MONEY MANAGEMENT

ESTATE PLANNING TERMS YOU NEED TO KNOW

(August 1, 2006) -- The first step in planning for what will happen to your assets when you die is mastering some key estate planning terminology and concepts. Here, the Virginia Society of CPAs offers a brief explanation of some of the most frequently used estate planning terms:

Administrator

The individual or institution appointed by the probate court to oversee the settlement of the estate of a person who has died without a will is the administrator of the estate.

Beneficiary

An individual designated to receive the principal and or income of an estate or trust is called a beneficiary.

Bequest

Property given as a gift under the terms of a will is bequeathed or handed down to the beneficiary.

Codicil

A Codicil is a properly signed, written addition or other change to an existing will that modifies the will.

Durable power of attorney

This is a written legal document that allows an individual to designate another person to act on his or her behalf during the creator's lifetime. Most powers of attorney grant powers to deal with the person's property. A durable power of attorney remains in effect even if the person who created it becomes disabled or incapacitated. This durable power of attorney ceases to exist upon the death of the individual granting the power.

Estate tax

Estate tax is a tax imposed at a person's death on the transfer of most types of property that is calculated on the total value of the estate. This is sometimes called the "death tax."

Executor

The person or entity named in a will empowered to carry out the provisions of the will is called the executor of the will. More than one executor can act together. In some states, this person is called the "personal representative."

Federal unified credit

The federal unified credit is a federal tax credit that offsets gift as well as estate tax liability. For 2006, the credit is $780,800, which offsets the tax liability on a net taxable estate of $2 million.

Fiduciary

An individual or institution legally responsible for acting in the best interest of another party is called a fiduciary. Trustees and executors are examples of fiduciaries.

Gift tax

A gift tax is imposed on the transfer (during the donor's lifetime) of property worth more than $12,000 per year to another person. The gift tax must be paid by the donor. There is no tax liability for the donee.

Gift tax annual exclusion

The first $12,000 (indexed for inflation) in gifts that an individual gives to as many people as he/she chooses during a calendar year is not subject to the gift tax. A husband and wife together can give $24,000 to each person. This is generally known as the "annual per donee exclusion."

Guardian

An individual legally appointed to act in loco parentis for a minor or to act on behalf of a person incapable of taking care of his or her own affairs is identified as their guardian.

Heir

An heir is a person(s) entitled by law to receive assets from the estate of a person who has died if no will existed.

Inheritance tax

The inheritance tax is a state tax based on the value of property and on the status of the beneficiary to whom it passes.

Intestate

Intestate is the term applied when a person dies without a will.

Living will

The living will is a legal document in which an individual states his or her wishes regarding medical treatment and life-saving interventions in the event of exigent medical circumstances such as a terminal illness or accident; and/or appoints a health care proxy to make health care decisions on the individual's behalf. The more common legal term is an "advance health care directive" or "durable power of attorney for health care."

Power of attorney

Power of attorney is a legal document that gives one individual the authority to act for another. See "durable power of attorney" and "living will." This authority ceases upon the incapacity or death of the individual granting the authority.

Probate

The court process for determining the validity of a deceased person's will and governing the distribution of the estate's assets is referred to as probate.

Trust

A legal, fiduciary relationship, usually established in a written document, in which an individual or institution (the trustee) holds and manages property for the benefit of another (the beneficiary) is called a trust.

Residual estate

Residual estate is determined as the portion of the estate that remains after all administrative expenses, taxes and specific bequests have been paid.

Unlimited marital deduction

The unlimited marital deduction is a rule permitting spouses to transfer an unlimited amount of assets to each other, while alive or after death, without federal income or estate tax implications.

Will

A will is a legally executed document that directs how and to whom a person's assets will be distributed upon death. A will may also designate a guardian to handle the affairs of minor children.

CPAs emphasize that by developing an estate plan you decide who will receive shares of your assets, who will manage your estate and who will care for your children. Without one, you relinquish the decision-making to the default provisions of state inheritance laws. Take the time now to familiarize yourself with the various aspects of estate planning and begin the process by meeting with your CPA and attorney.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.