Beneficiary:
A person who is named in a Will or a Trust to
receive a portion of Decedent's Estate.
Bonding of the Executor:
Bonding means that the Executor of your Will has to obtain a bond to insure the faithful
performance of his or her duties. If the Executor steals from the Estate, the beneficiaries
can require the bonding company to reimburse their losses.
If the executor is a trusted family member, or if the executor is the main or only
beneficiary (where he or she would be stealing from him or herself) many
Testators do not require the Executor to be bonded. If you do not totally
trust the Executor with all of your assets, you will want the executor to
be bonded (usually costing the estate approximately $200 to $400 in an
estate of $200,000). Remember, the Executor's duties consist of consolidating
the Estate, which usually means liquidating your assets into cash and
eventually distributing them to the beneficiaries. At some time, the Executor
will have a substantial amount of cash available to him or her in
the Estate bank account. The bonding is essentially an insurance policy for
the protection of your beneficiaries.
Community Property State:
The following States are community property states:
Arizona, California, Idaho, Louisiana, Nevada,
New Mexico, Texas, Washington and Wisconsin. (plus
the territory of Puerto Rico)
All other States are non-community property States.
Corporation:
A corporation is a legal entity established by or pursuant to a state
charter, and is legally separate and distinct from the owners of the
corporation, its shareholders. A corporation must be
organized in any one of the fifty states, or
a territory. The corporation's shareholders elect the members of
the Board of Directors, and the Board of Directors then hire the corporation's
Officers, who run the day to day business. The shareholders have "limited
liability", meaning they can only lose their investment in stock purchased,
but are generally not liable for corporate debt in excess of their investment.
Decedent:
The person who passed away. The Decedent is also known as the "Testator", i.e., the
person who signed the Will.
Estate Tax:
A tax on those assets you have transferred, through lifetime gift or death
transfer, which exceed $2,000,000 (Years
2006 - 2008, and $3,500,000 in Year 2009). This $2,000,000 amount is called your Lifetime
Exemption. Technically, there is a graduated tax on all assets transferred,
and then the IRS gives you a credit. The Credit effectively shields
$2,000,000 of assets.
Certain transfers are not counted toward the $2,000,000, such
as a gift of $11,000 or less made by you to any person per year, or
gifts to pay for tuition or medical expenses (See, Further Tax Saving
Techniques).
Executor:
The Executor of your Will and estate is the person named in your Will to
supervise your estate following your death, and who is required to
consolidate and liquidate your assets, file final tax returns, pay
creditors, possibly handle litigation between feuding heirs and
beneficiaries, and ultimately distribute your assets to the named
beneficiaries. Most people name as the executor their spouse,
a child or closely trusted friend. Before choosing an Executor,
think if that person wants to handle the responsibility of managing
your estate - although you may think you are honoring someone
to be named Executor of your estate, being the Executor takes work
and may place such person between feuding heirs or beneficiaries.
Also, think about that person's physical, mental and
business abilities to undertake this task now, 5, 10 or more
years in the future.
Gift Tax:
This term is really a misnomer. If you gift more than
$11,000 to another person in any one year, you usually don't pay a
tax, but instead you have to file a gift tax return, which lets the government keep track
of the total gifts which exceed $11,000 per year per person you made in
your lifetime, and which then effectively reduces your $2,000,000 Lifetime
Exemption (for year 2006).
Thus, if five years before your death you make a gift of an
asset worth $100,000 to your child during one year, you have
deducted from your Lifetime Exemption $89,000, and at your death you
will only be able to transfer $1,911,000 to your heirs free of tax.
There is an unlimited exclusion for certain gifts, such as tuition
costs paid directly to the university (but not room & board)
or medical expenses paid directly to the provider. These exemptions are
discussed in
Additional Tax Saving Techniques.
Heir:
A person who is or may be entitled to a portion of the Decedent's estate, whether by
intestacy or through a Will.
Independent Contractor:
The guidelines taxing (and worker's compensation) authorities look at to
determine if a worker is an independent contractor or employee include
the following:
- Does the worker determine his/her own hours of work.
- Does the worker have his/her own tools.
- Is the worker under the direct control and supervision of the company
hiring the worker.
- Does the worker have power to employ others to help with the project.
- Does the worker have his/her own place of business separate from the
company hiring the worker.
- Is the work an isolated project, or part of the general
business enterprise of the company hiring the worker.
- Is the worker paying his/her own taxes, insurance, worker's comp, etc.
Obviously, the more "control" the hirer exerts over the worker, the
more likely any taxing authority will determine an employment relationship
as opposed to an independent contractor relationship. An bookkeeper with
her own bookkeeping business with ten clients, spending 10 hours a
week doing one employer's books, would be deemed an independent contractor.
That same person working only for that one business each day from
9 to 11 a.m. at that business's offices, would likely be deemed a part-time
employee, no matter if she were called an independent contractor or not.
Intestate:
Dying without a Will to direct the disposition of your estate.
If a person dies Intestate, such person's Probate Estate
will be distributed as provided in the statutes in
the state where Decedent last lived. Usually, this would be all to the
children if Decedent was not married, all to spouse if married and no children,
one third to the child and two thirds to the spouse if married with one child,
and one half to the children and one half to the spouse if married with
more than one child.
Joint and Several Liability:
Liability which is not proportional to fault. For example, in a general
partnership, every partner is liable for the entire debt of the partnership. If
The opposite of joint and several liability is liability based on
proportion of fault; for example, in a car accident
litigation, the jury could find one defendant 20% at fault and another
defendant 80% at fault, and the 20% at fault defendant would only be
liable for 20% of plaintiff's general damages.
Limited Liability Company
A Limited Liability Company is a relatively new concept, and is
a hybrid between a limited partnership and a corporation. A
LLC has one or more "managing members" and one or more non-managing
members. The LLC allows the benefits of a corporation (limited liability for
the managing members) with the tax benefits of a partnership (no double
taxation of profits and dividends. As with a limited partnership, the
managing members control the company affairs, while the non-managing
members are passive investors only. Special care must be taken when
forming a LLC, to ensure that the LLC has no more than two of the four
corporate characteristics - otherwise it will be taxed as a corporation.
The four corporate characteristics are (1) limited liability, (2)
unlimited duration, (3) free transferability of interest, and (4) centralization
of management.
Limited Partnership:
A partnership consisting of one or more general partners, and one or more
limited partners. The limited partners usually provide the money to
fund the partnership activities, i.e., to purchase real estate. The
general partner is usually the deal maker, i.e., he or she found the
property to purchase, has the know-how to construct a building on it, and
then sells the property for a profit. The limited partner's liability is
limited to their contribution made - they're personal assets are not
liable for partnership debts. The general partners have unlimited
liability.
Probate:
In general, any legal proceedings dealing with matters of
administration and distribution of assets following death, conservatorship
proceedings, and/or guardianship proceedings. We will deal only with the
administration and distribution of assets following death. Any assets
which are held in the name of a deceased person ("Decedent"), and which
do not transfer automatically upon death (such as property held in joint
tenancy, or proceeds from an insurance policy which has a beneficiary
designation), are subject to court supervised probate administration
following the Decedent's death. Certain exceptions in most states allow
an abbreviated transfer process if the value of assets is less
than a certain sum, or the only heir is the decedent's spouse.
For example, assume an unmarried person has three children, and owns a house,
some stocks, a car, personal effects such as home furnishings, jewelry,
etc., and who also owns an IRA with a beneficiary designation. Further
assume this person has a Will, which states that the car should go to
Child One, and all other assets should be divided equally between his
children. Upon this person s death, the purpose of probate administration
is to:
- Collect all of the assets for safe-keeping (including
making sure the car is not driven, house insurance is maintained, etc.);
- Liquidate the assets by selling the house, the stocks,
and other assets with value (unless the children agree to jointly continue
owning the house);
- Pay decedent's valid debts to the extent there are
sufficient assets; and
- Distribute the assets by giving Child One title to
the car, and dividing the remaining funds between the children.
The IRA, because it usually has a beneficiary designation, is not
subject to probate administration and gets paid directly the named
beneficiaries. This asset is said to "pass outside of probate ".
Sole Proprietorship:
Any business owned by only one individual, and which is not
incorporated. Once two persons own a business it is a form of
partnership or joint venture. If the business is incorporated it is a
corporation.
Successor Trustee:
The person named to administer the Trust following
the death of the original Grantor/Trustee. In our Trust, the person who
sets up the Trust (the "Grantor") is the original Trustee.
When the Grantor/Original Trustee dies, the next person appointed to
administer the Trust (usually a family member or trusted friend) is called
the First Successor Trustee. A Second Successor Trustee can be named in the
event the First Successor Trustee can not or does not want to act as Trustee.
Court Supervision over Executor's Actions:
One of the primary duties of a probate court is to make certain that the
wishes of the person making the will are carried out, that no person or
persons improperly gain from the estate due to theft or other improper
activities (for example, an improper loan to the Executor or relative
of the Executor, outright theft, investing in speculative
investments, selling an asset below market value, etc.).
To complete this task, the probate process
is intensively court supervised, usually requiring court approval for
mundane activities such as hiring a real estate broker, liquidating
stocks, selling a car, etc. This can lead to an overly time consuming
and more expensive probate process where such high degree of supervision is
unnecessary. For example, if you believe your chosen Executor is both
ethical and has sound financial judgment, or if your chosen Executor is
the sole or main beneficiary, full Court supervision may
not be necessary.
Many states have adopted guidelines to allow an executor to administer
the estate with a bare minimum of court supervision, if and
only if the Will expressly states that the estate should
be administered with minimum supervision. This means that the
Executor can sell assets, invest funds, employ brokers and attorneys,
etc., without Court approval. In most instances, the Executor will
still have to present the Court with a final accounting and
need Court approval to make the distribution of the Estate assets to the
beneficiaries.
Because real estate holdings are often the largest asset in any
probate estate, many states allowing minimum court supervision
draw a distinction between real estate holdings and all other assets.
Thus, the Testator can specify minimum court supervision
for all assets, including real estate; or minimum court
supervision for all assets EXCEPT for real estate.
Testator:
The person who makes (signs) the Will. This person is also
known as the "Decedent" once the Testator dies.
Testamentary Trust:
A trust that is established through the directives of a Will.
Unlike a Living Trust (made while you are alive), a testamentary
trust is established through your Will at your death. The Last Will and
Testament available through Legaldocs allows you to establish a testamentary
trust to handle the estate (financial affairs) of any minor children,
should you die and there is no other living parent. This
alleviates the necessity of having to set up a guardianship of the estate,
with all of the concurrent court filings, accountings, and supervision.
The Executor is given full discretion to decide if such a trust
is beneficial to the minor, and if such a trust should be established.
If you currently have minor children, or are considering having children,
including this provision gives your Executor the greatest flexibility
in handling your children's estate should neither parent be living
during the children's minority.
Normally, the person or one of the persons named as guardian of your
minor child will also be named the Trustee of the Trust. However,
in some circumstances it may be advantageous to have
different persons hold these positions. For example, the best
person for the emotional and moral upbringing of your child may
be one relative, who may be a notoriously bad financial manager.
In this instance a more experienced financial manager may be appropriate
for financial matters, but who would be inappropriate to raise
the child in a manner you deem beneficial to the child's well being.
Trust:
A trust is a fictitious legal entity which owns assets for
the benefit of a third person. It can be as simple as setting up a
bank account entitled Jane Doe, as trustee for her daughter Mary Doe .
Technically, Jane Doe is the owner of the account, but she holds the account
for benefit of Mary Doe, named the Beneficiary. In this instance Jane
Doe is both the Grantor of the Trust (the person who set up and
gave money to the Trust) and the Trustee of the Trust (the person
charged with keeping the assets safe, invested properly, and finally
distributed to the Beneficiary at the proper time). As Grantor, Jane
Doe can pretty much decide how the money must be kept (in interest
bearing accounts, in real estate, or only in government insured FDIC
accounts, etc.), and when it may be distributed (when Mary Doe is
18 years old; or one half when Mary is 21
and the other one half when Mary is 25, or
whatever). Jane Doe can even say that as long as Jane Doe is alive, Jane
Doe can withdraw any income, or even the principal of the trust, if she
has financial need for that money, and that Mary Doe is only entitled to
that money that is remaining after Jane Doe dies (which is what happens
in a Marital Deduction Trust).
A trust can be revocable, meaning the Grantor can change the terms
of the trust or even revoke the trust in its entirety and take back all of
the assets in the trust. A trust can be irrevocable, meaning that the
terms of the trust cannot be changed (i.e., the beneficiary cannot be
changed), and that whatever assets that are placed in that trust cannot
be withdrawn by the grantor. The trusts which can be produced through
Legaldocs are all revocable.
Joint Venture:
A joint venture is a form of partnership, but usually made for only one
specific project, for example the purchase and build-out of only one
piece of property. Also, joint ventures usually terminate after the
specific project is completed, while a partnership is usually of a longer
or unspecified duration. The distinction between a
joint venture and a general
partnership is murky, but it can be said all joint ventures are a form of
partnership, while not all partnerships are joint ventures.
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