Estate Planning Glossary

Useful Legal Terms

A.

Administrator - A person representative who was not nominated in the will.

Annual exclusion - Under the federal gift tax, a deduction, up to $10,000, from gross gifts for gifts by any donor to each donee in a given year.

Ascertainable standard - Wording in a will or trust intentionally limiting the freedom of holder of a power of appointment over property. The most common words of limitation are, "health," "education," "support," and maintenance," derived from Section 2041. Use of the words avoid FET taxation to the holder of the power as a general power of appointment.

B.

Beneficiary - One who receives or is designated to receive assets from a will, insurance policy, trust, retirement plan, etc.

Buy-Sell Agreement - An arrangement, particularly appropriate in a closely held corporation or partnership, where surviving owners (shareholders or partners) of the corporation or partnership agree to purchase the interest of a withdrawing or deceased owner.

Bypass - An arrangement under which property owned by a decedent and intended for the lifetime benefit of the surviving spouse does not actually pass to the surviving spouse, thereby avoiding inclusion in the latter's gross estate.

C.

Charitable Lead Trust - A trust established for the benefit of a charitable organization under which the trustor receives income from an asset for a set number of years or for the trustor's lifetime. Upon the termination of the trust, the asset reverts to the charitable organization. The trustor receives a charitable contribution deduction in the year in which the trust is established and the assets placed in the trust are exempt from capital gains tax.

Charitable Remainder Annuity Trust (CRAT) - A trust into which the client transfers assets in exchange for a fixed annuity income of at least 5 percent of the original value of the assets transferred into trust, payable at least annually, usually for life. The value of the remainder is deductible on the income tax return.

Charitable Remainder Unitrust (CRUT) - A trust that is much like the charitable remainder annuity trust, except that the annual income depends on a fixed percentage of the current fair market value of the assets in the trust, determined annually.

Codicil - A supplement or an addition to a will. It may explain, modify, add to, subtract from, qualify, alter, restrain or revoke provisions in the existing will.

Community Property - Possessions, real estate and profits that a husband and wife receive during the marriage, excluding gifts and inheritances. Upon divorce, community property is distributed equally. This legal concept is recognized in the states of Arizona, California, New Mexico, Idaho, Nevada, Texas and Washington.

Completed Gift - A gift in which the donor has so parted with dominion and control (in an interest in property) as to leave him no power to change its disposition, whether for his own benefit or for the benefit of another.

Corpus - The property in a trust. Also called principal.

Credit Shelter Bypass Trust - A bypass of an amount approximately equal to $600,000, the exemption equivalent of the unified credit. Sometimes called the "Family Trust."

Crummey Provision - A general power clause found in some trusts that give one or more beneficiaries the right to withdraw, for a limited period of time each year, the lesser of the amount of the annual exclusion. Often found in trusts for minors and in irrevocable life insurance trusts.

Custodial Gift - Agift to a minor child from an adult who retains control over the gift, or grants such control to another adult, until the child reaches maturity age and legally can accept responsibility for the gift. A custodial gift may be in the form of a custodial savings account at a depository institution.

   

D.

Death Tax - A tax levied on certain property owned or transferred by the decedent at death. Either an estate tax or an inheritance tax. Virginia has no inheritance tax.

Decedent - The person who has died.

Devise - A gift of real estate through a will.

Devisee - The beneficiary under a will who receives a gift of real estate under the will.

Disclaimer - An unqualified refusal to accept a gift. In estate planning , a valid disclaimer must meet the requirements of both local law and IRC Section 2518.

Donee - A person who is receiving or will receive a gift of a beneficial interest in property.

Donor - A person making a gift to another or in to a Trust.

Durable Power of Attorney - A written legal document by which an individual (the ãprincipalä) designates another person (the ãagentä or ãattorney in factä) to act on his or her behalf. The power is durable in the sense that the agentâs authority endures in the event the individual becomes disabled or incapacitated.

Durable Power of Attorney for Health Care - A durable power of attorney granting to the attorney-in-fact the power to make medical decisions on behalf of the principal.

E.

Estate - Everything you own; all of your assets (whether real property or personal property) and liabilities.

Estate Tax - Tax imposed by a state or the federal government on assets left to heirs in a will.

Estate Planning - Planning for the orderly handling and administration of an estate upon the death of the owner. This usually involves drawing up a will and setting up trusts and insurance, with the intention of minimizing loss to the estate value incurred by estate taxes and administrative expenses.

Execute - To complete the legal requirements (such as signing before witnesses) that make a will valid.

Executor - A person assigned to carry out the provisions of a will.

Exemption Equivalent (of the unified credit) - In federal estate taxation, the amount by which the taxable amount can exceed zero and still sheltered by the unified credit.

Exercise a Power of Appointment - To invoke the power by appointing a permissible appointee.

F.

Family Limited Partnership - A form of holding property combining some of the advantages of holding property as a corporation with some of the advantages of owning property in a partnership. A Family Limited Partnership is sometimes used as a vehicle for a gift program to reduce or eliminate estate tax.

Fee Simple Interest - Absolute ownership of property.

Fiduciary - An individual, company, or association holding assets in trust for a beneficiary. The fiduciary has the responsibility of managing the money for the benefit of the beneficiary.

Fiscal Year - Any continuous 12 months, which is used by a business or government as its annual accounting period.

G.

General Bequest - A gift payable out of the general assets of the estate but not one that specifies one or more particular items.

Generation-Skipping Transfer Tax (GSTT) - A federal tax on transfers of property made to a family member who is more than one generation below the donor; they occur either during life as a gift or at death by will or bequest.

Gift - A completed lifetime or deathtime transfer of property by an individual in exchange for any amount that is less than full consideration.

Gift Tax - A tax imposed on transfers of property by gift during the lifetime of the giver

Grantor - A person who makes a grant; a person who makes a settlement, executes a deed or creates a trust giving up title to property.

Guardian - A person appointed by will or by law to assume responsibility for incompetent adults or minor children.

   

H.

Heir - A person who inherits under a will or a person who succeeds to property by the laws of descent if the decedent dies without a will (intestate).

Holder (of a power of appointment) - The person who has received the power of appointment; i.e., the one who has the right to appoint designated property to a permissible appointee. Also called the donee of the power.

Holding Period - In income tax law, the length of time that property is held. It determines whether a gain is short term or long term. The current threshold is eighteen (18) months.

Holographic Will - A will entirely written, dated and signed by the testator in his/her own handwriting.

I.

Income Beneficiary - A person designated to receive income from a trust during the term of the trust.

Income Tax - Taxes levied on net income—that is, on gross income less certain deductions permitted by law. These taxes can be levied on individuals, corporations, or unincorporated businesses where the income is taxed distinctly from individual income.

Inherit - To receive something from the estate of someone who has died.

Intangible Personal Property - Property, other than real property, with no intrinsic value; its value lies in the rights conveyed.

Inter Vivos Trust - A trust established between two or more individuals that are alive--also called "living trust".

Intestate - Dying without a will.

Issue - A person's direct offspring, including children, grandchildren, great-grandchildren, and the like. Also called descendants.

J.

Joint Interest - A form of equal, undivided ownership in property that, upon the death of one owner, automatically passes to the surviving owner(s). Also called joint tenancy.

L.

Legacy - A gift of money or property given by last will and testament. Also called a bequest.

Letters of Testamentary - A formal court document in probate indicating the court's authorization and empowerment of the estate's personal representative to deal legally with third parties. In Virginia, also called Certificate of Qualification.

Life Estate - An estate or interest in real property, which is held for the duration of the life of some certain person.

Limited Liability Companies - A business organization in which the owners, called members, do not have personal liability for the contracts or the torts of the business, yet the organization is taxed like a partnership.

Living Trust - A trust taking effect during the lifetime of a trustor. Also called an inter vivos trust.

Living Will - A legal document that voices your medical decisions if you are unable to speak for yourself as a result of medical incapacitation.

M.

Marital Deduction - A reduction of an estate for estate tax purposes, which is available if the decedent is survived by his or her spouse.

Marital Trust - A trust structured to receive property that will qualify for the marital deduction.

Minority Discount - A reduction from the market value of an asset because the minority interest owner(s) cannot direct the business operations.

P.

Per capita - Division whereby each person takes in his own right an equal share of the property, regardless of degree of kinship.

Per stirpes - Amethod of dividing an estate so that children act as a group, rather than individually, taking what their deceased ancestor was entitled to.

Perpetuities Clause - A clause in a will or trust that prevents interest from being ruled invalid under the rule against perpetuities.

Personal Property - Property of any kind except real property. It may be tangible, having physical existence, or intangible, having no physical existence, such as copyrights, patents, or securities.

Personal Representative - A person appointed through the will of a deceased or by a court to settle the estate of one who dies.

Pot Trust - A trust established for the benefit of minor children which typically remains undivided until the youngest child reaches age 21 (or age 18). At that time,the assets are divided into equal separate shares, one for each child. These assets are distributed outright or they are held for distribution at some older age. Also called a Family Pot Trust.

Pour-Over Will - A will that leaves some or all estate assets to a trust established before the will-maker’s death.

Power of Appointment - The authority given by one person to another under a trust agreement or Will to decide who will receive and enjoy an interest in property.

Power of Attorney - Authority given one person or corporation to act for and obligate another, to the extent laid down in the instrument creating the power.

Principal - The property in a trust. Also called corpus.

Probate - A court-supervised process of validating or establishing distribution of assets of a deceased including the payment of outstanding obligations.

Probate Estate - Those estate assets which fall within the jurisdiction of the probate court before being transferred to another person. Life insurance proceeds, for example, are not generally part of the probate estate.

   

Q.

QTIP Election - An election by the executor of the estate of the first spouse to die to treat certain property as QTIP property, thereby qualifying it for the marital deduction.

QTIP Trust - A marital trust for which a federal estate tax election is made. It provides that the surviving spouse is entitled to all of the income from the trust property, payable at least annually. In addition, the trust cannot give anyone a power to appoint any of the property to anyone other than the surviving spouse. Its uniqueness lies in the fact that its property need not pass to or be controlled by the surviving spouse.

R.

Remainder - In the context of trusts, the future interest right to the remaining trust assets at the termination of all other interests. More technically, the right to use, possess and enjoy property after a owner's interest ends in a situation where both interest were created at the same time and in the same document.

Remainderman - The beneficiary of a trust who will receive the remainder at the terminating of all other interests.

Residuary Bequest - A gift of that part of the testator's estate not otherwise disposed of by the will.

Rule Against Perpetuities - A common law principle invalidating a dispositive clause in a will or a trust if the contingent interest transferred may best in the transferee too long after the client's death.

S.

Settlor - The person who creates the trust and whose property usually winds up in it. Also called creator, grantor, or trustor.

Simple Will - A will prepared for a family having a small estate, one for whom death tax planning is not a significant concern.

Specific Bequest - A gift under a will of a specific item of personal property or a specific amount of cash.

Spendthrift Clause - A clause in a trust that restricts the beneficiary from transferring any of his or her future interest in the corpus or income. For example, a typical spendthrift clause would not permit the beneficiary to pledge the interest as collateral against a loan.

Splitting a Gift - Treating a gift of the property owned by one spouse on the federal gift tax return as if it were made one-half by each spouse.

Springing Durable Power of Attorney - A durable power of attorney that becomes effective at the onset of the principal's incapacity.

Step-Up In Basis - An increase in the tax basis of property to the value claimed in the taxable estate of a decedent.

Survival Clause - A disposition provision in a will or trust naming an alternate taker of certain property if the donee fails to survive the donor.

T.

Taxable Gift - In federal gift tax law, for a given year, total gross gifts reduced by total deductions and exclusions.

Tax Clause - A provision in a will specifying which property bears the burden of paying taxes.

Terminal Value - Used in this text to indicate the value of a cash value life insurance policy that is currently in force. Formally called the policy's interpolated terminal reserve value, its amount is nearly equal to it cash surrender value.

Testamentary Capacity - The requisite mental capacity needed to make a valid will; a person's need to understand who his or her relatives are and how the property will be distributed by his or her will.

Testamentary Transfer - A transfer at death by will.

Testamentary Trust - A trust which takes effect upon the death of the settlor and which is commonly found as part of a will. Trusts which take effect during the life of the settlor are called inter vivos trusts.

Testate - A person who dies with a valid will.

Testator - The person who executes a will.

Trust - A legal arrangement between trustor and trustee that divides legal and beneficial interests in property among two or more people.

Trust Beneficiary - A person who is named to enjoy a beneficial interest in the trust.

U.

Unification of Gift and Estate Taxes -

Unified Credit - An estate tax credit equal to $192,800, which allows an exemption from tax on property transfers up to $600,000. The Taxpayer Relief Act of 1997 replaced the Unified Credit with the applicable exemption amount and corresponding credit amount.

Uniform Gifts to Minors Act - An Act that governs the transfer and gifting of property to a minor as well as a custodian's responsibilities and duties concerning management of the property until the minor reaches the age of "majority." Applicable state law defines the age of majority for a minor.

Uniform Transfers to Minors Act - An Act that governs the transfer and gifting of property to a minor as well as a custodian's responsibilities and duties concerning management of the property until the minor reaches the age of "majority."

W.

Will - A written document disposing of a person's probate property at death.