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LEGAL TERMS & DEFINITIONS <## *********** ##>

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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