What do Estate Planning Terms Mean?

Estate planning terminology can be a bit confusing and tough to understand so I have created a reference guide to keep everything straight. This is from my consumer packet, Estate Planning 101; Tools, Techniques and Frequently Asked Questions. To download a complete copy, click here.

Estate Planning Terminology

Agent (Attorney-in-fact)

An agent (sometimes referred to as an attorney-in-fact is an individual who is authorized to act on another’s behalf in certain matters. In estate planning it arises through the use of a power of attorney. An individual (the principal) appoints another individual (the agent) to make decisions on the principal’s behalf relating to medical, financial and property decisions, typically upon the principal becoming incapacitated and unable to act for himself.

Authorization for final disposition

An authorization for final disposition sets forth an individual’s wishes regarding how his or her physical remains should be disposed of after death, whether he or she wishes to donate organs, desired funeral arrangements and the like.

Bequest

A “bequest” is the act of giving property under one’s will. Strictly speaking, an individual will bequeath personal property, and devise real property (such as a residence).

Codicil

A codicil is a document that amends or revokes certain portions of a previously executed will. Codicils are executed in the same manner as wills requiring the testator and witnesses to sign. Depending on the state, a holographic will or codicil (one that is handwritten) may or may not be recognized as valid if all other will requirements are met (Illinois may recognize them while Wisconsin does not).

Decedent

A decedent is simply an individual who has died.

Descendant

A descendant is a relative in the direct line of an individual (i.e. children, grandchildren, great-grandchildren, etc.). The term also usually includes adopted children who are typically given the same right as naturally born children in estate planning matters.

Devise

“To devise” has similar meaning as “to bequest”. Both mean to give something to someone in a will. Traditionally, “devise” referred to giving real property (land, buildings, etc.) and “bequeath” was used for other movable items.The distinction has largely fallen out of use.

Estate

In the area of estate planning an individual’s estate specifically refers to all of the property, in whatever form, owned by the individual at any given time.

Fiduciary Duty

In the area of estate planning a fiduciary duty is imposed on trustees, personal representatives and agents appointed under a power of attorney. A fiduciary (an individual such as a trustee) is expected to exercise a heightened standard of care when he is acting in the interests of another. This includes a duty of loyalty and a duty to act in the best interests of another (whether it is beneficiaries of a trust, a decedent of an estate or a principal who has appointed him an agent through a power of attorney).

Guardian

A guardian is an individual who is legally responsible for the care and management of a minor child in the event the parents are no longer living or able to care for the child. A guardian is also appointed to take responsibility for the person and property of an individual in the event he or she is deemed incompetent. Typically one is appointed in a will.

Guardian ad litem

A guardian ad litem is a guardian who is appointed by the court to act in the same manner as a guardian appointed in a will or other document. The difference between a guardian and guardian ad litem is the amount of court involvement in making a determination of who should be appointed.

Grantor (Settlor)

A grantor, settlor and trust-creator are all one in the same. They all refer to an individual who establishes a trust.

Heirs at law

Heirs at law are those individuals who take the property of an individual dying without a will (intestate). Heirs at law are determined by the intestacy laws of the state where the person lives at the time of death.

HIPAA release

Privacy laws limit who can access medical records of an individual and information relating to healthcare. A HIPAA release form permits another individual (usually a family member) to access medical records in order to make an educated decision regarding medical treatment and it permits a healthcare provider to share information regarding the medical status of a patient with loved ones.

Intestacy

Intestacy is the act of dying without a valid will. When an individual dies intestate his or her assets are then distributed by the court through the probate process according to the intestacy laws of the state where the individual died.

Irrevocable Trust

An irrevocable trust is a trust that cannot (typically) be amended or revoked. By creating an irrevocable trust, a grantor transferring property to the irrevocable trust effectively gives up all legal rights in that property. Typically, irrevocable trusts are used for the tax benefits they present to a grantor.

Issue

Issue in estate planning typically refers to an individual’s lineal descendants of all degrees (i.e. children, grandchildren, great-grandchildren, etc.).

Living (Inter-vivos) Trust

A living trust is a trust created during the settlor’s lifetime. The settlor transfers assets to the trust to be managed by the trustee. Upon the settlor’s death the assets in the trust pass outside of probate according to the terms of the trust. Typically unless stated otherwise a living trust is amendable and revocable by the settlor at any time.

Living Will

A living will is a document that sets forth an individual’s wishes regarding lifesaving or sustaining procedures in the event he or she becomes incapacitated or otherwise unable to communicate his or her wishes. Typically it covers items such as the use of feeding tubes and other artificial life sustaining technology and when the use of such items should be discontinued.

Per Stirpes

Per stirpes distribution refers to the process of distributing a decedent’s property in a manner so that each branch of the family receives an equal share regardless of how many members of that branch are living. For example, John Smith dies leaving his property to be distributed to his descendants in equal shares per stirpes. John has three children during life, Kim, Larry and Mark. Kim died before John, but she has two children who are still living, Nicole and Olivia. If John’s estate is divided among his descendants per stirpes, then in this case Kim, Larry and Mark would each get 1/3. Since Kim is deceased, Nicole and Olivia would spit her share, each taking 1/6 of John’s estate. So, Larry would get 1/3, Mark would get 1/3, Nicole would get 1/6 and Olivia would get 1/6.

Personal Representative

A personal representative is the term used in Illinois and Wisconsin to describe the individual appointed to manage the legal affairs of a decedent. It carries the same meaning as executor in other states. Typically, a personal representative is appointed in a will. Upon the death of the decedent he or she manages the decedent’s affairs, most notably, the probate process.

Pour-over will

A pour-over will is used by an individual who have already set up a trust or trusts to pass any property remaining outside of the trust(s) upon death into the trust(s). The assets basically, “pour over” into the trust, thus the terminology. All assets would then be governed, managed and distributed according to the terms of the trust.

Power of Attorney

A power of attorney is a written authorization to represent or act on another’s behalf in certain affairs, typically of a medical or financial nature. A power of attorney is the document which gives an agent or attorney-in-fact the authority to act on a principal’s behalf. A power of attorney can be drafted in a way so that the agent does not have any authority to act until such time the principal is incapacitated and unable to act for himself. This is known as a durable power of attorney. Typically in Illinois and Wisconsin this comes in two forms: a) the durable power of attorney for healthcare, granting authority to make decisions regarding medical treatment, and b) the durable power of attorney for finances and property, granting the agent the authority to act in financial and other transactions.

Probate

Probate is the formal process by which a will is proved to be valid or invalid, assets are collected, debts are paid, claims are filed on the estate and any remaining assets are distributed, either based on the terms or a valid will or, if there is no valid will, then according to the state intestacy statute.

Revocable Trust

A revocable trust is a trust that may be amended or terminated during the life of the settlor. Since the trust may be amended or terminated at any time the assets are considered to still be owned by the settlor. Therefore, it does not reap the tax benefits that an irrevocable trust would. Some main benefits of revocable trusts are: a) flexibility, b) ability to retain control of the assets during life, c) avoidance of probate, d) management of the assets by a trustee, and e) the ability to provide continuity of management in the event of a disability.

Tangible Personal Property

Tangible personal property is any property that can generally be moved, as opposed to real property (land, homes, etc.) In a will, an individual can generally make reference to a list of tangible personal property outside of the will directing that property should be distributed according to that list. The benefit of this approach is that the list can easily be updated as items are sold, given away or acquired, and thoughts change as to who that item should pass to upon death.

Testator (or testatrix) A testator (or testatrix) is an individual who dies leaving a valid will. The adjective “testate” means having made a valid will before death.

Trust

A trust is a separately created entity which holds property to be managed and distributed according to a specific set of detailed instructions. Trusts come in a number of different forms and can be revocable or irrevocable, but each involves the same three entities. A trust is created by a settlor. It is then managed by a third party trustee per the terms of the trust agreement for the benefit of the beneficiaries.

Trust Agreement

A trust agreement is a written agreement which establishes the trust. In the trust agreement the settlor transfers legal ownership of property to the trustee to manage for the benefit of the beneficiaries.

Trustee

A trustee is an individual or organization (such as a financial institution) that holds or manages property for the benefit of another (the beneficiarie(s)). A trustee has legal obligations to make decisions regarding the trust property which are in the beneficiaries’ best interests and may be liable for damages for not doing so.

Will

A will or last will and testament is a legal declaration by which a person (the testator) names one or more persons to manage his/her estate and provides for the transfer of his/her property at death.