Glossary of Estate Planning Terms
Abatement — A reduction, a decrease or a diminution of a legacy under a Will.
Ademption — A person disposing of that which he bequeathed under his Will so as to make the provision under the Will of no effect, i.e., selling a watch during his lifetime that he had bequeathed under his Will.
Adjusted Gross Income (AGI) — AGI equals all income minus “above-the-line” deductions, such as those for self-employed persons’ health insurance, alimony and one-half of the self-employment tax.
Admeasurement — Ascertaining at common law either spouse’s interest in real property owned by the other.
Administration — The management of a decedent’s estate or a trust.
Administration expenses — Those expenses necessarily incurred in the administration of the estate, or in the collection of assets, payment of debts and distribution of property; examples include executor’s commissions, accountant and attorney’s fees, costs of funeral and miscellaneous expenses.
Administrator — The person or corporate fiduciary appointed by a court to manage and distribute the personal property of one who dies without a Will; may also handle real property which must be sold in order to pay debts.
Administrator with Will annexed — The bank or individual appointed to manage the estate when the named executor dies, resigns, is removed or refuses to act.
Advancement — Money or property given by a parent to a child, which the parent had previously decided to bequeath under the parent’s Will and now intends to be deducted from that child’s share at the ultimate distribution of the estate under the parent’s Will.
Agency account — An arrangement whereby a bank or trust company acts on behalf of an individual in handling his property, legal title remaining in the individual.
Alternative Minimum Tax (AMT) — The AMT is a parallel tax system designed to ensure that all taxpayers pay some income tax. The AMT disallows many tax benefits (such as deductions for state and local taxes). Taxpayers pay AMT if it exceeds their “regular” tax.
Ancillary administration — Administration of a decedent’s estate in a state where he had property other than the state in which he resided in at his death.
Annual Exclusion Gift — The amount indexed annually for inflation that can be given tax-free to as many donees as desired, each year. The gift does not reduce the lifetime gift tax exclusion, and may be increased if split with a spouse.
Annuity — A periodic payment of money for life or a term of years.
Applicable Exclusion Amount (aka Applicable Exemption, aka Credit Shelter Amount) — The amount of property that can be sheltered from the imposition of the estate tax. The exclusion is $5.25 million in 2013, indexed annually for inflation. That translates to an applicable credit amount of $2,045,800.
Ascertainable Standard — A clearly discernable standard by which a fiduciary is authorized to pay income and/or principal to a trust beneficiary. A typical ascertainable standard authorizes payments for the beneficiary’s “health, education, maintenance and support”.
Attestation clause — The clause in a Will in which the witnesses certify that the Will has been signed before them and describes how all parties signed the Will.
Basis — This refers to the cost of property for income tax purposes, and the measure of gain or loss. Transfers by gift result in a carryover basis of the donor’s cost basis to the donee. Transfers at death give the heir a basis equal to the fair market value of the property as of the date of the decedent’s death. Therefore, it may be stepped-up or down from its value when the decedent acquired it.
Beneficiary — A person or entity named in a Will (or trust) to receive a devise or legacy or the use of estate assets.
Bequest — A direction in a Will to pay over or distribute personal property; also called a legacy.
Charitable Gift Annuity — An annuity paid by a charity in exchange for a gift to that charity. When the gift is made, the present value of charity’s remainder interest is eligible for a current income tax deduction.
Charitable Lead Trust (CLT) — A “split-interest” trust. With a CLT, the charity gets the “up- front” income interest, generally for a period of years, and the donor’s heirs get the “remainder interest,” or what’s left over after the income interest ends. The charitable interest usually doesn’t generate an income tax deduction, but does generate an estate or gift tax deduction that helps offset the gift of the remainder interest. The income interest must be either an annuity (a fixed amount that remains the same regardless of the trust’s value) or a unitrust interest (a variable amount that goes up or down depending on the trust’s value). There is no required minimum annuity or unitrust payout. A CLAT is a charitable lead annuity trust and a CLUT is a charitable lead unitrust.
Charitable Remainder Trust (CRT) — A “split-interest” trust. With a CRT, an individual gets the “up-front” income interest for a period of years (no more than 20) or life, and charity gets the “remainder interest” (what’s left over after the income interest ends). Charity’s interest is not subject to estate or gift tax, and is eligible for an income tax deduction (subject to limitations) if the donor creates the CRT during life. Lifetime CRTs are typically used to diversify low-basis assets and defer capital gains tax. With a CRAT (charitable remainder annuity trust), the payout must equal at least 5% (but no more than 50%) of the trust’s initial value, and there can’t be greater than a 5% probability that the trust’s principal will be exhausted before the up-front interest ends. With a CRUT (charitable remainder unitrust), the payout must equal at least 5% (but no more than 50%) of the trust’s annual value. For any CRT, charity’s remainder interest must equal at least 10% of the trust’s initial value.
Codicil — An amendment of the Will, made in a separate instrument and with the same formalities as the Will itself.
Common disaster — The death of two or more persons at the same time and from the same cause, as in the case of an accident.
Common disaster clause — A clause under the Will which prescribes the order of death as between two or more people who die at the same time.
Corporate fiduciary — A bank or trust company exercising fiduciary powers under statutory authorization.
Corpus — The principal fund, or capital, upon which income is earned. Also called principal.
Credit Shelter Amount — The amount that can be sheltered from the imposition of estate tax. The amount is $5,250,000 in 2013.
Credit Shelter Trust — A trust typically created under a will or a living trust that is funded with the amount of wealth that can be protected from estate tax, the applicable exclusion amount.
Crummey Power — The right of a trust beneficiary to withdraw property that is added to a trust. The existence of this right conveys a present interest that allows a transfer to the trust to be entitled to claim a present interest exclusion from the gift tax.
Community Property — The system that applies in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (Alaska has an elective community property system.) With community property, each spouse is deemed to own one-half of the property. When the first spouse dies, the cost basis of all of the community property is adjusted to its fair market value.
Curtesy — The estate to which at common law a husband is entitled on death of wife; generally abolished by a statute permitting him to elect to take under the intestate laws or augmented estate.
Custody account — An account in which the custodian or agent is mainly concerned with the preservation of the property and the performance of ministerial acts in connection therewith; the agent or custodian has no investment responsibilities.
Decoupling — The action taken by many states to separate themselves from the federal estate tax system so that they can maintain and continue to impose an independent estate tax system.
Defined Value Clause — A clause that is designed to mitigate adverse gift tax consequences when the donor gives away hard-to-value property. With such a clause, the gift’s value typically equals a fixed dollar amount: if the IRS argues that the property is undervalued, the clause reallocates the donor’s “excess” gift to another beneficiary (such as charity); if charity is not involved, the formula effectively reallocates the excess to the donor – a circumstance to which the IRS has announced its continuing opposition.
Descent and distribution — The distribution of property to heirs and next of kin, as directed by state laws, constituting the estate of a person who dies without a Will or who leaves an invalid Will.
Devise — A testamentary disposition of real property.
Domicile — The legal residence of a person which determines the place of probate of a Will, the tax situs and many other legal relationships.
Donee — The person who receives a gift.
Donor — The person making a gift.
Donor — Advised Fund – A charitable fund that is typically run by a community trust or a financial institution. The donor’s contribution goes into a separate account, and is eligible for a current income tax deduction even though the dollars may not be currently paid to charity.
Dower — The statutory provision made for a widow, relating to property of a deceased husband (at common law, often a one-third interest in real estate); generally abolished by a statute permitting her to elect to take under the intestate laws or augmented estate.
Dynasty Trust — A trust created for multiple generations in a jurisdiction that has abolished the rule against perpetuities, so that the trust could have an indefinite and permanent duration.
Estate tax, federal — A tax on the net value of the estate without regard to distributive shares, based essentially on the right to transfer or transmit property at death.
Executor — The individual or corporate fiduciary appointed to carry out the terms of a Will. One responsible for the filing of a Federal Estate Tax Return, State Inheritance Tax Return, decedent’s final Income Tax Return and Federal Gift Tax Return, if required. In preparing these returns it would be necessary to compute the fair market value of all assets as of the decedent’s date of death.
Fair market value — Price at which a willing seller and a willing buyer will trade.
Family Limited Partnership (FLP) — A pass-through entity that can claim gift and estate tax valuation discounts, since limited partnership interests are worth less than the underlying partnership property (“pass-through” means that income passes through to the partners, and is not separately taxed to the partnership).
Fiduciary — A person or institution having a duty created by his position to act primarily for another’s benefit. A person standing in a relationship of trust to another.
Generation-Skipping Transfer Tax (GST) — A transfer tax that is imposed in addition to the estate or gift tax; it typically applies to transfers, either outright or in trust, to people referred to as “skip persons”, i.e. persons two or more generations younger than the transferor, such as grandparents making transfers to grandchildren.
Gift tax, federal — A tax on the donor of lifetime gifts, based on the right to transfer or transmit property, and payable by the donor. It is imposed when the donor’s cumulative lifetime transfers (not counting present interest exclusion gifts) exceed (for 2013) $5.25 million in the aggregate.
Goodwill — A reservoir of good relations built up by a business; the probability that customers will continue to do business there. For purposes of valuation of a business or its stock, said to exist where earnings exceed a normal return on the invested capital.
Grantor — A person who creates a trust while alive. The grantor may also be referred to as the “settlor” or “trustor”.
Grantor Retained Annuity Trust (GRAT) — A trust that allows the grantor to make a gift of property while retaining a “qualified annuity interest” that permits the grantor to treat only the value of the remainder interest in the trust as a taxable gift. The intent of the GRAT is to transfer future appreciation to the grantor’s children for little or no gift-tax cost. The GRAT may be structured so that the present value of the grantor’s annuity equals virtually 100% of what the grantor put into the trust, thereby eliminating the gift to heirs (a “zeroed-out GRAT”). Assuming the GRAT outperforms the interest rate used to value the annuity (the Code Section 7520 Rate), that “excess” will pass tax-free to children.
Grantor trust — A trust created by a person while alive of which such person is the owner for income tax purposes. A revocable trust is a grantor trust.
Gross estate — Includes everything in which the decedent owned an interest at his death, embracing life insurance, joint property, retirement benefits, certain transfers made within three years of death, or intended to take effect at or after death, or where the power to change the enjoyment of property has been retained.
Guardian — One named to manage the person or the property, or both, of a child during minority, or of an adult who has been declared incompetent.
Health Care Proxy — The document which names an individual to be authorized to make health care decisions for the creator of the proxy when the creator is no longer able to do so on his or her own behalf.
Heirs and next of kin — Those entitled under the laws of descent and distribution to the estate of a person dying without a Will.
Incentive Trust — A trust that is typically created under someone’s will, and that is designed to reward beneficiaries for certain types of specified behavior.
In terrorem clause — A clause in a Will attempting to prevent a Will contest which provides that any beneficiary contesting the Will shall forfeit his or her legacy – be disinherited – under the Will. Courts are reluctant to enforce these clauses, but in some jurisdictions they are invalid.
Income Beneficiary — The individual or entity currently eligible to receive income from a trust.
Incident of ownership — Pertaining to ownership of life insurance; the retention of an interest by a person of almost any ownership rights in the policy.
Inheritance tax — A state tax on the value of the share of property passing to the particular heir, devisee or legatee and based essentially on the relationship to the decedent and the right to receive such property.
Insurance trust — A trust consisting of life insurance policies or proceeds.
Funded Insurance Trust — A trust to which other property is also transferred, and that can be used for the payment of premiums.
Unfunded Insurance Trust — A trust which contains no fund for payment of premiums.
Inter — vivos transfers-Transfers of property made during one’s lifetime as opposed to testamentary dispositions made under a person’s Will.
Intestate — Death without a valid Will.
Irrevocable Life Insurance Trust (ILIT) — An irrevocable trust created during one’s lifetime to hold life insurance on a person’s life. The purpose of the trust is to remove the life insurance policy from taxation at the deaths of both the insured and the insured’s spouse.
Issue — Children, grandchildren and others directly descending from a common ancestor.
Joint and survivor annuity — An annuity from which one spouse receives the income during life and upon death the payments continue for the benefit of the surviving spouse.
Jointly owned property — Property owned by two or more persons with the right of ownership in the one or ones who survive; normally unaffected by a Will.
“Kiddie Tax” — An income tax rule that taxes a child’s “unearned income” in excess of $2,000 (the 2013 threshold) at the parent’s highest rate. The kiddie tax applies to children under 19, and to full-time students, under age 24, who don’t earn more than half of their own support. (Unearned income refers to items such as interest, dividends and capital gains.)
Lapsed legacy — Occurs when the legatee dies before the testator.
Legacy — A disposition in a Will of personal property.
General — A pecuniary legacy payable out of the general estate.
Specific — A legacy of a particular article or specified part of the estate.
Letters of administration — Documents issued as proof of authority to act as administrator.
Letter of instruction — An informal writing having no legal standing, which sets forth personal directions and wishes by the testator to his executor and/or beneficiaries.
Letters testamentary — Documents issued as formal proof of authority to act as executor.
Life estate — An interest in property for life.
Limited Liability Company (LLC) The LLC is a pass — through entity, meaning that its income passes through to its members. It also enjoys the corporate characteristic of limited liability, i.e. its members are not liable for the actions of the entity.
Living will — A document advising health care providers whether certain life sustaining measures are desired in the face of serious illness.
Minor’s Trust — A trust that holds property for a minor child, and is sometimes referred to as a “2503(c) trust.” Gifts to the trust qualify for the annual gift tax exclusion. The trust must be solely for the child, and can be used for the child’s benefit before she reaches age 21, when the property must be turned over to her.
Per Capita — A direction for the distribution of property whereby all persons similarly described receive an equal share of designated property.
Per Stirpes — A direction for the distribution of property whereby persons receive shares of property by representation. For example, if X has two children, A and B. A has 1 child and B has 2 children. A transfer to X’s grandchildren “per stirpes” would result in the division of property into two shares, with A’s child getting one share, and each of B’s children receiving a one-half share. Contrast this with a distribution to X’s grandchildren per capita, in which case the property would be divided into three equal shares, one for each grandchild.
Pour-over Will — A Will whereby assets controlled by the Will are directed to be poured-over into a trust.
Portability — This refers to a surviving spouse’s ability to inherit the deceased spouse’s unused applicable exclusion amount. The decedent’s executor must file an estate tax return for the deceased spouse in all cases to elect portability. The surviving spouse can use the decedent’s unused exclusion for gift or estate tax purposes. Portability is now permanent in the law.
Power of appointment — The right to direct the disposition of property upon the happening of a certain event, such as the right of an income beneficiary to designate the person to receive the principal upon his death. General Power of Appointment — A power exercisable in favor of the donor, his estate, his creditors or the creditors of his estate. Property subject to a general power of appointment is included in the taxable estate of the power holder. A Limited (or Special) Power of Appointment — allows the power holder to appoint property to anyone other than the donor, his estate or creditors. Property subject to a limited power of appointment is not included in the taxable estate of the power holder.
Power of attorney — A document authorizing another person to act as your agent, known as an “attorney in fact. A “durable” power of attorney is effective upon execution and remains so even if the authorizing person becomes incompetent. A “springing” power of attorney only becomes effective upon the happening of a specified event, such as a declaration of incompetence. Death terminates a power of attorney.
Present Value — This refers to what a future dollar (or revenue stream) is worth in today’s dollars. An actuarial calculation must be made to determine present value. The Code Sec. 7520 rate issued monthly by the IRS is often the interest rate used to make this computation.
Private Foundation — A charitable entity that can be created either as a trust or a corporation, and that can last in perpetuity. It gives the founder maximum control over his charitable giving, and lets him direct how the foundation uses its contributions. Rules require minimum amounts that must be paid out annually and prohibitions on self-dealing. Gifts to private foundations are eligible for a limited income tax deduction, and an unlimited estate and gift tax deduction.
Probate Estate — Assets owned in a person’s name that pass by his or her will, and not by terms of a contract or state law. Non-probate property includes jointly-held property, life insurance, retirement benefits, etc.
Qualified Domestic Trust.(QDOT) — This trust is used when the surviving spouse is not a U.S. citizen. It is meant to qualify for the marital deduction in the estate of the first deceased spouse. Principal distributions to the surviving spouse, unless “hardship” related, will trigger the estate tax that would have been payable at the first spouse’s death if the trust had not been in existence. The QDOT reflects the concern that the surviving spouse might not be a U.S. resident at death, a circumstance that could defeat collecting the estate tax that was deferred at the first spouse’s death.
Qualified Terminable Interest Property Trust (QTIP) — This trust is used to qualify for the marital deduction and postpone possible estate tax from the death of the first spouse to the death of the surviving spouse. The surviving spouse must receive all of the trust’s income at least annually, and may receive principal distributions at the trustee’s discretion, if the trust permits this. When the surviving spouse dies, the trust property is taxable in his estate, with a stepped-up basis at the second death. At the second death, the property passes according to the trust’s terms – as determined by the predeceased spouse. QTIP trusts are especially useful in blended family situations, where the first decedent wants to benefit the survivor, but also protect children of an earlier marriage.
Qualified Personal Residence Trust (QPRT) — This is a trust to which the grantor transfers a “personal residence” (i.e., a principal residence or a vacation home) and retains the right to use the residence for a term of years. At the end of the trust term, the residence passes to the grantor’s beneficiaries. Although the grantor’s transfer of the residence to the trust is a gift, the gift is reduced by the present value of the grantor’s right to use the residence and direct what happens to it if he dies during the trust term. If the grantor outlives the trust term, the property transfers to the trust beneficiaries and is not part of the grantor’s estate. If the grantor dies during the term, the fair market value of the property is included in the grantor’s taxable estate.
Reciprocal Wills — Wills made by two persons in which they each leave everything to the other.
Remainderman — The persons entitled to receive the principal upon termination of the trust. A remainder is vested when payable to a designated beneficiary or class of beneficiaries whether or not living at the termination of the trust. It is contingent when dependent on some occurrence or event to take place in the future.
Required Minimum Distribution (RMD) — This refers to the annual distribution a retirement plan participant must start taking from a qualified plan, such as a 401(k) or pension or profit sharing plan, at the later of retirement or reaching age 70 ½. For IRAs, RMDs must start at age 70 ½, even if the IRA owner is still working.
Residuary clause — A testamentary provision disposing of property remaining in the estate after all other legacies and devises.
Residuary estate — What remains after all devises and bequests have been distributed or paid, and debts and expenses have been paid.
Revocable Trust — This is a trust that the grantor can revoke or amend at any time. It is also known as a “living trust.” The revocable trust is used to avoid probate and provide privacy, since it is not generally required to be filed and made public. A revocable trust offers an asset management vehicle during the grantor’s life, and can help provide for the grantor upon his disability or incompetence. While the grantor is living, the trust is a grantor trust with its income reportable on the grantor’s return. At the grantor’s death, the trust becomes irrevocable and a separate taxpayer and generally serves as a will substitute, providing for the disposition of the trust property.
Right of Election — This refers to the surviving spouse’s right to “elect against” the predeceased spouse’s will and take a share of that spouse’s estate, as determined under state law. The elective share is in lieu of whatever the surviving spouse would have received, if anything, under the predeceased spouse’s will.
Rule Against Perpetuities — The rule that requires that a trust must terminate within lives in being plus 21 years. That is, a trust must generally terminate 21 years after the death of the last beneficiary who was alive when the trust was created. Many jurisdictions have abolished this rule, allowing trusts to continue indefinitely.
Sale to a Defective Grantor Trust — This technique involves the sale by the grantor of an asset to a trust in exchange for a note. The trust is structured so that the grantor owns it for income tax purposes, but not for estate tax purposes. Accordingly, neither gain from the sale nor interest on the note is taxable to the grantor. Appreciation in excess of the note’s interest rate remains in the trust for the grantor’s heirs, gift-tax free. If the grantor dies while the note is outstanding, the value of the note, but not the value of the transferred property, is included in the grantor’s taxable estate.
Second-to-die/Survivorship Life Insurance — This is a life insurance policy taken on two people’s lives that does not pay out until both are dead. Married couples frequently use second-to-die insurance to replenish the wealth lost to estate taxes at the surviving spouse’s death, and provide cash for what could be an otherwise illiquid estate. Typically, second-to-die insurance policies on married couples are held in irrevocable life insurance trusts.
Separate share trust — A trust providing for defined, separate shares for beneficiaries.
Spendthrift trust — A trust created to provide a fund for the maintenance of a beneficiary, and at the same time protect this fund against the beneficiary’s incapacity or improvidence and also against claims of creditors.
Sprinkling or spray trusts — A trust which permits distribution of funds to the beneficiaries in the discretion of the fiduciary without fixed shares.
Tenancy — An interest in lands or property.
Tenancy by the Entireties — The owing of lands or property by husband and wife, with the survivor taking all, and with interest generally non-separable during life of both.
Tenancy in Common — The owing of lands or property by several persons, with the share of the one dying passing under his Will or under the intestacy laws to his heirs, and not to the survivors. Each tenant in common retains full control of the disposition of his or her interest.
Testate — Death leaving a valid Will.
Testator — The person who makes a Will. A female person making a Will is the testatrix.
Trust — An arrangement whereby property is held by a trustee for the benefit of others.
Irrevocable Trust — A trust which cannot be amended or revoked by the persons creating it.
Inter Vivos, or Living Trust — A trust set up and becoming effective during the lifetime of the person creating it.
Revocable Trust — A trust which may be amended or revoked by the person creating it.
Spendthrift Trust — A trust protecting the beneficiary from creditors or his own improvidence.
Testamentary Trust — A trust created by Will.
Trustee — The person holding the trust property for the benefit of others.
Unified credit — The transfer tax credit available for transfers of property during life and at death. In 2013 $2,045,800, it shelters $5,250,000 from taxation.
Unlimited Marital Deduction — For both gift tax and estate tax purposes, the rule which permits qualified transfers to a spouse, regardless of amount, to be entirely free of transfer tax liability.