Estate planning can seem complicated to those who have never gone through the process before. Most people have heard of wills and beneficiaries, but there is still a whole list of other important estate planning terms that can be confusing.
At Lovett & House Co., LPA, we’re here to make estate planning as simple and effective as possible. We work with each client to give much-needed guidance and to answer every question. And we want not only our clients but also every Dayton and Ohio resident to be informed about estate planning so that they can make the best decisions for themselves and their families.
Below, we’ve compiled a (mostly) A to Z list of the most important estate planning terms that you need to know.
Administration: Administration is the process during which an executor (someone you’ve chosen) or an administrator (someone appointed by the court if you did not appoint an executor) takes care of your estate. This process includes collecting your assets, paying all debts, and distributing your estate according to your will or Ohio law (if you die without a will).
Beneficiary: A beneficiary is the person who will receive assets of benefits from your estate or trust. You should choose beneficiaries for your estate, insurance policies, retirement accounts, and other accounts.
Codicil: A codicil is a legal document that amends a will. When you already have a will in place, you don’t have to create a new will in order to make changes. Instead, you can create a codicil.
Durable power of attorney: A power of attorney is a legal document that allows a person, chosen by you, to have the power to act in your place. You may allow this person to make health care and/or financial decisions for you. However, power of attorney documents only gives a person the authority to act on someone else’s behalf until the documents creator has died or become incapacitated.
Estate tax: Under Ohio and federal law, the value of a person’s estate can be taxed upon his or her death. In Ohio, the estate tax has been repealed for all people who pass away after January 1, 2013. The federal tax rate is 40 percent; however, this rate only applies to people who do not qualify for the estate tax exemption (see Unified Credit below). Because the estate tax exemption is very high, most people will not be subject to the federal estate tax.
Financial power of attorney: A financial power of attorney is a legal document allowing someone to make financial decisions in your place. This kind of power of attorney can be limited, allowing the person you choose to only perform certain actions (such as closing a real estate deal). It can also be durable (see Durable Power of Attorney above), allowing the person you choose to take care of your finances if you are unable to do so yourself. A power of attorney can allow someone to do simple or even complex tasks—from depositing your Social Security checks and filing your tax returns to watching over your retirement and investment accounts. The person you choose does not have to be a financial expect; in fact, he or she can hire experts to help handle your financial affairs.
Guardian: In estate planning, a guardian is someone you designate as the person who will care for your children if you pass away while they are still minors. This is designated in your will (see Will below). You should choose someone you trust, who will be unlikely to pass away before you (for this reason, parents are not always the best option as a guardian).
Health care power of attorney: A health care power of attorney is a legal document allowing someone to make health care decisions in your place if you are ever incapacitated. For example, if you were to fall into a coma, the person you appoint (sometimes called a “health care proxy”) would be able to make decisions about treatments and life support. This person is legally required to follow your wishes, as long as he or she knows them (see Living Will).
Intestate: Intestate refers to a person dying without a legal will in place. When a person dies intestate, his or her estate is distributed according to Ohio law.
Joint tenancy: In a joint tenancy, two (or more) people own a property. Most of the time, this arrangement includes “rights of survivorship.” This means that when one of the owners dies, the other owner automatically becomes the sole owner of the property, without having to probate the property.
Living will: A living will is a legal document that lets you spell out your wishes for medical care. This type of document becomes incredibly important if you are ever incapacitated due to injury or illness. For example, if you suffer from a terminal illness or fall into a persistent vegetative state, a living will can let your family and health providers know whether or not you would want to continue life-prolonging treatments. This document can help your health care proxy make the decisions you would make.
Marital deduction: Marital deduction refers to a tax law that allows spouses to transfer qualified property to each other without being taxed.
Nursing home planning: Nursing homes are incredibly expensive, and most people don’t have that kind of money on hand. Nursing home planning helps you plan for a possible long-term stay in a nursing home or assisted living facility. By planning ahead, you and your family may be able to keep more of your hard-earned money while still being able to pay for a comfortable nursing home.
Probate: During this court-supervised process, a person’s estate (with some exceptions) is distributed. If there is a will, it is examined to determine whether or not it is valid. If the will is valid, the person’s estate is then distributed according to the terms of the will. If there is not a will, the estate is distributed according to Ohio law. Probate can often be a long, difficult process.
QTIP: Qualified Terminable Interest Property, or QTIP, is property held in a trust that qualifies for the marital deduction. A QTIP trust can be helpful because it allows you to take advantage of the marital deduction while still outlining (in the trust) where the remainder of the money should go after your spouse passes away.
Residue: This is the property that remains in an estate after the debts have been paid and all specific gifts of property and money have been distributed according to the will.
Settlor: This is the term used for the person who establishes a trust. A settlor may also be called a “trustor” or “grantor.”
Trust: A trust is a legal instrument that is used in estate planning. Trusts are often advantageous because they allow you to avoid probate (which can save your family time and money), protect your heirs from creditors, and distribute money and property over time and under certain conditions. In general, a trust can give you more control than a simple will. However, not everyone needs a trust, so it’s important to talk to an estate planning lawyer about your options.
Unified credit: This is a credit against the federal estate tax and gift tax. It is often also called the estate tax exemption. In 2015, the estate tax exemption will be $5.43 million for individuals. Married couples can combine their estate tax exemptions, letting them leave more than $10 million. If the value of your estate is less than the exemption, you won’t owe federal estate tax.
Will: The most common—and most important—legal document in estate planning is the will. In your will, you can determine how you want to distribute your possessions, property, and money. You can appoint an executor to administrate your estate and you can designate a guardian for your children, in case you pass away while they are still minors.
To learn more, visit the American Bar Association glossary of estate planning terms. If you have questions about any of these terms or are thinking about estate planning, please don’t hesitate to call us. The Dayton, OH estate planning lawyers at our office are here to help you.