangers of using joint ownership as part of an estate plan. For example, in the context of a bank account, if Mom and her two sons (Joe and Bob) are joint owners, Joe or Bob have complete access to 100% of the funds in the account. In other words, Joe or Bob have equal legal right to the property and may “take” it at any time. Other potential disasters exist, so joint owner beware.
Last Will and Testament, or Will for short: is a legal document that gives the “Testator” (person making the will) the ability to control certain aspects of the probate process (like naming a personal representative and waiving bond and supervision) as well as the division of their property. Properly drafted, this document may also provide for the nomination of a guardian for minor children. Learn more about Welch Law's Will Packages.
Life Insurance: life insurance is perhaps one of the most shunned estate planning tools in our arsenals. Properly structured and properly funded, life insurance helps us ensure our families reach the financial goals we set during life. College education, weddings, health, and basic financial support can continue long after we do when the right tools are in place. Read about how to select your beneficiaries here.
Long-Term Care Insurance (“LTC”): LTC insurance is gaining popularity in recent years as the Baby Boomer generation is experiencing the devastating impact of seeing their parents’ savings depleted by nursing home and long term care costs. There are hundreds of different LTC plans on the market and not all are equal. Careful consideration should be given to this tool as you assemble your estate plan.
Nomination of Guardian: for parents of minor children, this is perhaps one of the most important estate planning tools you will want in your arsenal. The Nomination of Guardian tells the court who you would want to raise your child if you became incapacitated or passed away. This designation is commonly drafted into Wills, but for some reason, many practitioners fail to also create a “Stand Alone Nomination of Guardian” for their clients. Since a Will only becomes effective at death, a Stand Alone Nomination of Guardian will provide the court with much needed direction if a parent became incapacitated.
Pour-Over Will: this is typically a very simple Will that is a part of an estate plan utilizing a Trust as the main control device. The Pour-Over Will acts as a safety net to ensure any assets or real estate that did not make it into the Trust prior to the Grantor’s lifetime, should pass through probate to the Trust.
Power of Attorney (“POA”): like trusts, a POA can take on many forms and accomplish many tasks. The basics idea of this tool is that the Grantor gives to another person, the Agent, the power to take some sort of legal action on the Grantor’s behalf. The POA outlines the Agent’s powers and the limitations of those powers. Sometimes it is desirable to have the POA be “Durable,” which means the agent’s powers do not stop if the Grantor becomes incapacitated or dies. You may also consider having the POA be a “Springing POA,” which simply means the agent does not have power to act until some future date (usually death or incapacity).
Probate: the legal process involved when someone passes away with or without a will. There are a lot of legal requirements, such as: hiring an attorney, petition to be the personal representative, publish notice, inventories, satisfy creditors, tax returns, accountings, and distribute the remaining property to heirs. This process can be supervised by the court (typical when someone dies without a will) or unsupervised (less work for personal representative). Under Missouri law, and most other places, the process will take at least 6 to 9 months and a lot of work for the personal representative. 5 Steps You Should Take.
Probate Costs: there are several types of fees associated with the probate process, including: final expenses, professional fees, court fees, personal representative, and attorney fees. These are in addition to any debts owed by the estate and usually come prior to paying creditors and distributing assets to beneficiaries. In Missouri, the personal representative and attorney are typically entitled to the fees outlined in Chapter 473.153, RSMo (http://revisor.mo.gov/main/OneSection.aspx?section=473.153&bid=26054&hl)
Property: Property can take on many forms, but typically falls into two major categories. Real Property (your home or land) and Personal Property (your clothes, jewelry, animals). Note, that Personal Property is often subdivided into Intangible (money, stocks, insurance) and Tangible (silverware, vehicles, clothes). This property is usually owned by you solely (Separate Property) or with another (Joint Property). Each of these types of property may be held and transferred in various ways.
Retirement Accounts (IRAs, 401(k)s, and the like): most of these plans allow the owner to name a beneficiary(ies); however, how you do so can be the difference between a large inheritance and one that is reduced by massive tax burdens and potential attachment by creditors of the beneficiary(ies). This is a great area for your estate planning attorney, CPA, and financial advisor to share their knowledge with you.
Qualified Spousal Trust (“QST”) (Missouri): The QST is a type of joint trust, for married couples, which holds the assets transferred into it as Tenancy by the Entirety property (“TBE”). TBE is a type of joint ownership that only exists between spouses, where each spouse owns the whole of the property. As such, creditors of only one spouse cannot attach or sell a TBE asset; the creditor must be a creditor of both spouses in order to attach to TBE property.
Trust: a trust is like the Swiss Army Knife™ of an estate plan. There are many types of trusts that can be deployed to accomplish various planning objectives and needs. The most common of these is the Revocable Living Trust (“RLT”). RLTs are common tools used by families to provide asset protection, care for children and grandchildren, and greatly reduce or avoid probate. Learn about Welch Law's Trust Packages.
Trust Benefits: there are many benefits to incorporating a Trust into your estate plan, too many to list. Frequently, however, there are three main pain points that cause my clients to utilize a Trust over a simple Will. (1) Asset Protection during Life (even more so for spouses or families with step-children), (2) Dangling Inheritance (are your children prepared to inherit your estate at 18? Probably not), and (3) Asset Protection after Life (shield your beneficiaries from creditors, divorce, and to maintain federal benefits for special needs beneficiaries).
Trustee: in the common Revocable Living Trust, the person(s) creating the trust is/are the initial trustee(s). This person receives the assets from the Grantor and has a duty to control the assets owned by the trust according to the trust’s terms. A Trustee may be an individual or a corporate trustee. Often, even when an individual is named as a successor trustee (next in line after the Trustor ceases to act), it is a good idea to name a corporate trustee as a back-up.