A/B trust plan: See Marital / Family Trust Plan.
Accounting: A detailed analysis of income, gains, losses, transactions, and assets that may be required by a Trustee or Executor. A Trust and Will may require an accounting in certain situations or the need for an accounting may be waived in other situations.
Adjusted Gross Estate: The value of all property included in an Estate for estate tax purposes, less allowable debts and expenses.
Administration: The management and settlement of an Estate. See Probate.
After-born Child: A child born after a Will or Trust is executed.
Agent: Under a Power of Attorney, the person granted the legal right to act on behalf of another (the Principal), for his or her sole and exclusive benefit. Also sometimes referred to as an Attorney-in-Fact.
Alien: A person who is not a citizen of the United States. A person who is a resident in the U.S., but not a citizen, can be an alien.
Alternate Valuation: A federal estate tax term for the value of the gross estate six months after the date of death (excluding property that was sold or otherwise disposed of before that date, in which case the date of sale or other disposition is used). The alternate valuation can be used only if federal estate tax actually due will be reduced as a result of such valuation. 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, which is precisely six months after the date of death. If the assets have declined in value, this may be a useful tool to reduce estate taxes.
Alternate Valuation Date: The date, exactly six months after the date of death. See alternate valuation.
American Taxpayer Relief Act of 2012 (ATRA): This is the major federal tax legislation enacted by Congress and signed by President Obama in January 2013. Among other things, it established a $5,000,000 estate tax Applicable Exclusion Amount that increases with inflation and added portability, allowing a surviving spouse to use any portion of a deceased spouse’s remaining AEA that doesn’t get used through the deceased spouse’s estate plan.
Ancestor: A person from whom another has descended (whether through a mother or father).
Ancillary Jurisdiction: A jurisdiction outside the state where the decedent officially resided. If a Decedent owned real estate in more than one state, his or her Estate may be subject to Ancillary Probate in each state in which the real estate is located.
Ancillary Probate: If a Decedent owned real estate in more than one state, his or her Estate may be subject to Probate in each state in which real estate is located. Thus, Probate will be required in the state in which the Decedent was a legal resident, and Ancillary Probate will be required in each state in which the Decedent owned real estate. By re-titling real estate owned outside the state of residence into a Trust, Ancillary Probate may be avoided.
Annual Gift Exclusion: This is the amount that someone can give to another person during the calendar year without having to pay gift tax. Under IRC Sec. 2503 the annual gift exclusion is $10,000, but that amount is inflation adjusted periodically. For gifts in 2014-2016 the annual exclusion is $14,000 per beneficiary. Annual gift exclusion amount increases typically get posted by the IRS in a publication in late Q3 or early Q4 each year, but they are adjusted on a different basis than the AEA.
Annual Exclusion Amount: Each person may gift up to $13,000 per year (in 2012) to any other person without incurring gift tax. Gifts in excess of $13,000 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 $13,000 gifts a person 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.
Anti-Lapse Statute: A statute that provides that the descendants of a deceased taker will receive the property bequeathed to the deceased taker. Application of the statute may be limited (e.g., in Illinois, it applies only if the deceased taker was a descendant of the Testator).
Applicable credit amount: An estate tax credit of $1,730,800 that permits the transfer of up to $5 million free of federal estate tax. The term also applies to a lifetime gift tax credit that permits the transfer of up to $5 million. The use of the gift tax credit reduces the estate tax credit at death.
Applicable Exclusion Amount: The amount of property that can pass free of tax pursuant to the applicable credit amount.
Applicable Federal Rate (AFR): A rate published monthly by the Treasury Department, broken down into short-term, mid-term, and long-term rates. The rate (or a variation) is used to determine loan interest rates that will not result in imputation of interest and to determine values under various split-interest planning devices (life estates, remainders, annuities, etc.).
Appointment of Agent to Control Disposition of Remains: A directive authorized by Illinois state statute that allows an individual to name the person or persons (Agent) authorized to make decisions regarding the disposition of his or her bodily remains after death.
Ascertainable Standard: Language describing, and in some cases limiting, how Trust income and/or principal can be used by a Trustee for a Beneficiary. A common example of the wording used to create an ascertainable standard is “health, education, maintenance and support,” sometimes referred to as a “HEMS” standard. Using such a standard in a trust has estate tax consequences. See Non-ascertainable standard.
Asset Protection Trust: A Trust that is not subject to the claims of a Beneficiary‘s creditors, including the Grantor if the Grantor is a beneficiary. Generally, if for the Grantor’s benefit, the Trust must be created outside the U.S. but also could be created in several jurisdictions. The most prominent U.S. asset protection jurisdictions are Alaska, Delaware, and Nevada. The effectiveness of asset protection Trusts that include the Grantor as a beneficiary is debated by attorneys.
Basis: The acquisition cost of an asset, used to calculate gains and losses for income tax purposes.
Beneficiary: A person who receives or benefits from a Will, Trust, or contractual property such as insurance, qualified plans, annuities, or transfer on death accounts (TOD) or payable on death accounts (POD).
Bequest: A gift of personal property under a Will. A specific bequest is an identified piece or class of property. A general bequest is one that can be satisfied from the general assets of the Estate.
Bond: A guarantee by an insurance company or bonding agency to repay any loss due to negligence or criminal cause by a fiduciary, such as an Executor, Administrator, or Trustee. A Will or Revocable Trust can waive any bond requirement.
Bypass Trust: See Credit Shelter Trust
Capital Gain: The profit reported to the IRS upon the sale of a capital asset. Capital gain is the difference between the tax basis 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 Gift Annuity: A stream of income received by an individual when the individual makes a gift of property to a charity in exchange for the stream of income.
Charitable Lead Trust (CLT): An irrevocable Trust with a fixed term naming a charity as the income recipient (annuity interest or unitrust interest) with the remainder passing to non-charitable beneficiaries.
Charitable Lead Annuity Trust (CLAT): . This is basically the opposite of the CRAT. Here the Settlor establishes a trust and names a charity to receive an annuity amount from the trust for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the Settlor or to other noncharitable beneficiaries named in the trust.
Charitable Lead Uni-Trust (CLUT): This is basically the opposite of the CRUT. Here the Settlor establishes a trust and names a charity to receive a percentage of the trust’s value for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the Settlor or to other noncharitable beneficiaries named in the trust.
Charitable Remainder Trust (CRT): A Trust providing an annuity or unitrust distribution to an individual (possibly including the Grantor) or individuals that will distribute the remainder to charity after the death of the individual or individuals.
Charitable Remainder Annuity Trust (CRAT): A Trust created to receive a gift of property, providing an annuity distribution to an individual (possibly including the Grantor) or individuals that will distribute the remainder of the property to charity at the death of the individual or individuals. The annuity is based on the initial value of the Trust and never changes.
Charitable Remainder Unitrust (CRUT): A Trust providing a unitrust distribution to an individual (possibly including the Grantor) or individuals that will distribute to charity after the death of the individual or individuals. The unitrust amount changes annually based on changes in the valuation of the Trust assets.
Circular 230 (IRS Circular 230): As part of an effort to curb abusive tax shelters, the Department of the Treasury and the IRS have issued final regulations under IRS Circular 230 to restore, promote, and maintain the public’s confidence in those individuals and firms who act as tax advisors.
Clayton Election: This is a very popular method of determining the amount of a deceased spouse’s estate that will be set aside for the surviving spouse. The name is based on the case, Estate of Clayton v. Commissioner, 97 T.C. 327 (1991). It requires a trustee or personal representative to decide during the trust administration how big the marital deduction should be. The property set aside for the marital deduction gets transferred to the marital trust, which is set up as a QTIP trust. A 706 (Federal Estate Tax Return) is required to notify the IRS of the QTIP election and disclose the amounts going into the marital QTIP and bypass trusts. The Clayton election is a very flexible marital deduction planning tool and is most desirable for clients who have moderate to nearly-taxable estates, or in times of significant uncertainty in the estate tax.
Codicil: A written change to a Will. A codicil requires the same formality in its execution as a Will.
Community Property: 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 do not have community property laws 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: An individual or institution appointed by the Court to administer the affairs of a disabled adult. In Illinois, such an individual is now referred to as a “Guardian.”
Constructive Trust: A Trust imposed by a court of equity in order to keep a just result without regard to the intention of the parties.
Contingent Interest: A future interest in property that is conditioned upon the happening or non-happening of a specified event; the interest may never become a vested interest.
Credit for State Death Taxes: A credit against the federal estate tax for death taxes paid to a state. This credit has been phased out. Beginning in 2005, a deduction in determining the federal estate tax is allowed.
Credit Shelter Amount: See exemption equivalent.
Credit Shelter Trust: A Trust designed to protect the applicable exclusion that each person may gift or bequeath to Beneficiaries. This is often referred to as a bypass Trust because the trust assets more or less bypass the taxable estate of the surviving spouse (they are not included in his/her estate). Still, the surviving spouse can have certain rights in the Trust during his/her lifetime. It also is referred to as the Family Trust in an A/B trust plan. See Family Trust.
Crummey Power or Crummey Withdrawal Right: Named after the taxpayer in the case of Crummey vs. Commissioner, it is the right of a Donor to make gifts to a Trust with a withdrawal right. The Donor or Trustee must notify the donee Beneficiary of the withdrawal rights as to 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 gift to the Trust to be a gift of a present interest. This is necessary in order to qualify for the gift tax annual exclusion. Gifts of a future interest do not qualify for the gift tax annual exclusion.
Custodian: The person or organization managing assets for minor children or adults deemed incompetent.
Decanting: This is the process by which a trustee exercises the power to distribute property from one trust (the “originating” trust or the “inception” trust) into a new trust for the benefit of a beneficiary. Decanting is an increasingly popular strategy to allow a trustee to create new, more favorable trust terms for a beneficiary. (A trustee can only exercise a decanting power consistent with the trustee’s fiduciary duties to the beneficiaries).
Deceased Spouse Unused Exemption Amount (DSUEA): This is the amount of AEA that is leftover after the estate plan has allocated part of a deceased spouse’s estate exemption to a bypass trust.
- An example is easiest: Husband dies in 2015 and has $1,000,000 in his gross estate. His estate plan is designed in a way that allocates his AEA against that $1,000,000, causing that amount to be put into a bypass trust. Assuming he had made no other gifts that would reduce his AEA, after his estate plan goes into effect he has a remaining unused exclusion of $4,430,000 (his $5,430,000 AEA minus the $1,000,000 put into the bypass trust). His surviving wife now has her own AEA of $5,430,000 plus husband’s $4,430,000 DSUEA, for a combined estate tax exclusion of $9,860,000. (This oversimplified example also demonstrates a bit how portability works.)
Declaration of Trust: See Living Trust.
Defective Grantor Trust: See Intentionally Defective Grantor Trust.
Defined Benefit Plan: An employer-provided retirement plan that guarantees an employee specified retirement income, usually based on a formula that takes years of service and salary level into account. A pension plan is a defined benefit plan.
Defined Contribution Plan: An employer-provided retirement plan that does not require the employer to contribute a stated dollar amount but instead ties contributions to the employer’s profit levels (usually based on a formula). A profit-sharing plan is a defined contribution plan.
Delaware Tax Trap (DTT): Refers to the process of exploiting the Rule Against Perpetuities (RAP) provision in a trust by allowing a beneficiary to exercise a limited power of appointment in a way that extends the original RAP in the trust. The upshot is that the person who exercises the power causes the property subject to the power to be included in their estate (getting a basis adjustment) when they die. The DTT “loophole” is found in IRC sec. 2041(a)(3) when someone who holds a limited power of appointment exercises it in a way that “…postpone[s] the vesting of any estate or interest… or suspend[s] the absolute ownership or power of alienation of [the interest]… for a period ascertainable without regard to the date of the creation of the power.” This is a complicated way of saying that, if someone who holds a limited power of appointment exercises that power to give someone else a presently-exercisable general power of appointment (referred to as a “PEG” power), the person who exercised the limited power of appointment will have estate inclusion over the property for which the PEG power was granted to the other person. Effectively drafting for the DTT often requires modifying a trust’s RAP clause and carving out any limitation that would otherwise prevent the exercise of a limited power of appointment this way. It also requires the draft person to not rely on the state’s governing RAP statute, as most states have savings language to prevent “accidentally” triggering inclusion through a DTT.
Descendant: A person in the direct line of descent, such as a child or grandchild. Also referred to as a “lineal descendant.”
DING / NING / WING: Delaware / Nevada / Wyoming Incomplete Non-Grantor Trust. This is an irrevocable trust that works primarily as an income tax / capital gains tax strategy. The trust is set up in a state that does not impose state income tax so any highly-appreciated assets sold by the trust will avoid state capital gains tax. Any assets remaining in the trust when the client dies will be included in the client’s gross estate, causing a step-up in basis for those assets.
Disclaimer: The refusal to accept an inheritance. A person inheriting assets can refuse to accept any or all of those assets. 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.
Domestic Trust: A Trust with one or more U.S. persons having control (the control test) over all substantial decisions (including distribution or investment decisions and powers to remove, add, or replace Trustees) and over the administration of which a court within the U.S. (the court test) is able to exercise primary supervision. A Trust is presumed to meet the court test if the Trust does not direct administration outside the U.S., the Trust is administered exclusively in the U.S., and the Trust is not subject to an automatic migration provision.
Domicile: An individual’s permanent legal and intended home. A person can have only one domicile though residing in several locations. An individual’s domicile determines the appropriate taxing and probate jurisdictions.
Donee: The person to whom a gift is given.
Donor: The person making a gift.
Durable Power of Attorney for Health Care: A document allowing an Agent to direct a person’s health care decisions if the person is unable to do so, thereby 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 the Principal‘s incapacity. The Illinois Power of Attorney Act was amended effective July 1, 2011.
Durable Power of Attorney for Property: A document in which a person (the Principal) grants an Agent the authority to handle financial matters on his or her behalf. The document is used to avoid a financial Guardianship proceeding in court. it is durable because, unlike an ordinary Power of Attorney, it survives the Principal’s incapacity, but terminates at the Principal’s death. The Illinois Power of Attorney Act was amended effective July 1, 2011.
Equitable Apportionment: A legal doctrine that requires the recipients of Probate and non-Probate assets to pay their proportionate share of death taxes and administration expenses. Provisions in the Will can overrule this doctrine.
Estate Freeze: Any of a number of estate planning techniques typically used to prevent the value of an owner’s interest in a business or other asset from increasing after the technique is implemented. An estate freeze is often used to prevent estate tax liabilities from increasing as property values increase.
Estate Tax: A transfer tax that the federal government and some states assess on the right to transfer assets to others at death. The estate tax is sometimes referred to as the death tax or, incorrectly, as inheritance tax. The top rate in 2013 is 40 percent, which is, in effect, a flat rate, since there is an applicable exclusion for taxes at lower rates.
Executor: The individual or institution named in a Will who is responsible for management of assets, payment of debts and taxes, and ultimate transfer of the property passing under the Will. Multiple Executors can act together as co-Executors. The Executor is referred to in some states as a Personal Representative.
Exemption Equivalent: The amount that can pass estate tax free at death. Under the American Taxpayer Relief Act of 2012, that amount is now set permanently at $5 million, indexed for inflation ($5.25 million in 2013). For gift tax purposes, the law provides for an exemption equivalent equal to the estate tax exemption amount. The gift and estate tax exclusions are “unified.”
Family Limited Partnership (FLP): A device used to provide control and management of assets and transfer property interests among family members, and also sometimes to obtain valuation discounts for estate tax purposes. A general partner controls the entity; limited partners are treated as mere investors, with no rights to control the entity or its investments, nor to dictate any of its affairs.
Family Trust: See Credit Shelter Trust.
“Five and Five” Power: A non-cumulative general power of appointment giving the power holder the right to withdraw the greater of $5,000 or five percent of a Trust share. By specific exception under the estate and gift tax provisions of the Internal Revenue Code, the lapse of such power has no gift or estate tax consequences (except for the year in which the power holder dies).
Flip Charitable Remainder Unitrust: A Net Income Charitable Remainder Unitrust that converts to a regular Charitable Remainder Unitrust upon the happening of an event (e.g., the sale of a non-marketable asset, the attainment of a defined age, or the retirement of a Beneficiary).
Foreign Asset Protection Trust (FAPT): This is more advanced form of asset protection trust that is established under the laws of a foreign country that has even more favorable asset protection for clients. Nevis, the Cook Islands, Jersey, Guernsey, and other remote countries are popular choices.
Foreign Tax Credit: A credit against the federal estate tax for death taxes paid to a foreign nation.
Form 706: The federal estate tax return.
Form 709: The federal gift tax return.
Form 1040: The federal individual income tax return.
General Power of Appointment: A power to appoint property to anyone, including the appointer or the appointer’s estate or the creditors of either.
General Power of Appointment Marital Trust: A type of Marital Trust over which the surviving spouse can have the most control. The surviving spouse must receive the income and must have a lifetime or testamentary General Power of Appointment.
Generation-Skipping Transfer Tax (GSTT): A tax in addition to the estate tax or gift tax imposed when property passes to a Beneficiary more than one generation removed from the generation of the Donor or the Decedent (e.g., a grandchild). Each taxpayer is entitled to a $5 million exemption ($5.25 million in 2013, indexed for inflation). Language allocating the $5.25 million exemption from the tax can be included in a Generation-Skipping Transfer Tax Exempt Trust or Will.
Generation-Skipping Transfer Tax-Exempt Trust (GSTT Exempt Trust): A Trust that usually benefits multiple generations and is not subject to the GST Tax because the GSTT exemption was allocated to it and it was initially equal to or less than the GSTT exemption. The term also applies to a Trust grandfathered from the application of the GST Tax. A GSTT Trust is not subject to estate tax when a Beneficiary dies.
Generation-Skipping Transfer Tax Exemption (GSTT Exemption): The value of property that can be set aside for a Beneficiary more than one generation removed from the Donor‘s or the Decedent‘s generation (e.g., a grandchild) without the imposition of the tax. The GSTT exemption is the same as the exemption from federal estate tax, i.e., $5 million, indexed for inflation ($5.25 million in 2013).
Gift: A voluntary transfer of property to another person made without receiving something of equal value in return. 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 applicable exclusion amount is exhausted.
Gift Tax Annual Exclusion: A gift that is not considered a taxable gift. The law permits the exclusion each year of the first $14,000 in gifts made to any one Donee; married couples may jointly give up to $28,000 to any one Donee tax free. There is no limit to the number of Donees to whom the Donor may make gifts in any year. In addition to the $14,000 gifts, the exclusion also includes direct payments of tuition and medical care expenses. The term generally applies to outright gifts and transfers under a Uniform Transfers to Minors Act but also gifts in trust in limited circumstances. The Donor of a §529 Plan may use five years of annual exclusion amounts in one year.
Grantor Deemed Owner Trust (GDOT): This is just an alternative name for the IDGT or IDIT; it’s really the same thing. The grantor (the individual who sets up and puts property into the trust) is deemed to be the owner of the trust for income tax purposes, but the value of the trust property is not included in that person’s gross estate when they later die.
Grantor Retained Income Trust (GRIT): A GRIT is similar to a GRAT except that the Settlor receives the income stream from the trust assets, rather than a fixed annuity amount from the trust for a specified period of time. After the initial term ends the GRIT pays to other beneficiaries.
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 See Intentionally Defective Grantor Trust.
Gross Estate: All property subject to estate tax in the Decedent‘s estate (e.g., Probate property, joint tenancy property (only one half if between spouses), land Trusts, Revocable Trusts, death benefit of life insurance owned by the decedent, profit-sharing plans, IRAs, 401(k) plans) regardless of whether the property qualifies for a marital deduction or a charitable deduction.
Guardian of the Estate: An individual or institution legally responsible for the management of the assets of a minor or disabled adult. The Guardian is appointed by the Court and is under its supervision.
Guardian of the Person: An individual or institution legally responsible for the care and well-being of a minor or disabled adult. The Guardian is appointed by the Court and is under its supervision.
Guardianship: The Probate Court process of administration or management of the property or person of a minor child or an incompetent adult, 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.
Hanging power: Generally, a Crummey power that lapses gradually over a period of years.
Health Insurance Portability and Accountability Act (HIPAA): Pronounced “Hippa,” this is the common name given to a federal law, one of the purposes of which is to protect a person’s health information by requiring a written authorization before any information, including medical records, can be divulged. A HIPAA Authorization complies with the provisions of the Act and names those individuals who are authorized by the patient to access such medical information.
Incidents of ownership: Any element of control or ownership rights in property (often applied to insurance policies; i.e., 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).
Income in respect of a decedent (IRD): Property of an estate that, if collected by the decedent before he or she died, would have been subject to income tax (e.g., insurance commissions, payments under an installment sale, or profit-sharing proceeds, IRA benefits).
Incompetence: The inability of a person to function and take care of his or her own affairs, sometimes referred to as a legal disability or incapacity.
Inheritance tax: A tax levied by a local government (usually a state) on property that is inherited. The amount of tax relates to each inheritance received rather than the total size of the decedent‘s estate. Tax rates usually depend on (a) the relationship of the beneficiary to the decedent and (b) the total value of the bequest received by the beneficiary. An inheritance tax is imposed on the heir rather than on the estate, as in the case of an estate tax.
Intangible property: personal property that is representative of other rights (e.g., stock in a corporation, bank accounts, interests in a partnership even if the partnership owns real estate, or a beneficial interest in a land trust) as contrasted with personal property that can be touched or otherwise perceived by the senses.
Intentionally Defective Grantor Trust (IDGT): 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.
Intentionally Deficient (or Defective) Irrevocable Trust, or Income Defective Irrevocable Trust (IDIT): Just one more acronym for an IDGT or GDOT; all these are synonymous. Their usage is simply a matter of the professional’s preference.
Intestacy law: A state law that governs the distribution of an individual’s estate when the individual does not have a will or the will does not completely dispose of the assets (or the individual does not dispose of the property in another manner, e.g., revocable trust, beneficiary designation, or joint tenancy).
Intestate: A term used to describe the probate estate of an individual who has not made a valid will. When a person dies intestate, the probate court, following state intestacy laws, will determine who is to receive the assets, act as administrator, and act as guardian for minor children.
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).
Irrevocable Life Insurance Trust (ILIT): An irrevocable trust established for the purpose of owning life insurance and excluding its proceeds from the estate of the insured (and the insured’s spouse if married) for estate tax purposes.
Joint tenancy (with right of survivorship)(JTWROS): A form of joint ownership in which the death of one joint owner results in the immediate transfer, by operation of law, of ownership to the surviving joint owner. Joint tenancy property is not subject to probate. Compare with tenancy in common.
Lapse: The termination of a right or a power usually due to inaction on the part of the person holding the right or the power.
Legacy: Property transferred by your will.
Legatee: A person receiving a legacy.
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.”
Life estate: An interest in property limited to use during a person’s life or the life of another.
Limited power of appointment: See Special power of appointment.
Liquid assets: Cash or equivalent assets that can be readily converted into cash without any serious loss. Examples would be cash, Treasury bills, money market fund shares, and certificates of deposit.
Living (inter vivos) Trust: A trust that is created during the lifetime of the grantor and may be amended or revoked by the grantor during the grantor‘s lifetime. It will usually be used as the ultimate vehicle for the distribution of the grantor‘s assets when the grantor dies. Also known as a revocable trust.
Living Will: A statement of philosophy concerning your desire for treatment in the case of terminal illness, if the procedures in question are only going to delay the dying process. The Living Will is superseded by a validly executed the Durable Power of Attorney for Health Care.
Lump-sum distribution: A payment made from a “tax-advantaged” retirement plan that is made in one payment rather than in installments.
Marital deduction: A deduction that is available for transfers between spouses, either during lifetime or at death. Such transfers are exempt from gift and estate tax but the assets transferred are subject to estate tax in the estate of the surviving spouse. The deduction is not applicable if the donee spouse is not a U.S. citizen. See Qualified Domestic Trust.
Marital / Family Trust plan: An estate plan that divides property between two trusts – one trust equal to the exemption equivalent that is not subject to estate tax at the surviving spouse’s death, and another trust that qualifies for the marital deduction. Also called an A/B Trust Plan.
Marital / Non-marital Trust plan: See Marital / Family Trust plan.
Marital property: In Illinois (and most other states), property that arises during marriage other than property received by gift or inheritance. The concept applies in dissolution of a marriage and does not govern the disposition of property at death.
Marital / Residuary Trust plan: See Marital / Family Trust plan.
Marital Trust: A trust that qualifies for the unlimited marital deduction for federal estate tax purposes.
Merger of title: Occurs when all beneficial interests in an asset (such as a life estate and a remainder) become simultaneously owned by the same person or persons, resulting in the owners holding a 100-percent interest in the asset.
Minor: A person who has not reached the age of majority (legal age); in most states, the age of majority is 18.
Minority discount: A discount allowed when valuing an asset that is not publicly traded; the discount is allowed because of a lack of liquidity and/or lack of control.
Net Income Makeup Charitable Remainder Unitrust (NIMCRUT): A trust from which the individual or individuals receive the lesser of the net income or the unitrust amount, but if income ever exceeds the unitrust amount, the excess income can be used to make up for years in which the net income was less than the unitrust amount. See Charitable Remainder Trust.
Next of kin: Historically, referred to as takers of personal property. See heirs.
Non-ascertainable standard: A power granted to a trustee to use income or principal for the benefit of a trust beneficiary for his or hercomfort, welfare, best interests, or happiness. Using such a standard has estate tax consequences. See ascertainable standard.
Non-marital property: In Illinois (and in most other states), all property that is not marital property.
OBRA trust: A trust established for and containing the assets of a disabled individual created before the disabled individual attains age 65 by the individual’s parent, grandparent, legal guardian or a court, and making the beneficiary eligible for state aid (Medicaid) without exhaustion of the trust assets. The trust must provide that the state will recover any money paid to the disabled individual (to the extent of trust assets) at the death of the individual. The trustee may use trust assets for the beneficiary for items beyond what the state provides for the disabled individual.
OBIT: The “Optimal Basis Increase and Income Tax Efficiency Trust” is a form of trust that includes elaborate formula language granting testamentary or lifetime powers of appointment to strategically cause assets to be included in a decedent’s gross estate. The formula language is designed in a way that prioritizes estate inclusion for assets with low basis in order to ensure assets get a step-up, and not a step-down in basis when the power holder dies, and includes protective language to cause inclusion up to the decedent’s AEA. Rather than describe a specific type of trust, OBIT describes the estate tax inclusion nature of a trust designed to cause assets in the trust to receive a step-up in basis when a beneficiary holding a power of appointment dies. For additional information please see the outline, “The Optimal Basis Increase and Income Tax Efficiency Trust,” by Edwin P. Morrow, III, JD, LL.M (tax)
Payable-on-death (POD) account: A deposit of money in a bank or brokerage account in one’s own name with a designated beneficiary. The account creator/owner owns and controls the account without restriction during his or her life. At the death of the account creator/owner, the beneficiary becomes the account owner. Also referred to as a transfer-on-death (TOD) account. The owner’s agent under a Power of Attorney may, however, not be able to access or control such an account, since it is considered to be a “trust,” and therefore beyond the authority of a Power of Attorney, unless the account is expressly included within the terms of the Power of Attorney.
Pecuniary bequest: A bequest, in any form, of a specific amount of money. The amount may be determined by formula, but the specific dollar amount must be determined with only one result.
Per capita: A distribution made equally to a number of persons without regard to generation. A distribution to â€œall my descendants equally and per capitaâ€ would result in children, grandchildren, and great-grandchildren each receiving the same amount. This is generally a less prevalent distribution pattern than a per stirpes distribution.
Perpetuities, Rule Against: See Rule Against Perpetuities.
Per stirpes: Latin for â€œby the branch,â€ a distribution to members of a multi-generational group (descendants) with members of a younger generation taking only if their parent is deceased. For example, X has three children, A, B, and C; if all three are living, they take equally; if A is deceased and has two children, A‘s two children split the share A would have taken if living; if A is deceased and has no descendants, B and C take the property equally.
Portability: The concept of portability allows married couples to effectively combine their individual AEAs, allowing them to pass up to $10,000,000 (adjusted for inflation) to their heirs. If a spouse dies and doesn’t use all of his or her AEA in their estate plan, the amount they don’t use is called the DSUEA, and the surviving spouse is allowed to use that amount in their own estate tax planning. In order to take advantage of portability the trustee of the deceased spouse’s estate must file a federal estate tax return to claim.
Posthumous child: A child born after his or her father’s death. Compare to after-born child.
Pour-Over RLT: There’s a temptation to think the pour-over RLT works like a pour-over will, but it’s actually quite different. It’s designed generally for couples in blended families who live in a community property state (see that definition) and where the couple’s planning objectives are really different from each other. The couple will establish a joint RLT to hold their community property or other jointly-owned property, and they will each establish a separate RLT to hold their separate property. When the first of that couple dies, the joint RLT terminates and “pours over” the joint RLT assets into the separate trusts. Those separate trusts then manage the distribution of the property.
Power of appointment: The right to transfer or dispose of property not owned by the power holder, 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 of appointment, in which case the assets subject to the power may unintentionally be included in the estate of the person who has the power. Compare to a Special power of appointment.
Power of Appointment Support Trust (POAST): This acronym refers to the “Power of Appointment Support Trust,” a strategy discussed in the December 2015 issue of Trusts & Estates magazine. The purpose of the POAST is to allow multiple generations to leverage AEA and GSTT exemptions to accelerate a basis adjustment in appreciated assets by triggering inclusion in the estate of a senior generation by granting that older generation a general power of appointment. A wealthy client establishes a trust for the client’s parent and includes a formula general power of appointment to trigger estate inclusion up to (but not over) the parent generation’s AEA & GSTT. When that parent generation dies the assets subject to the power get a basis step up, and the assets continue in trust for the benefit of the original client (settlor) and their descendants in a DAPT structure. An additional option would be to include a “hybrid” DAPT structure that allows a trust protector to add the settlor as a possible discretionary beneficiary at a later time.
Power of attorney: A written instrument created by the principal, authorizing an agent (sometimes called the “attorney-in-fact”) to act on behalf of the person who signed the instrument (the principal). If the agent is authorized to act in all matters, the agent has a general power of attorney. If the authority granted in the instrument is not affected by the disability of the principal, the agent holds a durable power of attorney. If the agent’s powers become effective only upon the happening of an event described in the instrument, the agent holds a springing power of attorney. Â See also Durable Power of Attorney for Property and Durable Power of Attorney for Health Care.
Predeceased ancestor rule (or predeceased child rule): In generation-skipping, when the parent of the taker who is a descendant of the transferor is not living at the time of the transfer, the taker is placed in the generation of the deceased ancestor. The rule can apply to collateral heirs such as grandnieces and grandnephews if the transferor has no living descendants.
Presently-Exercisable General Power of Appointment (PEG Power): is a power that can be immediately exercised by the power holder to appoint property to that person’s self, their estate, their creditors, or the creditors of their estate. Possession of a PEG power causes the value of the property over which the power may be exercised to be included in the power holder’s estate. PEG powers are used in many contexts, including the application of the Delaware Tax Trap (DTT)
Pretermitted child: A child born after a parent has executed a will (a) who is not provided for in the parent’s will and (b) whose exclusion from the will is not expressly provided for in the will itself.
Principal: (1) The assets that make up a trust, sometimes referred to as the corpus. Many trusts provide for separate treatment of principal as opposed to income derived from the principal. (2) A person who gives authority for someone else to act on his or her behalf, i.e., the person making a power of attorney.
Private annuity: A transaction in which an individual sells property to another individual, corporation (other than a company in the business of issuing annuities), trust, or partnership in exchange for an annuity.
Private foundation: Typically, a charitable trust or not-for-profit corporation that makes gifts to operating charities. Often controlled by the individual (or members of the individual’s family) establishing the foundation. gifts to private foundations will usually qualify for a charitable deduction, for income tax, gift tax, or estate tax purposes.
Probate: The process of legally validating a will or intestate estate. It involves collecting assets, paying bills, and eventually changing title to the assets, with or without the supervision of the probate court, depending upon certain provisions under the will. In Illinois, estate having a gross value under $100,000 may avoid formal probate through the use of a Small Estate Affidavit.
Probate estate: Property that passes under a decedent’s will (or as directed by law under the intestacy statute if the decedent died without a will). Applies only to assets in the individual name of the decedent, and not to joint tenancy assets (which transfer to the surviving joint tenant by operation of law) nor to assets that have a beneficiary designation (which transfer to the named beneficiary by operation of law).
Prudent Investor Rule: The contemporary version of the Prudent Man Rule. It signifies the standard to be applied to a fiduciary, such as a trustee, requiring the fiduciary to invest and manage all assets as would a prudent investor under like circumstances, taking into account risk management and investment diversification.
Prudent Man Rule: An older standard to be applied to fiduciaries, requiring the fiduciary to invest and manage all funds as would a prudent man under like circumstances. Replaced by the Prudent Investor Rule.
Qualified Domestic Trust (QDOT): Special language that must be a part of the marital trust portion of a revocable trust if the surviving spouse is not a U.S. citizen. Not available for lifetime gifts.
Qualified Personal Residence Trust (QPRT): A trust funded with the grantor‘s residence and/or vacation residence that, after a term of years in which the grantor retains the right to live in the home rent free, will pass to the remaindermen.
Qualified Terminable Interest Property (QTIP) Trust: A type of marital trust that qualifies for the unlimited marital deduction, but does not give the surviving spouse a general power of appointment. QTIP Trusts 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 or her lifetime. The surviving spouse may, but need not, also receive principal distributions. This can be especially useful in the case of a second marriage where the grantor wishes to protect the children from the first marriage while benefiting the surviving spouse during his or her lifetime.
Quasi-community property: In California, property of a married couple moving to California from a common law state that, upon dissolution of marriage or death, will be considered community property.
Residuary estate: 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.
Re-titling: (1) The process that legally transfers ownership of property from the grantor to a trust. (2) In probate, the process of transferring ownership of assets from the decedent to the heirs or beneficiaries under the court’s supervision. See Funding.
Revocable Living Trust: See Living Trust.
Right of representation: See per stirpes.
Rollover IRA: An IRA that is allowed to accept unlimited transfers because the contribution is coming from another IRA or an employer’s qualified retirement plan.
Rule Against Perpetuities: A common-law principle that states that a trust interest must vest not more than â€œtwenty-one years plus a life in being.â€ (Check out the movie Body Heat, in which William Hurt’s character is tripped up by the rule.) In recent years, some states have abolished the rule while others, such as Illinois, have enacted laws enabling people to opt out of the rule.
Second-to-die insurance: See survivorship insurance.
Section 529 Plan:. An investment in which earnings withdrawn for education are not subject to income tax; otherwise, earnings withdrawn are subject to income tax plus a ten-percent penalty. The donor designates a beneficiary, but remains in control of the use of funds and can take property back (subject to income tax and applicable penalties). Not includable in the donor‘s estate for federal estate tax purposes, except under limited circumstances.
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 his or her discretion, may distribute income or principal to a beneficiary until the beneficiary reaches age twenty-one. At that point, the beneficiary is entitled to the trust assets.
Section 6166 election: An election to defer payment of estate tax attributable to operating business interests when certain tests are met.
Self-canceling installment note (SCIN): An installment note that is cancelled upon the death of the person who made the loan.
Short-term guardian: A guardian appointed by an acting guardian to take over the acting guardian’s duties each time the acting guardian is unavailable or unable to carry out those duties. Appointment cannot exceed a cumulative 60 days within a 12-month period.
Special Needs Trust: A trust for a third-party beneficiary who may receive state assistance. The trustee may use assets for the beneficiary‘s needs beyond what the state will provide, and the state is not entitled to reimbursement at the beneficiary‘s death. Also referred to as a “Supplemental Needs Trust.”
Special power of appointment: A power to appoint property to anyone other than the appointer or the appointer’s estate or the creditors of either, usually to a defined group such as “descendants and their spouses.”
Spendthrift provision: A clause in a trust that prevents a beneficiary from spending or encumbering an inheritance without restraint and also may prevent creditors from reaching the beneficiary‘s interest in the trust.
Spendthrift trust: A trust that is not subject to the claims of a beneficiary‘s creditors. Generally, the term does not refer to a trust established by a grantor for the benefit of the grantor. See also Asset Protection Trust.
Standalone Retirement Trust (SRT): This is a special type of trust designed to receive “qualified retirement accounts” like IRAs, 401(k)s, etc. It can be set up as either revocable or irrevocable, and it’s designed to allow trust beneficiaries to continue to defer income tax on the account balance for as long as possible. (This is referred to as a “stretch out.”) SRTs also provide a lot of protection for retirement account balances after they’re inherited by beneficiaries. The SRT gained great relevance in 2014 following the Clark v. Rameker case.
Standard Charitable Remainder Trust (SCRUT): Used as a type of CRT. A standard charitable remainder unitrust Trust (SCRUT) pays an annual “Uni Amount” to the Recipient(s). The Uni Amount is a fixed percentage of the value of the trust assets at the beginning of the trust’s tax year. Because the Uni Amount is a percentage of the value of the trust assets at the beginning of the trust’s tax year the annual amount distributed to the Recipient(s) will vary with variations in the value of the value of the trust. Additional contributions may be made to a standard charitable remainder unitrust if that option is selected.
Stepped-up basis: The rule that makes an heir‘s or beneficiary‘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.
Subchapter-S stock: Stock in a Subchapter-S Corporation.
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 the estate tax.
Supplemental Needs Trust: See Special Needs Trust.
Survivorship insurance: A life-insurance policy that insures a couple instead of an individual. Such a policy 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’ estates, possibly in an irrevocable life insurance trust (ILIT). Also commonly referred to as second-to-die insurance.
Survivor’s Trust: This term only applies in the context of a joint RLT plan. The survivor’s trust is the surviving spouse’s share of the joint trust property, plus any separate property the surviving spouse had. The deceased spouse’s property will typically flow into the marital and/or bypass trusts. The survivor’s trust is fully revocable by the surviving spouse for the remainder of the survivor’s life. It’s treated just as if the surviving spouse had established his or her own individual RLT.
Tangible personal property: Movable property such as jewelry, clothing, furniture, automobiles, etc., as opposed to real property (land and buildings) or intangibles such as stocks, bonds, and bank accounts.
Temporary guardian: A guardian appointed on a temporary basis, usually pending the appointment of a permanent guardian, upon a showing of necessity for the immediate welfare and protection of an alleged disabled person.
Tenancy by the entirety: A special form of joint ownership between spouses that, upon the death of one spouse, results in the immediate transfer of ownership to the surviving spouse. In Illinois, it is limited to a couple’s primary residence, or homestead. It is not subject to the claims of a creditor unless the creditor is a creditor of both spouses.
Tenancy in common: A form of ownership in which two or more persons own the same property. At the death of a tenant in common, the decedent‘s interest passes according to the decedent‘s will, or by intestacy laws if there is no will, not to the other owner (unless the decedent‘s will so provides). Different types of entities may be tenants in common. If the tenant in common who dies is an individual, there may be a need for probate. Property also may be owned by more than one trust as tenants in common.
Terminable interest: Any interest in property that terminates upon the death of the holder or upon the happening of some other specified event.
Testamentary capacity: The mental ability to make a valid will. In Illinois, the person executing the will must be of sufficient mind and memory to understand the nature of the business at hand, know the natural objects of his or her bounty, and the character and extent of his or her property, and to make disposition of said property according to a plan formed in his or her own mind.
Testate: A term used to describe the estate of an individual who has left a valid will.
Testator: An individual who creates and executes a valid Will.
Total return trust: A Trust that can invest without regard to whether the return is from income or capital appreciation.
TottenTrust: A Trust created by a deposit of money in a bank account in one’s own name as Trustee for another. The account creator/trustee/owner owns and controls the account without restriction during his or her life. At the death of the Trustee, a presumption arises that an absolute trust was created for the beneficiary for the account balance at the death of the Trustee.
Trust: A legal arrangement in which one person (the grantor) transfers legal title of property to another person (the trustee) to manage the property for the benefit of a third person or a charity (the beneficiary).
Trust Advisor: Many attorneys use this term interchangeably with Trust Protector. Whether those terms are truly synonymous is open to question, and is still an evolving issue under the law.
· Investment Advisor: This is a Trust Advisor whose role is limited to advising the trustee on the kinds of assets to invest in.
· Distribution Advisor: This is a Trust Advisor whose role is limited to advising the trustee on when to make or withhold distributions from the trust.
Trust Protector: This is a special type of power holder who can control certain aspects of irrevocable trusts. There is little consensus among attorneys as to what the protector can and cannot do, whether they serve in a fiduciary or nonfiduciary capacity, who should be the trust protector, etc.
Trustee: An individual or institution that manages property according to the instructions in a trust agreement.
Section 2032A election: An election to reduce the value of real property (either farm property or real estate used in business) for federal estate tax purposes when certain tests are met.
Two-trust plan: See Marital / Family Trust plan.
Undivided interest: A type of interest held in property in which the property is titled among parties as joint tenants or as tenants in common. No owner has the right to exclusive use or control of any particular piece or fraction of the property; rather, each owner has an equal right with all of the other owners to use and enjoy 100% of the property.
Unified credit: A tax credit applied to gift or estate taxes. The Taxpayer Relief Act of 2001 changed the terminology to applicable exclusion amount, since the estate tax and gift tax were not unified under that Act. Transfers at death were treated differently from gifts after 2003 until 2013, when the American Taxpayer Relief Act of 2012 re-unified the gift and estate tax credit at $5 million, adjusted for inflation. See also applicable credit amount.
Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA): Statutory provisions allowing for transfer of property to a minor with a custodian named to act on behalf of the minor without having to be appointed as the minor’s guardian. UTMA assets are treated as owned by the minor for income and other tax purposes. It is simple to set up, but less flexible than a Section 2503(c) trust or Crummey trust.
Uniform Trust Code (UTC): This is a body of law drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) that is intended to consolidate the law of trusts as it is applied among the states. Although many states have enacted significant portions of the UTC, important distinctions are made as state committees and legislatures review and enact the UTC. It’s safe to say that the Uniform Trust Code is far from “uniform.”
Unitrust: A Trust that provides for a distribution to an income beneficiary of a percentage of the trust assets based on the value of the assets on an annual valuation date (e.g., the first day of the year).
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. Indiscriminate use of the unlimited marital deduction may lead to a loss of the applicable exclusion amount in the estate of the first spouse to die.
Valuation discounts: Discounts from fair market value allowable because of minority interest, lack of control, and/or lack of marketability.
Vested interest: A present, ascertainable, fixed right of possession or enjoyment of property when actual delivery of the property may be postponed until a later date. Compare to Contingent interest.
Will: A legal document completed in accordance with state law directing the disposition of an individual’s property. A will is not operative until death and can be revoked up to the time of death or until there is a loss of mental capacity.
Will contest: A legal challenge to a Will, usually made by one or more disgruntled heirs. 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 or she created the Will or that someone exerted undue influence on the decedent.