A Living What? A Glossary of Estate Planning Terms
Administrator: A person appointed by a court to oversee the distribution of the assets and the payment of expenses and debts in the estate of an individual who has died without a will or has left a will that does not name an executor.
Agent: A person given the power or authority to make and carry out decisions on behalf of another individual, who is the one who gives that authority (the “principal”).
Amendment: A document which makes changes in or additions to an existing document other than a will, such as a trust.
Annuity: A contract entered into, most typically with an insurance company, under which invested funds are repaid to the investor over time, either starting soon after the funds are invested (an “immediate annuity”) or starting at a later time (a “deferred annuity”), together with a specified rate of interest (a “fixed annuity”) or a rate of interest that is subject to change over time (a “variable annuity”), generally under circumstances in which the withdrawal of the invested funds, either general or above a certain portion, prior to certain points in time is either prohibited or made subject to financial penalties (“surrender charges”). Because income accumulates in the annuity until it is later paid out, taxation of income is deferred until the time of distribution.
Basis: The value of an asset at the time of acquisition which is used in calculating capital gains or losses for income tax purposes.
Beneficiary: A person or organization who or which receives property from another, by gift or under the terms of a will or trust.
Bond: The written obligation of a court-appointed fiduciary (such as an executor, administrator, guardian or conservator) to faithfully carry out the duties of his or her office. The amount of a bond is set by the court based on the amount of property within the fiduciary’s control. A document nominating someone to later act, such as a will or power of attorney, can waive such obligation.
Capital Gain: The increase in value from the sale or the exchange of a capital asset, such as stock or real estate. Capital gains are taxed separately and at different rates from “ordinary income.”
Codicil: A document by which a person who has previously made a will makes changes to its terms, with the will remaining effective subject to those changes.
Codicil: A document which makes changes in or additions to an existing will.
Conservator: A person, similar to a guardian, who is appointed by a court to take over and to manage the financial affairs of another individual, who has been determined by the court to be legally incompetent.
Contingent: Dependent or based upon the occurrence of some act or event, such as the death of someone else. Thus, the holder of a “contingent interest” in property may or may not ever become the owner.
Descendant: A person who is a blood relative in a later generation, for example children, grandchildren and great-grandchildren.
Donor: A person who makes a gift during that person’s lifetime.
Durable: The power granted to another remains in force even after the person granting the power becomes incompetent or unable to take care of their own affairs. To be effective at the most logically intended time, when the person who makes it becomes later incapacitated, a power of attorney for property or health care must be durable.
Estate Tax: A tax in the form of a percentage of the taxable estate that is imposed on a property owner’s right to transfer ownership of property to others after his or her death, by will, trust or otherwise. Such tax is only imposed to the extent of assets having a value in excess of the “exemption amount,” which is subject to change over time, and can differ between jurisdictions. The federal government and some state governments impose estate taxes.
Estate: The assets, both personal and real, plus debts, left by an individual at his or her death, by will, trust or otherwise.
Executor: A person or business entity (such as a financial institution licensed to administer trusts), named by an individual in his or her will to carry out the instructions contained within the will.
Family Limited Partnership: A limited partnership among members of a family. A limited partnership is one which has both general partners (who run the partnership) and limited partners (who are passive investors). General partners have unlimited personal liability for partnership obligations, while limited partners have no liability beyond their capital contributions. Typically, the partnership is formed by older generation family members (for example, parents), who contribute assets to the partnership in return for general partnership units and limited partnership units. The parents can then embark on a plan of giving limited partnership units to their children and grandchildren, while retaining the general partnership units that control the partnership. Because limited partnership interests are subject to appraisal discounts reflecting their lack of marketability and the holder’s lack of control, and because the increase in the value of limited partnership interests between the time they are given and the time of the donor’s gift, the value of assets transferred through limited partnership interest can significantly exceed the original value of the gifted assets, thus enabling the donor to effectively leverage (“get more bang for the buck” from) his or her gift and estate tax exemption.
Family Trust: A trust established under the terms of a person’s living trust or will for the benefit of one or more beneficiaries, which for federal estate tax purposes can include the person’s surviving spouse, structured such that, even though final distribution of the trust may not occur until after the death of the surviving spouse, the assets of the trust are included as part of the taxable estate of the person who established it.
Fiduciary: A person who commits himself or herself to act on behalf of another individual and by doing so is under a duty to act in good faith and with care, honesty, and loyalty in acting on behalf of the individual, and to refrain from acts of self-dealing. A “fiduciary duty” is the highest level of care recognized in the law.
Funding: The process of transferring ownership of assets to a trust so that the future use and distribution of those assets will be controlled by the terms of the trust. Merely establishing a trust is insufficient for the trust to achieve that goal; the trust must be funded.
Generation-Skipping Tax: A tax imposed by the Internal Revenue Code on transfers made under trusts having beneficiaries in more than one generation below that of the individual creating the trust and on direct transfers to beneficiaries more than one generation below that of the individual making the direct transfer. The conceptual basis of the generation-skipping tax is that the estate tax upon wealth above a certain limit that is transferred from one generation to later generations is intended to be taxed once per generation.
Gift Tax: A tax imposed on an individual who makes a lifetime gift of property to another, but only if and to the extent that such gifts are not exempted under the terms of the tax laws and exceed certain exclusions, including a donor-to-recipient “annual exclusion” that is subject to change over time. Moreover, a person who makes lifetime gifts which would otherwise be subject to gift tax can elect to apply part of the exclusion that would otherwise apply in determining estate tax liability upon his or her death, and thus avoid the gift tax by reducing the amount of the estate tax exemption he or she will have available upon death.
Gift: A voluntary transfer of property to another without receiving any money, goods or services in return.
Grantor: An individual who gives property or gives a right to property to one or more others under the terms of a trust. “Settlor” and “Trustor” are other words that have the same meaning.
Guardian: person who is appointed by a court to care for another individual and to oversee another’s property, who due to incompetence is unable to manage their own affairs
Health Care Directive: A document (or, in many instances, a portion of a power of attorney for health care) in which a person expresses his or her wishes regarding medical treatments in the event of becoming incapacitated, and directs which types of care may or may not be permissibly provided in certain situations.
Heir: A person who inherits, or would be entitled to inherit, the right to receive distribution of all or some of the property of someone who dies, in accordance with the laws of intestate succession, either because the person who died did not have a will or because his or her will is set aside as invalid.
Income: The interest, dividends and other income generated by assets held by an individual, trust or estate, less certain debts, expenses and ordinary losses.
Individual Retirement Account (IRA): A bank or investment account held by an individual pursuant to the terms of the Internal Revenue Code which provide that the taxation of income contributed into or earned by the account will not be subject to taxation until it is later withdrawn, provided that income is not later withdrawn until the holder of the account reaches a minimum retirement age. After a certain age, certain required minimum distributions (“RMDs”) must be taken from the account. The amount of money that can be contributed annually to an IRA is regulated by law and regulation. Numerous regulations govern IRAs. The tax deferral of IRAs also applies to certain other types of retirement accounts, such as 401(k) plans, 403(b) plans, SIMPLE IRA plans, SEP plans and profit-sharing plans, which are subject to their own separate laws and regulations.
Inter Vivos: Occurring and becoming effective during one’s lifetime. Thus, an “inter vivos trust” can become effective as soon as it has been established.
Intestate: To die without a will, such that the property making up the estate of the deceased individual is distributed by the “laws of intestate succession,” which effectively make a will for that person in accordance with the laws of the state of that person’s residence at death, based on what the states supposes that people would most likely want.
Irrevocable Life Insurance Trust: A trust that owns one or more policies of insurance upon the life or lives of a person (or married couple). The trust pays the premiums to keep the insurance in force, collects the death benefits when the insured die, and distributes the money according to the terms of the trust. Since the person who establishes an “ILIT” does not own the insurance, the insurance policies are (subject to certain legal restrictions) exempt from claims of his or her creditors, and the life insurance proceeds payable upon his or her death are not included in his or her taxable estate. Moreover, any income and capital gains generated by and held within the insurance policy or policies as an increase in the value of the policy or policies is not subject to income taxation during the lifetime of the person who established the ILIT.
Irrevocable: Not able to be later cancelled or withdrawn, and not able to be amended by the person who makes it. Irrevocable trusts play a critical role in assets preservation planning, because it is the relinquishment of control over assets by the person who makes the trust that helps enable trust assets to be treated as no longer being owned by the person who makes and funds the trust, and therefore no longer reachable by his or her creditors or “countable” in determining his or her eligibility for government assistance.
Joint Tenancy: A form of ownership in which two or more persons hold equal interests in the same property under circumstances in which, when one of them dies, the other joint tenant or tenants become the only remaining owner or owners of the property, by operation of law. Property which is the subject of a joint tenancy passes upon the death of a joint tenant through that means, regardless of the terms of the deceased joint tenant’s will or trust.
Legatee: A person who is entitled to the right to receive distribution of all or some of the property of someone who dies, in accordance with the terms of the decedent’s will.
Life Estate: An interest in property which is only held during, or measured in time by, the lifetime of a specific individual, usually the individual enjoying the use of the property. The holder of a life estate interest (the “life tenant”) of income-producing property is entitled to the net income to the extent of his or her life estate interest.
Living Trust: A trust which becomes effective during the lifetime of the individual creating the trust. A living trust is typically revocable by and during the lifetime of the person who establishes it, and, like a will, directs the distribution of his or her property after death. If funding of a living trust has been properly accomplished and maintained during the lifetime of the person who established it, it is generally possible to avoid the probate of that person’s estate.
Living Will: A document by which a person directs others on what steps he or she does or does not want taken regarding life sustaining measures in the case of a terminal illness or permanent unconsciousness. Rather than naming an agent authorized to discuss those issues with health care providers and make or carry out decisions on behalf of the principal, it declares the intentions of the person signing it directly to health care providers.
Marital Deduction: A deduction allowed under the Internal Revenue Code upon the transfer of property from one spouse to another during lifetime or upon death.
Marital Trust: A trust established under the terms of a living trust or will by one spouse for the exclusive benefit of his or her surviving spouse, structured for federal estate tax purposes so that the assets of the trust are treated as part of the taxable estate of the surviving spouse rather than the spouse who established the trust.
Notary Public: A public officer who certifies and confirms that a document was actually signed by the person who purported to sign it, based on the notary having verified the identity of the person signing and witnessing the signing.
Payable on Death (POD): A beneficiary designation made in a bank account pursuant to which all funds remaining in the account pass by operation of law to the named beneficiary upon the account holder’s death. Property which is the subject of a “POD designation” passes upon death through that means, regardless of the terms of the account holder’s will or trust, assuming that the beneficiary survives the account holder.
Per Capita: The method of dividing an estate where an equal share is given to each of a named or described group of persons under circumstances in which the share of a pre-deceased beneficiary is distributed equally among the other members of the named or described group. For example, if an estate is given to someone’s three children “in equal shares, per capita,” and one of those beneficiaries has previously died, his or her share would be divided equally between the two surviving children.
Per Stirpes: The method of dividing an estate in which the share of a pre-deceased beneficiary is distributed to his or her descendants based on their generational proximity to the deceased beneficiary. For example, if an estate is given to someone’s three children “in equal shares, per stirpes,” and one of those beneficiaries has previously died, his or her share would go to his descendants.
Personal Representative: Another name for a court-appointed fiduciary, such as an executor or an administrator. States vary as to the nomenclature used.
Pour-Over Will: A will that provides for the transfer of assets to a trust (such as a living trust) at the death of the individual who created the will, to the extent that such person’s assets were not already owned by the trust during such person’s lifetime.
Power of Appointment: A power granted to a person under a will or living trust allowing that person to direct the distribution of assets during his or her life (a “lifetime power of appointment”) or upon his or her death (a “testamentary power of appointment.”)
Power of Attorney for Health Care: A document by which one person (the “principal”) grants another person (the “agent”) the authority to make and carry out decisions regarding health and personal care matters, including but not limited to end-of-life decisions and organ donation. Such authority ends when the person who grants it either revokes (cancels) it or dies, but the authority can extend to making decisions regarding autopsies and funeral arrangements. Its scope is much broader than that of a living will, which speaks only to end-of-life decisions. The agent under a power of attorney for property is authorized, but not required, to act. Because of the inherent uncertainty of whether the agent will agree to act, outlive the principal and remain competent to act, it is wise to name successors.
Power of Attorney for Property: A document by which one person (the “principal”) gives another person (the “agent”) the authority to make and carry out decisions regarding financial matters. Such authority ends when the person who grants it either revokes (cancels) it or dies. The scope of the powers granted can vary significantly and with great significance, especially in determining whether the agent can make gifts, fund trusts, and take other steps necessary toward protecting the principal’s assets from long-term care costs. The agent under a power of attorney for property is authorized, but not required, to act. Because of the inherent uncertainty of whether the agent will agree to act, outlive the principal and remain competent to act, it is wise to name successors.
Principal: As to documents, the person who gives authority to someone else (the “agent”) to make and carry out decisions on his behalf, to the extent stated and limited in the document creating the agency. As to investments, and as to trusts and estates, the original amount of assets, plus capital gains and less certain debts, expenses and capital losses.
Probate Estate: All the property of a deceased person, which is to be distributed under a will or, if the individual died without a will, through a state’s intestacy laws.
Probate: The court-supervised process of administering the estate of a deceased or legally incompetent person.
Residuary Bequest: A gift of all or a portion of the deceased person’s property that remains after the payment of debts, charges, taxes and any specific bequests.
Residue: The part of a deceased person’s estate remaining after the payment of all debts, charges, taxes and specific bequests.
Revocable: Able to be cancelled, withdrawn or amended (changed). In order to preserve the ability of the person who makes it to make changes, a living trust (which, like a will, directs disposition of one’s property after death) is generally revocable.
Roth IRA: An IRA account held pursuant to laws that permit deposits made into the account to be subject to income taxation at the time of deposit, with any later increase in the value of the account, whether attributable to ordinary income or capital gains, being tax-free, provided that later withdrawals are taken in accordance with the laws and regulations governing such accounts.
Special Needs Trust: A trust created to provide for the needs of a beneficiary who, due to incapacity or disability, is or may become eligible for government assistance to pay for essentials such as food, shelter and medical care, for the purpose of assuring such that the assets owned by the trust and used for the beneficiary are not counted in determining, and therefore do not jeopardize, the beneficiary’s eligibility to receive public benefits, (most particularly Medicaid or Supplemental Security Income (“SSI”) benefits.
Specific Bequest: A gift from a deceased person of a particular amount of money, real estate, personal property or account from such person’s estate. Specific bequests have priority for payment from an estate over residuary bequests; however, if the particular real estate, personal property or account that is the subject of a specific bequest is no longer owned by the deceased person upon such person’s death, the bequest “lapses,” which means that it is not paid at all, rather than being satisfied from other assets of equivalent value.
Spendthrift Protection: A clause in a trust that protects the beneficiary from spending the property set aside for his or her benefit from being spent in a wasteful manner, and from having creditors of the beneficiary, including an ex-spouse seeking alimony or separate maintenance in a divorce proceeding, be able to reach the property being held for the beneficiary’s enjoyment to satisfy the beneficiary’s debts.
Successor: A person who takes up the position of a previous individual, either as a beneficiary or as a fiduciary.
Surety: A financial commitment made by a person or bonding company (typically an insurance company) to stand behind a bond in the event that the fiduciary who give it fails to properly carry out his or her responsibilities or to account to the court for the assets over which he or she is charged with responsibility.
Taxable Estate: The estate of a deceased person that is subject to estate tax, which is defined as gross estate minus allowed deductions.
Testamentary Trust: A trust created in a will, which goes into effect only after the death of the person creating the trust and under whose will trust property passes.
Transfer on Death (TOD): A beneficiary designation made in an investment account pursuant to which all funds remaining in the account pass by operation of law to the named beneficiary upon the account holder’s death. Property which is the subject of a “POD designation” passes upon death through that means, regardless of the terms of the account holder’s will or trust, assuming that the beneficiary survives the account holder.
Trust Estate: The property placed within the trust, which is to be distributed by the trustee to beneficiaries at the time or times and in accordance with the terms and restrictions provided for in the trust.
Trust: A special relationship in which one party, the trustee, holds property of an individual for the benefit of another party, the beneficiary; the trustee owes special fiduciary duties to the individual for whom the trustee is holding the property and to the beneficiary for whom the property is being held. A trust can provide for the management and distribution of property, subject to the terms established by the person who establishes and puts assets into the trust, over what can be a long period of time. For that reason, a trust can be a very powerful and flexible planning vehicle. There are numerous types of trusts to serve various purposes.
Trustee: A person or business entity (such as a financial institution licensed to administer trusts), who is given property by another to hold for the benefit of one or more beneficiaries. In the case of a revocable living trust, the person who makes the trust can, and typically does, appoint himself or herself as beneficiary. Two or more persons can serve together as co-trustees, if that is provided for in a trust.
Will: A legal declaration of a person’s wishes regarding the distribution of his or her property after death. State laws govern the requirements signing, witnessing and notarization that determine whether a document that purports to be someone’s will will be given legal effect. Property passing under a will is subject to probate.
Witness: A person who is present at an event or transaction and can testify to the actual occurrence; as to documents, a person who is not a notary public but was present when a document was signed and who certifies and confirms that it was.
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