Estate Planning Glossary

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A Trust
The surviving spouse’s portion of an A-B trust. Also called marital trust or survivor’s trust.

A-B Trust
A trust that includes a tax-planning provision that lets you provide for your surviving spouse and keep control over who will receive your assets after your spouse dies. It also lets both spouses use their federal estate tax exemptions. This can save a substantial amount in estate taxes and leave more money for your beneficiaries. For example, until 2025, so that in 2019, when the federal estate tax exemption is $11 million (adjusted by inflation), an A-B trust will let a married couple transfer up to $22 million (adjusted upward by inflation factors as permitted by the Internal Revenue Code) to their beneficiaries estate tax- free, saving substantial estate taxes.

A common arrangement used in a will when a married testator has an estate with a value that exceeds his or her remaining estate tax exemption amount.  A testator creates at the first death a marital trust or “A Trust” for the sole benefit of the surviving spouse for life (sometimes called a “Marital Trust” or “QTIP Trust”) and a bypass or “B Trust” for the benefit of the testator’s descendants or the testator’s surviving spouse and descendants for life (sometimes called the “Credit Shelter Trust” or “Family Trust”).  After the death of the surviving spouse, the remaining assets of both trusts generally pass to the testator’s descendants.  The B Trust passes at the death of the surviving spouse to the beneficiaries free of estate taxes regardless of the value of the B Trust at that time.  The value of the A trust is included in the surviving spouse’s estate for estate tax purposes, and the surviving spouse’s remaining estate tax exemption is applied to the collective value of the A Trust and the surviving spouse’s own assets.  Under prior law, only the decedent could use his or her estate tax exemption, so it was important to create the B Trust in order to earmark this exemption.  Since the concept of portability is now part of the law, not everyone will need the complexity of the A-B trust structure in order to take advantage of his or her estate tax exemption. Portability allows the surviving spouse to use the unused estate tax exemption of the first spouse to die.  Be careful, however. While it is seductively simple and inexpensive to leave all assets outright to the surviving spouse and plan on his or her use of portability to avoid estate taxes, trusts offer many more advantages than tax planning.  Continuing to use trusts allows you the assurance that your assets will be used and distributed as and to whom you wish and offers other advantages such as asset or creditor protection and generation skipping.

Administration
The court-supervised distribution of an estate during probate. Also used to describe the same process for a trust after the grantor dies.

The process during which the executor or personal representative collects the decedent’s assets, pays all debts and claims, and distributes the residue of the estate according to the will or the state law intestacy rules (when there is no will).

Administrator
Person named by the court to represent a probate estate when there is no will or the will did not name an executor.  Also called personal representative.

The individual or corporate fiduciary appointed by the court to manage an estate if no executor or personal representative has been appointed or if the named executor or personal representative is unable or unwilling to serve.

Alternate Beneficiary
Person or organization named to receive your assets if the primary beneficiaries named in your Trust die before you do.

Ancillary Administration
An additional probate in another state. Typically required when you own real estate in another state that is not titled in the name of your trust.

Annual Exclusion
Amount you can give someone each year without having to file a gift tax return or pay a gift tax. The amount of tax-free gifts is tied to inflation and may increase from time to time.

The amount an individual may give annually to each of an unlimited number of recipients free of federal gift or other transfer taxes and without any IRS reporting requirements. In addition, these gifts do not use any of an individual’s federal gift tax exemption amount. The annual exclusion is indexed for inflation.

Payments made directly to providers of education or medical care services also are tax-free and do not count against the annual exclusion or gift tax exemption amounts.

Applicable exclusion amount

Another name for the estate tax exemption amount (formerly called the unified credit), which shelters a certain value of assets from the federal estate and gift tax. This amount is base amount is approximately  11 million dollar and is inflation adjusted annually.

Ascertainable standard

A standard, usually relating to an individual’s health, education, support, or maintenance, that defines the permissible reasons for making a distribution from a trust. Use of an ascertainable standard prevents distributions from being included in a trustee/beneficiary’s gross estate for federal estate tax purposes. Depending on state law, the use of an ascertainable standard may provide less protection for a beneficiary from creditors. If the risk of a lawsuit or divorce concerns you, you should discuss distribution standards with us.

Assets
Basically, anything you own, including your home and other real estate, bank accounts, life insurance, investments, furniture, jewelry, art, clothing, and collectibles.

Assignment
A short document that transfers your interest in assets from your name to another. Often used when transferring assets to a trust

Attorney-in-Fact – The person named as agent under a power of attorney to handle the financial affairs of another

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B Trust
The deceased spouse’s portion of an A-B trust. Also called credit shelter or bypass trust.

Basis
What you paid for an asset. The value that is used to determine gain or loss for income tax purposes.

Beneficiaries
In a living trust, the persons and/or organizations who receive the trust assets (or benefit from the trust assets) after the death of the trust grantor.

A person who will receive the benefit of property from an estate or trust through the right to receive a bequest or to receive income or trust principal over a period of time.

By-Pass Trust
Another name for the “B” part of an A-B living trust because the assets in this trust bypass federal estate taxes.

The “B Trust” in A-B trust planning that is sheltered from the federal estate tax by the decedent’s estate tax exemption amount.  Because this trust “bypasses” the estate tax in the decedent’s estate and at the surviving spouse’s death, this trust often is called a bypass trust. This type of trust will not be as important for tax planning in light of the concept of portability in the estate tax law, but such a trust still will be valuable for many non-tax planning considerations.  If you reside in a state with a lower estate tax exemption than federal estate tax law provides, you may need to modify the terms of any bypass trust to address that lesser amount.  See the comments above concerning A-B trust planning.

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C Trust
See “QTIP.”

Certificate of Trust
A shortened version of a trust that verifies the trust’s existence, explains the powers given to the trustee, and identifies the successor trustee(s). Does not reveal any information about the trust assets, beneficiaries, or their inheritances.

Children’s Trust
A trust included in your living trust. If, when you die, a beneficiary is not of legal age, the child’s inheritance will go into this trust. The inheritance will be managed by the trustee you have named until the child reaches the age at which you want him/her to inherit.

Codicil
A written change or amendment to a Will.

Co-Grantors
Two or more persons who establish one living trust together.

Co-Trustees
Two or more individuals who have been named to act together in managing a trust’s assets. A corporate trustee can also be a co-trustee.

Common Trust
One living trust established by two or more individuals (usually a married couple).

Community Property
Assets a husband and wife acquire by joint effort during marriage if they live in one of the eight community property states. (Wisconsin also has a similar law, but does not use the term “community property.”) Each spouse owns half of the assets in the event of divorce or death.

Conservator
One who is legally responsible for the care and well-being of another person. If appointed by a court, the conservator is under the court’s supervision. May also be called a guardian. (Duties and titles can vary by state. For example, in Missouri, there is a guardian of the person and a conservator of the estate.)

Conservatorship
A court-controlled program for persons who are unable to manage their own affairs due to mental or physical incapacity. May also be called a guardianship.

Contest
To dispute or challenge the terms of a will or trust.

Corporate Trustee
An institution, generally a bank or trust company, that specializes in managing trusts.

Credit Shelter Trust
Another name for the B Trust in an A-B living trust because this trust “shelters” or preserves the federal estate tax “credit” of the deceased spouse.

Creditor
Person or institution to whom money is owed.

Custodian
Person named to manage assets left to a minor under the Uniform Transfer to Minors Act. In most states, the minor receives the assets at legal age.

Charitable lead trust – A trust created during lifetime or at death that distributes an annuity or unitrust amount to a named charity for life or a term of years, with any remaining trust assets passing to designated non-charitable beneficiaries upon termination of the trust.

Charitable remainder trust – A tax-exempt trust created during lifetime or at death that distributes an annuity or unitrust amount to one or more designated non-charitable beneficiaries for life or a term of years, with the remaining trust assets passing to charity upon termination of the trust. If appreciated assets are transferred to a charitable remainder trust and sold by the trust, the trust does not pay capital gains tax.  Instead, the non-charitable beneficiaries are taxed on a portion of the capital gains as they receive their annual distributions and, in this manner, the capital gains tax is deferred.

Codicil – A formally executed document that amends the terms of a will so that a complete rewriting of the will is not necessary.

Community property – A form of ownership in certain states, known as community property states, under which property acquired during a marriage is presumed to be owned jointly.  Only a small number of states are community property states, and the rules can differ significantly in these states.

Conservator – An individual or a corporate fiduciary appointed by a court to care for and manage the property of an incapacitated person, in the same way as a guardian cares for and manages the property of a minor.

Credit shelter trust – Another name for the bypass or “B Trust” in A-B trust planning.

Crummey trust – An irrevocable trust that grants a beneficiary of the trust the power to withdraw all or a portion of assets contributed to the trust for a period of time after the contribution. The typical purpose of a Crummey trust is to enable the contributions to the trust to qualify for the annual exclusion from gift tax.  In light of the current high gift and estate tax exemption amounts, many taxpayers will no longer need their trust contributions to qualify for the annual exclusion.

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Deceased
One who has died.

Deed
A document that lets you transfer title of your real estate to another person(s). Also see warranty deed and quitclaim deed.

Disclaim
To refuse to accept a gift or inheritance so it can go to the recipient who is next in line.

Discretion
The full or partial power to make a decision or judgment.

Disinherit
To prevent someone from inheriting from you.

Distribution
Payment in cash or asset(s) to one who is entitled to receive it.

Durable Power of Attorney for Asset Management
A legal document that gives another person full or limited legal authority to sign your name on your behalf in your absence. Valid through incapacity. Ends at death.

Durable Power of Attorney for Health Care
A legal document that lets you give someone else the authority to make health care decisions for you in the event you are unable to make them for yourself. Also called a health care proxy or medical power of attorney.

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Equity
The current market value of an asset less any loan or liability.

Estate
Assets and debts left by an individual at death.

Estate Taxes
Federal or state taxes on the value of assets left at death. Also called inheritance taxes or death taxes.

Executor
Person or institution named in a will to carry out its instructions. Female is executrix. Also called a personal representative.

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Federal Estate Tax Exemption
Amount of an individual’s estate that is exempt from federal estate taxes. In 2012, the exemption is $5,120,000. If Congress does not act by the end of 2012, on January 1, 2013 the exemption will be $1 million.

Fiduciary
Person having the legal duty to act primarily for another’s benefit. Implies great confidence and trust, and a high degree of good faith. Usually associated with a trustee.

Funding
The process of transferring assets to your living trust.

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Gain
The difference between what you receive for an asset when it is sold and what you paid for it. Used to determine the amount of capital gains tax due.

Generation Skipping Transfer Tax (GSTT)
A steep tax on assets that “skip” a generation and are left directly to grandchildren and younger generations. In 2012, the GST exemption is the same as the federal estate tax exemption (double for a married couple) with a tax rate of 35%. If Congress does not act before the end of 2012, on January 1, 2013 the GST exemption will be $1 million with a top tax rate of 55%.

Gift
A transfer from one individual to another without fair compensation.

Gift Tax
A federal tax on gifts made while you are living. Currently $13,000 per person per year is exempt from gift tax. Also see “Annual Exclusion.”

Grantor
The person who sets up or creates the trust. The person whose trust it is. Also called creator, settlor, trustor, donor or trustmaker.

Gross Estate
The value of an estate before debts are paid.

Guardianship
See “Conservatorship.”

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Health Care Proxy
See “Durable Power of Attorney for Health Care.”

Heir
One who is entitled by law to receive part of your estate.

Holographic Will
A handwritten will.

Homestead Exemption
Portion of your residence (dwelling and surrounding land) that cannot be sold to satisfy a creditor’s claim while you are living.

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Incapacitated/Incompetent
Unable to manage one’s own affairs, either temporarily or permanently. Lack of legal power.

Independent Administration
A form of probate available in many states. Intended to simplify the probate process by requiring fewer court appearances and less court supervision.

Inheritance
The assets received from someone who has died.

Inter vivos
Latin term that means “between the living.” An inter vivos trust is created while you are living instead of after you die. A revocable living trust is an inter vivos trust.

Irrevocable Trust
A trust that cannot be changed (revoked) or cancelled once it is set up. Opposite of revocable trust.

Intestate
Without a will.

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Joint Ownership
A form of ownership in which two or more persons own the same asset together. Types of joint ownership include joint tenants with right of survivorship, tenants in common, and tenants by the entirety.

Joint Tenants with Right of Survivorship
A form of joint ownership in which the deceased owner’s share automatically and immediately transfers to the surviving joint tenant(s).

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Land Trust
Often used for privacy. Title is transferred to a corporate trustee or corporation, but you keep control over how the property is managed. Because the title is in the name of the corporate trustee or corporation, no one knows the property belongs to you. In all financial transactions and dealings, your personal name never comes up. Also called a title holding trust.

Liquid Assets
Cash and other assets (like stocks) that can easily be converted into cash.

“Living Probate”
The court-supervised process of managing the assets of one who is incapacitated.

Living Trust
A written legal document that creates an entity to which you transfer ownership of your assets. Contains your instructions for managing your assets during your lifetime and for their distribution upon your incapacity or death. Avoids probate at death and court control of assets at incapacity. Also called a revocable inter vivos trust. A trust created during one’s lifetime.

Living Will
A written document that states you do not wish to be kept alive by artificial means when the illness or injury is terminal.

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Marital Deduction
A deduction on the federal estate tax return that lets the first spouse to die leave an unlimited amount of assets to the surviving spouse free of estate taxes. However, if no other tax planning is used, and the surviving spouse’s estate is more than the amount of the federal estate tax exemption in effect at the time of his/her death, estate taxes will be due at that time.

Marital Trust
See “A Trust.”

Medicaid
A federally-funded health care program for the poor and minor children.

Medicare
A federally-funded health care program, primarily for Americans over age 65 who are covered by Social Security or Railroad Retirement benefits.

Minor
One who is under the legal age for an adult, which varies by state (usually age 18 or 21).

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Net Estate
The value of an estate after all debts have been paid. (Federal estate taxes are based on the net value of an estate.)

Net Value
The current market value of an asset less any loan or debt.

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Payable-on-Death Account
See “Totten Trust.”

Per Capita
A way of distributing your estate so that your surviving descendants will share equally, regardless of their generation.

Per Stirpes
A way of distributing your estate so that your surviving descendants will receive only what their immediate ancestor would have received if he/she had been living at your death.

Personal Property
Movable property. Includes furniture, automobiles, equipment, cash and stocks. Opposite of real property that is permanent (like land).

Personal Representative
Another name for an executor or administrator.

Portability of the Estate Tax Exemption

So what does “portability” of the estate tax exemption mean? In simple terms, portability of the federal estate tax exemption between married couples comes into play if the first spouse dies and the value of the estate does not require the use of all of the deceased spouse’s federal exemption from estate taxes.

The amount of the exemption that was not used for the deceased spouse’s estate may be transferred to the surviving spouse’s exemption so that he or she can use the deceased spouse’s unused exemption plus his or her own exemption when the surviving spouse later dies.

Pour Over Will
A short will often used with a living trust. It states that any assets left out of your living trust will become part of (pour over into) your living trust upon your death.

Power of Attorney
A legal document giving someone legal authority to sign your name on your behalf in your absence. Ends at incapacity (unless it is a durable power of attorney) or death.

Probate
The legal process of validating a will, paying debts, and distributing assets after death.

Probate Estate
The assets that go through probate after you die. Usually these include assets you own in your name and those paid to your estate. Usually does not include assets owned jointly, payable-on-death accounts, insurance and other assets with beneficiary designations. Assets in a trust also do not go through probate.

Probate Fees
Legal, executor, and appraisal fees and court costs when an estate goes through probate. Probate fees are paid from assets in the estate before the assets are fully distributed to the heirs.

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Qualified Domestic Trust (QDOT)
Allows a non-citizen spouse to qualify for the marital deduction.

Qualified Terminable Interest Property (QTIP)
A trust that delays estate taxes until your surviving spouse dies so more income will be available to provide for your spouse during his/her lifetime. You can also keep control over who will receive these assets after your spouse dies.

Qualifying Subchapter S Trust (QSST)
Trust that meets certain IRS qualifications and is allowed to own Subchapter S stock.

Quitclaim Deed
Document that allows you to transfer title to real estate. With a quitclaim deed, the person transferring the title makes no guarantees, but transfers all his/her interest in the property.

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Real Property
Land and property that is permanently attached to land (like a building or a house).

Recorded Deed
A deed that has been filed with the county land records. This creates a public record of all changes in ownership of property in the state.

Revocable Trust
A trust in which the person setting it up retains the power to change (revoke) or cancel the trust during his/her lifetime. Opposite of irrevocable trust.

Required Beginning Date (RBD)
The date you must begin taking required minimum distributions from your tax-deferred plans. Usually, it is April 1 of the calendar year following the calendar year in which you turn age 70 1/2. If your money is in a company-sponsored plan, you may be able to delay your RBD beyond this date if you continue working (providing you are not a 5% or greater owner of the company).

Required Minimum Distribution (RMD)
The amount you are required to withdraw each year from your tax-deferred plan after you reach your Required Beginning Date. This amount is determined by dividing the year-end value of your tax-deferred account by a life expectancy divisor found on a chart provided by the IRS.

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Separate Property
Generally, all assets you acquire prior to marriage and assets acquired by gift or inheritance during marriage.

Separate Trust
A trust established by one person. A married couple has separate trusts if each spouse has his/her own trust with its own assets. In contrast, see “Common Trust.”

Settle an Estate
The process of handling the final affairs (valuation of assets, payment of debts and taxes, distribution of assets to Beneficiaries) after someone dies.

Settlor
See “Grantor.”

Special Gifts
A separate listing of special assets that will go to specific individuals or organizations after your incapacity or death. Also called special bequests.

Special Needs Trust
Allows you to provide for a disabled loved one without interfering with government benefits.

Spendthrift Clause
Protects assets in a trust from a beneficiary’s creditors.

Spouse
Husband or wife.

Stepped-up Basis
Assets are given a new basis when transferred by inheritance (through a will or trust) and are re-valued as of the date of the owner’s death. If an asset has appreciated above its basis (what the owner paid for it), the new basis is called a stepped-up basis. A stepped-up basis can save a considerable amount in capital gains tax when an asset is later sold by the new owner. Also see “Basis.”

Subchapter S Corporation Stock
Stock in a corporation which has chosen to be subject to the rules of subchapter S of the Internal Revenue Code.

Surviving Spouse
The spouse who is living after one spouse has died.

Survivor’s Trust
See “A Trust.”

Successor Trustee
Person or institution named in the trust document who will take over should the first trustee die, resign, or otherwise become unable to act.

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Tax-Deferred Plan
A retirement savings plan (like an IRA, 401(k), pension, profit sharing, or Keogh) that qualifies for special income tax treatment. The contributions made to the plan and subsequent appreciation of the assets are not taxed until they are withdrawn at a later time — ideally, at retirement, when your income and tax rate are lower.

Taxable Gift
Generally, a gift of more than $13,000 in one year to someone other than your spouse. The value of the taxable gift is applied to your federal gift tax exemption. After you have used up your exemption, additional gifts will be taxed, usually at the highest estate tax rate in effect. In 2012, the gift tax exemption is the same as the federal estate tax exemption (double for married couples) and the tax rate is 35%. If Congress does not act before the end of 2012, on January 1, 2013 the exemption will be $1 million and the tax rate will be 55%.

Tenants-in-Common
A form of joint ownership in which two or more persons own the same property. At the death of a tenant-in-common, his/her share transfers to his/her heirs.

Tenants-by-the Entirety
A form of joint ownership in some states between husband and wife. When one spouse dies, his/her share of the asset automatically transfers to the surviving spouse.

Testamentary Trust
A trust in a will. Can only go into effect at death. Does not avoid probate.

Testate
One who dies with a valid will.

Title
Document proving ownership of an asset.

Transfer Tax
Tax on assets when they are transferred to another. The estate tax, gift tax and generation skipping transfer tax are all transfer taxes.

Trust
An entity that holds assets for the benefit of certain other persons or entities.

Trust Company
An institution that specializes in managing trusts. Also called a corporate trustee.

Trustee
Person or institution who manages and distributes another’s assets according to the instructions in the trust document.

Trustor
See “Grantor.”

Totten Trust
A “pay-on-death” account. A bank account that will transfer to the beneficiary who was named when the account was established. The terms “transfer on death” (“TOD”), “in trust for” (“ITF”), “as trustee for” (“ATF”), and “pay on death” (“POD”) often appear in the title.

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Unified Credit
The amount each person is allowed to deduct from federal estate taxes owed after death. In 2012, the credit is $1,772,800. This is the amount of estate taxes that would be due on $5,120,000 in net assets. After applying this credit, the result is that $5,120,000 is “exempt” from estate taxes in 2012.

Uniform Transfer to Minors Act (UTMA)
Law enacted in many states that lets you leave assets to a minor by appointing a custodian. In most states, the minor receives the assets at legal age.

Unfunded
Your living trust is unfunded if you have not transferred assets into it.

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Warranty Deed
Document that allows you to transfer title to real estate. With a warranty deed, the person guarantees that the title being transferred is clear (free of any encumbrances). If the title is defective, the person making the transfer is liable. Compare to quitclaim deed.

Will
A written document with instructions for disposing of assets after death. A will can only be enforced through the probate court.

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A

B

C

D

Decedent – An individual who has died.

Descendants – An individual’s children, grandchildren, and more remote persons who are related by blood or because of legal adoption. An individual’s spouse, stepchildren, parents, grandparents, brothers, or sisters are not included. The term “descendants” and “issue” have the same meaning.

Disclaimer – The renunciation or refusal to accept a gift or bequest or the receipt of insurance proceeds, retirement benefits, and the like under a beneficiary designation in order to allow the property to pass to alternate takers. To be a qualified disclaimer and thereby not treated as a gift by the disclaimant (the person who makes the disclaimer), the disclaimer must be made within nine months and before the disclaimant has accepted any interest in the property in order to avoid a tax triggering event.  In light of the current high gift and estate tax exemption amounts, it may be feasible in many instances to disclaim even after that time period to accomplish non-tax goals.  State laws addressing disclaimer may differ, and some wills and trusts might include express provisions  governing what happens to assets or interests that are disclaimed.  Be certain to consider all these issues before disclaiming.

Durable power of attorney – A power of attorney that does not terminate upon the incapacity of the person making the power of attorney.

E

Estate planning – A process by which an individual designs a strategy and executes a will, trust agreement, or other documents to provide for the administration of his or her assets upon his or her incapacity or death.  Tax and liquidity planning are part of this process.

Estate tax – A tax imposed on a decedent’s transfer of property at death.  An estate tax is to be contrasted with an inheritance tax imposed by certain states on a beneficiary’s receipt of property. More than 20 states have state estate taxes that differ from the federal system, so your estate could be subject to a state estate tax even if it is not subject to a federal estate tax.

Estate tax exemption amount – Another name for the unified credit amount, applicable exclusion amount, and credit shelter amount.

Executor – A person named in a will and appointed by the court to carry out the terms of the will and to administer the decedent’s estate. May also be called a personal representative. If a female, may be referred to as the executrix.

F

Family office – An arrangement to coordinate the legal, tax, and other needs of one or more families, either through a true office staffed with employees or through outsourcing to the family’s regular advisors. Frequently, a family’s private trust company serves as the family office.

Family trust – A trust established to benefit an individual’s spouse, children or other family members.  A family trust is often the bypass trust or credit shelter trust created under a will.

Fiduciary – An individual or a bank or trust company designated to manage money or property for beneficiaries and required to exercise the standard of care set forth in the governing document under which the fiduciary acts and state law. Fiduciaries include executors and trustees.

G

Generation-skipping transfer (GST) tax – A federal tax imposed on outright gifts and transfers in trust, whether during lifetime or at death, to or for beneficiaries two or more generations younger than the donor, such as grandchildren, that exceed the GST tax exemption. The GST tax imposes a tax on transfers that otherwise would avoid gift or estate tax at the skipped generational level. Some states impose a state generation-skipping transfer tax.

Gift tax – The tax on completed lifetime transfers from one individual to or for the benefit of another (other than annual exclusion gifts and certain direct payments to providers of education and medical care) that exceed the gift tax exemption amount ($5 million inflation adjusted).  Under the concept of portability in the tax law, if your spouse predeceased you after 2010 with remaining unused exemption (the deceased spouse unused exemption, or DSUE) and an estate tax return was filed, your exemption for gift tax purposes can be augmented by your deceased spouse’s DSUE.  Only the State of Connecticut imposes a separate state gift tax.

Grantor – A person, including a testator, who creates, or contributes property to, a trust. If more than one person creates or contributes property to a trust, each person is a grantor with respect to the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion. The grantor is also sometimes referred to as the “settlor,” the “trustor,” or the “donor.” Contrast with the use of the term “grantor trust” to imply a trust the income of which is taxed to the person considered the “grantor” for income tax purposes.

Grantor trust – A trust over which the grantor retains certain control such that the trust is disregarded for federal (and frequently state) income tax purposes, and the grantor is taxed individually on the trust’s income and pays the income taxes that otherwise would be payable by the trust or its beneficiaries. Such tax payments are not treated as gifts by the grantor to the trust or its beneficiaries.   Provided the grantor does not retain certain powers or benefits, such as a life estate in the trust or the power to revoke the trust, the trust will not be included in the grantor’s estate for federal estate tax purposes. Contrast with the non-tax reference to a person who forms or makes gifts to a trust as the “grantor.”

Gross estate – A federal estate tax concept that includes all property owned by an individual at death and certain property previously transferred by him or her that is subject to federal estate tax.

GST exemption – The federal tax exclusion that allows a certain value of generation-skipping transfers to be made without the imposition of a generation-skipping tax. The GST exemption amount is $5 million inflation adjusted ($5.25 million in 2013).

Guardian – An individual or bank or trust company appointed by a court to act for a minor or incapacitated person (the “ward”). A guardian of the person is empowered to make personal decisions for the ward. A guardian of the property (also called a “committee”) manages the property of the ward.

H

Health care power of attorney – A document that appoints an individual (an “agent”) to make health care decisions when the grantor of the power is incapacitated. Also referred to as a “health care proxy.”

Heir –  An individual entitled to a distribution of an asset or property interest under applicable state law in the absence of a will. “Heir” and “beneficiary” are not synonymous, although they may refer to the same individual in a particular case.

I

Income – The earnings from principal, such as interest, rent, and cash dividends. This is a fiduciary trust accounting concept and is not the same as taxable income for income tax purposes.

Insurance trust – An irrevocable trust created to own life insurance on an individual or couple and designed to exclude the proceeds of the policy from the insured’s gross estate at death.

Interest of a beneficiary – The right to receive income or principal provided in the terms of a trust or will.

Intestate – When one dies without a valid will, such that the decedent’s estate is distributed in accordance with a state’s intestacy law.

Inventory – A list of the assets of a decedent or trust that is filed with the court.

Irrevocable trust – A trust that cannot be terminated or revoked or otherwise modified or amended by the grantor. As modern trust law continues to evolve, however, it may be possible to effect changes to irrevocable trusts through court actions or a process called decanting, which allows the assets of an existing irrevocable trust to be transferred to a new trust with different provisions.

J

Joint tenancy – An ownership arrangement in which two or more persons own property, usually with rights of survivorship.

K

No terms listed

L

Life beneficiary – An individual who receives income or principal from a trust or similar arrangement for the duration of his or her lifetime.

Life estate – The interest in property owned by a life beneficiary (also called life tenant) with the legal right under state law to use the property for his or her lifetime, after which title fully vests in the remainderman (the person named in the deed, trust agreement, or other legal document as being the ultimate owner when the life estate ends).

Living trust – A trust created by an individual during his or her lifetime, typically as a revocable trust. Also referred to as an “inter vivos” trust, “revocable living trust” or “loving trust.”

M

Marital deduction – An unlimited federal estate and gift tax deduction for property passing to a spouse in a qualified manner.  In other words, property transfers between spouses generally are not taxable transfers because of the marital deduction.

Marital trust – A trust established to hold property for a surviving spouse in A-B trust planning and designed to qualify for the marital deduction. A commonly used marital trust is a qualified terminable interest property trust, or QTIP trust, which requires that all income must be paid to the surviving spouse.

N

Non-Resident Alien – An individual who is neither a resident nor a citizen of the United States.  A non-resident alien nonetheless may be subject to federal estate tax or probate with regard to certain assets sitused in the United States.  An estate tax treaty between that individual’s home country and the United States may affect this result.

No-Contest Clause – A provision in a will or trust agreement that provides that someone who sues to receive more from the estate or trust or overturn the governing document will lose any inheritance rights he or she has.  These clauses are not permissible in all instances or in all states.

O

Operation of Law – The way some assets will pass at your death, based on state law or the titling (ownership) of the asset, rather than under the terms of your will.

P

Personal representative – An executor or administrator of a decedent’s estate.

Per stirpes – A Latin phrase meaning “per branch” and is a method for distributing property according to the family tree whereby descendants take the share their deceased ancestor would have taken if the ancestor were living. Each branch of the named person’s family is to receive an equal share of the estate. If all children are living, each child would receive a share, but if a child is not living, that child’s share would be divided equally among the deceased child’s children.

Pour over will – A will used in conjunction with a revocable trust to pass title at death to property not transferred to the trust during lifetime.

Power of appointment – A power given to an individual (usually a beneficiary) under the terms of a trust to appoint property to certain persons upon termination of that individual’s interest in the trust or other specified circumstances. The individual given the power is usually referred to as a “holder” of the power. The power of appointment may be general, allowing the property to be appointed to anyone, including the holder, or limited, allowing the property to be distributed to a specified group or to anyone other than the holder. Property subject to a general power of appointment is includible in the holder’s gross estate for federal estate tax purposes.

Power of attorney – Authorization, by a written document, that one individual may act in another’s place as agent or attorney-in-fact with respect to some or all legal and financial matters. The scope of authority granted is specified in the document and may be limited by statute in some states. A power of attorney terminates on the death of the person granting the power (unless “coupled with an interest”) and may terminate on the subsequent disability of the person granting the power (unless the power is “durable” under the instrument or state law).

Power of withdrawal – A presently exercisable power in favor of the power holder other than a power exercisable in a fiduciary capacity limited by an ascertainable standard, or which is exercisable by another person only upon consent of the trustee or a person holding an adverse interest in the trust.

Principal – The property (such as money, stock, and real estate) contributed to or otherwise acquired by a trust to generate income and to be used for the benefit of trust beneficiaries according to the trust’s terms. Also referred to as trust corpus.

Private trust company –An entity formed by a family to serve as fiduciary for the estates and trusts of extended family members.  Often referred to as a family trust company.

Probate – The court supervised process of proving the validity of a will and distributing property under the terms of the will or in accordance with a state’s intestacy law in the absence of a will.

Probate tax – A tax imposed by many jurisdictions on property passing under an individual’s will or by a state’s intestacy law.

Property – Anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein.

Prudent man rule – A legal principle requiring a trustee to manage the trust property with the same care that a prudent, honest, intelligent, and diligent person would use to handle the property under the same circumstances. See Prudent Investor Act.

Prudent Investor Act – A law that provides for how fiduciaries must invest trust, estate and other assets they hold in a fiduciary capacity, such as a trustee or executor.

Q

Qualified domestic trust – A marital trust (referred to as a “QDOT”) created for the benefit of a non-U.S. citizen spouse containing special provisions specified by the Internal Revenue Code to qualify for the marital deduction.

Qualified personal residence trust – An irrevocable trust (referred to as a “QPRT”) designed to hold title to an individual’s residence for a term of years subject to the retained right of the individual to reside in the home for the term, with title passing to children or other beneficiaries at the end of the term.

Qualified terminable interest property – Property (referred to as “QTIP”) held in a marital trust or life estate arrangement that qualifies for the marital deduction because the surviving spouse is the sole beneficiary for life and entitled to all income.

R

Remainder interest – An interest in property owned by the remainderman that does not become possessory until the expiration of an intervening income interest, life estate or term of years.

Residue – The property remaining in a decedent’s estate after payment of the estate’s debts, taxes, and expenses and after all specific gifts of property and sums of money have been distributed as directed by the will.  Also called the residuary estate.

Revocable trust – A trust created during lifetime over which the grantor reserves the right to terminate, revoke, modify, or amend.

S

S corporation – A corporation that has made a Subchapter S election to be taxed as a pass-through entity (much like a partnership). Certain trusts are permitted to be shareholders only if they make the appropriate elections.

Self-dealing – Personally benefiting from a financial transaction carried out on behalf of a trust or other entity, for example, the purchasing of an asset from a trust by the trustee unless specifically authorized by the trust instrument.

Settlor – Term frequently used for one who establishes or settles a trust. Also called a “trustor” or “grantor.”

Special needs trust – Trust established for the benefit of a disabled individual  that is designed to allow him or her to be eligible for government financial aid by limiting the use of trust assets for purposes other than the beneficiary’s basic care.

Spendthrift provision – A trust provision restricting both voluntary and involuntary transfers of a beneficiary’s interest, frequently in order to protect assets from claims of the beneficiary’s creditors.

T

Tangible personal property – Property that is capable of being touched and moved, such as personal effects, furniture, jewelry, and automobiles. Tangible personal property is distinguished from intangible personal property that has no physical substance but represents something of value, such as cash, stock certificates, bonds, and insurance policies. Tangible personal property also is  distinguished from real property, such as land and items permanently affixed to land, such as buildings.

Tenancy by the entirety – A joint ownership arrangement between a husband and wife, generally with respect to real property, under which the entire property passes to the survivor at the first death and while both are alive, may not be sold without the approval of both.

Tenancy in common – A co-ownership arrangement under which each owner possesses rights and ownership of an undivided interest in the property, which may be sold or transferred by gift during lifetime or at death.

Terms of a trust – The manifestation of the grantor’s intent as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.

Testamentary – Relating to a will or other document effective at death.

Testamentary trust – A trust established in a person’s will to come into operation after the will has been probated and the assets have been distributed to it in accordance with the terms of the will.

Testator – A person who signs a will. If a female, may be referred to as the testatrix.

Transfer on death designation – A beneficiary designation for a financial account (and in some states, for real estate) that automatically passes title to the assets at death to a named individual or revocable trust without probate. Frequently referred to as a TOD (transfer on death) or POD (payable on death) designation.

Trust – An arrangement whereby property is legally owned and managed by an individual or corporate fiduciary as trustee for the benefit of another, called a beneficiary, who is the equitable owner of the property.

Trust instrument – A document, including amendments thereto, executed by a grantor that contains terms under which the trust property must be managed and distributed.  Also referred to as a trust agreement or declaration of trust.

Trustee – The individual or bank or trust company designated to hold and administer trust property (also generally referred to as a “fiduciary”). The term usually includes original (initial), additional, and successor trustees. A trustee has the duty to act in the best interests of the trust and its beneficiaries and in accordance with the terms of the trust instrument. A trustee must act personally (unless delegation is expressly permitted in the trust instrument), with the exception of certain administrative functions.

U

Unified credit – A credit against the federal gift and estate tax otherwise payable by an individual or estate. Frequently referred to as the estate tax exemption amount, the exemption equivalent, or applicable exclusion amount. The current exemption amount is $5 million inflation adjusted ($5.25 million in 2013).

Uniform custodial trust act – A law enacted by some states providing a simple way to create a trust for a minor or adult beneficiary without the need for a complex trust document. Such a trust typically is used for a trust of modest size, particularly for a disabled beneficiary. An adult beneficiary may terminate the trust at any time, otherwise the trust may continue for the life of the beneficiary.

Uniform transfers to minors act – A law enacted by some states providing a convenient means to transfer property to a minor. An adult person known as a “custodian” is designated by the donor to receive and manage property for the benefit of a minor. Although the legal age of majority in many states may be 18, the donor may authorize the custodian to hold the property until the beneficiary reaches age 21. Formerly called the Uniform Gifts to Minors Act.

V

Virtual Representation – A mechanism provided in a will or trust, or in some instances by state law, to permit a beneficiary to make decisions on behalf of another beneficiary who can claim or receive property only under or after them.

W

Will – A writing specifying the beneficiaries who are to inherit the testator’s assets and naming a representative to administer the estate and be responsible for distributing the assets to the beneficiaries.

X

No terms listed

Y

No terms listed

Z

No terms listed

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Glossary of Terms

Independent Trustee

The phrase “Independent Trustee” generally means a person who has no beneficial interest, present or future, vested or contingent, direct or indirect, in the trust. The Independent Trustee also cannot be any of the following:

(a) a contributor to the trust;
(b) a beneficiary;
(c) a spouse, former spouse, ancestor, descendant, sibling or employee of a contributor or beneficiary (or of a spouse or former spouse of a contributor or beneficiary);
(d) a corporation or other entity, or an employee of a corporation or other entity, in which the stock or other holdings of a contributor (or beneficiary, or a spouse or former spouse of a contributor or beneficiary) and the trust are significant from the viewpoint of voting or other control;
(e) a subordinate employee of a corporation or other entity in which a contributor or beneficiary (or a spouse or former spouse of a contributor or beneficiary) is an executive; or
(f) any party, not described in (a) through (e) of this clause (iii), that is, or, if nonadverse (within the meaning of Section 672(b) of the Code), would be, a “related or subordinate party,” with respect to a contributor or a beneficiary (as if the beneficiary were a contributor), within the meaning of Section 672(c) (after application of Section 672(e)) of the Code (iv), is not controlled, directly or indirectly, within the contemplation of income or any transfer tax, by any person or other entity that, according to the portion of this sentence preceding this clause (iv), is ineligible to be an Independent Entity and (v) under the United States internal revenue laws in effect at such time can alone (as though the only trustee), to such extent as some person or other entity (described in the portion of this sentence preceding this clause (v)) could alone (as though the only trustee), possess and exercise each power given a trustee by this instrument or by law (a) without causing any attribution of the trust estate of the trust to any person (whether personally or as deemed transferor or otherwise) for purposes of income or any transfer (including without limitation gift, estate and generation-skipping) tax before the person becomes entitled to receive it outright (or, because of a power granted in or according to this instrument to the person as a beneficiary, the person becomes entitled to pay it to the person or the estate, creditors or creditors of the estate of the person) or it is paid to, or for the benefit of, the person, (b) without otherwise causing any generation-skipping transfer, and (c) without causing any deemed sale or exchange, or transfer to a foreign trust, of any of the trust estate.

Intentionally Defective Grantor Trust

A grantor trust is a trust that runs afoul of the rules contained in IRC§§671-679. Traditionally, violating these rules was viewed negatively, because the grantor of the trust was, for income tax purposes, the owner of the trust assets, and therefore responsible for all income tax associated therewith. This income tax responsibility rested with the grantor whether the income and/or principal was distributed to the grantor or not.

Modern thinking is that violating these rules produces a positive result in many instances, as the grantor’s payment of the income tax generated on the trust’s assets is not considered a gift to the trust beneficiaries. Although the grantor is treated as the owner for federal income tax purposes, the grantor is not necessarily treated as the owner for federal estate tax purposes. The estate tax inclusion rules are applied separately to make this determination.

An Intentionally Defective Grantor Trust (“IDGT”) is a term used for a trust that is purposely drafted to invoke the grantor trust rules. The grantor typically utilizes an IDGT by irrevocably transferring assets to the trust for the benefit of others, typically children or grandchildren. Those assets are removed from the grantor’s estate for estate tax purposes.

The grantor continues to pay the income tax on those assets which provides three substantial benefits:

The grantor continues to decrease the value of his or her estate through the payment of income taxes on trust assets;
The assets in the trust grow income tax free (and if structured properly, estate and inheritance tax free) for the benefit of the beneficiaries; and
The payment of income taxes by the grantor is not considered a gift to the trust beneficiaries.

Decanting

The basic premise is that if the trustee has the ability to invade corpus for a beneficiary under the terms of a trust agreement, the trustee may, in the exercise of its principal invasion power, appoint the principal to a new trust for the benefit of some or all of the beneficiaries of the first trust.

The various state statutes permit a trustee to exercise a decanting power to varying degrees. Decanting statutes can be used to update the terms of a governing instrument by pouring over all of the assets from a trust governed by an outdated instrument to a new trust that contains modern administrative provisions that will afford more flexibility to the trustee and beneficiaries. The decanting statute can also be used in certain situations to alter the beneficial interest in a trust.

There are at least 17 states that have enacted decanting statutes: Alaska, Arizona, Delaware, Florida, Illinois, Indiana, Kentucky, Missouri, Nevada, New Hampshire, New York, North Carolina, Ohio, Rhode Island, South Dakota, Tennessee and Virginia.

Trust Protector

An independent person or entity who holds one or more powers capable of affecting what the trustees are able to do with the trust property.

Investment and Distribution Committees

Increasingly popular strategies to remove the trustee of investment and/or distribution decisions by assigning investment decisions to appropriate experts and distribution decisions to family advisors.