Estate planning is a crucial part of any financial plan. It has wide-ranging impacts on personal life decisions and the conservation of financial resources for individuals and their heirs. Among the many critical planning items encompassed in an estate plan are: 

• Who will make decisions in the event of incapacity? 

• Who will inherit assets after death? 

• What taxes and other costs will need to be paid out of an estate or by heirs? 

• Who will be responsible for carrying out wishes and settling affairs at death? 

• Who will be named as the guardian for minor children? 

These are important but often difficult decisions to make, and embarking on the estate planning process can feel daunting. In our work with clients, we address these issues early on in a new relationship – in collaboration with a qualified attorney – and provide a tremendous amount of support and guidance, drawing on decades of collective experience.  

One of the more intimidating facts about estate planning is that it involves multiple components and a number of unfamiliar terms. While other blogs we have written focus on specific areas of estate planning or related strategies, such as gifting, in this post we will provide a broader overview of the most common terms and parts of the process. By putting this information together in one place, we hope it will make the process less opaque and intimidating, as well as make it easier to create a plan or review plans you may already have in place.  

Who Will Inherit My Assets?

There are several ways your assets may pass at your death. If you are the joint owner of an asset with someone else, in most cases your share will pass to the joint owner automatically. If you have a beneficiary named on an account or a life insurance policy or your assets are held by a trust, the beneficiary designations or trust language will determine how assets are distributed when you pass away. Any other property, such as an account with no joint owner or beneficiary, will be required to go through the probate process prior to being distributed to heirs.  

What Is Probate?

Probate is a legal process run by a special court system designed to ensure assets are passed to heirs according to applicable state laws. While the intention behind the system is a good one, passing an estate through this process is expensive, public, and time-consuming. If you have a will, the probate court will need to determine the validity of the will and provide your executor with documentation, approving their role before any assets may be distributed. If you do not have a will, the probate court will appoint an administrator to your estate and determine how your assets will be distributed based on the laws of intestacy, which determine how an individual’s assets are distributed if they pass away without a will. While the process can be simplified somewhat for smaller and uncomplicated estates, probate is still a laborious and complicated procedure that most often requires professional and expensive legal assistance to navigate. Also, probate records are public, allowing interested parties to review details of a deceased’s estate that heirs may prefer to keep private. And the probate process can be lengthy, as courts can have backlogs lasting months, and may require the revision and resubmission of documents prior to approval.  

As expensive and time-consuming as the probate process is, there are straightforward, cost-effective ways to avoid the involvement of the probate court altogether. This can be accomplished through the thoughtful use of joint ownership, beneficiary designations, and trusts. With the right plans in place, assets may be passed to heirs in far less time and at a far lower cost than would be incurred through the traditional probate process. 

What Does an Executor of a Will Do?

One function of the probate process is the naming of an executor or a personal representative. There are technical differences between these terms, but they generally describe the same role, as does the term “estate administrator.” Any individual, individuals, or entity assigned to this role has the legal authority to enact transactions within the estate, as well as the legal responsibility to pay all expenses of the estate and distribute assets according to the deceased’s will or the laws of intestacy (if the deceased had no will). In practice, this may mean an executor or a personal representative does such things as opens accounts in the name of the estate, transfers the deceased’s personal accounts into an estate account, files tax returns, distributes personal property, and writes checks to heirs for their specified share of the deceased’s assets. The executor or personal representative role is a significant and time-consuming responsibility. Attorneys and financial planners who specialize in estate administration may provide assistance to individuals placed in this important position for a deceased’s estate. Leaving an executor or a personal representative with an organized plan can greatly ease the burden of this role and allow for the efficient collection and distribution of an estate’s assets. 

Why Do I Need a Will?

A will provides several functions in the estate planning process. It directs the distribution of any assets not held in trust or an account with a named beneficiary. A will is also the only document in which one may name an executor or a personal representative as well as a guardian or guardians for minor children. Even in the event all of someone’s assets are held in trust or accounts with named beneficiaries, a will remains a critical document with respect to the roles identified and serves as a backstop for any assets that end up passing through the probate process. Without a will, your assets will pass via probate according to state law, which may not be what you want. 

Who Will My Children Live with After I Die?

A valid will may name a guardian or guardians to care for minor children. If no will has been drafted, or if the document cannot be found or is deemed invalid, the probate court will appoint an individual or individuals to this role during the probate process. For anyone with minor children, the ability to specify a guardian or guardians of their choosing is one of the most important reasons to write a will.  

 What Is an Estate?

Your estate consists of the value of all your assets at your date of death, less any liabilities and charitable bequests. These assets can include life insurance proceeds owned by you individually as well as your home(s), business interests, and bank and investment accounts. Property held by most kinds of trusts will also be included in your estate. Some special kinds of irrevocable trusts may remove assets from your estate, but even with these kinds of trusts, a series of rules must be followed to preserve the exclusion. Generally speaking, the laws around estate planning lean more toward the inclusion of assets rather than the exclusion.  

What Are Estate Taxes? 

Estate taxes are taxes levied on the value of a deceased’s estate. While the federal estate tax exemption is currently over $13 million per person (that is, no tax is due unless the value of your taxable estate exceeds that amount), this amount will be reduced by about 50% in 2026 under current tax law. In addition, many states – including Massachusetts – have much lower thresholds. The recently updated Massachusetts estate tax applies to estates greater than $2 million. Both the federal government and individual states allow spouses to pass an unlimited amount of assets to each other with no tax due, and any assets left to a qualifying charity will also be excluded from tax calculations.  

Who Are Beneficiaries?

Broadly speaking, a beneficiary is a person or an entity that will inherit assets from an estate. A beneficiary may be named in a will, assigned to an account, or specified in a trust.  

The use of named beneficiaries on accounts is a powerful estate planning tool, although it comes with some hazards. An account with a named beneficiary will be included in a taxable estate but will pass to heirs outside the probate process, greatly easing the time and expense of distributing the applicable funds. Keep in mind that if an account is jointly owned, in most cases assets will pass to the joint owner before being passed to any named beneficiaries.  

Trust documents contain a section dedicated to how assets are distributed at death. The nature of trusts allows for nearly any kind of customized arrangement to be applied to the distribution of trust assets, such as restricting a child’s access to funds until a certain age or ensuring funds don’t supplant government assistance. In most cases, distributing assets to heirs named in a trust is a straightforward process that does not require the involvement of the probate court. 

Lastly, a will can direct how any assets not held in a trust or in an account with a named beneficiary will be distributed. If a deceased has a trust, it is very common for their will to direct all assets to their trust (this is known as a pour-over will, as all assets are “poured” into the trust). If no trust is present, their will may outline a simple arrangement, such as directing all assets to their surviving spouse or to a collection of charities (sometimes referred to as a simple will). A wide variety of structures are possible in a will, including the creation of trusts within the will document itself (known as testamentary trusts) to direct the distribution of assets into the future. Keep in mind, however, that a will is a public document and will require approval from a court before its executor or personal representative follows it. In most cases, directly named beneficiary arrangements and the use of trusts are the preferred means of outlining specific plans for the distribution of an estate.  

Related terms that may be seen in discussing beneficiaries are “primary” and “contingent.” A primary beneficiary is first in line to inherit assets. A contingent beneficiary will only inherit funds if one or more primary beneficiaries are deceased at the time of distribution or opt not to receive the assets left to them (known as disclaiming). 

What Is a Trust? 

Trusts are an important tool in estate planning that can serve numerous functions. Among the many benefits and uses of trusts are: 

• Allowing assets to pass to heirs outside the probate process 

• Simplifying the management of financial affairs in the event of incapacity 

• Directing the management and distribution of trust assets to heirs after the death of the donor 

• Ensuring each spouse makes full use of their individual estate tax exclusions 

• Reducing the size of the taxable estate 

A revocable trust (also known as a living trust) may be revised during the life of the donor and is effective at protecting assets from probate and directing the management of trust assets after death. This type of trust does not remove assets from the donor’s estate, which is most often a concern in managing estate taxes or easing qualification for Medicaid. A properly drafted trust can also protect trust assets from heirs’ creditors and insulate funds from claims in divorce proceedings of beneficiaries, and is often used in second marriages to protect the interests of the new spouse and children from the donor’s prior marriage. 

An irrevocable trust is the only type of trust that will allow trust assets to be removed from the donor’s taxable estate. This type of trust is also used in Medicaid planning. As the name suggests, an irrevocable trust is designed to permanently remove assets from the control of the donor; as such, it requires significant consideration and planning prior to implementation. Irrevocable trusts have some complications that revocable trusts do not. For example, the trustee must keep an accounting of trust activity and is responsible for filing (or paying a CPA to file) an annual tax return (Form 1041). Many states also have tax filing requirements for irrevocable trusts. 

At the death of the donor, most revocable trusts become irrevocable. If they do not, the wishes of the donor could be altered, removing one of the primary benefits of using the trust in the first place. This leads to a situation where a trust titled the “John Smith Revocable Trust” is actually irrevocable.  

Trusts are administered by one or more trustees, who are responsible for managing trust assets and distributing them according to the terms of the trust. The trustee of a revocable trust is usually the donor (the person who creates and funds the trust), possibly along with their spouse. At the death or incapacity of the original donor or trustee, a successor trustee named in the trust takes the place of the original trustee(s). The trustee(s) of an irrevocable trust will always be someone other than the donor.  

What Is a Durable Power of Attorney?

A durable power of attorney (DPOA) document allows someone else to step into your shoes and manage your affairs. It is a common misconception that estate planning deals only with the distribution and management of assets when someone passes away. Equally important is planning around what happens when someone is alive but incapacitated, unable to make or communicate decisions around their financial affairs or health care decisions. A properly authorized DPOA will be able to conduct nearly all financial transactions on behalf of the incapacitated individual, including signing checks, paying bills, and even filing tax returns.  

Note that any assets held by a trust will not require a DPOA document. The trust itself will specify who will step in as the successor trustee to manage trust assets in the event of incapacity. Exercising authority as a successor trustee is typically far easier than gaining approval from a financial institution as a designated DPOA – yet another argument for placing trusts at the center of a well-executed estate plan. 

What Is a Power of Attorney for Health Care (aka a Health Care Proxy)

A power of attorney for health care – or a health care proxy – is the health care equivalent of a DPOA document. The individual or individuals named in this document are authorized to make health care decisions on behalf of the incapacitated person. It is common to supplement the power of attorney for health care document with a living will or other advance directive about the wishes of the incapacitated person concerning life-sustaining treatment. In most states, living wills are legally binding and must be followed; in some states – including Massachusetts – they may provide guidance to the designated power of attorney for health care but are not legally binding.  

Summary

Hopefully, this blog has shed some light on the various terms and roles in estate planning, as well as the benefits of thoughtful planning in this area. Although there is a lot to consider, you don’t have to do it alone. If you need assistance with your estate, tax, or retirement planning in general, please reach out to our team.