Legal-Ease: An Attorney’s Perspective: Estate Planning From A-Z: A Glossary, Part I

June 19, 2017 • Columnists, Legal-Ease

By Staci Yamashita-Iida

When I was in law school, my professors told me that learning the law is like learning a new language. Most contracts and legal documents are inundated with legalese: formal, technical legal language. In the beginning, I remember how difficult it was to decipher the foreign terms. In fact, it was that feeling of confusion that prompted me to begin writing this column. I wanted to take legalese and explain it simply and clearly — thus, “Legal-Ease.”

This article seeks to do just that with Estate Planning terminology. While it is not intended to be a comprehensive list, it does touch upon some of the basic key terms that appear within a typical Estate Plan.

Advance Healthcare Directive (AHCD): Also known as a Power of Attorney for Healthcare, an AHCD states your preferences, wishes and instructions regarding your medical care in the event of your incapacity. It also allows you to appoint a trusted individual to carry out these decisions on your behalf.

Beneficiaries: Through a living trust or will, you can designate beneficiaries who will receive your assets upon your passing. Beneficiaries can be an individual or group of individuals. It can also be a church, charity or organization.

Capacity: Testamentary capacity is the legal term used to describe an individual’s ability to create or alter a living trust or will. Capacity refers to one’s mental competency, rather than physical capability. If you do not have capacity (e.g., if you are in a coma), then you cannot make changes to your Estate Plan.

Durable Power of Attorney for Asset Management (DPOA): Also known as a Durable Power of Attorney for Finances, a DPOA allows another individual or entity to manage your financial affairs on your behalf. You have the option to choose the type of authority that is granted (full or limited), as well as whether the DPOA comes into effect immediately or upon incapacity.

Estate Tax Exclusion: The federal estate tax is a tax imposed on assets transferred at death. Most Americans do not have to worry about this particular tax because, as of 2017, each individual has an exemption of $5.49 million. Meaning if your estate is valued at less than $5.49 million at the time of your death, then it is unlikely that any estate taxes will be owed.

Funding: This is the process of transferring your assets into your living trust. For example, real property and bank accounts are generally “funded” into the trust, resulting in the assets being titled in the trust’s name.

Gift Tax Exclusion: As of 2017, the IRS allows you to gift up to $14,000 per person per year without paying a gift tax. Generally, any gift above $14,000 is taxable, but there are some exceptions (e.g., education, medical expenses, gifts to a spouse, gifts to political organizations for its use, etc.).

Heirs: If you die without a will or trust, then your assets will pass through probate to your heirs. There is a predetermined order for who your heirs are, which can be found in the California Probate Code. Heirs are contrasted with beneficiaries. You choose your beneficiaries; heirs are chosen for you.

Irrevocable Trust: By definition, irrevocable trusts cannot be amended or terminated. The written terms of the agreement are pretty much set in stone once created, except under specific circumstances. A majority of the “typical” trusts are not irrevocable — they are revocable, which allows more flexibility with modification and revocation.

Joint Tenancy: A common way to take title to real property. One characteristic is the right of survivorship. Meaning if one joint tenant dies, the property is automatically conveyed to the surviving joint tenant(s). Generally speaking, if you are married and have a living trust, title is typically changed from joint tenancy to the trustee of the trust.

K-1: If a trust generates income and its beneficiaries are entitled to receive it, then the beneficiaries (rather than the trust) pay the income tax. At the end of the year, the beneficiaries will receive a K-1, which is a tax reporting statement used to disclose the income distributed from the trust.

Life Estate: A life estate occurs when a person has a legal right to use and live in a property for his or her lifetime, but does not actually own the property. After this “life tenant” dies, the property passes to named beneficiaries, called the “remaindermen.”

Minor: In California, any person under the age of 18 is considered a minor. In terms of Estate Planning, you cannot appoint a minor as your Power of Attorney or Successor Trustee but you can designate a minor as your beneficiary. There may be special administrative provisions regarding the minor’s inheritance.

Part II will be continued in my next column. Stay tuned!

Staci Yamashita-Iida, Esq. is an Estate Planning attorney at Elder Law Services of California. She can be contacted at (310) 348-2995. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or JACL. The information presented does not constitute legal advice and should not be treated as such.

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