Thirteen Estate Planning Terms You Need to Know

Estate planning—it is an incredibly important tool, not just for the uber wealthy or those thinking about retirement. On the contrary, estate planning is something every adult should do. Estate planning can help you accomplish any number of goals, including appointing guardians for minor children, choosing healthcare agents to make decisions for you should you become ill, minimizing taxes so you can pass more wealth onto your family members, and stating how and to whom you would like to pass your estate on to when you pass away.

While it should be at the top of everyone’s to-do list, it can be an overwhelming topic to dive into. To help you get situated, below are some important terms you should know as you think about your own estate plan.

Assets

Generally, anything a person owns, including a home and other real estate, bank accounts, life insurance, investments, furniture, jewelry, art, clothing, and collectibles.

Beneficiary

A person or entity (such as a charity) that receives a beneficial interest in something, such as an estate, trust, account, or insurance policy.

Distribution

A payment in cash or asset(s) to the beneficiary, individual, or entity who is entitled to receive it.

Estate

All assets and debts left by an individual at death.

Fiduciary

A person with a legal obligation (duty) to act primarily for another person’s benefit, e.g., a trustee or agent under a power of attorney. “Fiduciary” implies great confidence and trust, and a high degree of good faith.

Funding

The process of transferring (re-titling) assets to a living trust. A living trust will only avoid probate at the trustmaker’s death if it is fully funded, meaning it contains all of the decedent’s assets.

Incapacitated/Incompetent

Unable to manage one’s own affairs, either temporarily or permanently; often involves a lack of mental capacity.

Inheritance

The assets received from someone who has died.

Living probate

The court-supervised process of managing the assets of an incapacitated person.  Conservatorship is another term used for this process.

Marital deduction

A deduction on the federal estate tax return, it lets the first spouse to die leave an unlimited amount of assets to the surviving spouse free of estate taxes. However, if no other tax planning is used and the surviving spouse’s estate is more than the amount of the federal estate tax exemption in effect at the time of the surviving spouse’s death, estate taxes will be due at that time.

Settle an estate

The process of winding down the final affairs (valuation of assets, payment of debts and taxes, distribution of assets to beneficiaries) after someone dies.

Trust

A fiduciary relationship in which one party, known as the trustmaker or settlor, gives another party, known as the trustee, the right to hold property or assets for the benefit of another party, the beneficiary. The trust should be memorialized by a written trust agreement, outlining how the trust assets will be distributed to the beneficiary.

Will

A written document with instructions for disposing of assets after death. A will can only be enforced through a probate court. A will can also contain the nomination of guardian for minor children.

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How to Own Your Real Estate

Real estate encompasses not only one’s primary residence but also other real estate such as a vacation home or a rental property. The ideal form of ownership varies depending on the type of real estate you own. Below, we take a look at the different types of real estate and offer advice about the best form of ownership for each.

Primary Residence

Because your primary residence receives special tax treatment, you should carefully consider how your home is owned. In some states, tenancy by the entirety offers married couples creditor protection from the creditors of one of the spouses (with a possible exception for federal tax liens) while still preserving relevant tax benefits. It also allows automatic transfer of ownership to the surviving spouse upon the death of the first spouse without court involvement. Transferring ownership of the primary residence to a joint revocable trust may also be an option if you live in a state that allows the tenancy of the entirety protection to transfer to the joint revocable trust. Ownership by the trust also means that the real estate will not go through the lengthy, expensive, and public probate process but will instead be handled according to your wishes as specified in the trust document.

If you are single, owning the property in your name allows you to take advantage of tax benefits for primary residences. Transferring ownership to a revocable living trust may also allow you to retain the applicable tax benefits with the added benefit of avoiding the probate process. If asset protection is a major concern during your lifetime, certain types of irrevocable trusts are best suited for your needs but may require you to give up some control of the property.

The bankruptcy code may provide additional protections for a primary residence (e.g., your state may have a homestead exemption). However, in some states, transferring your primary residence to a trust may eliminate the homestead exemption because the trust rather than you (the debtor) will be deemed to be the owner of the residence. If this situation could apply to you, it is important that you meet with a knowledgeable estate planning attorney before transferring your primary residence to a trust.

Vacation Home

For some families, their vacation home has not only high monetary value but also significant emotional value. Ownership of a vacation home by a trust or limited liability company (LLC) can be advantageous because it addresses two main priorities: ease of transfer to the next generation and asset protection.

With a trust or LLC, you are able to establish rules for how the property is to be used and maintained, as well as designate what is to happen to the vacation home once you pass away. This can be a great solution if you want to ensure that the vacation home stays in the family for generations with minimal family conflicts.

An additional benefit of having an LLC own your vacation home is that it provides limited liability from outside claims. If a judgment is entered against the LLC, the creditor is limited to the accounts or property owned by the LLC to satisfy the creditor’s claims and cannot look to your personal accounts or property or those of the other members. Also, if a judgment is entered against you or another member for a claim unrelated to the LLC, it will be harder for a creditor to force a sale of the vacation home. This can be incredibly helpful if you wish to pass the vacation home on to the next generation without worrying about the individual financial situation of each new member.

Note: In some states, a single-member LLC (an LLC in which you are the only member) does not enjoy the same protection from your personal creditors. The rationale of these laws is that your creditors should be able to seek relief through your LLC interests to satisfy their claims because there are no other members that will be negatively impacted by seizure of money and property owned by the LLC.

If the vacation home has been in the family for many years, it is important to consult with us and your tax advisor to make sure that transferring your vacation home to a trust or LLC will not cause an increase in your property taxes or other unintended consequences.

Rental Property

Because rental property is an income stream rather than a residence, asset protection is usually the primary concern. As a landlord and owner of rental property, you face a higher probability of lawsuits arising in connection with the property because the occupants can change over time. Transferring ownership of the rental property to an LLC is a great option. If a renter gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any property insurance you have, the renter can seek satisfaction of any claims only from the accounts and property owned by the LLC, not from your personal accounts and property or those of any other owners of the LLC.

In addition, ownership by the LLC may protect the rental property from your personal creditors. However, if you are forming a single-member LLC, it is important to have us check state law to make sure creditor protection is available.

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One Mistake Can Cost You Half

This one common mistake could cost you half your house and/or half your money. This one common mistake could cost your children a hefty tax bill.

I see people almost every day that have made it and don’t realize the consequences.

Here are some of the consequences you may not have foreseen.

What is the mistake? Putting your children on the accounts as co-owners of your accounts or on your deed.

• If your child gets divorced, do you want their spouse to get half your home and accounts?
• If your child gets in an at fault accident, do you want the other person to get half your home and account?
• If your child gets in IRS trouble, do you want the IRS to put a lien against your house?
• If your child gets in credit problems, even if it isn’t their fault, do you want to have to fight their creditors to keep your money?
• If you want to sell the house, do you want to give half the money to your child?
• If you put your child on the deed to your house
  • They will owe capital gains tax on their half based on what you paid for the house
  • You’ve just pushed probate off onto the next generation

There are alternatives that can protect your money and home while allowing your children to manage your money if you aren’t able to anymore.

Setup a Call to Learn the Alternatives

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