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Planning Glossary

Use this glossary to help with any terms you’re unfamiliar with. And please don’t hesitate to get in touch if you have any questions! Contact Mark Jones at (415) 565-3206 or mjones@sfopera.com.

A / B / C / D / E / F / G / H / I / J / K / L / M / N / O / P / Q / R / S / T / U / V / W / X / Y / Z

A

A-B trust planning – The typical arrangement used in marital deduction estate tax planning by spouses to create at the first death a marital trust or “A Trust” for the benefit of the surviving spouse for life and a bypass or “B Trust” containing assets equal to the deceased spouse’s remaining unified credit exclusion amount. The B Trust is frequently referred to as the “Credit Shelter Trust” or “Family Trust” and is typically held for the surviving spouse’s lifetime for the collective benefit of the spouse and the couple’s descendants and generally passes at the death of the surviving spouse to the beneficiaries free of estate taxes regardless of the value of the B Trust at that time.

Administration – The process during which the personal representative collects the decedent’s assets, pays all debts and claims, and distributes the residue of the estate according to the will or state law.

Administrator – The person or corporate fiduciary appointed by the court to manage the estate if no executor or personal representative has been appointed or if the named executor is unable or unwilling to serve.

Annual exclusion – The amount an individual may give annually to each family member or other beneficiary free of federal gift or other transfer taxes and without any IRS reporting requirements. The annual exclusion is indexed for inflation and is $13,000 per donee for 2012. Tuition and medical care expenses paid directly to the provider are not treated as gifts for gift tax purposes.

Applicable exclusion amount – Another name for the unified credit that shelters a certain amount from the federal estate and gift tax.

Ascertainable standard – A standard, usually relating to an individual’s health, education, support, or maintenance, that defines the permissible reasons for making a distribution from a trust. Use of an ascertainable standard prevents distributions from being included in a trustee/beneficiary’s gross estate for federal estate tax purposes.

Attorney-in-Fact – The person named as agent under a power of attorney to handle the financial affairs of another.

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B

Beneficiary – A person who will receive the benefit of property from an estate or trust. This may be through the right to receive a bequest or to receive income or trust principal over a period of time.

By-pass trust – The “B Trust” in A-B trust planning that is sheltered from the federal estate tax by the unified credit exclusion amount and thereby “bypassing” the estate tax at the deaths of both spouses.

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C

Charitable lead trust – A trust created during lifetime or at death that distributes an annuity or unitrust amount to charity for life or a term of years, with the trust assets passing to designated beneficiaries upon termination of the trust.

Charitable remainder trust – A tax-exempt trust created during lifetime or at death that distributes an annuity or unitrust amount to one or more designated beneficiaries for life or a term of years, with the trust assets passing to charity upon termination of the trust.

Codicil – A formally executed addition to or changes in the terms of a will not requiring the complete rewriting of the will.

Community property – In certain states, known as community property states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly.

Conservator – An individual or a corporate fiduciary appointed by a court to care for and manage the property of an incompetent person, in the same way as a guardian cares for and manages the property of a minor.

Credit shelter trust – Another name for the by-pass or “B Trust” in A-B trust planning.

Crummey trust – An irrevocable trust that grants a beneficiary the power to withdraw all or a portion of assets that are contributed to the trust. The typical purpose of a Crummey trust is to enable the contributions to the trust to qualify for the annual exclusion.

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D

Decedent – A person who has died.

Descendants – A person’s children, grandchildren, and more remote persons who are related by blood or because of legal adoption. A person’s spouse, stepchildren, parents, grandparents, brothers, or sisters are not included. The term “descendants” and “issue” have the same meaning.

Disclaimer – The renunciation or refusal to accept a gift or bequest or the receipt of insurance proceeds, retirement benefits, and the like under a beneficiary designation in order to allow the property to pass to alternate takers. To be a qualified disclaimer and thereby not treated as a gift by the disclaimant, the disclaimer must be made within nine months and before the disclaimant has accepted any interest in the property.

Durable power of attorney – A power of attorney that does not terminate upon the incapacity of the person making the power of attorney.

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E

Estate planning – A process by which a person designs a strategy and executes a will, trust agreement, or other documents to administer the assets for the beneficiaries. Tax and liquidity planning are part of this process.

Estate tax – A tax imposed on an estate on the right to transfer property at death. An estate tax is to be contrasted with an inheritance tax imposed by certain states on the beneficiary’s right to receive property. Many states have no separate estate or inheritance tax.

Estate tax exemption amount – Another name for the unified credit amount, applicable exclusion amount, and credit shelter amount.

Executor – A person named in a will and appointed by the court to carry out the terms of the will and to administer the decedent’s estate. May also be called a personal representative. If a female, may be referred to as the executrix.

Exemption equivalent – Old term for applicable exclusion amount.

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F

Family office – An arrangement to coordinate the legal, tax, and other needs of one or more families, either through a true office staffed with employees or through outsourcing to the family’s regular advisors. Frequently the family’s private trust company serves as the family office.

Family trust – A trust established to benefit one’s spouse, children and/or other family members. Often used in reference to a by-pass trust or credit shelter trust.

Fiduciary – An individual or a bank or trust company designated to manage money or property for beneficiaries and required to exercise the standard of care set forth in the document under which the fiduciary acts and/or by state law. Includes executors and trustees.

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G

Generation-skipping transfer tax – The federal tax imposed on outright gifts and transfers in trust, whether during life or at death, to or for beneficiaries two or more generations younger than the donor, such as grandchildren, that exceed the GST exemption. It is designed to impose a tax on transfers that would otherwise avoid the gift or estate tax at a generational level. Some states impose a separate generation-skipping transfer tax.

Gift tax – The transfer tax on lifetime completed gifts from one person to another. For 2011 and 2012, up to $5 million of a person’s unified credit amount may be used to shelter lifetime gifts in excess of the annual exclusion. Some states impose a separate gift tax.

Grantor – A person, including a testator, who creates, or contributes property to, a trust. If more than one person creates or contributes property to a trust, each person is a grantor with respect to the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion. The grantor is also sometimes referred to as the “settlor,” the “trustor,” or the “donor.”

Grantor trust – When a grantor retains certain control over a trust, the trust is disregarded for federal (and frequently state income tax purposes), and the grantor is taxed on the trust’s income and pays the income taxes that otherwise would be paid by the trust or its beneficiaries. Such tax payments are not treated as gifts by the grantor. Provided the grantor does not retain certain powers or benefits, such as a life estate or the power to revoke, the trust may be structured so that it will not be included in the grantor’s gross estate for federal estate tax purposes.

Gross estate – A federal estate tax concept that includes all property owned at death and certain property previously transferred by a decedent that is subject to federal estate tax.

GST exemption – The federal tax exclusion that allows a certain level of generation-skipping transfers to be made without incurring a generation-skipping tax. The exemption amount is $5 million for 2011 and 2012.

Guardian – An individual or bank or trust company appointed by a court to act for a minor or incapacitated person (the “ward”). A guardian of the person is empowered to make personal decisions for the ward. A guardian of the property (also called a “committee”) manages the property of the ward.

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H

Health care power of attorney – A document appointing a person to make health care decisions when the grantor of the power is incapacitated.

Heir –The person entitled to a distribution of an asset or property interest under applicable state law in the absence of a will. “Heir” and “beneficiary” are not synonymous, though they may refer to the same individual in a particular case.

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I

Income – The earnings from the principal, such as interest, rent, and cash dividends. This is a fiduciary trust accounting concept and is not the same as taxable income for income tax purposes.

Insurance trust – An irrevocable trust created to own life insurance on a person or couple and designed to exclude the proceeds of the policy from the insured’s gross estate at death.

Interest of a beneficiary – The right to receive income and/or principal provided in the terms of the trust.

Intestate – When one dies without a valid will, such that the decedent’s estate is distributed in accordance with state law.

Inventory – A list of the assets of a decedent or trust and filed with the court.

Irrevocable trust – A trust that cannot be terminated or otherwise modified or amended by the grantor.

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J

Joint tenancy – An ownership arrangement where two or more persons own property, usually with rights of survivorship.

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K

No terms listed

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L

Life beneficiary – A person who receives income and/or principal amounts from a trust or similar arrangement for the duration of the person’s life.

Life estate – The interest in property owned by a life tenant having the legal right under state law to use the property for life, after which title fully vests in the remainderman (the person named in the deed, trust agreement, or other legal document as being the ultimate owner).

Living trust – A trust created by an individual during lifetime, typically as a revocable trust. Also referred to by a Latin phrase as an “inter vivos” trust.

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M

Marital deduction – An unlimited federal estate and gift tax deduction for qualified property passing to a spouse.

Marital trust – A trust established to hold property for the surviving spouse in A-B trust planning and designed to qualify for the marital deduction.

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N

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O

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P

Personal representative – An executor or administrator of a decedent’s estate.

Per stirpes – A Latin phrase meaning “per branch” and is a method for distributing property according to the family tree whereby descendants take the share their deceased ancestor would have taken if the ancestor were living. Each branch of the named person’s family is to receive an equal share of the estate. If all children are living, each child would receive a share, but if a child is not living, that child’s share would be divided equally among the child’s children.

Pour over will – A will used in conjunction with a revocable trust to pass title at death to property not transferred to the trust during lifetime.

Power of appointment – Gives a person (usually a beneficiary) the ability to choose the recipients of property upon termination of a trust or other specified circumstances. The person given the power is usually referred to as a “holder” of the power. The power of appointment may be general, allowing the property to be distributed to anyone, including the holder, or limited, allowing the property to be distributed to a specified group. Property subject to a general power of appointment is includible in the holder’s gross estate for federal estate tax purposes.

Power of attorney – Authorization, by written document, that one individual may act in another’s place as attorney-in-fact in some or all legal and financial matters. The scope of authority granted is specified in the document and may be limited by statute in some states. A power of attorney terminates on the death of the person granting the power (unless “coupled with an interest”) and may terminate on the person’s disability (unless “durable” under the instrument or state law).

Power of withdrawal – A presently exercisable power in favor of the power holder other than a power exercisable in a fiduciary capacity limited by an ascertainable standard, or which is exercisable by another person only upon consent of the trustee or a person holding an adverse interest.

Principal – The property (money, stock, real estate, etc.) contributed to or otherwise acquired by a trust to generate income and to be used for the trust beneficiaries according to the trust’s terms. Also referred to as trust corpus.

Private trust company – Often referred to as a family trust company. An entity formed by a family to serve as fiduciary for the estates and trusts of extended family members.

Probate – The court supervised process of proving a will and distributing property under the will or distributing property in accordance with the law in the absence of a will.

Probate tax – A tax imposed by many jurisdictions on property passing under an individual’s will or by intestacy.

Property – Anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein.

Prudent man rule – A legal principle requiring a trustee to handle the trust property with the same care that a prudent, honest, intelligent, and diligent person would use to handle the property under the same circumstances.

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Q

Qualified domestic trust – A marital trust (referred to as a “QDOT”) created for the benefit of a non-U.S. citizen spouse containing special provisions specified by the Internal Revenue Code to qualify for the marital deduction.

Qualified personal residence trust – An irrevocable trust (referred to as a “QPRT”) designed to hold title to one’s residence for a term of years subject to the retained right to reside in the home for the term with title passing to children or other beneficiaries at the end of the term.

Qualified terminable interest property – Property (referred to as “QTIP”) held in a marital trust or life estate arrangement that qualifies for the marital deduction because the surviving spouse is the sole beneficiary for life.

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R

Remainder interest – An interest in property owned by the remainderman that does not become possessory until the expiration of an intervening income interest, life estate or term of years.

Residue – The property remaining in a decedent’s estate after payment of the estate’s debts, taxes, and expenses and after all specific gifts of property and sums of money have been distributed as directed by the will. Also called the residuary estate.

Revocable trust – A trust created during lifetime over which the grantor reserves the right to terminate, modify, or amend.

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S

S corporation – A corporation that has made a Subchapter S election to be taxed as a pass-through entity (much like a partnership). Certain trusts are permitted to be shareholders only if they make the appropriate elections.

Self-dealing – Personally benefiting from a financial transaction carried out on behalf of a trust or other entity, for example, the purchasing of an asset from the trust by the trustee unless specifically authorized by the trust instrument.

Settlor – Term frequently used for one who establishes or settles a trust. Same as “trustor” or “grantor.”

Special needs trust – Trust established for a disabled person and designed to allow the disabled person to be eligible for government financial aid by limiting the use of trust assets for purposes other than the beneficiary’s basic care.

Spendthrift provision – A trust provision restricting both voluntary and involuntary transfers of a beneficiary’s interest, frequently in order to protect assets from claims of the beneficiary’s creditors.

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T

Tangible personal property – Property that is capable of being touched and moved, such as personal effects, furniture, jewelry, and automobiles. Tangible personal property is distinguished from intangible personal property that has no physical substance but represents something of value such as cash, stock certificates, bonds, and insurance policies. It is also distinguished from real property which is land and items permanently affixed to land such as buildings.

Tenancy by the entirety – A joint ownership arrangement between a husband and wife, generally with respect to real property, under which the entire property passes to the survivor and while both are alive, may not be sold without the approval of both.

Tenancy in common – A co-ownership arrangement where each owner possesses rights and owns an undivided interest in the property and under which each owner may sell, give, or will such owner’s individed interest.

Terms of a trust – The manifestation of the grantor’s intent regarding a trust’s provisions as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.

Testamentary – Relating to a will or other document effective at death.

Testamentary trust – A trust established in a person’s will to come into operation after the will has been probated and the assets have been distributed in accordance with the will.

Testator – A person who signs a will. If a female, may be referred to as the testatrix.

Transfer on death designation – A beneficiary designation on a financial account (and in some states, on real estate) that automatically passes title to the assets at death to a named person or revocable trust without probate delays and expenses. Frequently referred to as TOD or POD (payable on death) designations.

Trust – An arrangement whereby property is legally owned and managed by an individual or corporate fiduciary as trustee for the benefit of another, called a beneficiary.

Trust instrument – A document executed by a grantor that contains terms of the trust, including any amendments thereto. Also referred to as a trust agreement or declaration of trust.

Trustee – The person designated to hold and administer trust property (also generally referred to as a “fiduciary”). The term usually includes original (initial), additional, and successor trustees. A trustee has the duty to act in the best interests of the trust and the beneficiaries and in accordance with the terms of the trust instrument. A trustee must act personally (unless delegation is expressly permitted in the trust instrument), with the exception of certain administrative functions.

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U

Unified credit – A credit against the federal gift and estate tax otherwise payable by an individual or estate. Frequently referred to as the estate tax exemption amount, the exemption equivalent, or applicable exclusion amount. The exemption amount is $5 million for 2011 and 2012.

Uniform custodial trust act – A law enacted by some states providing a simple way to create a trust for a minor or adult beneficiary without the need for a complex trust document. Good for a trust of modest size, particularly for a disabled beneficiary. An adult beneficiary may terminate the trust at any time, otherwise the trust may continue for the life of the beneficiary.

Uniform transfers to minors act – A law enacted by some states providing a convenient means to transfer property to a minor. An adult person known as a “custodian” is designated by the donor to receive and manage property for the benefit of a minor. Although the legal age of majority in may be 18, the donor may in many states authorize the custodian to hold the property until the beneficiary reaches age 21. Formerly called the Uniform Gifts to Minors Act.

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V

No terms listed

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W

Will – A writing specifying the beneficiaries who are to inherit the testator’s assets and naming a representative to administer the estate and be responsible for distributing the assets to the beneficiaries.

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X

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Y

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Z

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