We’re financial planners, so use financial terminology every day. We realize that’s not the case for everyone. People reading this may be engineers, teachers, doctors, or entrepreneurs. And every industry has its own vocabulary. Since we would need a translator if you discussed the manubrium of the sternum, we figured you might feel the same way when we mentioned the inverted yield curve.
In the spirit of spreading as much useful information as possible, we will build and share a financial glossary. To avoid information overload — and heighten the suspense, we’ll define a handful of words at a time. We’ll start this month with estate planning.
- Beneficiary: In a financial matter, the beneficiary receives money or property according to a will, trust, or insurance policy. Certain types of accounts, such as qualified retirements accounts, allow beneficiaries to receive property upon the death of the account owner. Other types of accounts go through a court process called probate to distribute assets to beneficiaries.
- Probate: a legal proceeding which decides whether a will is authentic. The probate court reviews the deceased person’s assets, debts, and will (if existing) and must approve the allocation of assets to the heirs.
- Will: a document that delineates who cares for your children and who receives or controls your assets after you die.
- Living will: provides medical professionals with legal instructions about your healthcare if you cannot speak for yourself. In case you sustain a serious injury or loss of faculties doctors will understand your wishes. These are legal documents in most, but not all states.
- Trust: Trusts authorize a trustee, or third party, to retain and arrange the distribution of assets based on the wishes of the grantor (the creator of the trust). Creating a trust can help avoid probate and possibly save time.
- Living trust: Grantors create these trusts while they’re alive.
- Revocable trust: A type of living trust where the grantors can change the terms of the trust, even terminate it, during their lives.
- Irrevocable trust: This trust is more restrictive than a living trust. Generally speaking, it cannot be changed, if at all, except under very specific circumstances. Irrevocable trusts may offer advantages that revocable trusts do not such as creditor protection and possible estate tax savings.
- Testamentary trust: A type of trust established by a person’s will after their death.
- Trustee: The third party who holds the trustor’s assets and arranges for their distribution to the beneficiaries.
- Grantor (or Trustor): creates the trust to leave assets to beneficiaries.
- Testator: maker of a will.
- Personal representative (also executor): Personal representatives carry out the will’s instructions, working in the best interest of the estate’s beneficiaries.
- Life estate: a document that enables a person to pass on real property to a beneficiary, or remainderman, while still alive. The original property owner has the right to live in the property and must pay taxes, but the remainderman owns it legally. This can make leaving real property easier by avoiding probate.
- Remainderman: The beneficiary of a life estate is a remainderman. The term applies to men and women in this position.
- Estate planning: preparing to manage the assets of a person after they become incapacitated or die. Best accomplished with the help of an estate planning attorney (there is also online software supporting “do-it-yourself” estate planning). An estate plan outlines the distribution of assets and the payment of taxes and debts.
- Intestate: the state of dying without a will. Without a legal will, the probate court decides on the disposition of a person’s assets, usually based on state laws governing intestacy.
We hope this glossary helps you become a more informed financial consumer. We’ll keep adding to this series with descriptions of more finance-centric terms.
Is there a financial topic you’d like to know more about? Contact us with your ideas.