GLOSSARY OF ESTATE PLANNING TERMS

Transcription

1 GLOSSARY OF ESTATE PLANNING TERMS A-B trust - a trust created by a couple while both are living which calls for the division of the overall estate into the two halves (A is usually the surviving partner s half and B is usually the deceased partner s half) upon the death of one partner. If the estate of the partner who dies first is larger than the tax-exempt amount ($5,250,000 as of January 1, 2013), the excess is added to the survivor s half. An A-B trust is also used when one or both partners have sole and separate property. Also see survivor s trust (another name for the A portion) and bypass trust (another name for the B portion). A-B-C trust - same as an A-B trust, except that the couple must be married and deceased spouse s assets in excess of the tax-exempt amount are allocated to a third piece (the C portion) so that they can qualify for the marital deduction, can obtain creditor protection for the life of the surviving spouse, and so that the deceased spouse s wishes will control the final disposition (when the surviving spouse dies). Also see survivor s trust, bypass trust, and qualified terminable interest property (another name for the C portion). affidavit of non-probate transfer - a special form authorized by Arizona law which allows small estates to avoid probate. Real estate (total net value) of $75,000 or less can be transferred using the affidavit form; personal property (total net value) of $50,000 or less can be transferred using the affidavit form. If a probate is triggered for any reason, the affidavit forms cannot be used. agent - a person acting on behalf of another person (the principal), usually under a power of attorney. A principal-agent relationship can be implied under the law when a third party has reason to believe that such a relationship exists, even though there is no actual power of attorney. Also see power of attorney. ancillary probate - a probate proceeding in a state other than the state of decedent s domicile, usually because real estate is situated in that state and is subject to local law. Also see probate. annual gift tax exclusion - see gift tax. annuity trust - one of the two major types of charitable remainder trusts; the income stream paid to one or more individuals is a set amount. Also see charitable remainder trust and unitrust (the other type of charitable remainder trust). attorney - same as agent. attorney at law - a lawyer, licensed by a state authority to conduct the practice of law in that state.

2 beneficiary - (1) a person who is named under a life insurance contract, annuity, IRA or other retirement account, etc. to receive those assets on the death of the original owner; (2) a person who is entitled to receive distributions from a trust, sometimes in the discretion of the trustee. A person who is not entitled to any benefit until a certain event occurs, such as the death of a prior beneficiary, is sometimes referred to as a contingent beneficiary or a remainder beneficiary. beneficiary deed - a special deed, authorized by Arizona law, which names a beneficiary to inherit real estate when the owner dies. bypass trust - a trust created upon a person s death to shelter his or her estate tax exempt amount; this trust usually allows the surviving spouse to benefit from the deceased spouse s assets for life, without losing the deceased spouse s tax-exemption when the surviving spouse dies; sometimes called a credit shelter trust, a family trust, Trust B, or decedent s trust. Also see A-B trust. certificate of trust - a shortened version of a trust (sometimes called a trust abstract) which usually verifies the trust s existence, summarizes the trustee s powers, and identifies the successor trustee. In most cases, the certificate can be substituted for the trust itself (thus protecting privacy) when a copy of the trust is requested by a third party. charitable deduction - the gift and estate tax deduction (usually available at the state and federal level) for transfers to charity. The federal charitable deduction is unlimited. charitable remainder trust - a complex form of irrevocable trust expressly authorized by the federal tax code. The gist of this trust is that one or more individuals (sometimes the donor) receive an income stream for life and the balance goes to charity, when the trust terminates. There are two major advantages to a charitable remainder trust: (1) it allows a present income tax deduction for the future gift to charity; and (2) assets can be sold during lifetime with little or no income tax consequences. Also see annuity trust and unitrust. codicil - an amendment to a will. community property - property owned by a husband and wife who live in a community property state (California, Arizona, New Mexico, Texas, Washington, Wisconsin, Idaho, Louisiana, Nevada or Wisconsin), excluding certain assets defined by state law as sole and separate property (usually, assets acquired by gift or inheritance, assets acquired before marriage, and assets placed in joint tenancy with right of survivorship). The major advantage of community property is the adjustment to cost basis (on the whole) when one spouse dies. Also see sole and separate property. complex trust - an income tax term describing an irrevocable trust which permits the trustee to use its discretion to distribute or accumulate income. Also see simple trust. 2

3 conservator - a person who is appointed by a court to be responsible for the money and other assets of a minor child (under age 18) or of an incapacitated adult. In some states, this person is called a guardian. contingent beneficiary - see beneficiary. corpus or trust corpus - the property held in a trust (also known as trust res, trust estate or trust property). co-trustee - one trustee of two or more; any number of persons or entities may be named as co-trustees. Unless the governing trust document says otherwise, all co-trustees must act together on every trust transaction. credit shelter trust - see bypass trust and estate tax. Crummey letter - a notice given to a beneficiary of an irrevocable trust telling him or her of a gift to the trust and of his or her right to withdraw the gift from the trust; this notice is required when the donor making the gift wishes to use his or her annual gift tax exclusion. If a Crummey letter is not given, the gift will not qualify for the donor s tax exclusion; instead, it will use up part of the donor s estate tax exemption or be taxable. Also see gift tax and gift trust. custodian - an adult person who serves under a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) as custodian for a minor s or other young person s assets. Most states have one or both acts. UGMAs usually terminate when the minor reaches age 18; UTMAs usually terminate when the young person turns 21. Custodians under both acts must use funds only for the minor/young person. Since UTMA and UGMA funds already belong to the donee, they are not part of the donor s estate, unless the donor is serving as custodian. death tax - any tax payable as a result of a person s death; includes an estate tax and an inheritance tax. declaration of trust - see trust deed of trust - similar to a mortgage; the property owner transfers the title (by deed of trust) to a trustee for the benefit of the lender; easier to foreclose than a standard mortgage. disclaimer - a refusal to accept an inheritance or a gift so it can pass to the next person in line. A qualified disclaimer, which meets state and federal requirements, has favorable tax consequences. 3

4 domicile - the state where an individual is deemed to reside at the time of his or her death; the state of domicile determines which state s laws govern that person s estate. The legal definition of domicile is subjective: the place where you intend to remain indefinitely; it is determined by such things as where you spend your time, where you pay your income taxes, what your will says, where you obtain your driver s license, and where you register to vote. A person generally has only one domicile. donor - see grantor. durable power of attorney - a power of attorney which endures after the principal becomes mentally incapacitated; language to that effect must be in the document. Also see power of attorney. estate - all assets owned or controlled by an individual at the time of his or her death; subject to the federal estate tax rules. Includes life insurance proceeds if the insured decedent had any incident of ownership at the time of his or her death or within three years of his or her death. estate tax - a tax on a person s assets (estate) at his or her death, imposed by the federal and/or state government. Currently (2013), the amount exempt from the federal estate tax is $5,250,000; assets in excess of that amount are taxed at 40%. Also see death tax. executor/executrix - old terms for describing the person who is in charge of a deceased person s estate, male or female. Means the same as personal representative, which is gender-neutral. family limited partnership - a complex, sophisticated estate planning tool usually designed to keep control of certain assets in the family and to provide discounted values for estate tax purposes. fiduciary - a person who is in charge of another person s assets, sometimes appointed by a court. Examples of a fiduciary include a trustee of a trust, an agent acting under a power of attorney, a guardian or conservator serving under a court appointment, and a personal representative of an deceased person s estate. Also see fiduciary duty. fiduciary duty - the duty of care and skill owed by one person who is handling the assets of another person. The level of care and skill owed is defined by state law and usually involves a high level of responsibility for which the person holding the duty can be held liable. financial power of attorney - see power of attorney. flower bond - a special bond issued by the United States government which may be redeemed at par value in the payment of federal estate taxes, even though the bond hasn t 4

5 reached maturity. Flower bonds have not been issued for many years; very few are still in existence. formal probate - a probate which is conducted under the most complex rules and procedures; the court is involved in most activities relating to the estate. A formal probate is used only when someone involved in the estate requests it, usually because of distrust. Also see probate and informal probate. funded trust - a trust which holds the trust creator s property (or someone else s property). To fund a trust means to transfer assets to the trust. A revocable living trust which is fully funded holds all of the trust creator s assets. health care power of attorney - see power of attorney. general power of attorney - see power of attorney. generation skipping transfer - a federal gift and estate tax term meaning a transfer of money or other asset from one person to another person who is more than one generation removed, e.g., a transfer from a grandparent to a grandchild. Also see generation skipping transfer tax, skip person, and non-skip person. generation skipping transfer tax - a federal tax on a generation skipping transfer. Each person has an exclusion of $5,250,000 (2013) from this tax, increasing over time for inflation. The generation skipping transfer tax exclusion may be used during lifetime or at death; the tax (a flat 40%) applies only after the exclusion is used up. Also see generation skipping transfer. gift tax - a tax imposed on the lifetime transfer of assets from one person to another. The federal gift tax law applies in all states; some states have a separate gift tax imposed on its residents who make gifts. The current federal law allows each individual to make a taxfree, non-reportable gift of $14,000 (2013) each year (the annual gift tax exclusion) to as many persons as he or she desires, related or not. Each individual may also use up his or her $5,250,000 estate tax exemption on lifetime gifts; any use of this tax exemption requires the filing of a federal gift tax return (Form 709). gift trust - a irrevocable trust created for gifts so that the person selected by the donor (the trustee of the trust) has the control over the gifts instead of the donee himself or herself. Also see Crummey letter. grantor - a person who creates a trust or transfers property to a trust (also known as a trustor, settlor, donor or trust creator). grantor trust - an income tax term describing a trust whose income is taxed to the trust creator (even though the trust is irrevocable). 5

6 guardian - (1) a person who is named under a will to be legally responsible for a minor child; (2) a person who is appointed by the court to serve in that capacity; (3) a person who is appointed by a court to be in charge of an incapacitated adult. Also see conservator. health care directive - a relatively new term to denote a legal document in which a person states his or her wishes concerning health care in the event of mental incapacity (such that the person cannot make his or her own decisions at the time). A health care directive includes a living will and/or a health care power of attorney. heir - technically, only a person who inherits under a law of intestacy, in the absence of a valid will or trust governing disposition of one s assets. Informally, any person who receives an inheritance. homestead exemption - a statutory right to protect all or part of one s personal residence from creditors. In Arizona, the homestead is automatic and does not need to be filed. incident of ownership - an estate tax term which describes the control by the insured over a life insurance policy on himself or herself. Examples of incidents of ownership are the right to name or change the beneficiary, the right to borrow cash value, the right to exercise any policy option (such as the use of dividends to buy paid-up additions) and the right to surrender the policy. If the insured person has one or more incidents of ownership, the policy will be subject to estate taxes at his or her death. informal probate - a probate proceeding with minimal court involvement; the most typical type of probate. Also see probate and formal probate. inheritance tax - a state tax on a person who receives an inheritance. Also see death tax. inter vivos trust - a trust which is created during a person s lifetime; also known as a living trust. Also see testamentary trust. intestate - without a will. A person who dies without a will is said to die intestate. In such a case, the state law governing intestate estates (the law of intestacy) controls. Also see testate. irrevocable trust - a trust which may not be amended or revoked; a revocable trust usually becomes irrevocable when the original trust creator dies. I.T.F. (in trust for) - see P.O.D. irrevocable life insurance trust (ILIT) - an irrevocable trust which is intended to hold life insurance as its only asset. The donor usually makes cash gifts to the trust and the 6

7 trust purchases and pays for life insurance on the donor (so the proceeds will be free from estate taxes). Also see Crummey letter. joint tenants - two or more persons who own property (real estate or personal property) together; ordinarily, unless the ownership document specifically declares a right of survivorship, that term does not apply; instead, joint tenants are usually the same as tenants in common, with no right of survivorship. When the right of survivorship is expressly included, the official terms is joint tenants with right of survivorship. Also see tenants in common. limited power of attorney - see power of attorney. liquid assets - cash and other assets which can be converted to cash within a short period of time, usually 30 days or less. living probate - a probate proceeding during life to establish a guardianship and/or conservatorship for an incapacitated person. Also see probate. living trust - a trust created while you are living, also known as an inter vivos trust. living will - a legal document, authorized by state statute, which describes a person s desire to have no life support or limited life support in a hopeless situation. A living will is usually where one s wishes regarding cremation, donation of body organs, and similar wishes are found. Just like a regular will, formalities of execution must be strictly adhered to. marital deduction - an estate and gift tax deduction for transfers to a person s spouse; the deduction is unlimited under the federal tax laws; some states also allow an unlimited marital deduction. The marital deduction is available for outright transfers to a spouse or for transfers to trust, as long as the trust qualifies as a general power of appointment trust or a qualified terminable interest property (QTIP) trust. non-resident alien - a person who is not a U.S. citizen and who does not reside in the United States; his or her assets located in the United States are subject to special gift and estate tax rules. non-skip person - a federal gift and estate tax term (part of the generation skipping transfer tax section) defining a person who is not more than one generation removed, such as a child; the generation skipping transfer tax does not apply to a transfer to a nonskip person. Also see generation skipping transfer. notary - sometimes called a notary public; a person commissioned by law to take sworn testimony, usually regarding the execution of legal documents. In order to notarize a document, the notary must sign and date the document and must indicate the expiration 7

8 date of his or her notary commission. A notary cannot give a signature guarantee; that must be given by a national bank officer or a brokerage firm officer. Also see signature guarantee. per capita - equally. Also see per stirpes and principle of representation per stirpes - a division of assets such that a deceased person s share automatically transfers to his or her surviving children; technical meaning is by the root. Also see principle of representation. personal property - all property other than real property; includes personal possessions, but is much broader. Also see real property. P.O.D. (payable on death) - a form of beneficiary designation, usually used on bank accounts; same as I.T.F. (in trust for) and T.O.D. (transfer on death). These arrangements are collectively known as Totten Trusts. personal representative - a person appointed by the probate court to act on behalf of a deceased person s estate. The court will usually appoint a person named by the decedent in his or her will. Sometimes called an executor or executrix. power of attorney - a legal document in which one person (the principal) appoints another person (the agent) to act on his or her behalf. If the authority given to the agent covers health care only, it is sometimes referred to as a health care power of attorney. If the authority covers financial matters only, it is sometimes referred to as a financial power of attorney. If the authority covers everything, it is sometimes referred to as a general power of attorney. Any power of attorney which does not cover everything is sometimes referred to as a special power of attorney or a limited power of attorney. Also see durable power of attorney and springing power of attorney. principal - (1) a person who gives another person his or her authority to act under a power of attorney; (2) the corpus of a trust, but excluding in any calendar year the income earned during that year. A trustee of a trust usually has some discretion in determining whether a particular item is income or principal. principle of representation - usually means the same as per stirpes except that, if all of the persons who are alive to inherit have the same degree of relationship to their benefactor (e.g., they are all his grandchildren) then the division changes to per capita, or equal. In some states, per stirpes and principle of representation mean the same thing. probate - a court proceeding to handle a deceased or incapacitated person s assets and/or affairs. 8

9 pour-over will - a will which transfers a person s assets at his or her death to a trust created during lifetime. The trust into which the assets are poured is sometimes referred to as a pour-over trust. qualified domestic trust (QDOT) - a marital deduction trust (much like a QTIP Trust) which qualifies for the marital deduction when the surviving spouse is not a U.S. citizen. Without a QDOT, no marital deduction is available. qualified retirement plan - an IRA, 401k, pension, profit sharing or similar retirement plan under the federal tax code, into which pre-tax dollars may be placed, growing taxdeferred, until taken out at retirement. A very complex and detailed set of rules governs qualified retirement plans. qualified terminable interest property (QTIP) - a gift tax and estate tax term defining property held in trust for the benefit of the donor s spouse which qualifies for the gift tax marital deduction or the estate tax marital deduction, because the terms of the trust follow federal tax rules: the income of the trust must be distributed to the spouse for his or her lifetime; no person other than the spouse may receive any principal from the trust. A trust created for a spouse in order to utilize the marital deduction is sometimes called a QTIP Trust. qualifying Subchapter S trust (QSST) - a trust which meets certain federal tax law requirements so it can be the owner of Subchapter S stock. A trust which is not a QSST cannot hold Subchapter S stock beyond a limited length of time; such a trust may cause the corporation to lose its S status. quitclaim deed - a special type of deed which transfers real estate without any warranties of title; sometimes used to fund a trust. real property - real estate of all types (land, house, commercial building, etc.) and real estate interests, such as a mineral interest, a life estate interest, a leasehold interest, etc. Also see personal property. remainder beneficiary - also called a remainderman; see beneficiary. res - see corpus. resident alien - a non-citizen who resides in the United States; as a general rule, resident aliens are subject to the same gift and estate tax rules as citizens. Also see non-resident alien. revocable trust - a trust which may be amended or revoked. 9

10 rule against perpetuities - an old common law rule (now codified in most states) which defines the maximum period of time for which a trust may continue. The purpose of the rule is to prevent trusts from continuing in perpetuity. Some states have eliminated the rule against perpetuities and now permit trusts to endure indefinitely. settlor - see grantor. signature guarantee - a signed guarantee given by an officer of a national banking association or a brokerage firm who actually sees a person signing his or her name to a legal document and guarantees that the signature is authentic. A notary public cannot give a signature guarantee. simple trust - an income tax term describing an irrevocable trust which requires the distribution of income at least annually. Also see complex trust. situs - the legal home of a trust, i.e., the state where the trust is deemed to exist for purposes of income tax reporting, governing law and other trust issues; similar to domicile of an individual. skip person - a federal gift and estate tax term (part of the generation skipping transfer tax section) defining a person who is more than one generation below another, such as a grandchild. A skip person does not have to be a relative. Also see generation skipping transfer. sole and separate property - property owned by a husband or wife who live in a community property state but which is not community property; varies from state to state. Also see community property. special needs trust - an irrevocable trust designed especially for a beneficiary who has an impairment which may qualify him or her for public assistance. The main purpose of the special needs trust is to provide benefits to the individual without disturbing his or her right to public assistance. special power of attorney - see power of attorney. spendthrift clause - a clause in a trust which protects the beneficiaries interests from the claims of their creditors. Trusts which contain this clause are sometimes called spendthrift trusts. springing power of attorney - a power of attorney which only becomes effective when the principal becomes mentally incapacitated; a power of attorney which is not a springing power of attorney is sometimes called a present power of attorney. Also see power of attorney. 10

11 successor trustee - a person or entity who succeeds another as trustee; usually, the successor trustee has all of the duties and privileges of a predecessor trustee. survivor s trust - the name typically given to the surviving spouse s own assets which are in a joint trust (created by the husband and wife together while both were alive); sometimes called Trust A. The surviving spouse typically has total control over a survivor s trust. Also see A-B trust. survivorship life insurance - a special type of life insurance which insures two persons (usually a husband and a wife); the death benefit is not payable until both are deceased. Many insurance companies offer this type of insurance in several forms - whole life, variable life, universal life, etc.). Survivorship life insurance is especially useful in estate planning because it pays off when estate taxes are usually due - after both spouses are deceased. tenants in common - two or more persons who own property (real estate or personal property) together, with no right of survivorship. When one of the co-owners dies, his or her interest passes according to his or her estate plan. Also see joint tenancy. term life insurance - life insurance with premiums which pay for the death risk only, usually with no cash value build-up. Customary term insurance is renewable annually, with increased premiums each year; variations permit level premiums for 5, 10, 15, 20 or more years. Term insurance is usually the least expensive form of life insurance. testamentary trust - a trust which is created by a will; comes into existence only at the trust creator s death. Also see inter vivos trust. testate - with a will. A person who dies with a valid will is said to die testate. Also see intestate. testator/testatrix - a person creating a will. Although traditional law distinguished between a man (testator) and a woman (testatrix), modern law uses the term testator for both sexes. T.O.D. (Transfer on Death) - see P.O.D. Totten Trust - see P.O.D. trust - an arrangement in which one person (a grantor) transfers money or other property to a second person (a trustee) for the benefit of a third person (a beneficiary). When the same person is the grantor, the trustee and the beneficiary, the trust is sometimes called a declaration of trust. There may be more than one person in each of the three roles. trust estate - see corpus. 11

12 trustee - a person or entity who is in charge of administering a trust. Two or more persons (co-trustees) may serve together in this role. Also see trust. trustor - see grantor. unitrust - one of the two major types of charitable remainder trusts; the annual payments received by the donor are based upon a percentage of the value from year to year, thus changing over time. Also see annuity trust. universal life insurance - a cash value life insurance with flexibility to adjust future premiums and/or death benefit. Also see survivorship life insurance. variable life insurance - a relatively new form of life insurance which allows the owner of the policy to invest the cash value within certain guidelines. Also see survivorship life insurance. vested beneficiary - a beneficiary whose interest in a trust is secured and cannot be terminated by later events. Also see beneficiary. ward - a person for whom a guardian or conservator is appointed by a court, because the person is a minor (under the age of 18) or incapacitated. whole life insurance - the traditional form of cash value life insurance; premiums are usually constant and payable over a person s lifetime. Also see survivorship life insurance, term life insurance, variable life insurance, and universal life insurance. will - a legal document which disposes of one s assets at death; may also name a guardian for minor children; sometimes called a last will and testament. All wills must be executed in strict accordance with the laws of the state where they are signed. A few states (including Arizona) honor a hand-written will (holographic will) which does not meet these formalities. witness - a person who watches another person sign a document or who hears a person acknowledge that he or she signed a document; the witness then signs the document as a declaration to one of the foregoing. Under old law, witnesses had to be disinterested parties; today, in most cases, a witness can be anyone who is a competent adult. Living wills and powers of attorney are examples of documents which require witnesses to meet special qualifications. A standard will or trust does not have any special requirements of witnesses. 12