An estate plan includes numerous documents that you will need to read, understand, and sign. Never sign a document that you did not read and fully understand. Estate planning documents often contain specialized terms that you may not be familiar with. An attorney can help explain anything that you need to clarify prior to signing.
The following are some key terms that are important when it comes to estate planning.
Activities of Daily Living - Activities of daily living (ADLs) are basic self-care tasks, akin to the kinds of skills that people usually learn in early childhood. They include feeding, toileting, selecting proper attire, grooming, maintaining continence, putting on clothes, Bathing, walking and transferring (such as moving from bed to wheelchair).
Administrative Fees - Expenses charged to a trust account for the trust administration services provided. Includes but is not limited to enrollment fees, closing fees, and tax preparation fees.
Assisted Living Facility (ALF) - A licensed residential setting that offers a variety of support services such as meals, housekeeping, activities, transportation, and assistance with bathing, dressing, and medication.
Assistive Technology - Certain items or devices that help you do things easier or safer in your home like grabbers to reach things.
Beneficiary - A person for whom a trust has been established.
Beneficiary Designations – The process of naming beneficiaries who will automatically inherit property from life insurance policies, annuities, and retirement plans. Many plans or accounts that require beneficiary designation allow you to appoint primary and secondary beneficiaries. The primary beneficiaries will inherit assets in the account first. If the primary beneficiaries pass away before the assets are distributed, the assets go to secondary beneficiaries.
Charitable Lead Annuity Trust (CLAT) - The reverse of a charitable remainder annuity trust. Rather than paying the donor or designated beneficiaries a fixed amount each year, a CLAT initially pays the charity a fixed amount each year. Once the specified period of time passes, the remaining assets are passed to the donor's non-charitable beneficiaries.
Charitable Lead Unitrust (CLUT) - Identical to a CLAT except for the payout ratio. Like a CRUT, payments are determined by a fixed percentage of the principal value of the trust that is revalued each year.
Charitable Remainder Annuity Trust (CRAT) -An an irrevocable trust in which a donor transfers assets to a trustee. Over a period of time, not exceeding the length of 20 years or the donor's life expectancy, the donor or designated beneficiaries receive an annual fixed payment determined upon the trust's inception. Once the specified period of time has passed, the remainder of the principal goes to one or more charities.
Charitable Remainder Unitrust (CRUT) -Identical to a CRAT except for the payout ratio. Unlike a CRAT, the income received by the donor or designated beneficiaries is defined as a percentage of the market value of the trust and therefore can vary each year. The donor or designated beneficiaries receive a fixed percentage of no less than 5% of the principal of the trust that is revalued annually.
Community Property - A marital property regime under which most property acquired by a spouse during marriage (except for gifts or inheritances), is owned jointly by both spouses and is divided equally (e.g., in California) or equitably (e.g., in Texas) upon divorce, annulment or the death death of a spouse. Property owned by one spouse prior to the marriage is sometimes referred to as the "separate property" of that spouse. There are instances in which the community can gain an interest in inherited property and even situations in which gifts can be "transmuted" into community property. The United States has nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska has also adopted a community property system, but it is optional. Tennessee allows residents and non-residents to opt into community property through a community property trust. The primary benefit of owning community property is that upon the first spouse's death, both spouses' ownership in the community property receives a step up in basis to the fair market value of the property. If the surviving spouse subsequently sells the community property there are no capital gains.
Community Property With Right of Survivorship - A marital property regime that combines the tax advantage of community property with the probate-avoidance aspect of the right of survivorship.
Community (CCRC) - A continuing care retirement community provides several different levels of housing and care. This makes it easier to transition from one level to another, either short-term or long-term. The levels may include independent homes or apartments, assisted care living, and nursing home care.
Crisis Planning - Usually refers toplanning that is conducted when an individual is already in a nursing home or about to be admitted to a nursing home but is not then eligible for Medicaid due to excess income or excess assets. Crisis planning is much more expensive than advance planning. Advance planning is best done at least five years prior to the need (2.5 years prior in California).
Critical Adult Care Home - A home where up to five people live with a health care professional that takes care of the residents' special health and long-term care needs.
Disability - An individual must have been determined to meet the federal definition of disability in order to qualify to establish a Special Needs Trust (SNT).
Distribution - Expenditure of trust funds for the benefit of a beneficiary.May also be referred to as a disbursement or check.
Domestic Asset Protection Trust (DAPT) - An irrevocable self-settled trust in which the grantor is designated a permissible beneficiary and allowed access to the funds in the trust account. If properly structured, creditors are unable to reach the trust's assets. In addition to providing asset protection, a DAPT offers other benefits, including state income tax savings when it's used in a no-income-tax state. Not all states allow DAPTs. The states that are generally considered the most conducive to the formation of DAPTs are Nevada, Alaska, and Delaware, but there are others, including Tennessee.
Donor Advised Fund - A separately identified fund or account that is maintained and operated a public charity. In a donor-advised fund, the donor plays an advisory role in the distribution of the funds they have donated, i.e suggesting which charities receive funds andthe amount each charity receives. This is a very useful device for bunching charitable donations into one year in order to be able to itemize deductions while deferring the actual allocations of the funds to specific charities for later.
Durable Medical Equipment (DME) -Any medical equipment used in the home to aid in a better quality of living. It is a benefit included in most insurance plans and in some cases, Medicare may pay for the item if ordered by a physician.
Durable Power of Attorney – A document signed by a principal that appoints another person to make decisions on behalf of the principal. A durable power of attorney may grant the agent authority to make decisions regarding the principal's healthcare, finances, or both. The agent may sign documents on behalf of the principal. A power of attorney is "durable" if it survives the incapacity of the principal. If the power of attorney does not contain special language that makes it "durable", it is automatically revoked upon the incapacity of the principal. All powers of attorney are void upon the death of the principal.
Estate Tax - Tax imposed by federal government on the transfer of property from one person to another at death. Estate tax may also be charged at the state level.
Fiduciary Duties - A trustee has a broad range of responsibilities and obligations to the beneficiary(ies) as established in the trust agreement as well as state law. In addition to general duties including but not limited to proper and prudent administration of the trust, other duties include recordkeeping, duty to inform, safekeeping of assets, and loyalty to the interests of the beneficiary. Administration and distributions from a Special Needs Trust (SNT) must also comply with the federal regulations for SNTs; make distributions only for the sole benefit of the beneficiary and must preserve the trust to maximize benefit to the beneficiary.
First Party Trust - Also referred to as a "self-settled" or "(d)(4)(A) trust," is funded with assets or income that belong to an individual with a disability (see definition below) and who is the beneficiary of the trust. In order for the assets of this type of trust not to count for Medicaid or SSI purposes, federal law requires that the beneficiary must be under the age of 65 when the trust is created and funded; the trust must be irrevocable and provide that Medicaid will be reimbursed upon the beneficiary's death or upon termination of the trust, whichever occurs first; and the trust must be administered for the sole benefit of the beneficiary. Typically, the funding comes from a personal injury settlement or
inheritance the beneficiary receives directly.
Flip CRUT - A Flip CRUT begins as a NIMCRUT and can be funded with an unproductive asset. This allows the trustee to make smaller or no payments to the annuitant in years the trust is earning little or no income. Once the asset is sold, the trust flips to a traditional CRUT, which then pays the annuitant the fixed-percentage amount, allowing the trustee to invest for total return.
Gift Tax - Tax imposed by federal government on the transfer of property from one person to another during a lifetime.
Generation Skipping Transfer Tax (GSTT) - Tax imposed by federal government on a transfer of property either through gift or inheritance to a beneficiary more than 37.5years younger than the donor if unrelated and more than one generation younger than the donor if related.
Homemaker Services - Help with your household chores or errands like laundry, sweeping, mopping, or grocery shopping. Personal Support Service agencies and individuals provide these services.
Hospice - Hospice is a program, generally paid by Medicare, for persons with a life-threatening illness when the life expectancy is six months or less. A team approach is utilized to meet the physical, psychological and spiritual needs of patient and family. Hospice services can be provided in the home, in an assisted living or nursing home, in a hospital or a special hospice facility.
Independent Living - A residential setting for senior adults that may or may not provide supportive services.
Intestacy – Intestacy is a condition that occurs when a person passes away without a will. In this scenario, the decedent's property will be distributed according to state statutes which name their next closest relatives in order of their right to an inheritance.
Intestate Succession – The process by which property passes to a decedent's next of kin when there is no will. If the property goes to a spouse first but the decedent has no spouse, usually it will go to their children. Relatives such as parents, siblings, grandparents, nieces, and nephews are listed in the order in which they are entitled to receive property if the decedent had no spouse or children.
Irrevocable - Incapable of being revoked. When applied to a trust, "irrevocable" means the trust cannot be changed or terminated by the settler or other parties. An irrevocable trust effectively removes all of the settlor's rights of ownership to the assets and the trust.
Joint Tenancy – A legal term that is used when one or more individuals share equal rights to the same property. Joint tenancy is a term that is commonly used in the context of real estate. A joint tenancy is defined by “four unities”--(1) unity of interest; (2) unity of title; (3) unity of possession; (4) unity of time. All four must be present in a joint tenancy. In some states, the phrase "joint tenancy" includes within its meaning a right of survivorship. In other states, the magic words "with right of survivorship" must be used in order to grant rights of survivorship among the joint tenants. Survivorship in joint tenancy has been abolished in Tennessee.
Living Will – A document that specifies in advance how a person wants medical treatment to be administered if they are permanently unconscious or terminally ill and therefore unable to express their wishes. A living will can cover topics such as whether or not you wish to be resuscitated if you stop breathing or your heart stops, whether you wish to remain on life support if you are unconscious and not expected to recover from an accident or illness, and whether or not you wish to be given intravenous fluids and tube feeding if you are unable to eat or drink on your own.
Long Term Care (LTC) - Refers to a continuum of medical and social services designed to support the needs of people living with chronic health problems that affect their ability to perform activities of daily living.
Means Tested -Describes a public benefits program that requires that an applicant demonstrate financial need to qualify for the program. Any changes in financial status or assets of recipients must be reported to re-assess eligibility. Medicaid, Supplemental Security Income, food stamps, and many other financial assistance programs are means tested. Social Security Disability Insurance (SSDI) benefits are administered by the Social Security Administration and eligibility is NOT means tested.
Medicaid (MediCal in California, TennCare in Tennessee)- A state/federal partnership that helps pay for health care costs for people who cannot afford them, including people on Medicare. Financial and health eligibility requirements must be met.
Medicaid Compliant Annuity (MCA) - A product used to accelerate eligibility for Medicaid, used when the applicant's countable assets exceed the applicable asset eligibility limit. The purpose of an MCA is to convert excess countable assets into an income stream. It is a single premium, immediate annuity with added restrictions to meet the requirements of the Deficit Reduction Act of 2005. It has zero cash value and is considered income only. It must irrevocable, non-assignable, actuarially sound, and provide for equal monthly payments (i.e., with no deferral or balloon payments). In most cases, the state Medicaid agency must be named as the primary beneficiary. An MCA can be funded using an Individual Retirement Account.
Medicare - Medicare is a federal government health insurance program that provides medical care and prescription benefits to people age 65 years and older and persons who are under the age of 65 and disabled. Medicare has several parts: Part A (hospital) and Part B (Medical) and Part D (prescription drug coverage). In addition, there are Medicare Advantage plans that cover services provided by regular Medicare and may offer additional services, but clients may be subject to restrictions.
Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) - is a type of CRUT that allows the creator to provide income to himself or herself or others for life or a term of years, and to receive a tax deduction. The creator of the NIMCRUT irrevocably transfers assets to the trust, which is managed by a trustee of the owner's choosing. During the term of the trust, the trustee invests the assets and pays a fixed percentage of the value, as revalued annually, to the creator and/or others, such as a spouse or children. If the trust earns less income than the pre-determined fixed percentage (a minimum of 5% is required), it will only distribute what is earned. This feature ensures trust principal remains intact at all times. If, in a later year, the trust earns more than the fixed percentage, it will make up its earlier shortfall to the extent its earned income exceeds its fixed percentage. When the trust ends, the principal passes to charity for the purpose designated by the trust's creator.
Nonmedical Home Health Care - Non-medical home care is a service that helps those in need by assisting with activities of daily living (ADLs) in order to continue living life from the comfort of your own home. Home care is a model that can include both professional and informal support networks such as family, neighbors, and friends. To remain independent, these individuals work together to meet your goals and expected outcomes.
Nursing Home or Facility - Patients generally rely on assistance for most or all daily living activities (such as bathing, dressing, and toileting). Nursing homes provide 24-hour licensed skilled nursing care for more acute patients. Nursing homes may provide care by nurses, physical therapists, speech therapists, or occupational therapists.
Partition – A lawsuit filed to divide property in a joint tenancy to tenancy in common. A joint tenancy may also be divided by agreement.
Personal Emergency Response System - A personal emergency response system refers to an alarm system designed to permit the beneficiary to signal the occurrence of a medical or personal emergency on the part of the customer so that the personal emergency response system provider may dispatch appropriate aid. It is installed in the residence of a beneficiary and monitored by an alarm systems company. However, a personal emergency response is not part of a combination of alarm systems that includes a burglar alarm or fire alarm.
Personal Support Services - Agencies licensed by the state that provide services for those living at home as well as in hospitals, nursing homes and assisted living facilities. Services provided may include personal care, household assistance, sitters, medication reminders, and transportation. They do not provide medical services.
Pooled Income Fund (PIF) - An irrevocable trust that is run by a charity. Based on the value of the assets transferred to the fund, the donor receives a shared interest of the fund and receives income proportional to their interest. Upon the death of the donor or designated beneficiaries, the charity receives the donor's portion of the principal.
Private Foundation - A non-governmental, non-profit organization which is generally created by donations from an individual, family, or corporation and whose programs are managed by its own trustees or directors.
Public Benefits - Typically includes the Supplemental Security Income (SSI) program operated by the Social Security Administration or Medicaid as administered by the single state agency responsible for the program.
Remainder Beneficiary - The person or entity designated to receive remainder funds remaining at closure of a trust account after all allowable expenses and fees are paid.
Respite Care - Respite care involves short term or temporary care of a few hours or weeks. Respite care is designed for the sick or disabled to provide relief, or respite, to the regular caregiver. The regular caregiver is usually a family member. A family member may be hesitant to seek or use respite care to leave a loved one in the care of another; however, there is evidence that caregivers who take a break from the associated stresses can help prevent incidents of neglect or abuse.
Probate – Probate is the legal process of proving a will. A probate court oversees the process. In general, the assets named in the will must be accounted for, creditors and taxes must be paid, and then the property will be distributed to heirs who are named in the will.
Probate Court – Probate courts oversee the process of proving wills as well as guardianships for minor children and incapacitated adults and the distribution of property to heirs after a person has died without a will.
Qualified Income Trust (QIT) also known as a Miller Trust - A device used to accelerate eligibility for Medicaid, used when the applicant's countable income exceed the applicable income eligibility limit. The Miller trust can pay the Medicaid recipient a small personal needs allowance, and the trust can also be used to pay the recipient's spouse a monthly allowance. Any additional money is used to pay the recipient's share of his or her cost of care. If there is any money left in the trust when the recipient dies, Medicaid has a right to the money to recover the cost of care.
Revocable Living Trust – An estate planning instrument that allows the trust grantor(s) to put the property into the trust and retain complete control of the property during his or her or their lifetime(s). After the grantor's death, the assets in the trust are distributed to beneficiaries named in the trust document without having to go through the probate process.
Rights of Survivorship – Upon the death of a joint tenant, the deceased's joint tenant's interest passes to the surviving joint tenant(s).
Special Needs Trust - A category of trust that, if properly structured and utilized consistent with federal requirements, is an exempt asset and will not jeopardize public benefits.
Split-Interest Trust - A type of charitable giving trust in which the assets are gifted by the donor are split into two parts: a stream of income produced by the asset and the principal remaining after the income interest is paid. The donor or the named beneficiaries either receive the income interest each year or the remainder interest at the completion of the trust, while the charity receives the other interest. Examples of split-interest trusts are CRATs, CRUTs, CLATs, and CLUTs.
Tenancy by the Entirety – A marital property regime in which the property is immune from liability for the separate obligations of either spouse while they are both alive. After the death of one spouse, the property automatically passes to the surviving spouse.
Tenancy in Common (TIC) – A form of ownership of property by multiple people in which each person owns an undivided interest in the property. Unlike the joint tenancy form of ownership, each person's ownership interest in the property does not have to be equal. Unless restricted by a separate agreement, each owner's undivided interest can be freely sold or gifted during such owner's lifetime without the consent of the other co-owner(s). At death, TIC property passes to the beneficiaries of such deceased owner's will (or to the heirs-at-law if the deceased owner died without a will). The surviving owner does NOT automatically inherit the deceased owner's interest in the property unless the surviving owner is the beneficiary of the property under the will of the deceased owner. Each owner of TIC property has a right of partition which permits each owner the ability to force the division or sale of the property.
Tennessee Community Property Trust - A special type of trust that allows spouses to convert individually or jointly-owned property to community property by transferring it to a Tennessee community property trust. The primary benefit of owning community property is that upon the first spouse's death, both spouses' ownership in the community property receives a step up in basis to the fair market value of the property. If the surviving spouse subsequently sells the community property there are no capital gains. A Tennessee Community Property Trust can also be used to equalize asset ownership between spouses and to receive valuation discounts for fractional ownership of real property or closely-held business interests.
Tennessee Investment Services Trust - A self-settled irrevocable DAPT in which the grantor is also a beneficiary of the trust. The trustee can make income and (limited) principal payments to the grantor. The grantor can remove and appoint trustees and act as the investment advisor to the trust. In addition, the DAPT can be set up as a “Grantor Trust,” so that the trust's income is taxed to the grantor using the grantor's social security number, thus alleviating the need to file a separate federal tax return for the trust. So long as a creditor does not seek assets transferred to the trust within the later of two years after transfer or six months after the creditor knows or reasonably knows of the transfer, the creditor is barred from reaching the assets.
Third Party Trust - A trust that is funded with assets belonging to a person other than the beneficiary. In fact, no funds belonging to the beneficiary may be used to fund this type of trust. Typical funding comes from gifts, an inheritance from parents or grandparents, and proceeds of life insurance policies. This trust has no provisions to pay back Medicaid upon the trust's termination; rather, the person creating the trust decides how the trust estate is distributed when the beneficiary dies.
Trust - A legal arrangement whereby property is held by one party for the benefit of another.
Trust Agreement - The legal document that sets forth the terms under which the trust must operate.
Trustee - The person or agency that has legal authority and responsibility for administering a trust.
Unity of Interest – All property owners in a joint tenancy own the same property.
Unity of Possession – All owners in a joint tenancy have an equal right to possess the property.
Unity of Time – All owners acquired the property at the same time.
Unity of Title – All property owners' interests came from the same deed.
Will – A document wherein a person names how the assets in his or her estate are to be distributed upon his or her death and appoints an administrator to ensure that the decedent's wishes are carried out. A will must be probated—that is, the will must be presented in probate court, and its validity must be proven. There are specific requirements for a will to be valid, such as a witnessing requirement, and anyone who writes a will must be competent to make decisions about his or her estate and free of duress, coercion, or undue influence by another person at the time the will is signed.
Consult an Estate Planning Attorney
Your estate plan is all about what you want to happen in the future. It is unique to you. If there is anything you don't understand about your estate plan or if you want to know more about specific terms, speak to an attorney.
An experienced estate planning attorney can ensure that your wishes are carried out as you intended. Contact Nina Whitehurst at Cumberland Legacy Law by calling (931) 250-8585 or fill out our online form.