Author: Jennifer Climo
Estate planning is a crucial part of any financial plan. One of the first discussions we have with new clients is about whom they want to oversee their financial and health decisions if they are unable to do so themselves. It is crucial to have primary and contingent people identified for each role.
There is a lot of confusion about the various estate terms, so we have put together this primer.
Probate is an expensive, public, and time-consuming process of marshaling your assets after your death and passing them on to the next generation. Probate should be avoided due to its cost, the length of time it takes to settle the estate, and the public nature of the filings.
Guardian of Minor Children
This person will care for your minor children if you and your spouse are not able to.
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, bank and investment accounts, and other assets.
Estate taxes are taxes levied on the value of your assets after you pass away. While the federal estate tax exemption is currently over $12 million, (that is, no tax is due unless the value of your taxable estate exceeds that amount), it is scheduled to be cut in half in 2026. In addition, many states, including Massachusetts, have much lower thresholds. The Massachusetts estate tax applies to estates greater than $1 million. Your taxable estate may include all your bank and investment accounts, the equity in any real estate including your primary residence, and the proceeds of any life insurance policies that you owned.
Your trustee will administer your trust – pay bills, accumulate assets, hire/fire professionals, file tax returns, and distribute assets under the terms of the trust.
This person will settle your estate after you die (for example: collect assets, pay debts and taxes, file tax returns, and distribute property under the terms of your will).
Beneficiaries are a powerful estate planning tool. Your beneficiaries are the people or charities that will inherit your assets. Beneficiaries can be named on many types of accounts and are also named in trusts. Your primary beneficiary inherits first; a contingent beneficiary inherits if the primary beneficiary is deceased or declines the inheritance (known as a “disclaimer”).
Agent Under Durable General Power of Attorney
This person will manage your financial affairs when you are alive but incapacitated. They can sign checks, pay bills, collect debts, file tax returns, etc., on your behalf. They handle all your accounts that are not held in trust.
Agent Under Durable Power of Attorney for Health Care (aka “Health Care Proxy”)
This person makes your medical decisions when you are not able to.
A revocable (living) trust protects your assets from probate only. After your death, a properly drafted trust can protect those assets from your heirs’ divorces and creditors. It can also protect some assets from estate taxes in certain situations. A trust becomes irrevocable at the donor’s death as a matter of state law (which is why you can end up with a “John Smith Revocable Trust” that is irrevocable!).
The trustee of your revocable trust is usually you (and possibly your spouse) while you are alive. Your contingent trustees are often your adult children or friends/family members.
The terms of a revocable trust can be changed during your lifetime.
Revocable trusts are often used in second marriages to protect the new spouse while also protecting the inheritance of the children from the first marriage.
A revocable trust becomes irrevocable upon the death of the donor/grantor. At this point, the terms of the trust can no longer be changed. An irrevocable trust can also be established by a donor/grantor for someone else’s benefit at any time. However, as the name suggests, the terms of the trust cannot be changed.
Irrevocable trusts have some complications – for example, the trustee must keep an accounting of the 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 trusts.
A will’s purpose is to catch anything that was not titled in your revocable trust and did not have a named beneficiary. In general, nothing should pass through your will, as a will is subject to probate. However, a will is necessary to protect your heirs in case there is an asset that was not properly set up with a beneficiary during your life.
Your will also should name the guardian who will be responsible for your minor children.
SummaryHopefully this list has shed some light on the various terms and roles in estate planning.
This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Jennifer Climo, CFP®, CPA, MSFP is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.