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.