Helping You Understand The Terms of Estate Planning, Wills, Probate, and Elder Law
AB Trust – In a nutshell, with an AB Trust, a trust is created which splits into two parts upon the death of the first spouse. Trust A is the survivor's trust (Above ground), and trust B is the decedent's trust (Below ground). The surviving spouse has complete control over the separate trusts in his or her trust, but limited control in the assets of the deceased. However, the surviving spouse may withdraw funds from the deceased's trust for health and maintenance. This split and division of property is mandated by the terms of the AB trust.
Advanced Health Care Directive – This document spells out how you wish your healthcare to proceed, should you become incapacitated. In particular, it dictates what life sustaining measures you wish to be taken on your behalf, and what Agents are authorized to carry out your wishes. It also allows you to elect to become an organ donor, or not. Organ donation elections should also be made on your driver's license.
Attorney-in-Fact – When you create a Power of Attorney you assign someone to be your "Attorney-in-Fact." This person can direct your property and finances in your stead. If you don't have an "Attorney-in-Fact", your loved ones may have to obtain a conservatorship over you to pay your bills and handle other financial matters. Conservatorship can be an expensive and lengthy court process, which can be easily avoided by a executing a Durable Power of Attorney. See Power of Attorney below for more details on this critical document.
Beneficiary – The recipient of your assets when you pass away. Even without a will or trust, you may have had to elect "beneficiaries" on your IRA, life insurance, or other financial holdings. These elections trump any elections you may make in a Trust or Will. They may even hold firm if you divorce and remarry, and fail to update your beneficiary designation to your new spouse! So, be sure to have your designations consistent throughout your estate planning documents, and current.
Bypass Trust – The "B" trust is also sometimes referred to as the "Bypass", "Credit-Shelter", "Exemption", "Marital", or "Family" trust. The surviving spouse has complete control over the assets in his or her A trust, or "Survivor's Trust" but limited or no control over the assets of the deceased held in the B or Bypass Trust.
Clayton Selection – A Clayton election is marital deduction trust which hangs in suspense for 15 months after the death of first spouse, while the surviving spouse decides if he or she should elect to create and fund a QTIP or do nothing, wherein the Clayton "election period" will lapse, and a Bypass Trust will form.
Codicil - A codicil is a document that supplements, amends, or revokes portions of an existing will. When making minor changes and updates, it can be less expensive to draft a codicil than revoking and rewriting the entire will.
Community Property – There are several states which designate "marital property" as "Community Property;" California is one of them. In California, any property acquired while married is presumed by the courts (divorce courts or probate courts) to be "Community Property;" this means it is owned half and half by the two spouses, and both spouses have equal control over it. You may bring "separate property" into a marriage which can remain separate, if you take certain actions. The real significance of what is deemed separate or community arises at death or divorce. During life, couples may override this designation through a private prenuptial or postnuptial agreement, or through estate planning documents.
Conservator of the Estate & Conservator of the Person – If you have not given someone power of attorney over your finances should you become incapacitated, your loved ones will have to seek a "Conservatorship of the Estate" through the courts. This can be an expensive and time consuming process but, it is sometimes necessary to protect the interests of the incapacitated adult.
If you have not assigned someone to make healthcare decisions should you become unable to communicate effectively, your loved ones may have to go through a similar process to have someone appointed to be a "Conservator of the Person." The Conservator of the Person will assure you have proper food, clothes, shelter, etc.
In some cases the courts may assign a third party to take on these responsibilities. Thus, it is highly recommended that you select individuals you trust in your estate planning documents, so that decisions on your behalf can be executed without the expense and delay of court intervention.
Custodian – If you leave money to a minor – that is someone under age 18 in California – he or she may not legally be given the inheritance. It will be held for the minor until he or she reaches the age of majority, or 18. So, special consideration and designations must be made when designating a minor as a beneficiary in an IRA, trust or will.
In your estate planning documents you will have an opportunity to select someone to manage your child's inheritance. If your custodian is designated under the Uniform Transfers to Minor's Act (UTMA) the oldest age you can maintain the funds in an account managed by the custodian is 25. After that the beneficiary child will inherit the funds. If you wish to have your child's inheritance managed by a third party for longer, you may want to consider a Children's Trust or other vehicle.
Decedent – The individual who passes away is referred to as the "Decedent" in estate planning documents and court filings.
Devisee – This is the legal name for the person you give your property to via your will.
Disclaim – Sometimes, for tax purposes, a "Devisee" refuses to accept a gift or inheritance, and the gift then passes to the next person in line as designated in the will, trust, or through intestate succession. Thus, "to refuse to accept an inheritance" is to disclaim it. This must be done within 9 months from the date of death of the property owner, and the devisee must never take ownership of the property.
Disclaimer Trust or Bypass Trust – These terms refer to a trust wherein a couple may create a single joint trust to hold their assets during their lifetimes. This prevents the estate from entering probate, which will deplete the trust's assets. During their lifetime the couple has complete control of the assets. When one of them passes away, the surviving spouse has the option to "disclaim" any interest in the deceased spouse's property. This disclaimer must be done within 9 months of death. The surviving spouse must never "control" the disclaimed property. A new, irrevocable, trust is thus formed, called a "disclaimer trust." It is funded by the deceased spouse's separate property and a share of the community property up to a specific amount. After formation of this new, irrevocable "disclaimer trust", the surviving spouse has control over the income, but not the principal. This allows for flexibility, as the amount disclaimed can be based on the then existing tax laws and the particular needs of the survivor.
Distribution – When deciding how to distribute your estate to your decedents, you will decide if you want it to be given equally among your then living descendants, regardless of generation, or, if you want it to be distributed lineally to the descendants, with each generation's share being equal.
Estate – Estate refers to all of the real and personal property, and all of the rights of a decedent, prior to it being distributed.
Estate Tax – The tax paid from the estate prior to distribution to the beneficiaries. There is no estate tax in California, and there hasn't been one since 2002. Also, there is no inheritance tax in California. While there is a Federal Estate tax, it only applies to estates over 10 million per person. And, there is "portability," which means that this exemption is "portable" from one spouse to the other. That is, when one spouse passes away, the surviving spouse can use the deceased spouse's unused estate tax exemption amount. So, married people, if viewed as an economic single unit, have over a 20 million exemption.
Executor or Trustee – When you create a will you will select someone to be your executor. When you create a trust, you will select a trustee and successor trustee. The executor and trustee have the responsibility to administer your estate. Administering the estate involves inventorying and valuing the decedent's assets, paying the decedent's proper debts and liabilities, pursing or releasing claims of the estate, and distributing the decedent's property to the persons entitled to receive it.
Fiduciary – A person who is responsible for the property of another person and held to a high legal standard of care. This standard is higher than ordinary care, so when picking people as your: Attorneys-In-Fact, Conservators, Custodians, Executors, Guardians, and Trustees, look for someone with the following qualities:
• In good physical and mental health;
• Available: Lives nearby, and has time;
• Organized & detail oriented;
• Competent regarding business affairs, or willing and able to seek third party assistance as needed;
• Able to communicate effectively;
• A good record keeper; and more importantly of all;
• Willing to serve;
While a family member is often chosen, consider a California Licensed Professional Fiduciary or bank where appropriate.
Gift Tax – Individuals may give 10 million over their lifetime without having to pay a gift tax. When you go over that threshold, you must pay a gift tax. You need to file gift tax returns to comply with this 10 million exemption. You may give $16,000 to any number of people you want each year, without eating into this 10 million exemption. There is not gift tax between spouses, but gifts to anyone else count toward your lifetime exemption.
Grantor, Trustor or Settlor - The person who transfers property to a trustee to establish a trust.
Guardian - A guardian is like a conservator, but for someone who is under 18. You may select who you would like to be the guardian of your minor child should you, or you and your spouse, become incapacitated. However, the named guardian would still have to be approved by the court to assure that this choice is in the best interest of the child. A guardian of the minor's estate takes care of the minor's property, including any inheritance. A guardian of the minor's person has care, custody, and control of the minor, and makes sure the minor has proper food, clothing, shelter, healthcare, education, and emotional support. These two roles are often filled by the same person, but not always.
Heirs – Heirs has come to mean anyone who takes under the terms of the will. Traditionally it arose if someone died without a will. In that case, the laws of intestate succession determine who the heirs are, and thus who will inherit the estate. The probate court determines who the closest heirs are. The order of intestate succession is:
1st to the spouse, if any
2nd to the nearest issue (children, grandchildren, etc. They take equally if in the same generation.)
3rd to the parents,
4th to the parents' issue (that is the siblings of the deceased),
5th if the siblings are deceased but had children, to their issue/children (i.e., nieces and nephews of the deceased),
6th to the grandparents,
7th to the grandparents' issue (i.e., the decedent's aunts and uncles, if any, or cousins.
If none of the above exists, the court will give the estate to the "next of kin," meaning distant cousins.
HIPAA - Your Authorization for Release of Protected Health Information is a document required by the Health Insurance Portability and Accountability Act (HIPAA). This document allows the identified persons to obtain protected health information on your behalf in order to make informed decisions about your care and to pay your medical bills.
Holographic Will - A holographic will is one handwritten by the testator and while valid in California it can be very difficult to validate and administer.
Income – Property that a fiduciary receives as a return on a principal asset, such as interest from a bank or rental income.
Intestacy or Intestate - The status of dying without making a will or trust to take effect upon death. When this happens, the courts have nothing to look at to know your wishes. Thus, state law dictates how to distribute your assets. So, even if you have not created an estate plan, the State of California has done if for you.
Intestate succession – When someone dies without a will or trust dictating how to distribute the estate, the state laws of intestate succession prevail. These laws indicate who is entitled to receive property from another person's estate.
Irrevocable Trust - A trust that cannot, for all intents and purposes, be amended or revoked. While one should never count on being able to amend an irrevocable trust, and should enter it with full knowledge of its permanency, there are circumstances when a court will allow it to be amended, for example, if all the beneficiaries agree. If you are considering creating an irrevocable trust, or have one you wish to alter, you should consult with an estate planning attorney.
Issue – Your children, either by birth or through legal adoption. Issue are the direct lineal descendants of a person linked through parent-child relationships.
Pourover Will – This really isn't a "will" as we know it. But, it is a companion document to a trust. It states that all assets you did not put into your trust during your lifetime should still be distributed according to the terms of your trust. People may forget to put assets into their trust, or they may intentionally leave assets out. For example, it's common to not retitle your car in the name of your trust because you expect you'll sell your car during your lifetime, and having it in trust may complicate the sales transaction. However, when you pass away, the Pour-over will helps assure that your wishes will still be abided by for all your property, regardless of how it is titled.
Power of Attorney – A document that names an attorney-in-fact to have control of and responsibility for your property and finances. This power can be "springing," meaning it will "spring into effect" upon a certain event (such as if you are determined by a physician to be incapacitated) or it can be immediate, meaning it goes into effect as soon as you sign the document. Springing Powers of Attorney cause delay and can be burdensome. Immediate Powers of Attorney are more common, and beyond addressing incapacity concerns, can enable family members to make purchases and conduct other and business transactions with greater convenience. When deciding upon an Attorney-in-fact, select someone who:
1) You trust explicitly;
2) Knows you well enough, so that your wishes will be abided by, and best interests served; and
3) Is willing to serve in this fiduciary capacity.
Power of Attorney for Healthcare – This is the person you appoint to make healthcare designations for you, if you are incapacitated. As long as you can communicate with your doctor, your doctor will follow your requests. But, if you are unable to communicate, your physician will rely on the Healthcare Directive you have signed, and look to your Healthcare Power of Attorney to determine the course of your care. Remember that when your child turns 18 you should consider obtaining a Healthcare Power of Attorney over him or her. In this way you will be more easily able to make healthcare decisions for your child, if necessary.
Probate – In general, unless the deceased held assets in forms not subject to probate, estates in California valued over $150,000 must go through probate court before the assets are distributed. Probate involves a series of court proceedings during which the will (or lack of will) is confirmed, property is inventoried, taxes and other debts are paid, and the remainder of the estate is distributed. While "small estates" need not go through probate, they may incur court filing and other fees.
Probate lengthens the process by which beneficiaries receive their inheritance, and the process also depletes the estate. This is because, in California, the Probate Code statutorily provides payment to the executor / administrator of the estate and the attorney. The compensation schedule is based on the gross value of the estate:
4% on the first $100,000 ($4,000);
3% on the next $100,000 ($3,000);
2% on the next $800,000 ($16,000);
1% on the next $900,000 ($9,000);
?% on the next $15,000,000 ($75,000);
And an amount determined reasonable by the court for amounts above this.
This translates, for example, as follows: If you own a house valued at $600,000 (regardless of the size of your mortgage) and have other assets totaling $300,000, your estate may end up paying $21,000 in administration fees plus $21,000 in attorney's fees before distribution to beneficiaries!
Probate can be completely and easily avoided by creating a trust and moving your assets into it. That is, retitling your accounts and house to the trust's name. In addition to trust assets, life insurance and IRA's with named beneficiaries can also be distributed outside of probate.
QTIP Trust (Qualified Terminable Interest Property) – A QTIP is a marital deduction trust that enables the Grantors to provide for their surviving spouse, and also be sure the surviving spouse cannot change the beneficiaries after the first spouse dies. All income and sometimes some principal can be transferred from the QTIP to the surviving spouse during his or her life to take care of his or her health, education, maintenance and support. The trust requires that both married parties are U.S. Citizens. It also requires that all income is paid for life for the sole benefit of the surviving spouse. The surviving spouse gets a step up in basis on community owned assets.
QDOT Trust (Qualifying Domestic Trust) – A QDOT provides marital deduction planning options when one spouse is not a U.S. Citizen. U.S. Citizen married couples have an unlimited marital deduction, which is not available to non U.S. Citizens. When one spouse is not a U.S. Citizen, and the marriage has an estate greater than the estate tax exemption, then, in that event, the marital deduction saving trust should follow the QDOT regulations found at 26 CFR 20.2056A-2. Without following these, no marital deduction is allowed unless the surviving spouse becomes a citizen by the time the estate tax return is filed.
Revocable Trust - A trust that may be amended or revoked by the grantor(s), i.e., the person who created the trust. A revocable trust is also referred to as a "living trust," because you create it and operate it while you are alive. When you pass away it becomes irrevocable. An irrevocable trust, in almost all cases, can never be amended or revoked.
Separate Property – "Separate Property" is property owned by a person before he or she marries, or property he or she acquires during marriage via gift, inheritance, or profits that flow from separate property, such as rental income. The owner of the separate property has complete control of that property. An example of how this plays out was seen when Facebook founder Mark Zuckerberg got married the very next day after his public offering of Facebook. By doing this, his net worth (determined before marriage to be 19 billion) was his "separate property." If a spouse wishes to control how property is designated: i.e., separate or community, he or she should consult with an attorney about how to designate the property before, during, and after marriage.
Testamentary Trust – If you go to an estate planning attorney to have a trust drafted, it will be an inter vivos trust. That is, a trust you have created while you are alive. A testamentary trust, on the other hand, arises in probate court after you die, if you have designated it in your will. A common example of when a testator, or grantor, wishes to have a trust arise upon death is if he or she has minor children who will be unable to immediately inherit and control assets.
Testator/Testatrix – The creator or maker of a will. Testator (male) and Testatrix (female).
Totten Trust – Also known as a "poor man's will," or a "payable on death account," a Totten Trust is really not a trust at all. The simplest example is a bank account where the owner designates a beneficiary on the account. The owner has complete control of the assets during lifetime, but upon death it will be bequeathed to the beneficiary, without having to go through probate.
Transmutation – This is the process by which property in a marriage changes, or mutates, from:
1.) Separate to community;
2.) Community to separate; or
3.) Separate property of one spouse to separate property of the other.
This often takes place intentionally for estate or tax planning purposes. Or, it takes place unintentionally via actions by the couple.
Trust – A Trust is a document which can be created by you, and funded with your assets. It has many advantages, such as:
1) The assets in the trust need not go through probate;
2) The trust terms are private;
3) There are tax saving opportunities; and
4) You may designate an individual to manage and distribute your assets after death as you dictate. Should you wish to lessen the work and responsibility of financial management during your lifetime, you may transfer that responsibility to your trustee during your lifetime as well.
A trust has a:
1) Grantor or Settlor who creates the trust;
2) Trustee who administers the trust. During lifetime, the Grantor and Trustee can be the same person;
3) Beneficiaries who inherit the trust assets; and
4) Corpus, or "trust assets."
It is critical that the corpus or "body of the trust" is retitled under the name of the trust. If you create a trust and don't fund it by retitling your house, bank accounts and other assets, it remains an empty and virtually useless vessel.
There are many types of trusts. In addition to a Revocable or AB trust described below, which are the most common, depending on your individual circumstances you may benefit from a Children's Trust, an Irrevocable Life Insurance Trust (ILIT), a Grantor Retained Annuity Trust (GRAT), or an Intentionally Defective Grantor Trust (IDGT).
The B trust becomes irrevocable, and his or her wishes regarding distribution of the remaining corpus will be protected.
Trust Agreement – The Trust or "Trust Agreement" is like a multi-page "contract" between the "Trustor" (the property owner) and the "Trustee" (the person who will control the property, who until death, is usually the same person.) Basically, this refers to the formal agreement that states the terms of the trust which the trustor/grantor/settlor decides upon. For example, it delineates who is trustee and what his/her powers shall be, how assets shall be managed and distributed, and what the purpose of the trust is, among other terms.
Trustee and Successor Trustee – This is the person who administers a trust for the benefit of the beneficiaries of the trust. For some trusts, you can be the trustee of your own trust. There can also be co-trustees or institutional trustees. The Successor Trustee is the person you have designated to be next in line, and take over as trustee when you or another trustee passes away, becomes incapacitated, or resigns. When selecting a trustee, select someone you trust.
Uniform Transfers to Minors Act (UTMA) Uniform Gift to Minors Act (UGMA) – These are Statutory provisions which allow a transfer of assets to a custodian to be held for the benefit of a minor. In California the assets can be managed by the custodian until age 18 up to age 25, depending on how the designation is selected.
Will - A document created by the testator (the person who owns the property) which takes effect at death. It describes the property, who will receive the property (and sometime who will be omitted), and who shall execute the distributions. That person is thus named the "executor." A will must comply with certain legal requirements to be valid. A common misconception is that if you create a will your estate will stay out of probate. If you have only a will and not a trust, and assets over $150,000 (including the gross value of your home) your estate will go through probate.