Literate means "able to read and write". The default ability is generally taken to mean literate in one's native tongue; but the term can be applied to literacy in a particular language). The level of literacy in a society can often be thought as going hand-in-hand with the level of education. Therefore, in the middle ages, it was mainly the middle and upper classes who were literate. Peasants and serfs were unlikely to be literate.
Literacy is probably one of the third things to be looked for in royalty, after making sure that they're breathing and checking their teeth (to make sure no substitution has occurred).