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Technical Terms and Their Meanings: Wills, Probates and Estate Planning

January 15, 2018

Timothy P. Barry, CPA/PFS, MST, CFP®, CRPC®
Partner

Like many things in the world of financial planning and accounting, estate planning and trusts can be complex—and more than a little confusing.

Whether you’re experiencing the loss of a loved one and dealing with their estate, or you just had kids of your own and you’re hoping to create a trust fund to secure their futures, you’re likely to come across a number of terms you may be unfamiliar with.

This series of “Technical Terms and Their Meanings…” articles will attempt to define those terms, and help you prepare to handle the financial side of any future major life events.

We’ll start with wills, probates and estate planning.

Consider the following hypothetical situation.

Your beloved Uncle Billy passed away last week. He led a long, fulfilling life, and was fortunate enough to have accumulated wealth and assets that he was able to leave behind. Fortunately, Billy left a will. A will is a legal instrument whereby an individual specifies how their probate estate will be managed and distributed after their death. A probate estate consists of property that the decedent owned outright and which passes under the terms of a will. Certain property such as jointly owned property, property held in trust and property passing via beneficiary designation is excluded from the probate estate. Uncle Billy was a meticulous planner, ensuring his will was buttoned up and complete well before his death. Since he passed away with a valid, legally binding will, Uncle Billy’s estate is referred to as testate. If he passed without a valid will, his estate would be classified as intestate.

You’re with your family members and your Uncle Billy’s estate planning team. It’s time to begin the probate process—or, the court-driven legal process by which a decedent’s estate is administered. During the probate process, an executor or personal representative—a person named by the deceased to serve as the legal representative of the deceased’s estate—will be appointed by the probate court.

The executor reads your uncle’s will to you and your family members. Items included in the probate estate include everything from Uncle Billy’s car and home to bank accounts and small trinkets and keepsakes.

The executor begins going down the list, and you learn you inherited Uncle Billy’s collection of Revolutionary War memorabilia. Your brother inherited your uncle’s plot of land in South Florida. Your inheritance—a gift of personal property passing under the terms of your uncle’s will—is called a bequest. Your brother’s inheritance—a gift of real estate—is called a devise.

The property the family receives from Billy’s estate receives a basis adjustment, an increase or decrease in cost basis resulting from the property’s inclusion in a decedent’s gross estate. Generally, the basis of property received from a decedent equals the fair market value of the property at the date of death.

The executor continues down the list and gets to Uncle Billy’s son. He inherited your uncle’s snake-infested swamp in Alabama. The only problem: He doesn’t want it. He lives in Boston, is deathly afraid of snakes and he and his wife aren’t interested in maintaining property that is literally underwater. Taking all of this into account, your uncle’s son decides to disclaim his interest. Disclaimers of interest, also known as renunciations, are legal measures beneficiaries can take to deny a bequest or devise.

Before transferring the property to the beneficiaries, the executor must be sure to pay off any of Uncle Billy’s remaining debts and taxes. Your uncle passed away debt-free, but his estate may still be responsible for the estate tax (a tax assessed on the value of your uncle’s assets at the time of his death). To determine if an estate tax is due, the executor must determine if the value of Billy’s taxable estate exceeds his remaining lifetime exemption—the maximum amount of property that can be passed by an individual either during life or at death without being subject to gift or estate tax. The federal lifetime exemption for 2017 is $5,490,000.

Uncle Billy not only left behind his property but also a new list of terms and definitions for his family.

If you’re interested in learning more I’d urge you to contact your estate planning team.

Tim Barry, CPA/PFS, MST, CFP®, CRPC®, is a Tax Partner at BlumShapiro. He can be reached at tbarry@blumshapiro.com.

How BlumShapiro Can Help

BlumShapiro's estate and trust planning professionals will work with you to design a customized estate plan. By customizing your estate plan to your particular needs, our estate planning specialists can assist in managing and conserving your estate while reducing tax liabilities. Learn more about our trust and estate services >>

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

 

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