A-B trust planning – A common arrangement used in a will when a married testator has an estate with a value that exceeds his or her remaining estate tax exemption amount.  A testator creates at the first death a marital trust or “A Trust” for the sole benefit of the surviving spouse for life (sometimes called a “Marital Trust” or “QTIP Trust”) and a bypass or “B Trust” for the benefit of the testator’s descendants or the testator’s surviving spouse and descendants for life (sometimes called the “Credit Shelter Trust” or “Family Trust”).  After the death of the surviving spouse, the remaining assets of both trusts generally pass to the testator’s descendants.  The B Trust passes at the death of the surviving spouse to the beneficiaries free of estate taxes regardless of the value of the B Trust at that time.  The value of the A trust is included in the surviving spouse’s estate for estate tax purposes, and the surviving spouse’s remaining estate tax exemption is applied to the collective value of the A Trust and the surviving spouse’s own assets.  Under prior law, only the decedent could use his or her estate tax exemption, so it was important to create the B Trust in order to earmark this exemption.  Since the concept of portability is now part of the law, not everyone will need the complexity of the A-B trust structure in order to take advantage of his or her estate tax exemption. Portability allows the surviving spouse to use the unused estate tax exemption of the first spouse to die.  Be careful, however. While it is seductively simple and inexpensive to leave all assets outright to the surviving spouse and plan on his or her use of portability to avoid estate taxes, trusts offer many more advantages than tax planning.  Continuing to use trusts allows you the assurance that your assets will be used and distributed as and to whom you wish and offers other advantages such as asset or creditor protection and generation skipping.

Administration – The process during which the executor or personal representative collects the decedent’s assets, pays all debts and claims, and distributes the residue of the estate according to the will or the state law intestacy rules (when there is no will).

Administrator – The individual or corporate fiduciary appointed by the court to manage an estate if no executor or personal representative has been appointed or if the named executor or personal representative is unable or unwilling to serve.

Annual exclusion – The amount an individual may give annually to each of an unlimited number of recipients free of federal gift or other transfer taxes and without any IRS reporting requirements. In addition, these gifts do not use any of an individual’s federal gift tax exemption amount. The annual exclusion is indexed for inflation and is $14,000 per donee for 2013.  Payments made directly to providers of education or medical care services also are tax-free and do not count against the annual exclusion or gift tax exemption amounts.

Applicable exclusion amount – Another name for the estate tax exemption amount (formerly called the unified credit), which shelters a certain value of assets from the federal estate and gift tax. This amount is $5 million and is inflation adjusted annually.

Ascertainable standard – A standard, usually relating to an individual’s health, education, support, or maintenance, that defines the permissible reasons for making a distribution from a trust. Use of an ascertainable standard prevents distributions from being included in a trustee/beneficiary’s gross estate for federal estate tax purposes. Depending on state law, the use of an ascertainable standard may provide less protection for a beneficiary from creditors. If the risk of a lawsuit or divorce concerns you, you should discuss distribution standards with your attorney.

Attorney-in-Fact – The person named as agent under a power of attorney to handle the financial affairs of another.

B

Beneficiary – A person who will receive the benefit of property from an estate or trust through the right to receive a bequest or to receive income or trust principal over a period of time.

Bypass trust – The “B Trust” in A-B trust planning that is sheltered from the federal estate tax by the decedent’s estate tax exemption amount.  Because this trust “bypasses” the estate tax in the decedent’s estate and at the surviving spouse’s death, this trust often is called a bypass trust. This type of trust will not be as important for tax planning in light of the concept of portability in the estate tax law, but such a trust still will be valuable for many non-tax planning considerations.  If you reside in a state with a lower estate tax exemption than federal estate tax law provides, you may need to modify the terms of any bypass trust to address that lesser amount.  See the comments above concerning A-B trust planning.

C

Charitable lead trust – A trust created during lifetime or at death that distributes an annuity or unitrust amount to a named charity for life or a term of years, with any remaining trust assets passing to designated non-charitable beneficiaries upon termination of the trust.

Charitable remainder trust – A tax-exempt trust created during lifetime or at death that distributes an annuity or unitrust amount to one or more designated non-charitable beneficiaries for life or a term of years, with the remaining trust assets passing to charity upon termination of the trust. If appreciated assets are transferred to a charitable remainder trust and sold by the trust, the trust does not pay capital gains tax.  Instead, the non-charitable beneficiaries are taxed on a portion of the capital gains as they receive their annual distributions and, in this manner, the capital gains tax is deferred.

Codicil – A formally executed document that amends the terms of a will so that a complete rewriting of the will is not necessary.

Community property – A form of ownership in certain states, known as community property states, under which property acquired during a marriage is presumed to be owned jointly.  Only a small number of states are community property states, and the rules can differ significantly in these states.

Conservator – An individual or a corporate fiduciary appointed by a court to care for and manage the property of an incapacitated person, in the same way as a guardian cares for and manages the property of a minor.

Credit shelter trust – Another name for the bypass or “B Trust” in A-B trust planning.

Crummey trust – An irrevocable trust that grants a beneficiary of the trust the power to withdraw all or a portion of assets contributed to the trust for a period of time after the contribution. The typical purpose of a Crummey trust is to enable the contributions to the trust to qualify for the annual exclusion from gift tax.  In light of the current high gift and estate tax exemption amounts, many taxpayers will no longer need their trust contributions to qualify for the annual exclusion.

D

Decedent – An individual who has died.

Descendants – An individual’s children, grandchildren, and more remote persons who are related by blood or because of legal adoption. An individual’s spouse, stepchildren, parents, grandparents, brothers, or sisters are not included. The term “descendants” and “issue” have the same meaning.

Disclaimer – The renunciation or refusal to accept a gift or bequest or the receipt of insurance proceeds, retirement benefits, and the like under a beneficiary designation in order to allow the property to pass to alternate takers. To be a qualified disclaimer and thereby not treated as a gift by the disclaimant (the person who makes the disclaimer), the disclaimer must be made within nine months and before the disclaimant has accepted any interest in the property in order to avoid a tax triggering event.  In light of the current high gift and estate tax exemption amounts, it may be feasible in many instances to disclaim even after that time period to accomplish non-tax goals.  State laws addressing disclaimer may differ, and some wills and trusts might include express provisions  governing what happens to assets or interests that are disclaimed.  Be certain to consider all these issues before disclaiming.

Durable power of attorney – A power of attorney that does not terminate upon the incapacity of the person making the power of attorney.

E

Estate planning – A process by which an individual designs a strategy and executes a will, trust agreement, or oth

er documents to provide for the administration of his or her assets upon his or her incapacity or death.  Tax and liquidity planning are part of this process.

Estate tax – A tax imposed on a decedent’s transfer of property at death.  An estate tax is to be contrasted with an inheritance tax imposed by certain states on a beneficiary’s receipt of property. More than 20 states have state estate taxes that differ from the federal system, so your estate could be subject to a state estate tax even if it is not subject to a federal estate tax.

Estate tax exemption amount – Another name for the unified credit amount, applicable exclusion amount, and credit shelter amount.

Executor – A person named in a will and appointed by the court to carry out the terms of the will and to administer the decedent’s estate. May also be called a personal representative. If a female, may be referred to as the executrix.

F

Family office – An arrangement to coordinate the legal, tax, and other needs of one or more families, either through a true office staffed with employees or through outsourcing to the family’s regular advisors. Frequently, a family’s private trust company serves as the family office.

Family trust – A trust established to benefit an individual’s spouse, children or other family members.  A family trust is often the bypass trust or credit shelter trust created under a will.

Fiduciary – An individual or a bank or trust company designated to manage money or property for beneficiaries and required to exercise the standard of care set forth in the governing document under which the fiduciary acts and state law. Fiduciaries include executors and trustees.

G

Generation-skipping transfer (GST) tax – A federal tax imposed on outright gifts and transfers in trust, whether during lifetime or at death, to or for beneficiaries two or more generations younger than the donor, such as grandchildren, that exceed the GST tax exemption. The GST tax imposes a tax on transfers that otherwise would avoid gift or estate tax at the skipped generational level. Some states impose a state generation-skipping transfer tax.

Gift tax – The tax on completed lifetime transfers from one individual to or for the benefit of another (other than annual exclusion gifts and certain direct payments to providers of education and medical care) that exceed the gift tax exemption amount ($5 million inflation adjusted).  Under the concept of portability in the tax law, if your spouse predeceased you after 2010 with remaining unused exemption (the deceased spouse unused exemption, or DSUE) and an estate tax return was filed, your exemption for gift tax purposes can be augmented by your deceased spouse’s DSUE.  Only the State of Connecticut imposes a separate state gift tax.

Grantor – A person, including a testator, who creates, or contributes property to, a trust. If more than one person creates or contributes property to a trust, each person is a grantor with respect to the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion. The grantor is also sometimes referred to as the “settlor,” the “trustor,” or the “donor.” Contrast with the use of the term “grantor trust” to imply a trust the income of which is taxed to the person considered the “grantor” for income tax purposes.

Grantor trust – A trust over which the grantor retains certain control such that the trust is disregarded for federal (and frequently state) income tax purposes, and the grantor is taxed individually on the trust’s income and pays the income taxes that otherwise would be payable by the trust or its beneficiaries. Such tax payments are not treated as gifts by the grantor to the trust or its beneficiaries.   Provided the grantor does not retain certain powers or benefits, such as a life estate in the trust or the power to revoke the trust, the trust will not be included in the grantor’s estate for federal estate tax purposes. Contrast with the non-tax reference to a person who forms or makes gifts to a trust as the “grantor.”

Gross estate – A federal estate tax concept that includes all property owned by an individual at death and certain property previously transferred by him or her that is subject to federal estate tax.

GST exemption – The federal tax exclusion that allows a certain value of generation-skipping transfers to be made without the imposition of a generation-skipping tax. The GST exemption amount is $5 million inflation adjusted ($5.25 million in 2013).

Guardian – An individual or bank or trust company appointed by a court to act for a minor or incapacitated person (the “ward”). A guardian of the person is empowered to make personal decisions for the ward. A guardian of the property (also called a “committee”) manages the property of the ward.

H

Health care power of attorney – A document that appoints an individual (an “agent”) to make health care decisions when the grantor of the power is incapacitated. Also referred to as a “health care proxy.”

Heir –  An individual entitled to a distribution of an asset or property interest under applicable state law in the absence of a will. “Heir” and “beneficiary” are not synonymous, although they may refer to the same individual in a particular case.

I

Income – The earnings from principal, such as interest, rent, and cash dividends. This is a fiduciary trust accounting concept and is not the same as taxable income for income tax purposes.

Insurance trust – An irrevocable trust created to own life insurance on an individual or couple and designed to exclude the proceeds of the policy from the insured’s gross estate at death.

Interest of a beneficiary – The right to receive income or principal provided in the terms of a trust or will.

Intestate – When one dies without a valid will, such that the decedent’s estate is distributed in accordance with a state’s intestacy law.

Inventory – A list of the assets of a decedent or trust that is filed with the court.

Irrevocable trust – A trust that cannot be terminated or revoked or otherwise modified or amended by the grantor. As modern trust law continues to evolve, however, it may be possible to effect changes to irrevocable trusts through court actions or a process called decanting, which allows the assets of an existing irrevocable trust to be transferred to a new trust with different provisions.

J

Joint tenancy – An ownership arrangement in which two or more persons own property, usually with rights of survivorship.

K

No terms listed

L

Life beneficiary – An individual who receives income or principal from a trust or similar arrangement for the duration of his or her lifetime. 

Life estate – The interest in property owned by a life beneficiary (also called life tenant) with the legal right under state law to use the property for his or her lifetime, after which title fully vests in the remainderman (the person named in the deed, trust agreement, or other legal document as being the ultimate owner when the life estate ends).

Living trust – A trust created by an individual during his or her lifetime, typically as a revocable trust. Also referred to as an “inter vivos” trust, “revocable living trust” or “loving trust.”

M

Marital deduction – An unlimited federal estate and gift tax deduction for property passing to a spouse in a qualified manner.  In other words, property transfers between spouses generally are not taxable transfers because of the marital deduction.

Marital trust – A trust established to hold property for a surviving spouse in A-B trust planning and designed to qualify for the marital deduction. A commonly used marital trust is a qualified terminable interest property trust, or QTIP trust, which requires that all income must be paid to the surviving spouse.

N

Non-Resident Alien – An individual who is neither a resident nor a citizen of the United States.  A non-resident alien nonetheless may be subject to federal estate tax or probate with regard to certain assets sitused in the United States.  An estate tax treaty between that individual’s home country and the United States may affect this result.

No-Contest Clause – A provision in a will or trust agreement that provides that someone who sues to receive more from the estate or trust or overturn the governing document will lose any inheritance rights he or she has.  These clauses are not permissible in all instances or in all states.

O

Operation of Law – The way some assets will pass at your death, based on state law or the titling (ownership) of the asset, rather than under the terms of your will.

P

Personal representative – An executor or administrator of a decedent’s estate.

Per stirpes – A Latin phrase meaning “per branch” and is a method for distributing property according to the family tree whereby descendants take the share their deceased ancestor would have taken if the ancestor were living. Each branch of the named person’s family is to receive an equal share of the estate. If all children are living, each child would receive a share, but if a child is not living, that child’s share would be divided equally among the deceased child’s children.

Pour over will – A will used in conjunction with a revocable trust to pass title at death to property not transferred to the trust during lifetime.

Power of appointment – A power given to an individual (usually a beneficiary) under the terms of a trust to appoint property to certain persons upon termination of that individual’s interest in the trust or other specified circumstances. The individual given the power is usually referred to as a “holder” of the power. The power of appointment may be general, allowing the property to be appointed to anyone, including the holder, or limited, allowing the property to be distributed to a specified group or to anyone other than the holder. Property subject to a general power of appointment is includible in the holder’s gross estate for federal estate tax purposes.

Power of attorney – Authorization, by a written document, that one individual may act in another’s place as agent or attorney-in-fact with respect to some or all legal and financial matters. The scope of authority granted is specified in the document and may be limited by statute in some states. A power of attorney terminates on the death of the person granting the power (unless “coupled with an interest”) and may terminate on the subsequent disability of the person granting the power (unless the power is “durable” under the instrument or state law).

Power of withdrawal – A presently exercisable power in favor of the power holder other than a power exercisable in a fiduciary capacity limited by an ascertainable standard, or which is exercisable by another person only upon consent of the trustee or a person holding an adverse interest in the trust.

Principal – The property (such as money, stock, and real estate) contributed to or otherwise acquired by a trust to generate income and to be used for the benefit of trust beneficiaries according to the trust’s terms. Also referred to as trust corpus.

Private trust company –An entity formed by a family to serve as fiduciary for the estates and trusts of extended family members.  Often referred to as a family trust company.

Probate – The court supervised process of proving the validity of a will and distributing property under the terms of the will or in accordance with a state’s intestacy law in the absence of a will.

Probate tax – A tax imposed by many jurisdictions on property passing under an individual’s will or by a state’s intestacy law.

Property – Anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein.

Prudent man rule – A legal principle requiring a trustee to manage the trust property with the same care that a prudent, honest, intelligent, and diligent person would use to handle the property under the same circumstances. See Prudent Investor Act.

Prudent Investor Act – A law that provides for how fiduciaries must invest trust, estate and other assets they hold in a fiduciary capacity, such as a trustee or executor.

Q

Qualified domestic trust – A marital trust (referred to as a “QDOT”) created for the benefit of a non-U.S. citizen spouse containing special provisions specified by the Internal Revenue Code to qualify for the marital deduction.

Qualified personal residence trust – An irrevocable trust (referred to as a “QPRT”) designed to hold title to an individual’s residence for a term of years subject to the retained right of the individual to reside in the home for the term, with title passing to children or other beneficiaries at the end of the term.

Qualified terminable interest property – Property (referred to as “QTIP”) held in a marital trust or life estate arrangement that qualifies for the marital deduction because the surviving spouse is the sole beneficiary for life and entitled to all income.

R

Remainder interest – An interest in property owned by the remainderman that does not become possessory until the expiration of an intervening income interest, life estate or term of years.

Residue – The property remaining in a decedent’s estate after payment of the estate’s debts, taxes, and expenses and after all specific gifts of property and sums of money have been distributed as directed by the will.  Also called the residuary estate.

Revocable trust – A trust created during lifetime over which the grantor reserves the right to terminate, revoke, modify, or amend.

S

S corporation – A corporation that has made a Subchapter S election to be taxed as a pass-through entity (much like a partnership). Certain trusts are permitted to be shareholders only if they make the appropriate elections.

Self-dealing – Personally benefiting from a financial transaction carried out on behalf of a trust or other entity, for example, the purchasing of an asset from a trust by the trustee unless specifically authorized by the trust instrument.

Settlor – Term frequently used for one who establishes or settles a trust. Also called a “trustor” or “grantor.”

Special needs trust – Trust established for the benefit of a disabled individual  that is designed to allow him or her to be eligible for government financial aid by limiting the use of trust assets for purposes other than the beneficiary’s basic care.

Spendthrift provision – A trust provision restricting both voluntary and involuntary transfers of a beneficiary’s interest, frequently in order to protect assets from claims of the beneficiary’s creditors.

T

Tangible personal property – Property that is capable of being touched and moved, such as personal effects, furniture, jewelry, and automobiles. Tangible personal property is distinguished from intangible personal property that has no physical substance but represents something of value, such as cash, stock certificates, bonds, and insurance policies. Tangible personal property also is  distinguished from real property, such as land and items permanently affixed to land, such as buildings.

Tenancy by the entirety – A joint ownership arrangement between a husband and wife, generally with respect to real property, under which the entire property passes to the survivor at the first death and while both are alive, may not be sold without the approval of both.

Tenancy in common – A co-ownership arrangement under which each owner possesses rights and ownership of an undivided interest in the property, which may be sold or transferred by gift during lifetime or at death.

Terms of a trust – The manifestation of the grantor’s intent as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.

Testamentary – Relating to a will or other document effective at death.

Testamentary trust – A trust established in a person’s will to come into operation after the will has been probated and the assets have been distributed to it in accordance with the terms of the will.

Testator – A person who signs a will. If a female, may be referred to as the testatrix.

Transfer on death designation – A beneficiary designation for a financial account (and in some states, for real estate) that automatically passes title to the assets at death to a named individual or revocable trust without probate. Frequently referred to as a TOD (transfer on death) or POD (payable on death) designation.

Trust – An arrangement whereby property is legally owned and managed by an individual or corporate fiduciary as trustee for the benefit of another, called a beneficiary, who is the equitable owner of the property.

Trust instrument – A document, including amendments thereto, executed by a grantor that contains terms under which the trust property must be managed and distributed.  Also referred to as a trust agreement or declaration of trust.

Trustee – The individual or bank or trust company designated to hold and administer trust property (also generally referred to as a “fiduciary”). The term usually includes original (initial), additional, and successor trustees. A trustee has the duty to act in the best interests of the trust and its beneficiaries and in accordance with the terms of the trust instrument. A trustee must act personally (unless delegation is expressly permitted in the trust instrument), with the exception of certain administrative functions.

U

Unified credit – A credit against the federal gift and estate tax otherwise payable by an individual or estate. Frequently referred to as the estate tax exemption amount, the exemption equivalent, or applicable exclusion amount. The current exemption amount is $5 million inflation adjusted ($5.25 million in 2013).

Uniform custodial trust act – A law enacted by some states providing a simple way to create a trust for a minor or adult beneficiary without the need for a complex trust document. Such a trust typically is used for a trust of modest size, particularly for a disabled beneficiary. An adult beneficiary may terminate the trust at any time, otherwise the trust may continue for the life of the beneficiary.

Uniform transfers to minors act – A law enacted by some states providing a convenient means to transfer property to a minor. An adult person known as a “custodian” is designated by the donor to receive and manage property for the benefit of a minor. Although the legal age of majority in many states may be 18, the donor may authorize the custodian to hold the property until the beneficiary reaches age 21. Formerly called the Uniform Gifts to Minors Act.

V

Virtual Representation – A mechanism provided in a will or trust, or in some instances by state law, to permit a beneficiary to make decisions on behalf of another beneficiary who can claim or receive property only under or after them.

W

Will – A writing specifying the beneficiaries who are to inherit the testator’s assets and naming a representative to administer the estate and be responsible for distributing the assets to the beneficiaries.

Similar to a Trustee, you may wish to choose a family member to act on your behalf. Someone who is highly trusted.

Many people name their spouses or one or more children. In naming more than one person to act as agent at the same time, be alert to the possibility that all may not be available to act when needed, or they may not agree. The designation of co-agents should indicate whether you wish to have the majority act in the absence of full availability and agreement. Regardless of whether you name co-agents, you should always name one or more successor agents to address the possibility that the person you name as agent may be unavailable or unable to act when the time comes.

There are no special qualifications necessary for someone to act as an attorney-in-fact except that the person must not be a minor or otherwise incapacitated. The best choice is someone you trust. Integrity, not financial acumen, is often the most important trait of a potential agent.

Assume Michael Douglas appoints his wife, Catherine Zeta-Jones, as his agent in a written power of attorney.

Catherine, as agent, must sign as follows: Michael Douglas, by Catherine Zeta-Jones under POA or Catherine Zeta-Jones, attorney-in-fact for Michael Douglas.

If you are ever called upon to take action as someone’s agent, you should consult with an attorney about actions you can and cannot take and whether there are any precautionary steps you should take to minimize the likelihood of someone challenging your actions. This is especially important if you take actions that directly or indirectly benefit you personally.

In addition to managing your day-to-day financial affairs, your attorney-in-fact can take steps to implement your estate plan. Although an agent cannot revise your will on your behalf, some jurisdictions permit an attorney-in-fact to create or amend trusts for you during your lifetime, or to transfer your assets to trusts you created. Even without amending your will or creating trusts, an agent can affect the outcome of how your assets are distributed by changing the ownership (title) to assets. It is prudent to include in the power of attorney a clear statement of whether you wish your agent to have these powers.

Gifts are an important tool for many estate plans, and your attorney-in-fact can make gifts on your behalf, subject to guidelines that you set forth in your power of attorney.

For example, you may wish to permit your attorney-in-fact to make “annual exclusion” gifts (up to $14,000 in value per recipient per year in 2013) on your behalf to your children and grandchildren. It is important that the lawyer who prepares your power of attorney draft the document in a way that does not expose your attorney-in-fact to unintended estate tax consequences. While some states permit attorneys-in-fact to make gifts as a matter of statute, others require explicit authorization in the power of attorney.

If you have older documents you should review them with your attorney. Because of the high estate tax exemption ($5 million inflation adjusted) many people who had given agents the right to make gifts may no longer wish to include this power. Others, however, in order to empower their agent to minimize state estate tax might continue or add such a power.

Finally, there may be reasons not to limit the gifts your attorney-in-fact may make to annual exclusion gifts in order to facilitate Medicaid planning or to minimize or avoid state estate tax beyond what annual exclusion gifts alone might permit.

In addition to the power of your agent to make gifts on your behalf, many powers of your attorney-in-fact are governed by state law. Generally, the law of the state in which you reside at the time you sign a power of attorney will govern the powers and actions of your agent under that document.

If you own real estate, such as a vacation home, or valuable personal property, such as collectibles, in a second state, you should check with an attorney to make sure that your power of attorney properly covers such property.

Generally, a power of attorney that is valid when you sign it will remain valid even if you change your state of residence. Although it should not be necessary to sign a new power of attorney merely because you have moved to a new state, it is a good idea to take the opportunity to update your power of attorney.

The update ideally should be part of a review and update of your overall estate plan to be sure that nuances of the new state law (and any other changes in circumstances that have occurred since your existing documents were signed) are addressed.

Some states used to require the renewal of a power of attorney for continuing validity. Today, most states permit a “durable” power of attorney that remains valid once signed until you die or revoke the document.

You should periodically meet with your lawyer, however, to revisit your power of attorney and consider whether your choice of agent still meets your needs and learn whether developments in state law affect your power of attorney.

Some powers of attorney expressly include termination dates to minimize the risk of former friends or spouses continuing to serve as agents. It is vital that you review the continued effectiveness of your documents periodically.

A living will is your written expression of how you want to be treated in certain medical circumstances. Depending on state law, this document may permit you to express whether you wish to be given life-sustaining treatments in the event you are terminally ill or injured, to decide in advance whether you wish to be provided food and water via intravenous devices (“tube feeding”), and to give other medical directions that impact your care, including the end of life. “Life-sustaining treatment” means the use of available medical machinery and techniques, such as heart-lung machines, ventilators, and other medical equipment and techniques that may sustain and possibly extend your life, but which may not by themselves cure your condition. Be very careful signing any such document without reviewing the implications to you. For example, some of the commonly used clauses in living wills may forbid the provision of assisted breathing, including devices you presently may be using if, for example, you are living with COPD.  Most important, many of the provisions of such a document have profound religious and philosophical implications. Be certain that whatever you sign is consistent with your beliefs and wishes. In addition to terminal illness or injury situations, most states also permit you to express your preferences as to treatment using life-sustaining equipment or tube feeding for medical conditions that leave you permanently unconscious and without detectable brain activity.

A living will applies in situations in which the decision to use such treatments may prolong your life for a limited period of time and not obtaining such treatment would result in your death.  Having a living will does not mean that medical professionals would deny you pain medications and other treatments that would relieve pain or otherwise make you more comfortable. Living wills do not determine your medical treatment in situations that do not affect your continued life, such as routine medical treatment and non life-threatening medical conditions. Most states permit you to include other medical directions that you wish your physicians to be aware of regarding the types of treatment you do or do not wish to receive.  In all states the determination as to whether you are in such a medical condition is determined by medical professionals, usually your attending physician and at least one other medical doctor who has examined you or reviewed your medical situation.

A “health care proxy,” sometimes called a “health care surrogate” or “durable medical power of attorney,” is a durable power of attorney specifically designed to cover medical treatment.  You appoint a person and grant to him or her the authority to make medical decisions for you in the event you are unable to express your preferences about medical treatment. Most commonly, this situation occurs either because you are unconscious or because your mental state is such that you do not have the legal capacity to make your own decisions. As with living wills, depending on your state of residence, the health care proxy may be a standard or statutory form or it may be may be drafted specifically for you by your lawyer. 

Normally, one person (not multiple persons to act at one time) is appointed as your health care proxy.  It is quite common, however, for you to appoint one or more alternate persons (successors) in the event your first choice proxy is unavailable. You should confirm prior to appointing someone as your proxy that he or she will in fact be willing and able to carry out your wishes. If your preferred proxy  has, for example, a religious view that prevents him or her from carrying out your wishes, you should name someone else.  As in the case of a living will, medical professionals will make the initial determination as to whether you have the capacity to make your own medical treatment decisions.

Regardless of the name your state gives to these documents, their purpose is to allow you to express your preferences concerning medical treatment in an extreme medical situation when you cannot communicate, including at the end of your life. By expressing such preferences in a written legal document, you are ensuring that your preferences are made known. Physicians prefer these documents because they provide a written expression from you as to your medical care and designate for the physician the person he or she should consult concerning unanswered medical questions. Rather than the physician having to obtain a consensus answer from your family as to your treatment, the physician knows your preferences and knows who you want to provide decisions when you cannot do so.  Also, providing such information and designating a health care proxy means that the physician knows whose direction is to be followed in the event your family disagrees as to what medical treatment you would want.

In addition to helping your physician, these documents express your wishes to your family so that they do not have to guess about what you would want.  Making your wishes known in advance prevents family members from making hard choices at what likely will be one of the most stressful times in their lives.

Your lawyer can provide you with these documents. Generally, these documents require at least two witnesses, who must be adults as defined under your state law. It is the policy of some hospitals and other medical institutions not to permit their employees to witness the signing of such documents. Most states have other restrictions as to who may witness such documents. Generally, the persons who act as witnesses are not permitted to be individuals entitled to any inheritance as a result of your death, either by will or by state law.  Often, state law does not permit persons to witness such documents if they are related to you by blood or by marriage or if they are responsible for payment of your medical bills.  Some lawyers recommend that these documents be notarized as well as witnessed.

While all states recognize these types of documents, the law varies as to whether a state will recognize a document prepared in another state. It is not necessary to prepare additional documents in case you might vacation in another state. If you spend a considerable amount of time living in more than one state, however, you should consider having such documents prepared in each of the states in which you spend significant periods of time.

Should you change your mind about your health care treatment or end of life decisions or your choice of health care proxy, you can simply destroy the documents you have and create new ones. Once you have a living will, health care proxy, or advance health care directive, you should keep it among your important papers. Make sure a responsible adult, such as the named health care proxy, knows where you keep these documents. If you have a regular physician who keeps your medical records, you should provide a copy of the document to him or her for your medical records. In the event you are admitted to a hospital, you should take this document with you at the time you are admitted and permit the hospital to place a copy of it into your medical file.  It is also a good idea to discuss the decisions you have made in your document with family members so that they may better know and understand your wishes concerning these matters.

Some states used to require the renewal of a power of attorney for continuing validity. Today, most states permit a “durable” power of attorney that remains valid once signed until you die or revoke the document.

You should periodically meet with your lawyer, however, to revisit your power of attorney and consider whether your choice of agent still meets your needs and learn whether developments in state law affect your power of attorney.

Some powers of attorney expressly include termination dates to minimize the risk of former friends or spouses continuing to serve as agents. It is vital that you review the continued effectiveness of your documents periodically.

The living trust is often marketed as a vehicle that allows you to “avoid probate” upon your death. This provides ZERO asset protection in most cases. The way around that is only if you have some of your other assets under LLC’s owned by your Living Trust in which a large portion of your assets are still publicly exposed.

Probate is the court-supervised process of administering your estate and transferring your property at death pursuant to the terms of your will. 

Probate is rarely the calamity naysayers claim.  In addition, many types of property routinely pass outside of the probate process, even without the cost of establishing a living trust.  Such property includes life insurance or retirement plan proceeds, which pass to a named beneficiary by designation rather than pursuant to your will, and real estate or bank or brokerage accounts held in joint names with right of survivorship.

While it is true that the property passing under the terms of a living trust upon your death will “avoid probate,” it should be noted that there may or may not be actual value in that result.

Probate laws are different in every state. In some states there are statutorily mandated court or attorney fees while in others those fees may be minimal. Many states have expedited or simplified court proceedings that are efficient and inexpensive for small or simple estates.

A properly drafted will in many states can eliminate some of the steps otherwise required in the probate proceedings. In addition, much of the delay and red tape customarily associated with probate is a result of tax laws and tax filing requirements, which cannot be eliminated through a living trust and the avoidance of probate. 

Finally, a living trust can almost never totally avoid probate, and a simple will is needed to “pour over” to the trust any property that has not been transferred to the trust during your lifetime.

Let’s not forget to mention that there is ZERO Asset Protection under a living trust. The Living Trust is 100% under your Social Security number whereas a irrevocable trust has its own EIN number thus no longer allowing the ownership of those assets to be in your name.

Property that passes at death through a revocable living trust must be transferred to the trust, administered by a trustee who may or may not charge fees, and then transferred out of the trust to the beneficiaries. There may be other costs, such as real estate transfer taxes or fees, depending upon the jurisdiction.  The costs associated with these steps and the costs associated with tax filings are often ignored by living trust marketers.  A comparison of the costs of probate and those of a living trust should be made on a case by case basis.

Living trusts, in fact, have great value as part of estate planning, but not necessarily to avoid probate.  A living trust, if properly prepared and administered, can be a very effective tool to manage assets in the event of illness, disability or the effects of aging. In light of the aging population, the use of living trusts to minimize the risk of elder financial abuse and address similar issues, should be an important consideration in an estate plan.

Assets held in qualified plans and IRAs normally generate no current income tax liability.  The distribution of those assets to a participant or a participant’s beneficiaries in a future tax year, however, generally triggers income tax liability at ordinary income tax rates.  However, a significant exception applies for Roth contributions.

Roth contributions to a Roth IRA or to a designated Roth account in a qualified plan are made on an after-tax basis.  Roth contributions included in a distribution from a Roth IRA or a qualified plan are not taxable, but the earnings on those Roth contributions may or may not be taxable.  If the distribution is a “qualified distribution,” then those earnings are not taxable.  Earnings in a distribution that is not a “qualified distribution” are taxable.  A “qualified distribution” from a Roth IRA or a qualified plan generally is a payment made after the participant reaches age 59-1/2 (or death or disability) and after the 5-taxable-year period commencing with the first taxable year for which the participant made Roth contributions to the Roth IRA or the plan, as the case may be.

The Internal Revenue Code (“Code”) imposes a tax penalty on withdrawals made either too soon or not soon enough.  For example, if a participant withdraws assets from a plan before reaching age 59-1/2, the participant will normally be responsible for paying ordinary income tax on the taxable portion of the distribution, plus a 10% tax penalty on the taxable portion of early distributions (unless a limited exception applies). 

Roth contributions are not subject to this tax penalty, but earnings on Roth contributions are if they are not part of a qualified distribution. 

Information on the exceptions to the 10% penalty tax for qualified plan distributions may be found in IRS Publication 575 (Pension and Annuity Income), and information on the exceptions to the 10% penalty tax for IRA distributions may be found in IRS Publication 590-B (Distributions from Individual Retirement Accounts (IRAs)).

The tax rules allow qualified plans to adopt certain features to allow participants to use their qualified plan account balances before reaching retirement.  

For example, a 401(k) plan may allow participants to request hardship withdrawals in the event of an immediate and heavy financial need.  The tax rules also allow plans to make loans available so that participants can borrow against their account balances (up to a certain statutory limit) and make repayments directly to their plan accounts with interest added. 

Hardship withdrawals are taxed as early distributions, but properly made plan loans generally have no income tax consequence unless the loans are not repaid to the plan as agreed.  Two other distribution options that a plan may offer to participants are in-service distributions for participants who have reached age 59-1/2 and disability distributions.  Participants should consult their plan administrators, official plan documents, and summary plan descriptions for additional details about whether their plans offer these and other distribution features.

Plan terms generally govern when distributions may occur for a terminated participant, although the tax rules require qualified plans to permit terminated participants to roll over their vested account balances to an eligible retirement plan, such as another employer’s plan or an IRA. 

Any rollover of Roth contributions from an employer’s plan must be to a Roth IRA or to another employer’s plan that accepts Roth contribution rollovers.  Direct rollovers from one plan to another plan generally are tax-free rollovers. 

If a participant elects to receive the rollover check instead of conducting a “direct” rollover to an eligible retirement plan, mandatory 20% income tax withholding normally applies to the taxable portion.  For small account balances totaling up to $1,000, many plans require participants to accept a lump sum distribution of the entire account balance. 

For balances between $1,000 and $5,000, most plans include the Code’s automatic IRA rollover rule that requires the plan to roll over the participant’s account balance to an IRA established by the plan on behalf of the participant.  Plans generally permit participants to retain in the plan any account balance that exceeds $5,000. 

These distribution rules are plan-specific, so it is important to consult the official plan documents or the summary plan description for additional details about plan offerings.

More onerous than the early distribution tax penalty is an additional penalty tax imposed if a participant does not begin receiving certain minimum withdrawals, called “required minimum distributions” (“RMDs”), commencing by the participant’s “required beginning date” (“RBD”).  The minimum distribution rules apply to qualified retirement plans, IRAs − including traditional IRAs, Roth IRAs (but only after a participant’s death), Simplified Employee Pension (“SEP”) IRAs and Savings Investment Match Plan for Employees (“SIMPLE”) IRAs – and 403(b) plans. 

The tax rules require that participants begin receiving RMDs as of the RBD.  The RBD generally is April 1 of the year after the year that the participant reaches age 70-1/2.  (Separate RBD rules may apply to participants who remain employed after reaching age 70-1/2 or who are owner-employees.)  However, RMDs are not required from a Roth IRA during the Roth IRA owner’s lifetime. 

If a participant elects to delay RMDs until April 1, instead of electing to receive the first RMD in the year that the participant reached age 70-1/2, the participant will be required to accept two RMD payments–one for the year that the participant reached age 70-1/2 and another for the year that includes the April 1 date. 

In other words, if the participant postpones RMDs until April 1 (generally, the latest date that the participant may postpone RMDs) the participant will be required to accept two RMDs for the first year of retirement. 

If a participant does not timely withdraw RMDs in a given year, a 50% tax penalty is imposed on the amount that should have been distributed to the participant on top of the federal income (and, if applicable, state) taxes that ordinarily apply to plan distributions. 

For good cause, however, the IRS may waive the 50% penalty if the participant follows the guidelines explained in IRS Instructions to Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) and files Form 5329.

If a participant receives more than one RMD payment, the participant should contact the plan administrator as soon as possible.  Plan rules may allow participants to elect partial withdrawals so that, if desired, the plan may allow the participant to keep the second check. 

For participants who prefer to redeposit the funds back into the plan, options may be limited if the participant cashes the check.  Under all circumstances, however, the participant should contact the plan administrator for additional instructions.

As you can see, there is a potential tension between a participant who may not want to receive any plan withdrawals even after the RBD and the IRS which monitors the statutorily-mandated withdrawals (i.e., the RMDs).  The good news is that, with proper planning, a participant can decrease the size of the RMD and increase the plan’s income tax benefit.  Note that RMDs provide a floor, not a ceiling.  Participants generally are free to withdraw more than the minimum amount if needed for living and health expenses after retirement.  As noted, RMDs are not required of a Roth IRA during the Roth IRA owner’s lifetime.