Estate Planning Terms Everyone Should Know

Whether you are making arrangements for your own estate or you are faced with managing an estate after the loss of a loved one, estate planning is essential to ensure the timely distribution of assets to heirs following a loss. Working with an estate can be a challenging process, to say the least. Probate, executor, beneficiary – if these terms are new to you, they can contribute to feelings of awe and confusion. Understanding basic estate planning terminology will help you to feel more confident when making decisions or engaging in discussions about this broad and confusing topic.

What is an estate, anyway?

The definition of the word ‘estate’ can vary by context. When referring to real estate, the term describes property rights only. When declaring bankruptcy, however, an estate describes any asset that can be collected by a trustee, creditors and other institutions.  

Estate, independent of context, refers to the tangible and intangible elements that make up a person’s financial net worth after the owner’s death.

Assets are the property that hold value such as a home, investments or a vehicle. Estates are made up of all of a person’s legal interests and entitlements, assets and ownership. Assets include interests that someone may have as part of a partnership or joint ownership, as well as any other assets that someone would from another party. An example is if a decedent was an heir to someone else’s probate estate but died before he could receive his inheritance. There are 3 categories of estates: gross, residue and estate debt.

Gross estate refers to the whole financial value of a person’s assets without factoring in liabilities such as taxes or consumer debt. 

Net estate reflects the financial value of an estate after accounting for debts repaid, funeral expenses and taxes to name only a few. For example, a person whose assets outweigh financial liabilities (like credit card debt) by $40,000.00 is said to have a net worth of $40,000.00.  

Estate debt describes the financial value of a person’s debt.

What items are not included in an estate?

There are exceptions to what can be included in an estate. Life insurance and pensions, for example, are entitlements that are immediately passed on to the beneficiaries (those receiving the benefit of these funds – see below) upon the insured’s passing. That means that these entitlements cannot be used as part of an estate to repay estate debts; rather, the beneficiary receives them immediately. Similarly, a jointly held asset, such as a home, avoids probate. For example, ownership of a home that is jointly held by a husband and wife will automatically pass to the wife in the event that the husband passes away, without going through a probate process.

Assets or investments that are held in an irrevocable trust are also not available to be considered part of an estate. These are items that were transferred into trust during the testator’s lifetime. A testator is the person who signs and executes a will. A trustee maintains assets separate from his own and does so, sometimes for his benefit but ultimately for others’ benefit.

In the case of an irrevocable trust, once something is put in trust the testator forgoes any rights to it, since it is an arrangement which cannot be reversed. The trustee in this case holds fiduciary responsibility (see below).

Other Important Terminology

Here are other terms that will be helpful to understand as you proceed with the handling or preparation of an estate.

Ancillary Administration – In some cases, estates include properties outside of the state or country that the decedent lived in at the time of passing. Since these assets are subject to the laws in the area or areas in which they are located, a separate estate will in many cases need to be opened in some or even all of those other locations. Each of those secondary – or ancillary – administrations will need oversight by its own administrator. 

Beneficiaries – Beneficiary refers to the person or entity that receives money or assets after and as a result of someone’s death. For example, life insurance policies pay a beneficiary upon passing of the insured. Typically, this is the spouse or child(ren) of the deceased.

Executor – An executor is the person who is legally able to carry out the wishes of the deceased as outlined in a will. The role of an executor can be burdensome when you consider the associated responsibilities such as contacting beneficiaries, locating and recovering all of the deceased’s assets, handling the deceased’s debts and ensuring they are paid as well as offering the will for probate. Executors are nominated by the deceased but can decline or renounce their role as executor of the estate. Executors are sometimes referred to as personal representatives or administrators. The word for a female executor is executrix.

Inheritance – Similar to benefits, inheritance refers to the assets received by a legal heir or beneficiary upon someone’s death.

Fiduciary – Refers to the ethical responsibility of a trustee when holding assets in trust for the deceased or executor in administering an estate.

Power of Attorney – A written grant of permission to act on another’s behalf in private affairs, financial matters etc.

Probate Estate – Probate is the process of administering a person’s financial rights and obligations after the person has died.

Last Will and Testament – This is a legal document that outlines someone’s wishes for the distribution of assets upon death. A person can leave in his or her will assets to particular individuals, groups of people (e.g., “to all of my nieces and nephews”) and organizations. It also provides instructions about how to manage investments, accounts, and dependents. A last will and testament can only be enforced through probate court.

Heir – This term is similar to beneficiary but involves blood/family lines rather than beneficiary. A deceased person’s closest living relatives are his heirs.

Testate – Indicates whether there was a formal will in place at the time of death. Someone who dies without a will in place is said to die ‘intestate’.

Have Faith in an Estate Lawyer

Outlining and legally defining your wishes for your estate in the event of your death can be a complex and daunting task, let alone carrying out the wishes of someone who has passed as their executor. Rather than risk indefinite procrastination and leaving your dependents without protection, reach out to an estate attorney who can partner with you to simplify your involvement and produce a timely result. You and your loved ones deserve the peace of mind of a well-planned estate.  

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

Are you in a fog and need help seeing your way through this mess? Let us help.

Discover exactly what you need to do as the legal heir to ensure that your loved one’s affairs are handled properly from a legal and financial perspective.

What Is Probate?

What Is Probate?

WHAT IS PROBATE? WHAT IS INHERITANCE? To start let’s first define inheritance. An inheritance is something you receive from someone who has passed away.

Read More »