Estate Planning Glossary

Asset Protection: The process of taking steps to minimize the risk of creditors or other claimants from being able to reach your assets. This can include setting up a different entity, such as an LLC, for each property, business, etc. Thus, if one particular property is subject to a suit (e.g., a tenant is hurt on one rental property) the claimant will be limited to the assets from that particular property or entity. This can prevent a domino effect against your other assets. An LLC, just like a limited partnership, offers important benefits where asset protection is important.

Annual Exclusion: Every person is permitted to give away a certain amount per year to any other person without incurring any gift tax. There is no limit on the number of people you can make these gifts to in a year. To qualify for this exclusion, the gifts must be a gift of a present interest, meaning that the recipient can enjoy the gift immediately. This can present problems when you make gifts to trusts. This exclusion amount can be doubled for each person, per year, if you’re married and your spouse consents to join in making the gift. This is called gift splitting. These amounts are indexed for inflation. Because the exclusion amount may change from time to time, you should consult a tax lawyer before making such gifts.

Beneficiary: A person who receives the benefits of a trust or of transfers under your will.

Bequest: Property transferred under your will.

By-Pass Trust: See Credit Shelter Trust.

Charitable Remainder Trust: You donate property or money to a charity, reserving the right to use the property, or to receive income from it for a specified time (a number of years, the duration of your life, or the duration of your life and the life of a second person such as your spouse). When the agreed period is over, the property belongs to the charitable organization.

Credit Shelter Trust: A trust designed not to qualify for the unlimited estate tax marital deduction so that it will use up your lifetime exclusion (unified credit). Often the same as a by-pass trust because such a trust by-passes (is not included in) your surviving spouse’s estate.

Donor: A person who makes a gift. The person setting up a trust can be called donor, trustor, grantor, or settlor.

Donee: A person who receives a gift. Gifts can be made to trusts as well as individuals. The remainder beneficiaries are effectively the donees of the trust, receiving the remainder interest in the asset left in the trust at the end of its term.

Durable Power of Attorney: This document is concerned with the ongoing administration of a person’s financial affairs in case they are [even only temporarily] incapacitated. The Durable Power of Attorney appoints someone who can act during the period of incapacity. Having a Durable Power of Attorney can also avoid the expense, inconvenience, embarrassment and humiliation involved in the legal procedures to appoint a guardian for an adult, which involves going through an incompetency adjudication.

Estate Tax: On the death of a taxpayer, a tax may be due on the transfer of wealth to family and others. Exclusions are provided for transfers to the taxpayer’s spouse, charities, and so forth. The tax rate for the estate tax can reach as high as 55 percent. A once-in-a-lifetime credit is permitted, which enables you to pass property to others without having to pay an estate tax.

Executor: [Also now called Personal Representative] The person responsible for carrying out the administration of your estate according to the provisions of your Will.

Generation Skipping Transfer (GST) Tax: A transfer tax generally assessed on transfers to grandchildren, great
grandchildren, etc.

Gift: When you transfer property without receiving something of equal value in return, the federal government will assess a transfer tax where the value of the gift exceeds the annual exclusion and your unified credit is exhausted.

Gift Tax: A tax that can be due when you give property or other assets away. See the discussion above on Annual Exclusion. The gift tax and the estate tax are coordinated (unified) so that the exclusion is only available once between them. The exclusion amount is being increased in periodic increments and should be checked at any time to verify the current exclusion amount.

Grantor: When you establish a trust and transfer assets to it, you’re called the grantor of that trust.

Gross Estate: The total value of the assets you own at death or are included in your estate. The value is determined at the date of your death or as of the alternate valuation date, which is six months following the date of death.

Heirs: The persons who are entitled to receive your assets following your death.

Insurance Trust: An irrevocable trust established to own your insurance policies and thereby prevent them from being included in your estate.

Irrevocable: When a trust cannot be changed after you’ve established it, the trust is irrevocable. This is an essential characteristic in having the assets you give to the trust removed from your estate.

Joint Tenancy: If you and your spouse or another person own assets as joint tenants, when one of you dies, the property automatically passes to the surviving joint tenant. Too often used as a means of avoiding probate, although it is not necessarily the optimal tax strategy for most people.

Living Will or Advance Health Care/Medical Directive: This document lists different kinds of treatments, and shows the preference of the person to receive or refuse such treatments.

Health Care Power of Attorney: This appoints another person to speak for the person if s/he is incapacitated from making and communicating those decisions. This is especially important in non-marital relationships, where the law does not provide decision- making authority to the partner of the patient.

Marital Deduction: Where you and your spouse are legally married, either of you can transfer an unlimited amount of assets to the other without incurring any gift or estate tax cost. This is too often used as a simplistic approach to eliminate the entire estate tax on the death of the first of you or your wife.

Minor: Person who is not old enough to be an adult under state law. The age varies by state.

Per Capita: A distribution made equally to the number of persons receiving property [in equal shares to all of the persons] without regard to family lines or generation. See Per Stirpes.

Per Stirpes: A distribution made equally among family lines so that depending on the number of issue in that family line, the individuals may received more or less than if distribution had been made per capita [in equal shares to all of the persons]. State law definitions can vary. Check with your estate planner.

Personal Property: Furniture, equipment, and other moveable property and assets. Buildings and land are not personal property, they are real property. When buying or constructing a building, valuable tax benefits can be found by carefully identifying which property is properly treated as personal property instead of real property. This is because personal property can be written off (depreciated) more quickly than real property.

Power of Appointment: The right and authority to transfer or dispose of property that you do not own. Depending on the nature of the power, this can cause the value of the asset to be included in your estate.

Present Interest: A gift must be a gift of a present interest (the beneficiary can enjoy the property given immediately) for it to qualify for the annual gift tax exclusion.

Probate: The process of marshalling assets of a deceased person, having the will recognized by the court (called by different names in different states) and having the person designated in the will (personal representative or executor) officially empowered to act (often by issuance of documents called letters testamentary). Ancillary probate is probate in a state other than the state in which you reside. Ancillary probate and the attendant fees and time delays can be avoided, in many instances, through planning.

Special Trusts –¬†Qualified Domestic Trust (Q-DOT) and Qualified Terminable Interest Trust (Q-TIP): These trusts are for special situations and should be used only in consultation with a tax lawyer/estate planning lawyer.

Remainder Beneficiary: The person or persons who will receive assets of a trust after the interests of persons who are currently receiving income end.

Remainder Interest: The interests or rights that follow the initial beneficiary’s interests.

Res: Literally, “thing”. Principal or assets of a trust.

Reversionary Interest: Pertains to giving property away on certain conditions, with the possibility that the property will return to you.

Second-to-Die Insurance: Insurance for a married couple that pays a death benefit only on the death of the last spouse to die. This payment method makes the cost of such insurance less than insurance on just one person’s life. This type of insurance is designed for an estate plan where, on the death of the first spouse, all assets are given tax free to the surviving spouse using the unlimited marital deduction. On the death of the second spouse, the insurance benefit is paid and provides the cash to pay the estate tax. Also called survivors insurance.

Settlor: Person who sets up a trust. Also called grantor, trustor, and occasionally, donor.

Tangible Property: Real estate, equipment, and furniture are examples of tangible property. Where you own tangible property in a state other than the one in which you permanently reside (i.e., where you are domiciled), it will be subject to ancillary probate on your death. An LLC, partnership, or corporation may avoid this.

Taxable Estate: The gross estate reduced by expenses and debts and charitable contributions.

Tenancy by the Entirety: Where husband and wife are joint tenants, it provides limited protection from creditors and malpractice claimants, but has several drawbacks that the use of a trust can address.

Trust: Property is held and managed by a person (trustee) for the benefit of another (the beneficiary). The terms of the trust are generally governed by a contract which you, the grantor, have prepared when you establish the trust.

Trustee: The person (fiduciary) who manages and administers a trust you establish.

Trustor: Person who sets up a trust. Also called grantor, settlor, and occasionally, donor.

Uniform Gifts (Transfers) to Minors Act (UGMA or UTMA): A method to hold property for the benefit of another person, such as your child, which is similar to a trust, but is governed by state law. It is simpler and much cheaper to establish and administer, but is far less flexible than some other Trusts may be.

Unified Credit: Every taxpayer is allowed to exclude from estate and gift tax a certain amount of transfers. This amount will change from year to year. Check with your estate planner to find out what the current amount is.

Will: The legal document completed in accordance with state law that states how your assets will be distributed on your death, appoints an executor for your estate, may establish trusts for your children and name a trustee for those trusts, names guardians for your children, and so forth.