In this month's Monthly Financial Jargon series, we’re discussing five estate planning terms that are often misinterpreted and used interchangeably but in actuality denote differing, essential roles throughout the estate planning process.
What is Estate Planning?
We’ve taken a deep dive into estate planning before, and as a quick recap: Estate planning is a comprehensive term that covers all of the planning components that involve how an individual’s assets, along with any financial obligations and debts, will be managed, distributed, and preserved after his or her passing or if he or she becomes incapacitated. Examples of tasks associated with devising an estate plan include making a will, electing beneficiaries and naming an executor, setting up trusts, and making tax-efficient charitable donations. To ensure no technicalities are overlooked, most estate plans are created and established with the help of an estate attorney.
Below, we break down five terms used throughout the estate planning process that are important to understand, especially in terms of the varying roles each involves.
5 Estate Planning Terms to Know
- Power of Attorney (POA): A power of attorney, often referred to as a POA, is an essential legal estate planning document that provides someone with the authority – or power – to act for another person. The person granted the power is known as the agent, and the individual whose power is at hand is known as the principal. The agent is granted certain legal authorities to make legal decisions regarding the principal’s finances, assets, property, and medical care. The power of attorney is used when the principal cannot be present to sign legal documents for certain financial transactions or when the principal becomes sick or incapacitated. That being said, a power of attorney should especially be created when planning for long-term care. Overall, the POA can be general, giving the agent the ability to take any action on the principal’s behalf, or it can be limited and restrict the areas in which the agent can make decisions. A POA is vital to have in place because you want to have a trusted individual making decisions for you if you are not able to make the decisions for yourself. Without a POA, your loved ones will need to go to court to have you declared incapacitated and have someone appointed to act on your behalf.
- Trustee: A trustee is an individual, firm, or organization that administers and holds assets for the benefit of a third party, known as the beneficiary. A trustee is assigned via a trust, which is an agreement between two consenting parties that involves a person or group of individuals – known as the trustors – assigning the right to hold the title to specific assets to the trustee. A trust is typically created to ensure legal protection is in place for the assets of the trustor and to make sure the assets protected by the trust are distributed properly to the beneficiary under the conditions of the trust. Put simply, the trustee is tasked with ensuring the wishes of the trustor are properly fulfilled. Trusts are often leveraged in estate planning because these agreements can be leveraged in many ways and can specify exactly how and when assets pass to the beneficiaries. A trustee can be leveraged for a variety of objectives, including for a charity or a trust fund. Trustees are – as the title denotes – trusted and have a fiduciary responsibility to make decisions in the best interest of the beneficiaries.
- Executor: An executor is the individual who manages and administers an estate according to a person’s will upon his or her passing. In other words, the executor is tasked with carrying out an individual’s final wishes and any instructions in regards to the management of the person’s estate and affairs. Executors are imperative in estate planning because these individuals serve as the bearers of a person’s final wishes and legacy. If someone passes without a will or if someone’s will does not contain a reference to an executor and does not name one, then a probate court is responsible for appointing one, in which case a loved one can petition the court to become the executor of the deceased’s estate.
- Personal Administrator: A personal administrator, often simply referred to as an administrator, oversees the management and distribution of a person’s estate if the person dies intestate, meaning without a will. The administrator is typically selected by a judge in probate court, where the distribution of a descendant’s assets is dictated according to state law.
- Personal Representative: The terms personal representative, executor, and administrator are often used interchangeably. Think of the term “personal representative” as the umbrella term under which executors and administrators fall. The main difference between executors and administrators involves whether or not an individual leaves a will. When a personal representative is assigned to the position of administering a will, he or she is identified as the executor of the estate. If the deceased does not leave a will, his or her estate goes through probate – the court-supervised process of authenticating a will or administering a person’s estate in the absence of a will – and the judge appoints someone to oversee the process and serve as the estate’s personal representative. When a personal representative is assigned to handle the estate of someone who did not leave a will, he or she is known as the administrator or personal administrator.
Final Points
Although each term bears a unique role, all of these positions serve as fiduciaries, meaning these individuals are entrusted to act in the best interest of the owners and beneficiaries. Due to the innate responsibility of these roles to preserve and distribute an individual’s legacy, these positions are all vital to the estate planning process. Even though some people mistaken estate planning as a component of financial planning reserved for the one percent, as these terms emphasize, if you have any assets to your name, you need some semblance of an estate plan to ensure your legacy finds its way into the hands of the right people.
Monthly Financial Jargon: The world of finance and investments is notorious for its extensive use of jargon. With a goal to enhance financial literacy and make the world of money more transparent, we have our “monthly jargon” articles that focus on debunking financial terms that are often used sans explanation.
Questions and/or interested in how this applies to your financial life?
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