Common Estate Planning Terms

There is a current legal trend to avoid using legal terms and to make the language of law accessible for clients.  For example, lawyers use less Latin than they used to.  However, there are some terms that are unavoidable, and it helps to be familiar with them when considering your estate planning, a sentiment echoed by the recent article, “Learn lingo of estate planning to help ensure best outcome” from The News-Enterprise.

Accordingly, I wanted to define some common estate planning terms.  If you are on the fence about creating an estate plan but found this article to get started, you may also want to review this article on the important of having a will.  https://galligan-law.com/understanding-why-a-will-is-important/  

Fiduciary – the person you named to a role in your estate plan and who acts with your best interest in mind.  They owe you a fiduciary duty to act with prudence and loyalty to you.

Principal – the person who creates the fiduciary relationship, especially in a power of attorney.

Agent or Attorney-in-Fact – this is the person named to act on your behalf under a power of attorney.  They aren’t your “power of attorney,” they are your agent.

Within a last will and testament, there are more: testator or testatrix, executor, administrator, beneficiary, specific bequest, residuary beneficiary, remote contingency and even more. There are also many variations on these terms based upon location and common practice.

Testator – (Testatrix is the feminine version of it) is the person who makes a will.

Executor – the person who is appointed in a will to administer an estate.  Note, in Texas you often see “Independent Executor” or references to an independent administration.  This is because Texas has grades of executors, and independent executors largely work free of court supervision.  Most states don’t have this distinction.

Administrator- generally stated, this is the person who administers an estate just like an executor, but who wasn’t named in the will.  So, for example, if you name John Smith, and if he can’t then Kevin Horner to be your executors, and neither serves after you pass away, a third person may be granted permission to administer your estate.  They will be an administrator, and not an executor, because you didn’t name them.

Beneficiaries are individuals who receive property from the estate or a trust. Contingent beneficiaries are “backup” beneficiaries, in case the original beneficiaries are unable to receive the inheritance for whatever reason.  Sometimes you see the phrase per stirpes or by representation or something similar.  These indicate who the contingent beneficiaries if the original beneficiary is deceased.  Generally speaking, these indicate the original beneficiary’s children.

Specific Bequest – these are clauses giving specific property to a beneficiary.  So, for example, “I leave the real property known as 123 Main Street to my daughter” is a specific bequest.  In most cases, it is distributed first.

Residuary beneficiary – these are beneficiaries of the “residuary” or the “residue.”  This means all of the property in an estate or trust that isn’t already distributed.  So, using my above example, if your will says 123 Main Street to daughter, but you also own stock, another house, a car, bank accounts and items in your home and don’t otherwise address those items in your will, then everything except for the 123 Main Street goes to the beneficiaries you list as a residuary beneficiary.  These are often dealt with by percentages or shares.  So for example, “all of the rest, residue and remainder of my estate to my children, by representation.”  If you have three children, they are splitting the residuary in thirds.

In the world of trusts, you often have trustor, trustee and then beneficiaries which are very similar to the beneficiaries described above.

Trustor – Many states have different names for this, we just happen to use trustor.  This is the person who creates the trust.  Other names for it are grantor, settlor or trustmaker.  I’ve even seen founder and originator in my career.  If the trust is created by will, which is often called a testamentary trust, then the trustor is the testator.

Trustee – this is the person who administers a trust.

There are more terms than this of course, but these are some of the most common estate planning terms. Getting comfortable with the terms will make the estate planning process easier and help you understand the different roles and responsibilities involved.

Reference: The News-Enterprise (Jan. 18, 2022) “Learn lingo of estate planning to help ensure best outcome”

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Common Mistakes with Living Trusts

At The Galligan Law Firm, we are fans of using trusts in estate plans.  Trusts are versatile, you can accomplish incapacity planning, probate avoidance, tax planning, asset protection and more with trusts.  However, it’s true, as with all planning, that things don’t always go as intended.  Sometimes people make mistakes with living trusts, and although the trust is still a good plan, it doesn’t create all of the benefits intended.  Yahoo Life’s recent article entitled “Why You Should Put Your House in a Living Trust” explains some of the biggest errors people make with trusts.  However, take that article with a grain of salt, there are a few things I disagree with that I’ll mention later.

First, remember that a trust is a fiduciary relationship in which one party (trustor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiary).  In living trusts, this is frequently the same person, at least during their lifetimes, and then there are new individuals to take over as trustee and beneficiary once something happens to the trustor.

Trusts are created for the reasons I mentioned earlier.  Most people ask about them because they want to avoid the probate process.

Also remember that although trusts are generally associated with the wealthy, almost everyone can use them as many people benefit from them.  I personally think they are associated with the wealthy because high profile deaths often reference trusts.  So, if a very wealthy person passes, say Steve Jobs for example, there will be stories talking about his wealth and how it passed by use of trusts.  His lawyers used those trusts for the benefits I mentioned above, but people only hear about it in high profile cases, so they assume that’s what they are for, not realizing everyone can use them.

All that said, if you are using a living trust, here are a few common trust mistakes to consider:

Failing to retitle your real property.  If you own a home, other land, mineral interests, etc, then transferring it to the trust or arranging for it to transfer to your trust at your death with a lady bird deed or transfer on death deed is very important.  If you don’t, probate may be necessary to gain control of the property and transfer it to your trust.

As a note, the Yahoo Life article is incorrect here and when they mention telling your mortgage company of a transfer.  Transferring your owner-occupied primary residence to your revocable living trust does not trigger a “due on sale” clause in the mortgage.  The Garn-St. Germain Act of 1982, which is a federal law governing mortgages, prohibits that.

Failing to trust fund.  Most clients like the idea of avoiding probate.  However, it is important to recognize that the trust itself cannot collect assets for you.  If you have a bank account with your name on it and nothing else addressing title during life or at your passing, the trust isn’t the owner.  The trust WON’T become the automatic owner at your death.  Instead, the probate of will becomes necessary.  This too is an easy thing to address as part of proper estate planning, but sometimes I hear clients say “it’s just a little bit, no big deal.”  I assure you your beneficiaries will not agree.

Failing to tell the insurance company of ownership change. Be sure to tell your home insurance company about retitling to a trust. If not, the insurance company may deny your claim in an event because the actual property owner—your trust—wasn’t insured.  This is seldom is serious problem, but is easy to overlook.

Don’t make these trust mistakes. Work with an experienced estate planning attorney to ensure you are getting the most value you can out of your trust.

Reference: Yahoo Life (Jan. 10, 2022) “Why You Should Put Your House in a Living Trust”

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What is an Estate Asset?

Estate planning attorneys are often asked if a particular asset will be included in an estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.

When you die, your estate is defined in different ways for different planning purposes. For example, you have a gross estate for federal estate taxes which defines all of the assets subject to the tax. However, there’s also the probate estate, which means property controlled by a will, and a non-probate estate, which means property passing outside of probate and the will.  So, if you are asking if an asset is part of an estate, it depends on which “estate” you mean.

Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax.

However, if you want to know if the policy will be included in your probate estate, the answer is no. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.  An executor or administrator of your estate never controls or has access to it.

Next, is the policy an estate asset available for beneficiaries of your probate estate?  So, let’s assume you left a will and your son is the named executor.  The will names all three of your children as equal beneficiaries.  Because the life insurance bypassed the probate process and went to a named beneficiary, none of the life insurance is available to the other two children.  If you wanted the money to go in trust for a beneficiary under the will, fund charitable giving or specific bequests, then the life insurance proceeds aren’t available for those purposes.

As an aside, common probate assets may include real property, tangible property like household contents, vehicles and so on, bank accounts depending on titling, and miscellaneous refunds due to the decedent.  Common non-probate assets may include life insurance, retirement funds and accounts with beneficiary designations generally.

Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a transfer on death deed or similar technique is available.

It is also true that certain states expect executors to have information about non-probate assets.  For example, New York has estate tax and Pennsylvania has inheritance tax.  Both states require an executor to file the appropriate return that will include information about non-probate assets because they are subject to tax (similar to the federal estate tax) even though the executor doesn’t take control of them.  Texas, you’ll be happy to know, does not have an estate or inheritance tax.

Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what are part of your probate estate, and how taxes and creditors will apply to these various assets.

Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”

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