Many professions and disciplines have their own vocabulary. As an example, think about the terminology used in medicine and law. Often this vocabulary defines complex ideas, yet just as often, “terms of art” can be defined with relative ease to a layperson.
Such is the case with much of the language associated with wills. Below we provide a few key terms you are likely to come across, defined in a way that should aid in understanding drafting the bedrock of estate planning—a will.
Basics in Will Planning
The individual who establishes a will is known as the testator. After the testator’s death, they are sometimes called the decedent. An executor, or personal representative, is the institution or individual named in a will required to carry out the will’s provisions, manage and protect property during the estate settlement process, and distribute the estate’s assets to beneficiaries (heirs). The distributions that the heirs receive are often referred to as bequests or legacies.
When people fail to create a will, they are considered to have died intestate, and state laws (the intestacy laws) will determine how assets are distributed. The court will appoint an administrator to handle an intestate estate.
A will often requires approval by a probate court. Probate is the legal process by which a will is proved or established to be valid. The assets that pass by means of a will are often called probate property. Then there are assets for which a beneficiary has been designated in a separate document and that are not subject to the process of probate— non-probate property. Together, these two elements form the gross estate for tax purposes. (Just because property passes outside of a will doesn’t mean that it necessarily escapes taxation.) Non-probate property includes property taken in the joint name and passed automatically to the other joint owner (the family home, bank accounts, etc.). Other common non-probate property: life insurance policies and retirement plan accounts.
A pourover provision in a will refers to transferring property from one estate or trust to another when a specified event occurs.
Finally, changes to your will may be necessary because life brings change. A whole new will may be drafted, or a codicil may be added to the will. A codicil is simply an addition or amendment to a will, made with all the formalities of the will itself.
A Bit About Taxes
Death taxes are the taxes that may need to be paid as a result of death. An estate tax is imposed upon the total value of property owned at death without regard to who will receive that property. An inheritance tax, in contrast, varies depending upon the heir’s identity, with more distant family members taxed at higher rates or with lower exemptions. The generation-skipping transfer tax is levied on gifts or bequests made to grandchildren and is imposed in addition to the estate or gift tax on such transfers.
The gross estate is the starting point for determining any taxes that may be owed. The term adjusted gross estate refers to gross estate minus certain adjustments. As one would expect, the taxable estate is the amount to which tax is applied.
Trusts in a Will
A will may direct establishing one or more trusts (testamentary trusts). A trust is an arrangement in which the ownership of assets is given to someone else, the trustee—usually a financial institution such as ours, but sometimes an individual. The trustee keeps possession of and control over the assets in the trust and is said to have legal title to these assets, which allows the trustee to exercise most property rights. The trustee’s responsibilities and duties concerning the trust’s assets are delineated in the trust agreement.
The trustee manages the assets in the trust for the trust beneficiaries, the recipients of the trust’s income, and the principal (sometimes referred to as the corpus of the trust). The beneficiaries have equitable title to the trust’s assets, meaning they have the right to benefit from the assets managed by the trustee.
Specific Kinds of Trusts
Wills often include a marital trust or marital deduction trust. These trusts allow for property transfers from husband to wife or wife to husband and are designed to take advantage of the federal estate tax deduction available to them. A bypass trust (over the years, referred to sometimes as an exemption equivalent, credit shelter, or unified credit trust) is a trust for the benefit of a surviving spouse, created to avoid estate taxes at a first spouse’s death and which takes advantage of the available federal estate tax credit.
There are two variations on the basic marital deduction trust. One is the qualified terminable interest property (or QTIP trust), a special form of property ownership that qualifies for the marital deduction. Although the surviving spouse has no absolute right to the trust’s assets, they have an income interest in the trust’s assets and a right to direct to whom the assets will pass. A qualified domestic trust (QDT) is established when a surviving spouse is not a U.S. citizen and is designed to allow the assets in the trust to qualify for the marital deduction.
Charitable trusts often are established by will. A charitable remainder trust is established to allow the grantor or someone they designate to receive the income from the trust for the beneficiary’s lifetime or a period of years. When the income beneficiary’s interest ends, the trust’s assets pass to the designated beneficiary. With a charitable lead trust, the charity receives the income from the trust, and the trust assets later pass to the beneficiaries named by the grantor. To take advantage of the charitable deductions associated with the gifts made, charitable trusts must adhere rigorously to a set format.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or email@example.com.
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Any developments occurring after July 1, 2022, are not reflected in this article.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.