Will
A document that controls the flow of your personal property such as jewelry,
family heirlooms, and assets held in your name only. It does not control what
passes by beneficiary designation (for example, life insurance, IRAs, retirement
plans, Transfer on Death agreements), by contract (for example, accounts held by
joint tenancy with rights of survivorship), or by trust.
Trust
A separate entity that holds property for the benefit of either the grantor
(creator) of the trust or his or her heirs. A trustee manages the assets that
are placed in the trust and makes sure that the terms of the trust are followed.
Executor
The person who administers your final estate. That person should be sensitive to
the needs of your beneficiaries, competent to handle financial and legal
matters, and available and willing to take on responsibilities.
Guardian
The person(s) who will take care of your dependents. They should know your
children already (if possible), have similar philosophic views to your own, and
be financially able to take on the responsibility of caring for your children.
Health Care Power of Attorney
A document that clearly states what your wishes are if you find yourself on life
support. You appoint an "agent" that will act on your behalf to make
sure your wishes are followed.
Power of Attorney for Property
A document that establishes who will act on your behalf (again, your
"agent") in financial matters if you are incapacitated. The agent can
manage your assets, sign a tax return, pay your bills, or even sell property.
They can also fund a "living trust."
Living Trust
A trust that's established while you are alive. You can declare yourself the
trustee of the trust until you are no longer able to act on your own behalf. You
can set standards for determining capacity--for example, your doctor and your
spouse must agree that you are unable to make significant decisions on your own.
Assets must be retitled in the name of your living trust. At your death, any
assets in the living trust do not have to go through probate.
Probate
A court process that makes sure that all your final debts are paid and that your
will is executed. Probate can be a lengthy and costly process, but not always.
If you want to bypass probate, set up a living trust.
Testamentary Trust
Just the opposite of a "living trust." This trust isn't established
until after you die. Your will typically includes the language to establish
these trusts at your death.
Taxable Estate
The total assets that will be taxed at your death. To determine whether your
estate will be subject to estate tax, add up all of your assets plus your home
(50% if owned as joint tenants) and life insurance and subtract any of the
following: unified credit, unlimited marital deduction, unlimited charitable
deduction. Whatever is left is your taxable estate.
Unified Credit
A credit for a portion of estate tax due on taxable estates. Everyone is allowed
one unified credit. If your taxable estate is $2 million (the maximum amount in
2008 that you can pass tax-free to your heirs), you would get a unified credit
of $780,800.
Unlimited Marital Deduction
Allows one spouse to pass an unlimited amount of assets tax-free to the other
spouse in life or at death (unless one spouse is not a U.S. citizen).
Unlimited Charitable Deduction
Allows anyone to bypass estate tax by gifting property to a qualified charity.
Marital Trust
Also known as an "A" trust, the marital trust provides management for
assets passed to your spouse. (The alternative is to leave assets for your
spouse outright--no trust.) If no restrictions are placed on what happens to the
assets when the second spouse dies, it's called a "general power of
appointment." If you choose to control what happens upon the death of your
spouse, you need to establish a Qualified Terminable Interest Property Trust or
"QTIP" Trust (a stricter form of marital trust).
QTIP Trust
Often used in second marriages in which children are involved, a QTIP trust
allows the creator of the trust to determine where his or her assets will
ultimately go after the spouse dies.
Family Trust
Also known as a "B" trust or a credit equivalent trust, the family
trust is funded with up to the maximum assets that can pass with no tax due
(currently $2 million). These assets are taxed at death, but because each person
has a unified credit, no tax is actually due. Once these assets have been taxed
(with no tax due), they are free to grow to any amount and will never be taxed
again for estate purposes.
Qualified Domestic Trust
A type of trust that can be set up for the benefit of a non-U.S. citizen spouse
to help defer estate taxes to a future date.
Trustee
A person who holds title to assets that will be used for the benefit of someone
else. When choosing a trustee for your trust, look for someone who is
financially capable, responsible, and sensitive to your family's needs.
Equalizing the Estate
A term used to denote that each spouse owns up to $2 million (in 2007) in his or
her own name. This ensures that both spouses make use of their unified credits.
Children's Trust
A document that controls when your children will be able to access the money
you've left them. Frequently the trust provides for equitable payment of college
costs for each child. Then assets are distributed as you direct. Many times
parents will choose to stagger when the money is paid out—for instance, one
third at age 25, one third at age 30, and the final third at age
40.
Irrevocable Life Insurance Trust
A document that removes the value of your life insurance from your taxable
estate. You irrevocably assign your policies to the trust. This means you can't
change your beneficiaries at a later date. You choose a trustee to make sure the
policy premiums are paid. If you transfer life insurance policies to an
irrevocable trust, you must live three years past the date of transfer or the
value of the policies will be pulled back into your estate.
Transfer on Death (TOD) or
Payable on Death (POD)
A type of non-retirement account that allows you to name a beneficiary just like
you would on an IRA or other type of retirement account. At death, your assets
flow directly to your beneficiaries without going through probate.
Special Needs Trust
A type of trust that can be set up for a disabled person. By specifying that
assets are only to be used for "luxuries" and not basic care, the
trust allows the disabled person to continue being eligible for government
financial aid.
Charitable Remainder Trust
A trust that is established to ultimately benefit a qualified charity. These
types of trusts can be set up so that the grantor (creator) of the trust
receives a stream of income during his or her lifetime. Then at death, the
balance of the trust passes to the charity tax-free. When you set up a
charitable remainder trust, you get the benefit of a current tax deduction.
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