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The Importance of Coming to Terms With Estate Planning

August 24, 2006
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The first step in planning for what will happen to your assets when you die is knowing key estate-planning terminology and concepts. To that end, the Pennsylvania Institute of Certified Public Accountants offers a brief explanation of some of the most frequently used estate planning terms.

· Administrator: The individual or institution appointed by the probate court to oversee the settlement of the estate of a person who died without a will.

· Beneficiary: An individual designated to receive the principal and/or income of an estate or trust.

· Bequest: Property given as a gift under the terms of a will.

· Codicil: A properly signed, written addition or other change to an existing will.

· Durable Power of Attorney: A legal document that allows an individual to designate another person to act on his or her behalf during the creator's lifetime, particularly to deal with the person's property.

A durable power of attorney remains in effect even if the person who created it becomes disabled or incapacitated, but ceases to exist upon the death of the individual granting the power.

· Estate Tax: A tax imposed at a person's death on the transfer of most types of property that is calculated on the total value of the estate. This is sometimes called the "death tax."

· Executor: The person or entity named in a will to carry out the provisions of the will. More than one executor can act together. In some states, this person is called the "personal representative."

· Applicable Federal Credit: A federal tax credit that offsets gift and estate-tax liability. For 2006, the credit is $780,800, which offsets the tax liability on a net taxable estate of $2 million.

· Fiduciary: An individual or institution legally responsible for acting in the best interest of another party. Trustees and executors are examples of fiduciaries.

· Gift Tax: A federal tax on the transfer of property to another person, during the donor's lifetime, worth more than $12,000 per year.

The gift tax must be paid by the donor. There is no tax liability for the recipient. Pennsylvania does not have a gift tax, but gifts in excess of $3,000 per person, transferred within one year of a person's death, are included in the decedent's estate.

· Gift-Tax Annual Exclusion: The first $12,000, indexed for inflation, in gifts that an individual can give tax free to as many people as he or she chooses during a calendar year. A husband and wife together can give $24,000 to each person. This is known as the "annual per donee exclusion."

· Guardian: An individual appointed to act in the place of a parent for a minor or to act on behalf of a person incapable of taking care of his or her own affairs.

· Heir: A person(s) entitled by law to receive assets from the estate of a person who has died if no will existed.

· Inheritance Tax: A state tax based on the value of property and on the status of the beneficiary to whom it passes.

· Intestate: The term applied when a person dies without a will.

· Living Will: A legal document in which an individual states his or her wishes regarding medical treatment and life-saving interventions in the event of exigent medical circumstances, such as a terminal illness or accident. A living will may also appoint a health care proxy to make health-care decisions on the individual's behalf. The more common legal term is an "advance health-care directive" or "durable power of attorney for health care."

· Power of Attorney: A legal document that gives one individual the authority to act for another. See "durable power of attorney."

· Probate: The court process for determining the validity of a deceased person's will and governing the distribution of the estate's assets.

· Trust: A legal, fiduciary relationship, usually established in a written document, in which an individual or institution (the trustee) holds and manages property for the benefit of another (the beneficiary).

· Residual Estate: The portion of the estate that remains after all administrative expenses, taxes and specific bequests have been paid.

· Unlimited Marital Deduction: A rule permitting spouses to transfer an unlimited amount of assets to each other, while alive or after death, without federal income- or estate-tax implications.

· Will: A legally executed document that directs how, and to whom, a person's assets will be distributed upon death. A will may also designate a guardian to handle the affairs of minor children.

CPAs emphasize that by developing an estate plan, you decide who will receive shares of your assets, who will manage your estate, and who will care for your children.

Without one, you relinquish the decision-making to the default provisions of state inheritance laws. 

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