Do Estate Planning Terms Confuse You?

  • Published: February 15, 1999
  • By Bardin Levavy

If you answered “yes” to the question put by this article’s title, you are far from alone. Indeed, there are so many terms relating to estate planning in the air these days that it is a small wonder that they don’t collide with each other. Failure to understand various shades of difference among “living trusts” (which come in two styles, revocable and irrevocable—and oh, what a difference between them!) “living wills,” and “wills,” just to name three, presents potholes, not just traps, for the unwary.

While many aspects of estate planning are complex and highly technical, some basic terms and concepts should be explained and differentiated:

1. “Will.” This is the traditional estate planning tool. A will is a formal document which directs the disposition of property and names the persons who are to administer the property and direct its transfer. It takes effect upon the death of the person who signed it, who is called a testator. While a very formal document to make and to change, a will is an easy document to revoke. It can be changed at will (so to speak) during the life of the testator.

But a will does not effect the disposition of all property, only of particular kinds of property. If someone is not aware of the limitations of a will, there can be some unpleasant surprises upon death. To take a simple example, a will does not serve to pass ownership of certain kinds of jointly owned property. Consequently, if a will gives everything to nephew Albert, but the testator’s entire estate is owned jointly with Uncle Fred, Albert will receive nothing.

In the absence of a will, property passes as statute determines, not as the testator desires. The persons who direct the transfer are appointed by the court, not by the testator, and may be strangers to the family of the deceased.

A will need not be complex to be effective. Nevertheless, wills are often not present when they should be. The reasons are various and range from superstition to procrastination.

2. A “living will” is not a will at all—at least not in the sense that it directs the disposition of property. The term “living will” is a commonly accepted shorthand for a document which incorporates certain decisions relating to health care and medical treatment at times when the person creating the living will is physically or mentally unable to give instructions.

A living will is the direction of an individual as to medical treatment to be administered at times when the individual is not capable of making the decisions. It sets forth choices as to such matters as organ donation, resuscitation and the employment of what are called “heroic measures” to preserve life.

In appropriate circumstances, a living will can be as important as a will. It governs life and death, often when no time is available for reflection and considered opinion. Put another way, if medical personnel have no instruction from a properly designated health care representative or living will, they will make the decisions that seem best to them—and these may not be the decisions that the patient or the patient’s family want.

3. A “living trust” is both the least ambiguous and the most complex of the three terms we define here. Quite simply, the term refers to a trust created by an individual during life. The opposite of a “living trust” is a testamentary trust, that is, a trust created by will and one which, therefore, takes effect only at death.

So far, so simple. However, as noted, living trusts come in revocable and irrevocable forms. The difference, once again, is simple. A revocable trust can be changed, altered, amended, or terminated as long as the terms of the trust itself permit. An irrevocable trust, once signed, is set in stone.

The differences between revocable and irrevocable trusts are as crucial as they are simple. The differences in gift tax consequences, income tax consequences, and estate planning implications are enormous. Failure to understand those implications can lead to misplaced reliance and some very unpleasant surprises. We also shouldn’t close without noting that trusts are very effective ways to make certain kinds of gifts.