Some days when I’m watching TV, or even the news, I hear new words like twerking, YOLO and binge watching and it often sounds like a whole new language I need to learn. Luckily, the Oxford Online Dictionary is good enough to add these new words regularly – so when I have no idea what someone is talking about, Oxford helps keep me hip.
The same word bewilderment happens when you listen to a financial planner or attorney talk about estate planning. It can easily sound like they speak a whole different language.
Have you ever Googled the words your financial planner or attorney uses and found that the definitions are just as difficult to understand? I think part of the problem is that the words they use are so old that they don’t make sense in modern times. Like the phrase “estate planning” … so many people say to me “I don’t have an estate, why would I need this?”
I hope these 10 legal terms (translated into plain English) are helpful. I sincerely think everyone should understand them and why they are so important.
1. Estate Planning
Estate planning is the process of making plans for how your possessions and responsibilities are distributed if you become incapacitated or die.
Why you should care…Everyone has an estate. Even if you don’t own a home or a car and are in debt, believe it or not, you have an “estate” in the eyes of the government. Your estate includes everything you own, no matter how modest or how grand. Your estate also includes your responsibilities as a parent of a minor child, as an owner of a pet, and as the owner of a business. If you don’t put your wishes in writing, then your state government has guidelines they follow for distributing your responsibilities and possessions. State guidelines get the job done, but most likely not in the way you would want.
2. Financial Power of Attorney
This document authorizes someone else to manage your finances for you.
Why you should care…If you become incapacitated and cannot manage your finances, you set the rules as to who can manage your money and under what conditions. If you don’t have a Financial Power of Attorney, your state government has guidelines they follow for assigning someone to manage your finances. If you live alone, chances are your state government is not going to assign who you would want to assign.
3. Healthcare Power of Attorney
This document authorizes someone else to manage your health care decisions for you.
Why you should care…If you become incapacitated and cannot make medical decisions for yourself, you name the people you trust to work with your doctors on your behalf. If you don’t have Healthcare Power of Attorney documents, your state government will choose someone for you. This is not just for people over 50; anyone over 18 should have one, especially if you live alone. In many states, court approval is required for anyone (even parents and siblings) to make medical decisions on someone’s behalf.
4. Living Will / Healthcare Directives
This is a legal document with instructions on how much or how little life support you want if you become terminally ill.
Why you should care…Leaving these types of end of life decisions for someone else by not making a Living Will is one of the worst things you could do to someone you love. Many of your close relatives may have differing opinions than your own and, without your wishes in writing, you leave heart-wrenching decisions in your loved ones’ hands. These decisions, foisted upon unsuspecting family members, many times can damage relationships forever.
5. Last Will & Testament
This is a legal document with instructions on how you want your possessions to be distributed when you die and who you want to be the guardian of your minor or special needs children.
Why you should care…Money and possessions aside, deciding who would raise your child in your absence is one of the most difficult decisions you’ll face as a parent. No one will ever be as good as you, and planning for or even thinking about a hypothetical emergency where you are no longer able to provide care for your children can be uncomfortable. As uncomfortable as it may be, if you don’t give legal instructions you leave these critical decisions in the hands of your state government. Every state’s laws are different, but one thing is the same, someone other than you is deciding the fate of your children.
I was surprised to learn that 70% of Americans living with children under 18 do not have a will. 70%! I’ve surveyed hundreds of parents and they told me they didn’t want to “tempt fate,” or spend the money, or couldn’t decide whom to name as guardians. Most people surveyed by Rocket Lawyer said they just haven’t gotten around to it.
6. Executor
This is the person who will manage settling your affairs with the state government and distribute your belongings when you die.
Why you should care…This person is the one you trust to carry out your wishes. If you don’t name someone you want in a will, then your state government names someone for you. I know it can be overwhelming, but this helpful article on Choosing the Executor FAQ will answer some of your initial questions and inspire you to name an executor.
7. Guardian
This is the person or persons who will care for your children if both parents die or are incapacitated.
Why should you care…There are two types of guardians, one who manages the money and one who cares for the child. They can be one person or two. Choosing the right people is difficult and they can change over time. This helpful article on the Ten Things to Think About: Choosing a Guardian for Your Child outlines the most important considerations.
Whether you have named guardians in a will or not, my advice to you is the same: equip at least two people with simple, yet vital, instructions on how to care for your children in an emergency.
8. Trust
A trust is a way to organize assets using a legal document so that the property is distributed efficiently after your death.
Why you should care…If you want to bypass the state government’s handling of your assets (called probate) when you die to reduce costs and increase privacy, you should speak to an estate planning professional about creating a trust. As CNN Money points out in this article “Assets you want protected by the trust must be re-titled in the name of the trust. Anything that is not titled to the trust when you die will have to go through probate.”
9. Trustee
A trustee is the owner of the assets in a trust and has the legal obligation to administer the trust according to the rules outlined.
Why you should care…Many times the trustee is not the recipient of the assets in the trust. They are there to make sure the guidelines of the trust are followed. If you are named as trustee, Understanding The Duties and Responsibilities of a Trustee is vital.
10. Beneficiary
Life insurance, retirement accounts, health care accounts and some other financial assets pass directly to someone you name as a beneficiary when you die.
Why you should care…This process bypasses your will and/or trust. You need to make sure you put the correct name on these documents or else your assets will be distributed to the wrong people. This is a mistake a lawyer can rarely fix. Here are the 3 most common mistakes in naming beneficiaries.
Recently I was giving my friend a demo of TheTorch.com and I asked her if all of her beneficiaries on her accounts were up-to-date. She said “yes,” but I could hear a slight hesitation in her voice. A few days later she called me saying, “I can’t believe it, my ex-husband’s name was on my teacher’s pension, I totally forgot to change it. Thank you so much for making me think to check. I would be rolling over in my grave if he had that money!”
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So there you have it. I hope you found this information helpful.
Do you have some other legal terms you think everyone should know or a link to helpful information? Please share in the comments below!