Heir. Beneficiary. Personal Representative. Trustee. Often used interchangeably, they can cause confusion at best, real issues, at worst. Understanding the difference is important, both in the creation of the estate plan and in its administration. In this two-part series, I will define them and then apply them in specific examples. At the end, I hope my readers have a better understanding of these terms and how they fit into the grand scheme of an estate plan.
Heirs are those who receive the estate of someone dies intestate (with no testamentary document, like a Will or a Trust). Oregon statutes define an heir as “any person who is or would be entitled under intestate succession to property of a person upon that person’s death.” Our actual heirs are determined by those alive at our death and the statutes tell us how to figure it out. First in line are our spouse, children, grandchildren, etc. If there are none, the statute looks to parents, siblings, nieces and nephews. After that, grandparents, aunts and uncles, and then cousins.
When a person creates a Will or a Trust, the document names Beneficiaries, those who are to receive the person’s property at their death. Often, heirs and beneficiaries are the same people. However, it is important to understand the distinction between the two terms, because we choose our beneficiaries, not our heirs. In a Will, the beneficiaries are those who receive the estate at the end of the administration (often a probate).
In a Trust, the primary beneficiary is typically the Settlor of the Trust (the person who created the Trust); those named to receive the estate at the Settlor’s death are the remainder beneficiaries.
When a person dies (the “decedent”), if their estate is over a certain value, that estate goes through probate, the court-overseen process for administering a decedent’s estate. Personal Representatives are appointed by the courts to manage that process. We can name our personal representatives in our Wills; if we don’t, the Oregon statutes, once again, give us a priority list of who is appointed.
When we create a living Trust (and properly fund it), we bypass the need for probate. The person in charge of the Trust is the Trustee. Unlike a Personal Representative, a Trustee comes into play before death and, initially, the Settlor is the Trustee. The Settlor names a Successor Trustee to manage the Trust when the Settlor no longer does. The circumstances under which the Successor Trustee takes over determines the Successor Trustee’s job. If the Successor Trustee takes over because of the Settlor’s inability to manage their own finances, their main job is to manage the Trust for the benefit of the Settlor. If the Successor Trustee steps in at the Settlor’s death, their main job is to distribute the Trust to the remainder the beneficiaries.
Clear as mud? Let it sit and percolate. In part two (next month), I’ll give some examples and it should all come together!