We try to keep the estate planning process as simple and streamlined as possible for our clients. But we do appreciate that sometimes terms will be used that you might not be familiar with. In order to make sure that we don't confuse matters we have compiled this short glossary with brief explanations of the more commonly used terminology.
Please don't hesitate to contact us if you have any questions or would like further explanation of any element of our Estate Planning services.
Legacy Estate Planning's Revocable Living Trust is an A-B-C Trust, but before we can explain an A-B-C Trust, we need to explain how an A-B Trust works.
An A-B Trust is a Trust created by a couple while both are living which calls for the division of the overall estate into two halves. (A is usually the surviving partner's half and B is usually the deceased partner's half) upon the death of one partner. If the estate of the partner who dies first is larger than the tax-exempt amount ($5,000,000 as of January 1, 2011), the excess is added to the survivor's half. An A-B Trust is also used when one or both partners have sole and separate property.
Note: Read the A-B Trust explanation before reading this.
An A-B-C Trust is the same as an A-B Trust, except that the couple must be married and the deceased spouse's assets in excess of the tax-exempt amount are allocated to a third piece (the C portion) so that they can qualify for the marital deduction, can obtain creditor protection for the life of the surviving spouse, and so that the deceased spouse's wishes will control the final disposition (when the surviving spouse dies).
Your assets are anything of material value or usefulness that you own; including any investments, life insurance, annuities, pension plans, stocks, bonds and mutual funds, household furnishings, clothing, jewelry, vehicles, real estate, business interests, collectibles, cash on hand and bank accounts. Your assets are what make up your estate.
(1) A person who is named under a life insurance contract, annuity, IRA or other retirement account, etc. to receive those assets on the death of the original owner; (2) A person who is entitled to receive distributions from a Trust, sometimes in the descretion of the trustee. A person who is not entitled to any benefit until a certain event occurs, such as the death of a prior beneficiary, is sometimes referred to as a contingent beneficiary or a remainder beneficiary.
Your estate consists of property in different categories; for example you can have property with a "positive balance" or a "negative balance". Items with a positive balance have a net worth; examples are bank accounts or an investment portfolio and life insurance. Property with a "negative balance" can include outstanding balances on credit card accounts, your mortgage or a lien on your vehicle. Your estate is a combination of your property with a positive and negative balance.
An Estate Plan is a collection of legal documents - a Living Trust, Living Will, Last Will & Testament (also known as a Pour-Over Will), Financial Powers of Attorney & Health Care Powers of Attorney. It protects your assets while you are alive and directs them upon your death.
A tax on a person's assets (estate) at his or her death, imposed by the federal and/or state government. Currently (2012), the amount exempt from the federal estate tax is $5,000,000; assets in excess of that amount are taxed at 35%.
(1) A person who is named under a will to be legally responsible for a minor child; (2) a person who is appointed by the court to serve in that capacity; (3) a person who is appointed by a court to be in charge of an incapacitated adult.
A will is a legal document which disposes of one's assets at death; may also name a guardian for minor children; sometimes called a Last Will and Testament. All wills must be executed in strict accordance with the laws of the state where they are signed. A few states (including Arizona) honor a hand-written will which does not meet these formalities.
A Living Trust is an arrangement in which one person (a grantor) transfers money or other property to a second person (a trustee) for the benefit of a third person (a beneficiary). When the same person is the grantor, the trustee and the beneficiary, the trust is sometimes called a declaration of trust. There may be more than one person in each of the three roles.
A Living Will is a legal document, authorized by state statute, which describes a person's desire to have no life support or limited life support in a hopeless situation. A living will is usually where one's wishes regarding cremation, donation of body organs, and similar wishes are found. Just like a regular will, formalities of execution must be strictly adhered to.
Power of Attorney is a legal document in which one person (the principal) appoints another person (the agent) to act on his or her behalf. If the authority given to the agent covers health care only, it is sometimes referred to as a Health Care Power of Attorney. If the authority covers financial matters only, it is sometimes referred to as a Financial Power of Attorney. If the authority covers everything, it is sometimes referred to as a General Power of Attorney. Any Power of Attorney which does not cover everything is sometimes referred to as a Special Power of Attorney or a Limited Power of Attorney.
Probate is a court proceeding to handle a deceased or incapacitated person's assets and/or affairs. Unless exempt under state law, all property left by a will must go through probate, which is a tedious and expensive court process (a will does not protect your assets from being probated). It is costly and time consuming and usually provides no benefits, except to the probate attorneys. It can drag on for months, or even years, as papers are filed, notices are sent out and routine hearings are held, until a judge finally allows the property in the will to be distributed to the beneficiaries.
Currently, the probate law in Arizona is $50,000, meaning that if you have $50,000 or more in assets and you are not protected by a Living Trust, most likely your assets will be probated.