Appendix D: Estate Planning Terms
A/B TRUST
A type of Revocable Living Trust used by married couples. In this type of living
trust, two trusts (trust A and trust B) are created at the time the first spouse dies.
By dividing the couple's estate into two trusts at the first death, each spouse can
pass the maximum amount of property allowed to avoid federal estate taxes. One
trust, usually trust A, is often referred to as the marital deduction trust and the
other trust, usually trust B, is often referred to as the shelter trust.
ADMINISTRATION
The care and management of an estate by an executor, an administrator, a
trustee, or a guardian.
ADMINISTRATOR/EXECUTOR
A person appointed by the court to administer (i.e. manage or take charge of)
the assets and liabilities of a decedent. If the person performing these services is
named by the decedent's will, he is designated as the executor of the estate.
ADVANCE DIRECTIVES
Written instructions, such as a living will or durable power of attorney for health care, which guides care when an individual is terminally ill or incapacitated and unable to communicate his/her desires.
ANNUAL GIFT EXCLUSION
The amount of property the IRS allows a person to gift to another person during
a calendar year before a gift tax is assessed and/ or a gift tax return must be filed. The amount is increased periodically. There is no limit to the number of people you can give gifts to which qualify for the annual exclusion. To qualify for the annual exclusion, the gift must be one that a recipient can enjoy immediately and have full control over.
ASSETS
Property owned, in this case by an insurance company, including stocks, bonds,
and real estate. Insurance accounting is concerned with solvency and the ability to pay claims. State insurance laws therefore require a conservative valuation of
assets, prohibiting insurance companies from listing assets on their balance sheets whose values are uncertain, such as furniture, fixtures, debit balances, and accounts receivable that are more than 90 days past due.
BENEFICIARY
An individual, institution, trustee or estate that receives, or may become eligible
to receive, benefits under a will, insurance policy, retirement plan, annuity,
trust, or other contract.
BY-PASS TRUST
An estate planning device (also called a credit shelter trust, family trust, or B
trust in "AB" plans where the A trust funds for the marital deduction) used to minimize the combined estate taxes payable by spouses whereby, at the death of the first spouse, the estate is divided into two parts and one part is placed in trust usually to benefit the surviving spouse without being taxed at the surviving spouse's death, while the other part passes outright to the surviving spouse or is placed in a marital deduction trust. A by-pass trust permits a maximum of $2,000,000 transfer to heirs of the spouses on an estate tax-free basis under the unified gift and estate tax credits as they exist in 2007.
CHARITABLE GIFT ANNUITY
An arrangement whereby the donor makes a gift to charity and receives back a guaranteed lifetime (or joint lifetime) income based on the age(s) of the annuitant(s).
CHARITABLE LEAD TRUST
An arrangement whereby the charity receives an income from a trust for a period
of years, then the remainder is paid to non-charitable beneficiaries (generally
either the donor or his or her heirs).
CHARITABLE REMAINDER ANNUITY TRUST
A charitable trust arrangement whereby the donor or other beneficiary is paid
annually an income of a fixed amount of at least 5% but not more than 50% of the initial fair market value of property placed in the trust, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to
receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.
CHARITABLE REMAINDER TRUST
An arrangement wherein the remainder interest goes to a legal charity upon the
termination or failure of a prior interest.
CHARITABLE REMAINDER UNITRUST
A charitable trust arrangement whereby the donor or other beneficiary is paid
annually an income of a fixed percentage of at least 5% but not more than 50% of the annually revalued trust assets, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.
CHILDREN'S TRUST
An irrevocable trust funded through gifts using either the $12,000 per person
annual gift exemption or by using all or a portion of the unified credit exclusion of
$2,000,000 per person or $4,000,000 per couple. The trust is for the benefit of the grantors' heirs and is set up to continue benefiting the family for multiple generations. Also commonly referred to as a Dynasty Trust.
CONSERVATOR
Generally, an individual or a trust institution appointed by a court to care for
property; specifically, an individual or a trust institution appointed by a court to
care for and manage the property of an incompetent, in much the same way as that in which a guardian cares for and manages the property of a ward.
DECEDENT
The person who has died.
DONOR
A person who makes a gift. The person setting up a trust can be called donor,
trustor, grantor, or settlor.
DURABLE POWER OF ATTORNEY
A written legal document which allows one person (the principal) to authorize
another person (the attorney-in-fact or agent) to act on his or her behalf with
respect to specified types of property, and which may remain in effect during a subsequent disability or incompetency of the principal.
DURABLE POWER OF ATTORNEY FOR HEALTH CARE
A written legal document which grants decision-making powers related to
health care to an agent; generally provides for removal of a physician, the right to
have the incompetent patient discharged against medical advice, the right to medical records, and the right to have the patient moved or to engage other treatment.
ESTATE
Everything of value (all property) that a person owns while living or at the time
of death.
ESTATE PLANNING
Process designed to conserve estate assets before and after death, distribute
property according to the individual's wishes, minimize federal estate and state
inheritance taxes, provide estate liquidity to meet costs of estate settlement, and
provide for the family's financial needs.
ESTATE TAX
A tax imposed on the transfer of property from a decedent to his or her heirs,
legatees or devisees.
FIDUCIARY
A person in the position of great trust and responsibility, such as the executor
of a will or the trustee of a trust.
GENERAL POWER OF APPOINTMENT
A power of the donee (the one who is given the power) to pass on an interest
in property to whomever he pleases, including himself or his estate.
GENERATION SKIPPING TRANSFER (GST)
A transfer of property, usually in trust, that is designed to provide benefits for
beneficiaries who are two or more generations younger than the generation of the grantor.
GENERATION SKIPPING TRANSFER TAX (GST)
A transfer tax generally assessed on transfers to grandchildren, great grandchildren and others who are at least two generations younger than the donor.
GENERATION SKIPPING TRANSFER TAX EXEMPTION
An exemption from generation-skipping tax for transfers by an individual either
during life or at death.
GENERATION SKIPPING TRUST
Any trust having beneficiaries who belong to two or more generations younger
than the grantor.
GIFT
A voluntary transfer of property for which nothing of value is received in return.
If the Internal Revenue Service is to recognize a transfer as a gift, the donor(s) must unconditionally transfer all title and control of the property to the recipient(s) at the time the gift is given.
GIFTING
A means of implementation of an estate plan through gifts to intended successors in the ownership of assets owned by the person(s) making the gifts.
GRANTEE
A person to whom property is transferred by deed or to whom property rights
are granted by means of a trust instrument or some other document.
GRANTOR
The person who establishes the trust. Also called the creator, settlor, donor or
trustor.
GROSS ESTATE
The total value of all property in which a deceased had an interest. This must
be included in his or her estate for federal tax purposes.
HEIR
A person entitled by law to inherit part or all of the estate of an ancestor who
died without leaving a valid will.
INCIDENTS OF OWNERSHIP
Includes a variety of rights and powers that an insured decedent may have held
over a life insurance policy; the possession of one or more of these incidents of ownership within three years of death will bring the policy proceeds into the insured's gross estate.
INCOME BENEFICIARY
The beneficiary of a trust who is entitled to receive the income from it.
IRREVOCABLE LIFE INSURANCE TRUST
An irrevocable trust established to own an insurance policy or policies and
thereby prevent them from being included in the insured's estate. This trust is usually set up to distribute to the beneficiaries upon the death of the insured for the payment of estate taxes.
IRREVOCABLE TRUST
A trust that cannot be changed or terminated after it is established.
LIVING TRUST
A written legal document into which you place all of your property, with
instructions for its management and distribution upon your disability or death.
MARITAL DEDUCTION
A deduction allowing for the unlimited transfer of any or all property from one
spouse to the other generally free of estate and gift tax.
POUR OVER WILL
This is a Will used to transfer (pour over) into a trust any property that is left
in a person's estate after death.
POWER OF APPOINTMENT
A right given to another in a written instrument, such as a will or trust, that
allows the other to decide how to distribute your property. The power of appointment is "general" if it places no restrictions on who the distributees may be. A power is "limited" or "special" if it limits the eventual distributee.
POWER OF ATTORNEY
A written legal document that gives an individual the authority to act for
another. If the authority is to act for the principal in all matters, it is a general power of attorney. If the authority granted is limited to certain specified things, it is a special power of attorney. If the authority granted survives the disability of the principal, it is a durable power of attorney.
PRIMARY BENEFICIARY
Beneficiary of a life insurance policy who is first entitled to receive the policy
proceeds on the insured's death.
PROBATE
A court procedure for settling the personal affairs of a decedent by formally
proving the validity of a will and establishing the legal transfer of property to beneficiaries, or appointing an administrator and supervising the legal transfer of property to heirs if there is no valid will.
PRUDENT MAN RULE
An investment standard. In some states, the law requires that a fiduciary, such as a trustee, may invest the trust's or fund's money only in a list of securities designated by the state. In other states, the trustee may invest in a security if it is one which a prudent man of discretion and intelligence, who is seeking a reasonable income and preservation of capital, would buy.
PRUDENT PERSON
A person who acts cautiously in the handling of assets. See Prudent Man Rule.
REGISTERED INVESTMENT ADVISOR
An individual or firm able to fully manage a portfolio for an "RIA" client under
the Prudent Investor Act.
REVOCABLE TRUST
A trust that can be changed after it is established. Assets can be added or
removed from the corpus of the trust, the beneficiary(ies) can be changed, and
other changes, including termination of the trust, are allowed.
STATE DEATH OR INHERITANCE TAXES
The tax imposed by the state in which you live and/or where your property is
located, if different, on the transfer of that property to another at your death.
STEP UP IN BASIS
A decedent's capital gains property that passes to others escaping capital gains
tax when sold by the person who inherits the property. Persons inheriting capital
gains property receive the property at date-of-death fair market value. In effect, the basis in this property is deemed to be "stepped up" and does not reflect the decedent's original cost basis for determining applicable capital gains tax on the sale of the property.
TAXABLE ESTATE
The portion of an estate that is subject to federal estate taxes or state death
taxes. Technically, all of an estate is subject to federal estate taxes, but because of the unified credit, only estates with a value over the exemption equivalent amount actually have to pay any estate taxes. Therefore, it is common to refer to an estate with a value over the exemption equivalent amount as a taxable estate and an estate with a value under the exemption equivalent amount as a nontaxable estate.
TENANTS IN COMMON
A form of asset ownership in which two or more persons have an undivided
interest in the asset and the ownership shares are not required to be equal.
TRUST
A legal arrangement in which an individual (the trustor) gives fiduciary control
of property to a person or institution (the trustee) for the benefit of beneficiaries.
TRUST DECLARATION OR TRUST INSTRUMENT
A document defining the nature and duration of the trust, the powers of the
trustee, and identifying the trust's beneficiary(ies).
TRUSTEE
An individual or organization which holds or manages and invests assets for the
benefit of another.
UNIFIED TAX CREDIT
Tax credit that can be used to reduce the amount of the federal estate or gift
tax.
UNIFORM GIFTS (TRANSFERS) TO MINORS ACT (UGMA OR UTMA)
A method to hold property for the benefit of a minor, which is similar to a trust
but the rules are governed by state law.
WILL
A person's written declaration of desires for disposal of his or her property after death.
