Embarking on your journey to understanding estate planning may initially seem daunting, with a complex set of terms and concepts to grasp. But fear not, we’re here to demystify some of the most common phrases in the realm of estate planning to make this process more accessible. Let’s delve into these terminologies.
Let’s begin with the very term itself. Estate planning is the process of arranging for the distribution of an individual’s assets after their death. It also covers decisions about medical care and financial matters if the individual becomes unable to make decisions.
A simple will, or “last will and testament,” is a legal document that articulates an individual’s wishes concerning the distribution of their assets after death. It also appoints guardians for minor children, if applicable.
Probate: Probate is the legal process that validates a will and carries out the deceased person’s wishes under court supervision. This process can be time-consuming and expensive, so many choose to use estate planning strategies to avoid it.
A trust is a legal agreement where a person, known as a trustee, holds and manages assets for the benefit of others, known as beneficiaries. Trusts are often used to avoid probate, reduce taxes, and protect assets.
The living trust, or revocable living trust, is created during the lifetime of the person creating the trust (the grantor). The grantor can make changes to the trust during their lifetime. Upon their death, the assets in the trust are distributed to the beneficiaries without going through probate.
Unlike a revocable trust, an irrevocable trust cannot be altered under most circumstances. It offers strong asset protection, can reduce estate taxes, and an irrevocable trust can be used to qualify for Medicaid to pay for long-term care.
Power of Attorney
A power of attorney is a legal document that gives someone else (the attorney-in-fact) the power to act on behalf of the person who created the document (the principal). This authority can cover financial matters, health care, or both.
Health Care Directive
A living will is a health care directive that outlines an individual’s wishes for life support utilization if they cannot communicate. Durable powers of attorney for health care are also considered to be advance health care directives.
A beneficiary is a person or entity (like a charity) that is named in a will, trust, insurance policy, or financial account to receive a part or all of an individual’s assets after their death.
An estate tax is a tax on the transfer of the deceased person’s estate before distribution to the beneficiaries. The federal estate tax only applies to larger estates that are worth over $12.92 million, and some states also have their own estate taxes.
A gift tax applies to the transfer of assets during an individual’s lifetime. There is a federal gift tax that is unified with the estate tax, so you cannot give large lifetime gifts to avoid taxation.
Guardianship is the legal process where a person is given the legal authority to care for another person and/or manage their affairs. This term is often used in the context of appointing a guardian for minor children, and there is adult guardianship for incapacitated adults.
An executor, sometimes known as a personal representative, is the person named in a will to manage the deceased person’s estate, including the distribution of assets and payment of debts and taxes.
Take the Next Step!
Understanding these terms is a significant first step in the process, and the next step is decisive action to put a carefully calculated, professionally constructed plan in place. If you are ready to take it, you can call us at 310-677-9787 to set up a consultation at our Losa Angeles, CA estate planning office, and you can alternately send us a message through our contact page.