Definitions
To help make things easier, we’ve included definitions of several terms that you’ll likely encounter when putting your legal affairs in order. We’ve listed them alphabetically.
Applicable Exclusion Amount
The amount of wealth that a surviving spouse can actually pass tax-free. It is equal to his or her basic exclusion amount plus the deceased spouse’s unused exclusion (DSUE) amount.
Basic Exclusion Amount
An exemption against lifetime gift taxes and estate taxes. It currently allows each U.S. citizen to pass $5.25 million to their loved ones without paying any gift or estate taxes. It is indexed to inflation so it will gradually increase each year. Through a combination of credit shelter trusts and portability, a married couple can together pass $10.5 million of their wealth without incurring gift or estate taxes.
Credit Shelter Trust
Also known as Bypass Trust, “B” Trust, or Family Trust. An irrevocable trust for couples (which can work together with or independent of a living trust) that is created specifically to contain wealth up to the equivalent of the federal credit and to thus preserve each spouse’s federal credit. This married trust can save a married couple hundreds of thousands of dollars in estate taxes, and does not need to be funded until after the death of the first spouse.
Deceased Spousal Unused Exclusion Amount
A deceased spouse’s unused exclusion (DSUE) amount that can be added to the surviving spouse’s exclusion. For example, if George dies in 2014 owning $1 million that he passes to his children, the DSUE amount will be $4.25 million ($5.25 million minus $1 million) ($5.25 million is the basic exclusion amount—see Basic Exclusion Amount above). His spouse will then be able to add the DSUE amount to his or her basic exclusion and be able to pass $9.5 million ($5.25 million plus $4.25 million) tax free at death.
Estate Planning
The ordering of your affairs to minimize trouble upon incompetency or death and maximize the well-being of your beneficiaries.
Incompetency (Legal)
The condition of being adjudicated unable to manage your affairs.
Living Trust
A revocable trust created during your lifetime to hold title to your assets. So long as you live, you retain complete control of your assets, and at death your assets avoid probate. Note well that a living trust does not shield assets from estate taxes or from creditors.
Living Will
Your directions regarding your health care while incompetent and the disposition of your body once deceased.
Marital Deduction
The unlimited right of spouses to transfer as much wealth between themselves as often as they wish (and once more at the death of the first to die) without federal estate or gift tax consequences. Note well that this deduction does not preserve the federal credit of the first spouse to die.
Portability
A technique created by the 2012 American Tax Relief Act that allows a surviving spouse to use whatever is left from the deceased spouse’s basic exclusion amount in addition to his or her own basic exclusion amount. In order to claim this benefit, the executor must file IRS Form 706, the federal estate tax return, within 9 months of the death of the first spouse. Then the surviving spouse can elect to pass an applicable exclusion amount that is more than his or her basic exclusion amount. Using portability can be better or worse than using a credit shelter trust, depending upon the types of assets involved and individual circumstances.
Power Of Attorney (Financial)
Your authorization to another to act for you relative to your assets with full powers. Should be “durable.”
Power Of Attorney (MEDICAL)
Your authorization to another person to act for you relative to your body with full powers except where your living will controls.
Probate
The state-court post-mortem lawsuit which retitles assets out of the name of a deceased person and into the name of that person’s rightful successor(s), whether by will or by intestacy.
Special Needs Trusts
These trusts can take many forms to address your particular concerns, whether income generation, minors, spendthrifts, philanthropy, and so forth.
Will
Your directions to the probate court regarding the distribution of your personal estate after your death. Any asset of yours with another person’s name on it or which you endorsed to another at your death is not subject to your will.