Glossary 2016-12-22T06:23:23+00:00

Glossary of Commonly Used Estate Planning Terms

Advance Directive
Alternative Dispute Resolution
Applicable Exclusion Amount
Arbitration
Beneficiary
Beneficiary Designation
Business Succession
Bypass Trust
Charitable Gift Annuity
Charitable Giving
Codicil
Collaborative Process
Conservator
Corporate Fiduciary
Credit Shelter Trust
Defined-Value Transfers
Dispute Resolution
Disabled Adult Child (DAC)
Disabled Beneficiary
Durable Power of Attorney
Estate Disputes
Executor
Fiduciary
Fiduciary Selection
Generation-Skipping Transfer Tax (“GST”)
Gift Tax
Ethical Will
Guardian
In Terrorem Clause
Irrevocable Trust
Joint Tenants
Lifetime Gifts
Living Will
Living Trust
Medicaid
Medicare
Medicare Advantage Plan
Medicare Supplemental Insurance
Perpetual Dynasty Trusts
Payable on Death (POD) Designation
Per Stirpes
Postnuptial Agreement
Pot Trust
Prenuptial Agreement
Probate
Reverse Mortgage
Revocable Living Trust
Rule Against Perpetuities
Social Capital
Special Needs Trust
Spray Trust/Sprinkle Trust
Supplemental Needs Trust
Supplemental Security Income (SSI)
Transfer on Death (TOD) designation
Trust
Veteran’s Compensation
Veteran’s Pension (also Veterans Improved Pension)
Wealth Transfer Taxes
Will
Work Quarters / Credits

Advance Directive

In general, this term is used to mean a set of written instructions that a person gives that specify what actions should be taken for their health if they are no longer able to make decisions due to illness or incapacity. This version is also frequently known as a “living will.” In Georgia, however, “Advance Directive” now means a document which both names one or more Health Care Agents who can make health care decisions for the person in the event of incapacity. A Georgia Advance Directive also includes provisions which create a “living Will,” under which the person describes what medical care should be withdrawn or provided in the event the person is incapacitated and in either a terminal condition or a state of permanent unconsciousness.

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Alternative Dispute Resolution

This is a broad term for a number of different dispute resolution processes and techniques, each of which is intended as a way to help disagreeing parties to come to an agreement without resorting to litigation.

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Applicable Exclusion Amount

Under federal estate tax law, the “Applicable Exclusion Amount” is the amount which is effectively exempted from the federal gift and estate tax. A U.S. citizen or U.S. permanent resident will generally be able to transfer this amount of property in transfers made during life and/or at death, without any gift or estate taxes being owed. The “Applicable Exclusion Amount” may include an amount of Exclusion Amount received from a person’s deceased spouse, if certain requirements have been met, and the “Basic Exclusion Amount” is now the term which refers to an individual’s Exclusion Amount.

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Arbitration

Arbitration is one of several kinds of Alternative Dispute Resolution. In arbitration, parties to a controversy present their respective sides of the argument to an arbitrator, who is then empowered to decide how the dispute will be resolved. Arbitration can be binding, in which case the arbitrator’s decision is final, or not, in which case an unhappy party can still proceed with litigation.

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Beneficiary

Any person or entity (like a charity) who is to receive assets from another party. The beneficiary can be named in an estate or a trust, can be the designated beneficiary of an insurance policy or a tax-deferred retirement account, or can receive assets under a “Payable on Death” or “Transfer on Death” registration.

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Beneficiary Designation

Assets which are subject to a contractual agreement between you and another party, such as tax-deferred retirement plans, annuities, and life insurance policies, normally contain a provision in the contract which lets the asset owner designate the recipient of the assets in the event of the owner’s death. This provision is a “beneficiary designation.” Many beneficiary designations include a “primary” designation, which sets out the beneficiary or beneficiaries who will receive the property if they survive the owner, and a “successor” or “contingent” beneficiary designation, which describes how the assets will be distributed if no primary beneficiary survives the owner.

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Business Succession

“Business Succession Planning” is the process of planning what will happen to a business in the event the owner decides to retire or sell, or if the owner dies or becomes incapacitated. It can include identifying and developing potential successors or buyers for the company, and should include steps designed to help ensure that the business will continue after its owner is no longer able or willing to operate it.

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Bypass Trust

A “bypass” trust is a trust designed to allow one person to leave assets to another so that the second person can enjoy the benefits of having the assets available without having those assets included in the second person’s estate for estate tax purposes at his or her death. They are commonly used by long-term or unmarried couples who want to ensure that the surviving member of the couple can continue to use assets but also want to ensure that both members’ estate tax exemption amounts will be usable, to minimize the potential for estate taxes.

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Charitable Gift Annuity

A “charitable gift annuity” is an arrangement between a donor and a charity, under which the donor gives the charity a sum of money, and the charity in turn pays the donor a set amount each year for a set period of time. The donor normally receives a charitable contribution income tax deduction for a portion of the amount paid to the charity. The donor also receives guaranteed payments for a set period of years or the donor’s life.

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Charitable Giving

“Charitable giving” is a general term for transfers which result in contributions being made to a charity. “Charitable gift planning” can be as simple as determining what type of outright charitable contribution will produce the best income tax donation result, to as complex as the creation of a private foundation which will engage in charitable giving over many years. Charitable donations are often made in the form of cash, but real estate, automobiles, appreciated securities, clothing, and tangible personal property are also commonly contributed.

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Codicil

An addendum of any kind to a will. Codicils can alter, change, add to or subtract from the provisions in the will. They can be used to keep a will and testament current and up to date.

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Collaborative Process

The Collaborative Process is a way of practicing law which is designed to reduce the costs and collateral damage often associated with full-blown litigation. In a collaborative law matter, the attorneys for each of the parties help the parties resolve their differences and legal issues using cooperative strategies, including facilitated meetings where all parties and their lawyers are present. In order to provide an incentive for the parties to truly try to cooperate and work together to find a win-win solution, each party and his or her attorney agree that, if the collaborative process is later abandoned in favor of litigation, the attorneys will all withdraw, and the parties will all start over with new attorneys.

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Conservator

A conservator, in Georgia, is a fiduciary who is appointed by a Probate Court judge and given the task of managing the financial affairs of a person who has become unable to handle his or her own affairs due to physical or mental disability. The disability could result from an injury or an illness, or simply from old age. The conservator can be appointed for a temporary period, or for many years. A conservator is required to report to the appointing Probate Court on a periodic basis.

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Corporate Fiduciary

A corporate fiduciary is an entity other than an individual person who has been entrusted with the task of managing assets on behalf of an individual, an estate, or a trust. Corporate fiduciaries include bank or brokerage house related trust departments. However, there are also entities whose primary purpose is to serve as a fiduciary – these are typically referred to as “trust companies.” A corporate fiduciary can serve alone, or as a co-fiduciary with one or more individual fiduciaries.

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Credit Shelter Trust

A “credit shelter trust” is essentially the same as a “bypass trust,” as defined above. The term “credit shelter” is derived from the fact that this type of trust is designed to allow a married person to pass assets to his or her surviving spouse in a way which allows the spouse to continue to use and benefit from the assets, but which will not result in the trust assets being included in the surviving spouse’s estate for estate tax purposes at his or her later death. This structure “shelters” the benefits of the first spouse’s lifetime credit against estate taxes. The lifetime credit against estate taxes is the mechanism which creates the effective exemption from estate taxes which is sometimes referred to as the “Applicable Exclusion Amount” or the “estate tax exemption.”

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Defined-Value Transfers

A mechanism for gifting hard-to-value assets, under which the actual amount of assets transferred is defined as that amount of assets which has a certain specified dollar value, rather than a set percentage or fraction of the underlying assets. Defined value transfers have long been a target of the IRS, with the agency often attempting to revalue the transferred assets for a higher amount at a later date.

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Dispute Resolution

The process of resolving a dispute or a conflict, which can include the use of litigation, collaborative law processes, mediation, arbitration, or simple negotiation between the parties. The general goal is to resolve a given dispute with a solution which meets at least some of each side’s needs and addresses their interests.

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Disabled Adult Child (DAC)

An adult who develops a disability (as defined by Social Security) before age 22 may be eligible for DAC benefits if a parent is deceased or receiving retirement or disability benefits. The amount of DAC benefit is dependent on a parent’s Social Security earnings record. An eligible adult child includes both natural born and adopted children and, in some cases, a stepchild, grandchild, or step grandchild. The adult child must be unmarried, age 18 or older, and have a disability that started before age 22.

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Disabled Beneficiary

An individual who meets the federal definition of “disabled,” who is a recipient of disability benefits (especially needs-tested benefits), who has behavioral problems such as gambling, drug, or alcohol abuse, or who simply can’t be trusted to prudently invest and manage money. Generally speaking, a disabled beneficiary is anyone for whom special arrangements must be made, either for their medical care or to protect them from themselves. A disability may not be readily apparent. If a disabled beneficiary may be eligible for needs-tested benefits, such as Medicaid or Supplemental Security Income (“SSI”), the provisions of the estate plan which provide for that beneficiary can be especially critical, to prevent assets received by the beneficiary as a gift or inheritance from being counted against the beneficiary for needs-testing purposes.

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Durable Power of Attorney

A Power of Attorney is a document which allows one person (called the “principal”) to authorize another person (called the “attorney-in-fact” or “agent”) to make most financial and many legal decisions on behalf of the principal. The Power of Attorney also authorizes the attorney-in-fact to carry out transactions with regard to the principal’s assets on the principal’s behalf. A “durable” power of attorney is one which remains in effect even if the principal is eventually deemed to be incompetent.

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Estate Disputes

An “estate dispute” is one which arises over the administration of an estate or over other estate-related issues. Disputes over estate administration often arise when the decedent’s heirs or beneficiaries discover that the personal representative is not administering the estate properly. Estate dispute claims include breach of fiduciary duties, wrongful interference with inheritance, fraudulent conveyance, conversion or misappropriation, self-dealing, negligence, and claims for an accounting.

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Ethical Will

An “ethical Will” is not a legal document. Instead, an ethical Will is a way for a person to leave a legacy beyond simply the assets he or she leaves behind. The purpose of an ethical Will is for you to express what you believe, what you value, what you find truly important in life, and to communicate these ideas and values to your loved ones in writing, in an audio or video recording, or both. In our firm, we view “The Last Lecture,” by Randy Pausch, as a great example of an ethical Will.

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Executor

An Executor is the person who is in charge of ensuring that a deceased person’s estate is dealt with properly and distributed in accordance with the provisions of the deceased person’s Will. The Will should provide for the nomination of at least one person or corporate fiduciary to serve as Executor. However, no one is actually the Executor of an estate unless and until their appointment has been finalized by the probate court or other appropriate court.

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Fiduciary

A fiduciary is someone who is given the responsibility of managing assets or making decisions on behalf of one or more others. The fiduciary serves in a position of trust, and is usually subject to special duties with regard to how the fiduciary role is carried out. Examples of fiduciary roles include: the Executor of an estate, the Trustee of a trust, the attorney-in-fact named in a Power of Attorney document, or a health care agent under an Advance Directive for Health Care. Other examples of fiduciary roles include guardians and conservators.

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Fiduciary Selection

Since a fiduciary is someone who will make very important decisions, and since those decisions will affect others besides the fiduciary (such as you or your family), it is critical that the decision of who to name as a fiduciary be very carefully considered. Different fiduciary roles require different qualities and strengths, and it is important to consider each potential candidate for a role in light of the demands of that role. For example, someone might be perfect as the guardian of your children because they are warm and nuturing and share your values with regard to religion and family structure. However, if that person is not also good with managing money and making economic decisions, you might not want that person to be the Trustee of your children’s trust, or your attorney-in-fact under a Power of Attorney.

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Generation-Skipping Transfer Tax (“GST”)

The generation-skipping transfer (“GST”) tax is a federal tax which, like the estate and gift taxes, may apply any time assets are transferred from one person to another person. The estate tax applies to transfers made at the death of the asset owner. The gift tax applies to transfers made by the asset owner during his or her lifetime. The GST tax can apply either during life or at death. The key is that the GST tax may apply if assets are transferred from the original owner to a recipient in a manner which effectively causes the assets not to be taxable at an intervening generational level. A very simple example of a generation-skipping transfer is a gift of $50,000 from a grandparent to his grandchild. A more complex example would be a transfer at death, under a Will, to a trust which will benefit the transferor’s child during the child’s lifetime, but eventually pass to the transferor’s grandchildren (her child’s children) without being included in the child’s estate for estate tax purposes. The GST tax may apply in either of these situations. The GST tax can also apply to transfers between unrelated parties, if the recipient is 37 1/2 years or more younger than the person making the transfer. The GST tax, like the estate and gift taxes, also comes with an exemption amount. The GST tax exemption can be used to prevent the GST tax from applying to an outright transfer (such as the direct gift from grandparent to grandchild discussed above). However, it can also be allocated to transfers made to a trust – this can allow the trust to remain exempt from the GST tax for many years and, potentially, over multiple generations.

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Gift Tax

The gift tax is one of three federal taxes which may apply any time assets move from one person to another. The gift tax is applied to transfers made during the lifetime of the original asset owner. It can apply to outright gifts, gifts made indirectly (which benefit a person but are not given directly to him or her), or gifts made in trust. The federal gift tax is considered to be “unified” with the federal estate tax because taxable gifts made during your lifetime reduce the amount which you can transfer free of estate taxes at your death. The gift tax has some exceptions. For example, gifts made using the “annual exclusion” are not taxable. To qualify for the gift tax annual exclusion, the gift must usually be made either outright or through a properly structured trust under certain conditions. In addition, tuition payments made directly to a school, and medical expenses paid directly to the provider of health care related services, may not be considered “gifts” at all for purposes of the gift tax. There are also some gifts which are deductible for gift tax purposes, such as charitable gifts made to tax-exempt charities, which can qualify for the charitable deduction, and gifts to your spouse, which may qualify for the marital deduction. Each exclusion, exemption, and deduction has certain rules which must be met, or the gift will not qualify. Gifts which do not qualify for an annual exclusion, an exemption, or a deduction are subject to the gift tax. These taxable gifts first reduce your ability to make taxable transfers during your lifetime or at your death. If taxable gifts made during your lifetime exceed your gift tax exclusion amount, however, gift taxes will actually be payable. In addition, making a taxable gift triggers a requirement that the gift maker file a federal gift tax return (IRS Form 709) and report the gift to the IRS, even if no gift taxes will actually be payable.

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Guardian

In Georgia, a “guardian” is a person who is charged with the physical care and well-being of a minor or disabled person. The guardian is appointed by a court and subject to ongoing supervision requirements. However, a parent of a child can provide for the appointment of a guardian for that child in the parent’s Will. In some states other than Georgia, the term “guardian” also refers to someone who is charged with managing assets owned by a minor or disabled person; however, in Georgia, a person who manages assets is referred to as a “conservator.”

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In Terrorem Clause

In terrorem clause, is a clause in a legal document, such as a contract or a will, that is designed to threaten someone, usually with litigation or criminal prosecution, into acting, refraining from action, or ceasing to act. The phrase is typically used to refer to a clause in a will that threatens to disinherit a beneficiary of the will if that beneficiary challenges the terms of the will in court.

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Irrevocable Trust

One that by its design can’t be amended, modified, changed or revoked. Once an Irrevocable Trust has been created, the written terms of the trust agreement are generally written in stone and can’t be tweaked for any reason by the original creator. However, a well-drafted Irrevocable Trust often contains ways in which the trust’s beneficiaries can modify certain provisions of the trust, and often also allows the Trustee to make certain modifications. In addition, in some cases, the use of an independent person (someone who is not either a creator, trustee, or beneficiary of the trust) as a “Trust Protector” can add even more flexibility to the Irrevocable Trust.

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Joint Tenants

A form of joint ownership under which two or more persons own the same asset, with what are called “rights of survivorship.” The individual owners are called joint tenants. With real estate, the joint tenants usually each own an equal share of the property, and each of them has the right to keep or dispose of his or her interest in the property during his or her own life. Each owner also normally has the right to use and access the entire property while he or she is still living. With a joint bank or brokerage account, each owner can withdraw from or deposit assets into the account, but the assets held in the account are usually owned by the person who actually contributed them until and unless one of the other owners withdraws more assets than he or she actually contributed. Under any joint tenancy, when an owner of an interest in the asset dies, the other owners automatically receive the deceased owner’s interest, under their rights of survivorship. The owner of a joint tenancy interest in an asset cannot transfer his or her interest in the asset through a Will or other estate planning document, as the rights of survivorship override everything else. In Georgia, a bank or brokerage account is set up as a joint tenancy by default, unless otherwise specifically stated in the account paperwork. With real estate, the default is the opposite: a deed showing multiple owners does not create a joint tenancy unless the deed clearly states that the intention was to do so. This intention must be shown by language in the deed which clearly indicates that a joint tenancy was intended, such as a statement that the owners hold the property “as joint tenants,” or “with rights of survivorship.”

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Lifetime Gifts

A “Lifetime Gift” is an asset transfer which is made during the lifetime of the original owner when he or she transfers an asset to a third party recipient (which can be either an individual or a charity). Lifetime gifts can be either exempt from or subject to federal gift taxes (Georgia has no state gift taxes; some states do have state gift taxes, however), depending on the circumstances surrounding the gift and a number of factors. Gifts which are subject to the gift tax may be deductible if made to a qualifying spouse or charity, or they can be fully taxable. Under current federal law, each individual U.S. citizen or U.S. permanent resident has a tax credit against gift taxes which allows a maximum amount of assets to be transferred in taxable lifetime gifts. For 2013, this tax credit produces an effective gift tax lifetime exemption of $5,250,000, and this amount is subject to indexing for inflation in future years. The gift tax has a top marginal rate of 40%. If taxable gifts are made after the lifetime tax credit against gift taxes has been used up, the maker of the gift (the “donor”) may need to actually write a check to pay the gift taxes generated. In addition, under current federal law, the amount of taxable gifts made during a donor’s lifetime will reduce the amount of assets which the donor can transfer at his or her death without incurring a federal estate tax.

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Living Will

A document in which the signer states his or her wishes regarding medical treatment. A true “Living Will” is often restricted to providing advice which applies only in certain situations where a decision to withhold or withdraw life-sustaining or life-prolonging treatment may be made. In Georgia, the “Living Will” as a separate document has been replaced by the Advance Directive for Health Care, which both contains a Living Will type of provisions and allows the maker to name a “Health Care Agent” who can make broader health care related decisions for the maker if needed during a period in which the maker is incapacitated due to illness or injury.

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Living Trust

A trust which is created and takes effect during its creator’s lifetime can be referred to as a “living” trust. However, this term is most commonly used to refer to a trust which is revocable or amendable by the creator at any time during his or her life, rather than an irrevocable trust.

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Medicaid

Medicaid is a jointly funded, Federal-State health insurance program for children, the aged, blind and/or disabled and other people who have low income and few assets. Georgia offers 36 classes of assistance for Medicaid, including Aged Blind & Disabled Medicaid, Family Medicaid, and Q-Track Medicaid (Medicaid supplements for low income individuals receiving Medicare). Georgia is one of thirty-two states and the District of Columbia to provide Medicaid eligibility to people receiving Supplemental Security Income (SSI) benefits.

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Medicare

Medicare is our country’s health insurance program for people age 65 or older. Certain people younger than age 65 may also qualify for Medicare, including those who have disabilities, permanent kidney failure or amyotrophic lateral sclerosis (Lou Gehrig’s disease). Medicare consists of four parts: Part A (e.g., hospitalization, in-patient hospice), Part B (e.g., doctor visits, laboratory tests), Part C (see Medicare Advantage, below), and Part D (prescription drugs). The program is an 80/20 medical insurance program in which Medicare covers 80% of the cost of services and the patient pays the remaining 20 percent. Originally, the program was designed to provide coverage for medical expenses incurred with a “spell of illness.” Increasingly, Medicare covers preventative care at reduced or no-cost to the insured. Medicare is financed in part by payroll taxes paid by workers and their employers and in part by monthly premiums that are deducted from Social Security checks.

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Medicare Advantage Plan

A Medicare Advantage Plan (also known as a Medicare Part C plan) is a type of Medicare health plan offered by a private company that contracts with Medicare to provide you with all your Medicare benefits. Medicare Advantage Plans include Health Maintenance Organizations, Preferred Provider Organizations, Private Fee-for-Service Plans, Special Needs Plans, and Medicare Medical Savings Account Plans. Individuals enrolled in a Medicare Advantage Plan receive services through this plan and not through traditional Medicare Parts A and B. Most Medicare Advantage Plans offer prescription drug coverage.

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Medicare Supplemental Insurance

Medicare supplement insurance (Medigap insurance), sold by private companies, can help pay some of the health care costs that traditional Medicare doesn’t cover, including copayments, coinsurance, and deductibles. Some Medigap policies also offer coverage for services that traditional Medicare doesn’t cover, such as medical care when you travel outside the U.S. Currently Medicare applicants can select among twelve standard types of Medigap policies. If you have traditional Medicare and you buy a Medigap policy, Medicare will pay its share of the Medicare-approved amount for covered health care costs, and your Medigap policy will pay its share. Individuals have a guaranteed right to the issue of a Medigap policy regardless of their medical history if they purchase the policy during certain periods, such as within the first six months after they become entitled to Medicare. In Georgia, individuals receiving both SSDI and Medicare are eligible to purchase a Medigap policy. A Medigap policy is different from a Medicare Advantage Plan.

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Perpetual Dynasty Trusts

A “perpetual” or “dynasty” trust is one which is intended to continue for many decades and include multiple generations of beneficiaries. These trusts are generally created in states or foreign nations which allow a trust to continue for hundreds of years or indefinitely. The general goal of these trusts is allowing the trust’s assets to be protected from estate tax as the assets move from one generation to the next, as well as protecting the assets from problems that the beneficiaries of the trust may have, such as creditors, divorces, and outsiders who try to access the family assets. Like any well-drafted trust, a dynasty trust can both spell out the creator’s intent and also allow the Trustees and beneficiaries flexibility to deal with changes the future may bring. With a dynasty trust, careful planning and drafting is especially critical, since the trusts are intended to last for such long periods of time.

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Payable on Death (POD) Designation

A designation on a bank, brokerage, or other financial account which provides for one or more stated individual beneficiaries to receive the assets in the account immediately upon the death of the account’s original owner. The beneficiaries of a POD designation do not have any right to the assets in the account while the original owner is still living, but they receive the rights to the assets in the account automatically upon the account owner’s death. POD designations are typically much less flexible and more difficult to keep up-to-date than a well-drafted Will, and we do not generally recommend that our clients use them.

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Per Stirpes

Distribution of an estate whereby each beneficiary receives a share in the property, not necessarily equal, but in certain proportions, some receiving a fraction of the fraction to which the person through whom they claim from the ancestor would have been entitled.

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Postnuptial Agreement

A written contract executed after a couple gets married. As with a prenuptial agreement, the intent is generally to spell out how the couple’s affairs and assets will be dealt with in the event of a divorce. Some states may not recognize postnuptial agreements, although in Georgia they are generally now respected.

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Pot Trust

A trust which has multiple beneficiaries, many or all of whom are to be considered equally important by the Trustee. In a pot trust, the Trustee must weigh the needs of the various beneficiaries in determining what distributions to make and how to make them. One potential benefit of using a pot trust over having each main beneficiary receive a separate trust is that the pot trust effectively allows the trustee to provide more benefits to some beneficiaries over others where it is desirable to do so. For example, in a trust where multiple children are all beneficiaries, the Trustee could make extra distributions to pay for expenses caused by one child’s medical emergency, and those distributions will effectively be borne by all of the children rather than all by the one child. However, we often refer to pot trusts as “litigation trusts,” because they frequently result in arguments between beneficiaries and between the beneficiaries and the Trustee. In situations where it is desirable to use a pot trust, such as a trust to be held for the benefit of minor children whose future needs may differ widely, it is usually wise to provide that the pot trust will end at a certain date or event. For example, a pot trust intended to last until all children have at least had a reasonable chance to get a college education paid for by the pot trust might terminate, and divide into equal shares for the children, when the youngest living child reaches age 22.

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Prenuptial Agreement

A prenuptial agreement (also sometimes known as an antenuptial agreement or premarital agreement), is a contract in which two people agree, prior to entering a marriage, on how certain rights and interests will be treated if the relationship ends in divorce. This type of agreement is often known informally as a “prenup.” A prenuptial agreement can address a wide variety of issues. Most often, they include provisions regarding how property will be divided, as well as whether and how much alimony or spousal support will be paid. Couples who are not getting legally married, but who may be entering a civil union or domestic partnership, can enter similar agreements. Couples who do not want to enter any type of legally binding relationship can create domestic partnership agreements. However, while the rules regarding the enforcement of prenuptial agreements are fairly well developed, the rules regarding how agreements relating to non-marriage relationships are much less clear.

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Probate

A process by which a will of a deceased person is proved to be valid, such that their property can in due course be retitled or transferred to beneficiaries of the will.

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Reverse Mortgage

A reverse mortgage is a loan for homeowners age 62 and older that uses a portion of the home’s equity as collateral.  The homeowner can receive the loan as a lump sum, monthly payments, or as a line of credit against the home. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage. The type and amount of fees that a bank can charge for a reverse mortgage is strictly regulated by federal law.

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Revocable Living Trust

There are two basic types of trust: revocable and irrevocable. A “revocable” trust is one which can be revoked or amended by its creator during his or her lifetime. They are often referred to as “living” trusts because the creator creates the trust while he or she is living, instead of providing for the trust to be created after his or her death, under the terms of a Will. The revocable trust normally provides that assets contributed to it are to be used for the benefit of the creator during his or her lifetime. At the creator’s death, the revocable trust spells out what happens to the assets. Assets can either be owned by the revocable trust during the creator’s lifetime or transferred to it at the creator’s death under a “pourover” Will or via beneficiary designations. Revocable trusts are most commonly used whether either there is a need or desire to minimize the need for assets to be dealt with as part of the creator’s “probate” estate (as in cases where a potential dispute seems likely or where real estate located in more than one state is owned), or where the creator has or may have a need for another person to manage his assets over a long period if the creator becomes mentally incompetent. Revocable living trusts do not provide income tax advantages or creditor protection for the creator, and they are not necessary or desirable for everyone.

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Rule Against Perpetuities

Rule that no contingent interest is good unless it vests not later than 21 years after the death of a person living at the time the interest is created. It prevents a person from keeping property in his family for multiple generations.

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Social Capital

When estate planning attorneys speak of creating “social capital,” they often mean diverting assets which would otherwise be paid to the government in the form of taxes to charitable purposes.

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Special Needs Trust

A “special needs trust” is a trust which contains provisions designed to allow assets held by the trust to be used to provide for the benefit of a person who suffers from a disability. The goal is generally to allow the beneficiary to receive needs-tested benefits, such as Medicaid, which he or she needs in order to obtain medical care and sometimes housing, while not causing the trust’s assets to be counted as the beneficairy’s resources under the needs-testing formulas. Special needs trusts are often referred to as “supplemental needs trusts,” which is a somewhat more accurate term.

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Spray Trust/Sprinkle Trust

Spray trust is a trust in which the trustee has discretion to distribute, divide, sprinkle or spray the trust funds among the beneficiaries in any way s/he sees fit.Spray trusts are also called Sprinkle trusts.

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Supplemental Needs Trust

A supplemental needs trust is designed to allow its assets to be used to provide “supplemental” benefits to a person who suffers from a disability and needs to maintain eligibility for needs-tested benefits such as Medicaid or Supplemental Security Income (“SSI”). A properly drafted supplemental needs trust should not be viewed as the beneficiary’s resource for needs-testing formulas, but should be able to help provide a higher, more comfortable standard of living than the beneficiary would be able to achieve from needs-tested benefits alone. Supplemental needs trusts come in two types: first-party settled (ones created using assets actually owned by the beneficiary) and third-party settled (ones created by someone other than the beneficiary, using assets which never belonged to the beneficiary). The two types have different sets of rules with which they must comply.

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Supplemental Security Income (SSI)

The Supplemental Security Income (SSI) program pays a monthly benefit to individuals who have limited income and resources, including individuals over age 65, disabled adults and disabled children. In Georgia, individuals who receive $1.00 of SSI also automatically are eligible to receive Medicaid benefits, and they may qualify for a host of other public benefits including subsidized housing benefits and the SNAP program (food stamps). The monthly SSI subsidy in 2013 for an eligible individual is $710.00.

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Transfer on Death (TOD) designation

Securities such as stocks can often be registered in “transfer on death” form. This means that the listed owner remains in full control of the asset during his or her lifetime, but upon the owner’s death, the stock will be immediately transferred to the designated beneficiary. This allows the beneficiary to receive the TOD designated assets without the assets having to pass through the owner’s probate estate. However, in many cases, using TOD designations creates problems, as they are often forgotten and don’t get updated when estate plans change. This can result in assets passing to people other than the anticipated recipients. While TOD designations can have their place, we often recommend to our clients that they avoid using them, because there are generally better and simpler ways to make sure your assets get where you want them to go at your death.

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Trust

A “trust” is not technically an entity, like a corporation or a person. Instead, a “trust” is a legal relationship which is created when one person (or more than one person) transfers the legal title to an asset to another party (the “Trustee”), with the Trustee being charged with managing, holding, and using the transferred asset for the benefit of others (the “beneficiaries”). Trusts can arise with or without a written trust agreement being created. However, for purposes of clarity, it is usually better to have a complete, written, signed, trust agreement which spells out how the trust is to operate and makes provisions for backup Trustees.

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Veteran’s Compensation

The Department of Veterans Affairs provides monthly monetary compensation to Veterans who have a service rating of at least 10% disability due to injuries or diseases that occurred or were aggravated during active military service.

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Veteran’s Pension (also Veterans Improved Pension)

The Department of Veterans Affairs helps Veterans and their dependents cope with financial challenges by providing supplemental income through the Veterans Improved Pension benefit (known as a VA Pension). VA Pension is a tax-free monetary benefit payable to low-income wartime Veterans who are aged (over age 65) or disabled, who had at least 90 days active military service, who served one day of service during a wartime period, and who were discharged from service for reasons other than dishonorable. In addition to the improved pension, a veteran may be eligible to receive a Housebound or an Aid & Attendance supplement.

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Wealth Transfer Taxes

The term “wealth transfer taxes” refers generically to three specific federal taxes which can apply any time assets move from one party to another party in something other than a sale between unrelated individuals or companies. These three taxes are the Gift Tax, the Estate Tax (sometimes derisively called “the death tax”), and the Generation-Skipping Transfer Tax. The Gift Tax can apply anytime assets are transferred from one party to another party without full compensation being paid for the transferred assets. The estate tax applies when assets transfer to new owners at the death of the original owner. The generation-skipping transfer (“GST”) tax can apply any time assets move from one party to another party in a way which the IRS views as cheating them of the opportunity to apply gift or estate taxes to those assets in the hands of an intervening party (i.e., if you give money directly to your grandchild, the IRS views this as a lost opportunity for them to impose a gift or estate tax on the gifted money in the hands of your child, and so a GST tax may apply). These three taxes are the price you pay under federal law for being allowed to transfer your assets to others in a relatively unrestricted manner.

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Will

A Will is a legal document in which a person (known as the “Testator” if male and the “Testatrix” if female) spells out how his or her assets should be dealt with at his or her death. Ideally, the Will also appoints someone to act as the Executor of the estate and states the powers that Executor has. If appropriate, the Will can also provide for one or more trusts to be created, and state how those will be managed. In order for a Will to be legally effective after its maker’s death, it must be admitted to probate. The “probate” process is the process by which the appropriate court (in Georgia, this is the probate court of the county where the deceased person had his or her primary residence) takes steps designed to ensure that the Will is really the valid expression of the last wishes of the person stated as its maker.

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Work Quarters / Credits

Work quarters or credits refer to monetary amounts that enable a person to become eligible for Social Security retirement and disability benefits. An individual can earn up to four quarters or credits per year. The amount of money needed to qualify for a credit is minimal; in 2013, an individual must receive $1,160 in “covered earnings” to earn one Social Security or Medicare work credit, or $4,640 to get the maximum four credits for the year. Most individuals need to have forty work credits to be eligible for Social Security retirement benefits. However, younger individuals need fewer credits to be eligible for social security disability benefits.

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