Glossary
|A| |B| |C| |D| |E| |F| |G| |H| |I| |J| |K| |L| |M| |N| |O| |P| |Q| |R| |S| |T| |U| |V| |W| |X| |Y| |Z|
A
Accounting—A detailed analysis of income, gains, losses, transactions, and assets that may be required of a trustee or executor. A trust and will may require
accounting for certain situations or waive the need for it in other situations.
Administration—The management and settlement of an estate in probate court. Similar in usage to the term “probate.”
Administrator (fem.: administratrix)—The person appointed by the probate court to handle an administration when there is no will or where the executor or executors named in the will are unable to serve.
Agent—Under a power of attorney, the person granted the legal right to act on behalf of the principal. Also sometimes referred to as an attorney-in-fact.
Alternate valuation date—In an estate-tax return, IRS Form 706, the executor can choose to value the estate by its fair market value on the decedent’s date of death, or on the alternate valuation date, precisely six months after the date of death. If the assets have declined in value, this may be a useful tool to cut estate taxes.
Ancillary jurisdiction—A jurisdiction outside the state where the decedent officially resided. If a decedent owns real estate in more than one state, his estate may be subject to probate in each state in which the real estate is located. By retitling real estate owned outside the state of residence into a trust, multiple ancillary probates may be avoided.
Annual exclusion amount—Each person may gift up to $12,000 per year to any other person without incurring any gift tax. Gifts in excess of $12,000 will result in a partial or full use of the maximum applicable exclusion amount and require a gift-tax filing. There is no limit on the number of $12,000 gifts you can make to different people in a year. To qualify for this exclusion, the gift must be of a present interest, meaning that the recipient can enjoy the gift immediately. Annual exclusion gifts are often used creatively to deplete estates with prospective estate-tax problems.
Applicable exclusion amount—The amount that you can leave to your designated heirs (other than your spouse, in most cases) without incurring any estate or gift tax.
Ascertainable standards—Language describing, and in some cases limiting, how trust income and principal can be used by a trustee for a beneficiary. A common example is, “The trustee can use the trust’s income for the beneficiary’s health, maintenance in reasonable comfort, and education.”
B
Basis—The acquisition cost of an asset, used to calculate gains and losses.
Beneficiary—A person who receives or benefits from a will, trust, or contractual property such as insurance, qualified plans, annuities, or transferable-(payable-)-on-death accounts.
Bequest—Assets transferred to a beneficiary under a will.
Bond—A guarantee by an insurance company or bonding agency to repay any loss due to negligence or criminal cause by an executor, administrator, or trustee. A will or revocable living trust can waive any bond requirement.
Buy-sell agreement—A contractual agreement among partners or shareholders of a business that specifies the terms for buying out one partner’s or shareholder’s share upon his retirement, death, or disability.
C
Capital gain—The profit reported to the IRS upon the sale of a capital asset.
Capital gain is the difference between the basis cost of an asset and the net proceeds of the sale of the asset. If the asset is sold for a lower price than its acquisition cost, a capital loss may be reported.
Charitable remainder trust—The donation of an asset to a charity in which the donor reserves the right to use the property or receive income from it for a specified period of time, perhaps years or even lifetimes. When the agreed period is over, the property belongs to the charity.
Codicil—A document that amends or supplements a will. It must be executed with the same degree of formality as a will.
Community property (CP)—Community-property states (currently Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) provide that a husband and wife each own a one-half interest in the other’s assets and earnings during the course of the marriage. States that are not community-property states provide for separate property rights during the course of the marriage. In most community-property states, the only separate property is that which is owned exclusively by one of the spouses prior to the marriage and never commingled with community property and assets received by gift or inherited at any time.
Conservator—A type of guardian appointed by a probate court to manage the affairs of a mentally incapacitated adult.
Contingent fiduciary—The backup to the successor trustee, executor, guardian, or agent, should that person be unable or unwilling to act.
Credit shelter trust—A trust designed to protect the unified credit that each person may gift or bequeath to heirs. This is often referred to as a bypass trust because the trust assets more or less bypass the surviving spouse and are not included in her estate. Still, the surviving spouse can have certain rights in the trust during her lifetime. It also is referred to as the “B” trust in an “A-B” trust. Since the unified credit has been replaced by the applicable exemption amount under the Tax Relief Act of 2001, the term “credit shelter trust” is now more accurately referred to as the “applicable exemption amount shelter trust”—same effect, new terminology.
Crummey power—The right of a donor to make gifts to a trust with a withdrawal right. The donor or trustee must notify the beneficiary of his Crummey rights to withdraw some or all of the value of the gift in the year made. The right to withdraw—which is typically not exercised—is required for the donation to the trust to be a gift of a present interest.
Custodian—The person or organization managing assets for minor children or adults deemed incompetent.
D
Death probate—The process of legally validating a will or intestate estate. It involves collecting assets, paying bills, and eventually retitling the assets, all under the supervision of the probate court. For living probate, see “Guardianship.” All types of probate can be substantially avoided and its costs minimized though proper estate planning.
Decedent—A person who has died, whether testate or intestate (that is, with or without a will).
Descendant—A person who is a relative in a direct vertical line from another person—children, grandchildren, great-grandchildren, and so forth.
Disclaimer—A person inheriting assets can refuse to accept any or all of those assets. Disclaimers can be very useful in certain situations, especially if they have been anticipated and planned for. An effective disclaimer is governed by strict state and federal laws. Among other things, a disclaimer must be in writing and made within nine months of a person’s death.
Domicile—The state or county where a person primarily resides, determining the taxing and probate jurisdictions.
Donee—A person who receives a gift or bequest or to whom a power of appointment is given.
Donor—See “Grantor.”
Durable power of attorney for health care—Document allowing your agent to direct your health care if you are unable to do so, avoiding a guardianship of the person. As with the durable power of attorney for property, it is durable because, unlike an ordinary power of attorney, it survives a subsequent incompetence.
Durable power of attorney for property—A document in which you grant an agent the authority to handle financial matters should you become disabled. The document is used to avoid a financial guardianship proceeding in court, which is a type of living probate.
E
Escheat—The process by which assets of a person who dies intestate (without a will), without heirs, go to the state.
Estate tax—A transfer tax that the federal government and some states assess on the right to transfer assets to others on your death. Sometimes referred to as the death tax or, incorrectly, as inheritance tax.
Executor (fem.: executrix)—A person, bank, or trust company designated in your will to administer your estate upon your death, under the supervision of the probate court. More than one executor can act together as co-executors. Referred to in some states as a personal representative.
F
Family Limited Liability Company (FLLC)—(see Family Limited Partnership)
Family Limited Partnership (FLP)—A legal entity created by state statute that
serves estate planning and asset protection needs.
Fiduciary—A person in a position of trust and responsibility, subject to heightened legal and ethical standards, including, among others, trustees, executors, guardians, and agents.
G
Generation-skipping transfer tax (GST tax)—An additional transfer tax assessed on gifts and bequests in excess of $1 million to grandchildren, great-grandchildren, or anyone at least two generations below the donor. Language allocating the $1 million exemption from the tax can be included in a generation-skipping trust as part of the overall trust or will.
Gift—A voluntary transfer of property to another made without receiving something of equal value. A completed gift, which removes an asset from a donor’s estate, must be of a present interest and without any conditions. The federal government will assess a gift tax when the value of the gift exceeds the annual exclusion and the unified credit is exhausted.
Grantor—The person who establishes a trust and transfers his own assets to it. Also called the trustor, settler, or donor.
Grantor trust—A trust in which the grantor retains control of the assets or income. The income from a grantor trust is taxable to the grantor rather than to the beneficiary, although the grantor and beneficiary may be one and the same.
Guardian—The person appointed by a probate court, often designated in your will, to be responsible for your children or an incompetent adult. In the case of the incompetent adult, also known as a conservator.
Guardianship—The probate court process of administration or management of the property or person of minor children and incompetent adults, a type of living probate. Guardianships of incompetent adults can generally be avoided though the use of trusts and durable powers of attorney if signed while the person is still competent.
H
Heirs—The persons who receive your assets under a will or following your death if you die intestate.
I
Incidents of ownership—Any element of control or ownership rights in an insurance policy. To remove insurance from a gross estate for estate-tax purposes, you must give up all incidents of ownership and live at least three years.
Incompetence—The inability of a person to function and take care of his/her own affairs, sometimes referred to as a legal disability or incapacity.
Inheritance tax—A tax levied by some states on the right of heirs to inherit assets. An inheritance tax is imposed on the heir rather than on the estate.
Intentionally defective grantor trusts (IDGTs)—Income-tax-shifting trusts in which a grantor irrevocably transfers assets, usually by partial gift and partial sale, out of his estate but still pays the income taxes on earnings and capital gains, even though paid to the beneficiaries.
Inter vivos trust—See “Revocable living trust.”
Intestate—Dying without a valid will. When a person dies intestate, the probate court—following state intestacy laws—will determine who is to receive assets, act as administrator, and act as guardian for minor children.
Inventory—A list of all assets contained in a probate estate. A probate estate inventory is a matter of public record, available for examination by anyone who cares to ask for it.
Irrevocable trust—A trust that cannot be amended or revoked by its grantor(s). Like corporations, these are separate tax entities. Irrevocable trusts are often used in estate planning to place assets outside of someone’s estate. One of the most common types of irrevocable trust is the irrevocable life-insurance trust (ILIT), which is intended primarily to prevent insurance death benefits from being included in your taxable estate.
J
Joint tenancy with right of survivorship (JTWROS)—Shared ownership between two or more people, with the survivor(s) owning the property after the death of one or more fellow joint tenants. This delays probate, but ultimately does not avoid it. Moreover, it may result in income-and estate-tax pitfalls along with unintended liabilities. Compare with “Tenancy in common.”
L
Legacy—Property transferred by your will. The person receiving a legacy is the legatee.
Letters testamentary—Term used in some jurisdictions to refer to the legal document that provides the proper authority for an executor to act for the estate of a deceased person. Also referred to as “letters of office.”
Living trust—See “Revocable trust.”
Living will—A statement of philosophy concerning your desire for treatment in the case of extreme injury or illness, if the procedures in question are only going to delay the dying process. The living will is generally considered a less important health care directive than the health care power of attorney.
N
No-contest clause—A clause in some wills and trusts that purports to disinherit any person attempting to attack the validity of such will or trust. Does this work? Sometimes, depending on the court and the equities involved. If the beneficiary has something substantial to lose, it may at least give him pause before contesting the document.
P
Payable-on-death account (POD)—A type of bank or brokerage account that avoids probate. If a person has a very limited net worth and very limited beneficiaries with no complicating factors, this may be a useful tool. Also referred to as a transfer-on-death account (TOD).
Per capita—A distribution made equally to a number of persons without regard to generation. A distribution to “all my descendants equally and per capita” would result in children, grandchildren, and great-grandchildren each receiving the same amount. This is generally a less prevalent distribution pattern than per stirpes distributions.
Per Capita at Each Generation—A hybrid of per stirpes and per capita. The share of a deceased person is divided into equal shares among those heirs living and the number of heirs at the same level who are survived by descendants. When looking to the next level, another equal division is made the same way.
Per stirpes—Latin for “by the branch,” the method of dividing assets among descendants so that such descendants as a class take the share that the ancestor would have been entitled to take had the ancestor survived.
Illustration of differences between per stirpes, per capita and per capita at each generation:
Example: Patriarch has three children, named, A, B and C.
A has 2 children (d & e),
B is deceased leaving 3 children (f, g & h),
C is deceased leaving one child (i).
Per stirpes distribution:
A gets 1/3rd,
f, g & h each get 1/9th (B’s share),
i gets 1/3rd (C’s share).
Per capita distribution: A, d, e, f, g, h & i get 1/7th shares, making no distinction between members of different generations.
Per capita at each generation: A gets 1/3rd, d, e, f, g, h & i each get 11.11% (an equal share of 2/3rds)
Pour-over will—A will used in conjunction with a revocable living trust stating that all remaining assets are to be transferred (“poured over”) to the trust. Even where there is a fully funded trust, you should have a pour-over will.
Power of appointment—The right to transfer or dispose of property that you do not own, such as assets in a trust created by someone else. If estate-tax planning is involved, care must be taken that the power is not a general power, in which case the assets subject to the power may unintentionally be included in the estate of the person who has the power. A special power limits the authority of the person holding the power to transfer assets, perhaps restricting transfers to a particular class of persons, such as to the descendants of the original donor, to charities, or for ascertainable standards. In a general-power-of-appointment marital trust (as opposed to a Q-Tip marital trust), the surviving spouse can withdraw as much of the principal trust as she desires whenever she desires.
Precatory language—Suggestive language in a will or trust that expresses your sentiments or preferences, but is not binding.
Principal—(1) The assets that make up a trust, sometimes referred to as the corpus. Many trusts provide for separate treatment of principal and income derived from the principal. (2) The person who confers authority on an agent in a power of attorney.
Probate—See “Death Probate.”
Probate court—A state court where probate estates are administered. In some jurisdictions, a magistrate’s court or surrogate court handles probate functions.
Q
Qualified domestic trust (QDOT)—Special language that must be part of the marital trust portion of a revocable living trust if the surviving spouse is not a U.S. citizen.
Qualified S corporation trust (QSST)—A trust that contains special provisions to enable a trust to own S corporation stock.
Qualified terminable interest in property trust (Q-TIP)—A type of marital trust that qualifies for the unlimited marital exclusion, but does not give the surviving spouse a general power of appointment. Q-TIPs limit the rights of the surviving spouse in such a way that the assets are preserved for a different beneficiary at the surviving spouse’s subsequent death. As with any marital trust, the surviving spouse must receive all of the trust’s income during his/her lifetime and can, under certain circumstances, also receive portions of principal. This can be especially useful where there is a second marriage and the grantor wishes to protect the children from the first marriage while benefiting the surviving spouse during his/her lifetime.
R
Remainder—The assets remaining in an estate for a beneficiary or heir, after an income or other temporary interest has ended.
Residuary—The assets remaining in an estate after all specific transfers of property are made and all expenses are paid. When a pour-over will is used, the residuary is transferred to a trust.
Retitling—(1) The process that legally transfers ownership of property from the grantor to the revocable living trust. Without retitling assets, a revocable living trust is unfunded and will not work efficiently as a means to avoid probate. (2) The portion of the probate process that, at the court’s direction, transfers ownership of assets from the decedent to the heirs or beneficiaries.
Revocable living trust—A trust established by the grantor during his lifetime. A revocable living trust can be amended (changed), or revoked (canceled) at any time during the grantor’s lifetime. Sometimes called an inter vivos (Latin for “while living”) trust, also interchangeable with “revocable trust” and “living trust.”
Rule against perpetuities—A common-law principle that prevents a person from reaching out from the grave to control his assets forever. A trust interest must vest not more than “twenty-one years plus a life in being.” (Check out the movie Body Heat, in which William Hurt’s character is tripped up by the rule.) In recent years, some states have, by statute, enacted laws enabling people to set up their estates so as to opt out of the rule.
S
S corporation—A corporation whose income is taxed to its shareholders, thus avoiding a corporate tax. Only certain trusts may own S corporation shares.
Section 2503(c) trust—An irrevocable trust established for minor children. Gifts to such trusts are deemed to be gifts of a present interest and thus can qualify for the annual $12,000 gift-tax exclusion. The trustee manages the trust assets and, at her discretion, may distribute income or principal to a beneficiary until the beneficiary reaches age twenty-one. At that point, the beneficiary has the right either to withdraw the trust assets or to leave the trust intact until a later date. This type of trust is generally more flexible than a Uniform Transfers to Minors Act (UTMA) account and is a good choice for removing assets from a grantor’s estate in favor of a minor.
Self-declaration of trust—A type of revocable living trust in which the grantor is also the trustee and therefore controls the assets of the trust.
Settler—See “Grantor.”
Spendthrift provision—A clause in a trust that prevents a beneficiary from spending an inheritance without restraint and also may prevent creditors from reaching the beneficiary’s interest in the trust.
Sprinkle power—A trustee’s right to distribute income in any proportion to several named beneficiaries. Such a power gives the trustee the discretion to distribute money according to the relative needs of the beneficiaries.
Stepped-up basis—The rule that makes an heir’s cost basis equal to the value of the asset at the date of the grantor’s death—or, alternatively, six months later—rather than its original cost. If a gift of an appreciated asset is made during the donor’s lifetime, the donee takes the donor’s original cost basis and there is no step-up in the basis. The step-up avoids a capital-gains tax on the appreciation that occurred during the donor’s lifetime. The step-up rule is scheduled to end in 2010, but could be brought back the following year by the Sunset provision of the Tax Relief Act of 2001.
Successor trustee—Under a self-declaration of trust, the backup to the grantor, who is the initial trustee. The document can provide for successors to act individually or collectively. The same holds true for other fiduciaries.
Sunset provision—A provision in a law that ends the law at a certain date as if the law never existed. The Tax Relief Act of 2001 contains a Sunset provision that activates after the year 2010, eliminating the repeal of estate taxes.
Survivorship insurance—A life-insurance policy that insures a couple instead of an individual. It can be much less expensive than an individual insurance policy. Its purpose is usually to pay the estate taxes that arise after the death of the surviving spouse and is most useful where the decedent’s assets are predominantly illiquid, such as real estate or a family corporation. In order to be properly utilized, the policy should be held outside the insureds’ estate, possibly in an irrevocable insurance trust. Also commonly referred to as a second-to-die policy.
T
Tangible personal property—Movable property such as jewelry, clothing, automobiles, etc., as opposed to real property (land and buildings) or intangibles such as stocks, bonds, and bank accounts.
Tenancy by the entirety—A special type of joint tenancy available in some states for a husband and wife who own their principal residence, it protects the residence from creditors and liability claims against one of the spouses. As with a regular joint tenancy, this delays but does not eliminate probate.
Tenancy in common—An undivided interest in property. Unlike a joint tenancy interest, there is no right of survivorship to the remaining tenants in common. Different types of entities may be tenants in common. If the tenant in common who dies is an individual, there may be a need to probate. Property also may be owned by more than one trust as tenants in common.
Testamentary trust—A trust created under a will and activated upon death. In and of itself, it does not necessarily avoid probate.
Testator (fem.: testatrix)—A person who creates and executes a valid will.
Trust—A legal written arrangement in which one or more trustees hold and manage assets for the benefit of one or more beneficiaries under a fiduciary relationship.
Trustee—The person or company acting in a fiduciary capacity managing and administering trust assets for the benefit of one or more beneficiaries.
Trustor—See “Grantor.”
U
Unified credit—A tax credit applied to gift or estate taxes. The Tax Relief Act of 2001 changed the terminology to “applicable exclusion amount,” and it is not unified anymore, because inheritances and gifts are treated differently after 2003.
Uniform Transfers to Minors Act (UTMA)—A method of holding property for the benefit of a minor. It is simple to set up, but less flexible than a 2503(c) trust or Crummey trust.
Unlimited marital deduction—A rule permitting spouses to transfer an unlimited amount of assets to each other, while alive or after death, without any income- or estate-tax implications. Overuse of the unlimited marital deduction may lead to a loss of the unified credit of the first spouse to die.
W
Will—A legal document completed in accordance with state law that lays out how your assets will be distributed on your death. The will appoints an executor to administer your estate and may establish trusts for children and recommend guardians for minor children.
Will contest—A legal challenge to a will, usually made by one or more disgruntled heirs, which can result in great expense to the estate and tie up the estate for great lengths of time. Will contests often are based on allegations that the will was improperly executed or that the decedent lacked proper mental capacity at the time he created the will or that someone exerted undue influence on the decedent.
