Different people can have different names for the same thing. Different states have different definitions for the same thing. In the law, terms don’t always carry a common sense meaning. It’s confusing! Let’s examine the terms and definitions for common terms used in the Estate Planning area:
Power of Attorney / Agent / Attorney – in – fact:
These are all terms to describe the person whom you have appointed to manage affairs on your behalf via a document called a Power of Attorney. We generally draft two Power of Attorney documents: One for health care decisions and one for financial decisions. One person can be appointed to manage both your health care decisions and financial decisions if you choose. When you pass away, the person’s ability to manage your affairs ceases and they cannot take any further action. Upon death, management of your affairs (now called your estate) is handled by your Executor.
The term for the person you appointed in your Will to manage your estate when you die. Your estate is everything that you owned and owed in life. The Executor’s job is to reconcile your debts against your assets and distribute the remainder pursuant to the terms of your will. The Executor’s actions are supervised by the Court and the Court has the discretion to compensate the Executor out of the assets of the estate. The Executor can further enlist the help of professionals (attorney, CPA, financial planner) to assist in administration of the estate.
The term for the person who is appointed by the court to manage your estate when you die without a will. Their role is the same of the Executor.
Document which provides instructions for how to settle your estate and names the Executor. During life, this document has no power. Since the Will becomes effective at death, it is not made public until such time. Without a Will your estate is settled pursuant to the laws of NC, which for most people is not what they would choose for themselves.
Living Will / Advanced Directive:
A Living Will is not your Will when you are alive. I admit the term is confusing, but what a Living Will a/k/a Advanced Directive does is specify your wishes for end of life care. The decisions governed by this document surround life support, nutrition, and hydration. You can state your wishes ahead of time via a directive in the document, or you can appoint your health care power of attorney to communicate your decisions to the health care professionals.
During a child’s life, a child’s parents are their guardians. When parents are living, they fill the role of both the “guardian of the person,” a/k/a the individuals who have custody of the child and “guardian of the estate,” a/k/a the individuals who have control over the child’s finances. If parents die before their child is an adult, they can specify their wishes regarding guardians in their estate planning documents. The guardian of the person and the guardian of the estate can be the same individual, but parents can choose to bifurcate those roles. In other words, parents can choose one individual to have custody of the child, and a different individual to manage the child’s finances.
Once a child turns 18, they are an adult and no longer in need of a “guardian of the person.” However, most parents wish to delay inheritance beyond the age of 18. The most efficient way to provide guidance for an inheritance beyond 18 is to set up and Trust and name a Trustee. The Trustee would manage the assets for the child until such time and in such a manner as the parents specify in the Trust document. As you can imagine this provides a lot of flexibility for parents when planning for their minor children.
The trust is an entity, similar to a company, that owns assets which are managed and disposed of. Trusts come in many flavors, but what all trusts have in common is this:
- There is a person who creates the Trust – that person is known as the grantor/settlor/trustor.
- There is the person who manages the assets owned by the Trust – that person is known as the Trustee.
- There is the person who receives distributions from the Trust – that person is known as the Beneficiary.
In addition to providing flexibility in estate planning when minor children are involved. Trusts are routinely used in the following situations:
- If the person wishes to keep their estate planning private. Wills are public record when you die, whereas a Trust never becomes public record.
- Beneficiaries with Special Needs: Making sure that distributions to these individuals don’t jeopardize that individual’s ability to qualify for benefits that are tied to income.
- Planning for multiple generations. For blended families, a wife may want to leave her estate to her husband for his life, but then when husband dies specify that the remainder go to wife’s children. Similarly, parents may want to leave assets to their children for life, but retain control over those assets once the child dies so that the remainder either go to the grandchildren, or somewhere different.
- Asset Protection – If you fear that you or any of your beneficiaries may have creditor issues, a Trust can assist in providing protection.
- Protecting a Beneficiary from themselves. If the individual has substance abuse issues, or generally is wasteful with spending, a Trust could provide for a third party to manage that Beneficiary’s share.