JOINT AND SURVIVOR ANNUITY: An annuity that is payable for two lives and does not expire with the death of the first annuitant (although the amount may vary after the first death). Required to be available in ERISA defined benefit plans.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP or “JTWROS”: Method of titling property by two or more persons in such a manner that, upon the death of one, the survivor or survivors take the entire property by operation of law without the intervention of probate. It is not necessary to include “with right of survivorship” as there is no joint tenancy without survivorship provisions. This type of titling results in a transfer by operation of law at the death of a joint tenant irrespective of terms of the decedent’s will. Taxation may occur at two times, one the creation of the joint tenancy interest, and two, at the death of a joint tenant. Taxation is different, by statute, at the death of the first joint tenant depending on whether the joint tenants are spouses or not.
JOINT TENANTS: Exactly the same as Joint Tenants with Right of Survivorship
JOINT TRUST: A trust where there are two or more Grantors/Settlors. This the the form of revocable living trust used most often in community property states (see above) for married couples. It is also used frequently in common law states (see above) for a married couple where there are common heirs and agreement as to ultimate distribution at the death of both grantors.
JOINT WILL: The same instrument is made the will of two or more persons and is signed jointly by them. When it is joint and mutual, it contains reciprocal provisions. (See also mutual wills.) Very archaic. It is rarely ever seen. Do not allow your clients use this form, as almost no one knows how to deal with these later.
LEGAL COMPETENCE: Generally, only persons over the age of 18 may make contracts or perform testamentary acts (create a will or name a beneficiary), There are exceptions for testamentary acts for persons under the age of 18, generally: those who are married, emancipated, or serving in the military.
Also, a court of competent jurisdiction may declare a person to be a “Protected Person” and such court action deprives such protected person of the legal capacity to enter into contracts or make testamentary acts without court approval.
LEGATEE: A person receiving personal property through a will.
LIFE ESTATE: A property interest established for the lifetime of a specific individual. This creates a “split interest” as there is inherently created a “remainder interest” which must vest in some one or some entity to receive the property at the death of the measuring life.
LIVING WILL: A document created by state law which is signed while you are mentally competent, instructing doctors as to your wishes regarding artificial life support if you become terminally ill. Living wills only apply to artificial life sustaining procedures, not to other types of medical treatment. Generally, living wills must be witnessed by two persons, but the scope and formalities vary from state to state.
LAST WILL AND TESTAMENT: The traditional term referring to a will. It was an outgrowth of the old English law under which a will was a disposition of real estate and a testament was a disposition of personal property. The two terms originally meant different things, but the difference is no longer recognized.
LEGACY: A gift of personal property by will. It would perhaps be more traditionally proper to use the term bequest to include any disposition by will, the term devise to cover gifts of real estate, and the term legacy to cover gifts of personal property. However, both at law and in common practice, these terms are not used with any great respect for this distinction and often appear more or less interchangeably.
LEGATEE: The person who receives a legacy (see above.)
LETTERS OF ADMINISTRATION: Written documents, authorized by the judge in an intestate matter, or a proceeding for a protected person (minor or mental incapacity) which authorizes the person named therein as Conservator, Guardian of the Assets, Executor, Personal Representative, or other named fiduciary appointed by the court to perform all acts necessary to administer the estate. Usually with each copy is certified by the court and signed by the Court Administrator, Registrar, or other court official. Often, third parties require Letters to have been issued within the last 60-90 days before they will accept them as authority to act on trust assets.
LETTERS TESTAMENTARY: Written documents, authorized by the judge in an testate matter which authorizes the person named therein as Executor or Personal Representative to perform all acts necessary to administer the estate. Usually with each copy is certified by the court and signed by the Court Administrator, Registrar, or other court official. Often, third parties require Letters to have been issued within the last 60-90 days before they will accept them as authority to act on trust assets.
LIMITED POWER OF APPOINTMENT: A power given to someone which gives the donee a right at any time to designate the property to parties that specifically does not include the right to give the property to either one or more of : the donee, the donee’s estate, the donee’s creditors, or the creditors of the donee’s estate. Contrast this to a General Power appointment where the power does, or may, include the rights to direct the assets to any of: the donee, the donee’s estate, the donee’s creditors, or the creditors of the donee’s estate. The difference is that at death, any assets over which the decedent had a Limited Power of Appointment is not included in his or her taxable estate while the assets over which the decedent had a General Power of Appointment is included in his or her taxable estate (although not usually in a probate estate).
LIQUID ASSETS: Cash or assets that can be readily converted into cash without any serious loss of principal (for example, CDs or life insurance paid in lump sum). Is a very important concept to keep in mind when planning future transfers and it is likely that there will be tax obligations, or requirements to pay creditors, or business associates (see Buy-Sell Agreements, above).
LIVING TRUST: A trust that is created and operates before the death of the grantor/settlor. Usually refers to a Revocable Living Trust (see below).
LIVING WILL: A written expression of an individual’s wishes concerning life-sustaining procedure in terminal illness and imminent death situations. Also known as an Advance Medical Directive (see above). There are considerable differences from state to state as to what forms are allowed or required, the formalities necessary, and the acts of the agent, which can be authorized or directed. There are also considerable differences from state to state as to the acceptance and enforcement of such directives created in another state (e.g. this is unlike the rule that a will, or a marriage, which is valid in one state must be recognized by all states.) Watch for considerable evolution in this legal area over the next decades.
MARGINAL ESTATE TAX RATE: A under a progressive tax system which refers to the rate at which each additional incremental dollar is taxed.
MARITAL DEDUCTION: A deduction allowed for property passing in a qualifying manner to a spouse. Since 1982, the marital deduction has been allowed without limit for qualifying property passing to a U.S. citizen spouse.
MARITAL-DEDUCTION TRUST: A trust consisting of all property that qualifies for the marital deduction, more generally known as a QTIP trust (see below).
MENTAL COMPETENCE: The mental ability to be able to do a certain thing. Traditionally, there have been different standards for minimal capacity to make contracts (higher) than for making a testamentary act. Traditionally, the mental capacity necessary For estate planning purposes, usually characterized as Legal Competence (see below) or Mental Competence (see below).
MEDICAL AND TUITION EXCLUSION: Medical and Tuition payments (so-called qualified transfers) made directly to the service provider free of federal gift taxes. Qualifying medical expenses are those Incurred for the diagnosis, cure, medication, treatment or prevention of disease, including drugs and medical insurance. The medical payments must be paid directly by the donor to the individual or organization providing the medical services. No gift tax exclusion is available if the donee is simply reimbursed or serves as an intermediary for the hospital or school. The unlimited exclusion from gift taxes is not permitted for amounts that are reimbursed by insurance. Qualifying tuition means only tuition paid on behalf of an individual directly to an education organization. The educational organization must maintain a regular faculty and curriculum and must have a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. No exclusion is provided for books, supplies, and dormitory fees. The gift tax exemption extends to foreign educational institutions.
MEDICAL (DURABLE) POWER 0F ATTORNEY: A type of power of attorney which appoints an agent to provide informed consent (or informed refusal) to medical and health-related matters. A medical durable power of attorney covers a broader spectrum of situations and medical procedures than a living will can.
MUTUAL WILLS: The separate wills of two or more persons, with reciprocal provisions in favor of the other person contained in each will generally with consideration (some states allow the wills themselves to be adequate consideration to make the provisions binding). Contrast this to Joint Wills (see above). The modern legal trend has been to hold the right to change your individual testamentary documents to be a higher legal right than enforcing long-ago made wills which may not fit current conditions.
NATURAL PERSON: An living human individual.
NET GIFT: A taxable gift, which, requires the recipient to pay the gift tax on the transferred asset.
NET TAX: Generally the actual amount of tax which is payable in a given situation, after all deductions, credits and other adjustments.
NIMCRUT: A Net Income with Make-up Charitable Remainder Unirust whose lifetime income beneficiary’s interest is a fixed percentage of the trust assets as determined annually, but is limited to the lesser of that percentage or the actual income recognized by the Trust. The annual amount must be at least 5% of the trust assets. The Trust maintains a ‘Make-Up” account for the difference between the income distributed and the income theoretically due the income beneficiary. The income beneficiary may withdraw any previously due amount from the make-up fund in any subsequent year.
NON-GRANTOR TRUST: A trust, which was created either while the grantor was alive (irrevocable inter-vivos trust, see above) or at the testator’s death (testamentary trust, see below) that is deemed irrevocable and considered a separate taxpayer. This trust must report any and all income (in excess of $100 per year) on Form 709 (see above) under the principals of Fiduciary Tax Accounting (see above). The technical determination as to whether or not a trust is a grantor trust (see above) or a non-grantor trust is whether or not the grantor retained one or more powers listed in IRS Code Â§671 -679.
NON-LIQUID ASSETS: Cash or assets that cannot be readily converted into cash without serious loss of principal (for example, CDs or life insurance paid in lump sum). Is a very important concept to keep in mind when planning future transfers and it is likely that there will be tax obligations, or requirements to pay creditors, or business associates (see Buy-Sell Agreements, above).
NON-NATURAL PERSON: A legal entity such as a corporation, LLC, trust, estate, etc. which has an interest in any property.
NON-PROBATE PROPERTY: Any property that passes outside the probate administration of the estate. It passes other than by will or the intestacy laws by law (for example, jointly held property, beneficiary designations on retirement plans, POD/TOD designations) or by contract (for example life insurance proceeds payable to a named beneficiary, or property in an inter vivos trust). Important note, while the mechanics of the transfer avoided probate proceedings, some states have probate laws which may make these assets subject to the probate proceedings to pay creditors. In addition, all non-probate transfers are fully includable in the decedent’s taxable estate. The manner of passing the asset does not matter to the IRS, only that the decedent owned it, or had sufficient control over it at time of death, and that someone else received the asset by reason of the decedent’s death.
NON-QUALIFIED: Refers to anything not under ERISA jurisdiction.
NON-SKIP PERSON: A GST term that refers to a person other than a skip-person ( see below).
NON-REVERSIONARY TRUST: A trust in which there is no possibility of the grantor’s regaining the property, having it return to the estate, or having a power of appointment over it. For tax reasons, while an irrevocable trusts is reversionary the transfer will be deemed incomplete (see above) or if it is complete, will likely cause inclusion in the taxable estate under the provisions of IRS Code Â§Â§2036-2039. Most trusts that are reversionary are typically designed for a term of years with the trust becoming non-reversionary at the end of the term thus obviating the negative estate tax consequences at that time. (See QPRT, GRAT, GRUT)
NUNCUPATIVE WILL: A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will is considered a “deathbed” will, meaning that it is a safety for people struck with a terminal illness and robbed of the ability or time to draft a proper written will. Nuncupative wills are only recognized in a few states and usually only in compelling situations such as the impending death of a soldier in wartime. Those states will admit a nuncupative will, only if the testator died as a result of the impending peril. A nuncupative typically will neither revoke nor change an existing written will.
OPERATION OF LAW: A method of assets or property passing directly from a decedent to a recipient other than by will or contract. The legal process effectuates the transfer immediately upon death without the necessity of any further action, e.g. when one (of two) joint tenant dies, title to the entire property or asset immediately vests in the survivor without the need of any action by the survivor. Note that the survivor will generally need to provide a death certificate (file it in the case of real property) to establish that there is only one person in title.
ORDINARY INCOME: Income received from labor, rents, royalties, etc. Contrast with income resulting from the gain in appreciation of value of capital assets (capital gains income).
PAY-ON-DEATH (POD) ACCOUNT: A method of providing for a beneficiary-like transfer at death of accounts at a banking institution which does not need probate. This needs to be authorized by state banking law. Not all states have POD arrangements. In states without such laws, one can use a “Totten Trust” (see below) to provide a similar result. For securities institutions, the corresponding method is known as Transfer on Death or TOD.
PECUNIARY BEQUEST: A provision in a will or a trust which makes a bequest of a specific dollar amount.
PER CAPITA AT EACH GENERATION DISTRIBUTION: Most modern method of dividing a decedent’s estate, which combines the best properties of Per Stirpes and Per Capita. Each branch of the family lines is treated equally as in Per Stirpes. As in Per Stirpes, the most senior members (generationally) of the branch take for that branch. However, if there are multiple members of a generation, which take because they all are senior in that branch, each member of that generation takes equally from all the assets, which would go to that generation from all branches (i.e. Per Capita, but only for the amount that generation takes). Comes from proposed provisions of the Uniform Probate Code II, not adopted yet in many states, but can be written in wills and/or trusts to overwrite the default law.
PER STIRPES: (By the Branch) Typical method of dividing a decedent’s estate by representation or by branches of family lines with each branch being treated equally. The most senior members (generationally) of the branch take for that branch. If there are multiple members of a branch of the same generation, the share equally in that branch’s amount. Also commonly known as By Representation (see above). Contrast with Per Capita (see above).
PERSONAL EXEMPTION FOR TRUSTS AND ESTATES: Annual amounts ranging from $600 for an estate, to $100 for a complex trust, allowed as a deduction by the trust. These deductions are allowed so returns will not have to be filed for trusts and estates that generate only a small amount of income each year.
PERSONAL PROPERTY: Any property that is not real property or an interest in real property.
PERSONAL REPRESENTATIVE: Modern (Uniform Probate Code) name for Executor or Executrix. Totally interchangeable with no differences in use.
PERSONAL RESIDENCE TRUST: A trust which provides the grantor with a retained interest in the residence(s) transferred to the trust and allows for favorable gift and estate tax treatment
“PICKUP” STATE: A state which does not impose an estate tax or an inheritance tax, but does “pick up” an amount equal to the federal state death tax credit as the amount owing to it on a decedent’s death. This was used increasingly until the passage of EGTRRA in 2001 when the credit for state inheritance tax was phased out in favor of a deduction. If EGTRRA is allowed to “sunset” in 2011, this will again become the operative law.
POST-MORTEM ESTATE PLANNING: Tax planning after the death of the decedent. The typical tax issues involve special use of valuation, disclaimers, installment payment of estate taxes and use of the alternate valuation date in order to minimize federal estate taxes.
POUR OVER: A term referring to the transfer of property from an estate or trust to another estate or trust upon the occurrence of an event as provided in the instrument (for example, property disposed of by will pours over into an existing trust). A “Pour-over” will is a standard part of any living trust (see above) based estate plan to serve as a ‘safety net’ to assure that all assets are controlled by the terms of the trust, at least at death, if not during life.
POST-NUPTIAL AGREEMENT: A contract entered into by a couple after marriage and usually pertaining to issues of support and property distribution in the event of a subsequent dissolution of marriage or death of either party. Many, but not all states allow these agreements and those that do allow them may differ in required formalities and enforceability of various terms and provisions.
POWER OF ATTORNEY: A document, signed while you are still competent, appointing someone you name as your “agent” or “attorney-in-fact” to handle your affairs. “General” powers of attorney convey a broad range of authority, while “special” or “limited” powers of attorney are narrower and limited to specific activities or transactions.
PRE-NUPTIAL AGREEMENT: Also known as an Antenuptial Agreement. A contract entered into by a couple prior to marriage and usually pertaining to issues of support and property distribution in the event of a subsequent dissolution of marriage or death of either party. All states allow these agreements, although states differ in required formalities and enforceability of various terms and provisions.
PRECATORY LANGUAGE: Terms in a will or a trust that generally states the testator’s wishes regarding the distribution of personal effects or other matters but is not legally enforceable.
PRESENT INTEREST GIFT: When the recipient of a transfer has the immediate present right to the use or enjoyment of the subject matter of the transfer. It is always from the viewpoint of the recipient, and only occurs when the transfer is complete. A present interest is a necessary component of any gift for that gift (or the appropriate portion thereof) to qualify for the annual gift exclusion. If the gift is not of a present interest, it is by default a gift of a Future Interest (see above.)
PRINCIPAL: 1- The assets making up the estate or fund that has been set aside in trust, or from which income is expected to accrue (corpus). Trust principal is also known as the trust res.
2 – The person who gives authority to an agent to act for him or her
PRINCIPAL AND INCOME ACT (P & I ACTS): The law in each state which regulates the default of what is considered to be income and what is to be considered principal. Usually, income that would be taxed as “Ordinary Income” (see above) will be classified as “income” while capital gains are classified as principal. This is important for trusts where the income beneficiary (see above) and the remaindermen (see below) are not the same and to the extent that income is emphasized in the investment portfolio, principal is diminished, and visa versa. A number of modern P & I Acts allow a trustee to invest for the maximum overall return, irrespective of the character of the return, and then subsequently recharacterized the previously earned income to fairly allocate between competing interests.
PROBATE: The mechanical process of proving a will’s validity in court and executing its provisions under the guidance of the court. The process of probating the will involves recognition by the appropriate court of the executor named in the will (or appointment of an administrator if none has been named), and the determination of the validity of the will if it is contested.
PROBATE ESTATE: The sum total of all probate property left by a decedent.
PROBATE PROPERTY: Real or personal property that is passed under the terms of a will; if there is no will, it passes under the intestacy laws (for example, individually held property or one-half of community property).
PROPERTY: An interest or item capable of being owned, including actual outright ownership of material objects as well as a right to possess, enjoy, use, consume, or transfer something. May be tangible or intangible, real or personal.
PRUDENT-PERSON RULE: Traditional common law rule stating that a fiduciary, in acquiring, investing, reinvesting, exchanging, retaining, selling, and managing property for the benefit of another, shall exercise the judgment and care under the circumstances then prevailing, that persons of prudence, discretion, and intelligence exercise in the management of their own affairs.
QUALIFIED DOMESTIC TRUST (QDOT): A trust created when a decedent needs to have assets going to (or for the benefit of) a non-citizen spouse qualify for the marital deduction. To qualify for the marital deduction, the QDOT must: 1 – have a US citizen or corporation serve as Trustee (or co-Trustee) at all times; 2 – the Trustee must have the requirement to withhold and pay applicable estate taxes at all distributions of principal; 3 – the QDOT must exist for the lifetime of the non-citizen spouse; 4 – no principal distributions can be made to anyone other than the spouse. The taxes incurred when principal distributions are made (e.g. during the lifetime of the non-citizen spouse or at the death of the non-citizen spouse) are accounted for in an amendment to the first decedent spouse’s 706 (see above) and does not become a part of the surviving, non-citizen spouse’s estate. Contrast this tax treatment with that of the QTIP (see below).
QUALIFIED FAMILY-OWNED BUSINESS EXCLUSION: A provision in the code prior to 2001 EGTERRA (and possibly after 2011 when/if EGTERRA “sunsets”) whereby an executor can elect to exclude “qualified family-owned business interests” from a decedent’s estate if those interests comprise more than 50% of a decedent’s estate and certain other requirements are met.
QUALIFIED INCOME INTEREST: An income interest where the interest holder (usually a surviving spouse) has the right to compel the trustee to convert the asset into assets which will produce a minimum amount of income (note that capital gains are not usually considered income, but are normally considered to be principal – see Total Return Trust, below, and Principal and Income Act, above.)
QUALIFIED PERSONAL RESIDENCE TRUST (QPRT): A trust designed to take advantage of a statutorily created exception to the provisions of IRC Â§2702 whereby a grantor can transfer his or her personal residence (and/or up to one vacation home) to a trust whereby the grantor retains the exclusive right to use of the property for a term of years and at the end of the term, the property belongs to the remainderman (see below). The purpose is to set the value of the transfer at the present value of the retained interest (which would normally be valued at zero under the provisions of IRC 2702 for transactions with related parties). This “freezes” the value of the gift portion to today’s value (less the value of the retained interest). Consequently, all future growth in the value of the residence will inure to the benefit of the remainder interest and not the retained interest. Note that the grantor must outlive the term of the trust, otherwise the provisions of IRC Â§2036 (see above) will bring the entire date of death value of the subject property into the decedent’s taxable estate.
QUALIFIED STATE TUITION PROGRAM Â§529: A program established and maintained by a state, state agency, or state instrumentality (such as a brokerage house) under which a person: (1) may purchase, in cash, tuition credits or certificated on behalf of a “designated beneficiary” that entitle the beneficiary to wavier or payment of “qualified higher education expenses” of the beneficiary; or (2) may make cash contributions to an account established solely for meeting the qualified higher education expenses of the designated beneficiary of the account.
QUALIFIED TERMINABLE INTEREST PROPERTY: Property, the interest in which will terminate by reason of death, and will then be directed to someone else. Terminable Interest Property does not qualify for the unlimited marital deduction unless it is “Qualified” i.e. kept in a trust (QTIP Trust, see below) that gives the surviving spouse the rights to a qualified income interest (see below) for life.
QUALIFIED TERMINABLE INTEREST PROPERTY TRUST (QTIP TRUST): Although most limited or “terminable” interests in property (such as life estates) do not qualify for the marital deduction, in 1981 laws were enacted to allow a marital deduction for such interests if, at a minimum, all of the income was payable to the surviving spouse in all events during the surviving spouse’s lifetime. This type of property is known as Qualified Terminable Interest Property, and a QTIP trust is the trust that holds such property. It is used when a person has more assets than will pass either directly, or via a credit shelter trust (see above) and wants the remainder to qualify for the unlimited marital deduction (see below) and still direct where the property goes after the death of the surviving spouse.
REAL PROPERTY: Land, or interests in land and anything attached to the land. Always controlled by the laws of the state where the land is located.
RECAPTURE: If the tax code gives favorable benefits for certain situations, the if the terms of the code are violated, then the benefits given may have to be repaid.
RECIPROCAL TRUSTS: These are trusts created by two individuals in which each party is a beneficiary of the trust established by the other party. The trusts are typically identical except that the creator and beneficiary are reversed on each document.
RECIPROCAL TRUST DOCTRINE: A common law doctrine that allows reciprocal trusts being “uncrossed” for tax purposes because the trusts are deemed to have no purpose other than tax avoidance and do not vary the economic positions of the trust creator.
REDUCTION IN VALUE BY MERE LAPSE OF TIME: The diminished value of an asset by reason of the passage of time. Typical of wasting assets, such as annuities, mortgages, and notes receivable. These assets are always valued for estate tax purposes as of date of death even if the alternative valuation date (see above) is validly elected for the estate.
REMAINDER INTEREST: A future interest that comes into existence after the termination of a prior interest.
REMAINDERMEN: The person or persons who is/are entitled to receive the principal (corpus) of an estate upon the termination of the intervening life (or income) estate or estates.
REQUIRED BEGINNING DATE (RBD): This is the date on which a retirement plan participant is required to begin making distributions from his or her retirement plan(s). It is April 1st of the calendar year following the year the participant reaches age 70-1/2.
RESIDUARY ESTATE: The remaining part of an estate (usually through a will or a living trust) after payment of administration costs, expenses, funeral expenses, debts, taxes, personal property via memoranda, and specific bequests.
REVERSIONARY INTEREST: A right to future enjoyment by the transferor of property that is now in the possession or enjoyment of another party. The interest may be contingent or vested.
REVERSIONARY TRUST: A trust in which there is a possibility of the grantor’s regaining the property, having it return to the estate, or having a power of appointment over it. For tax reasons, while an irrevocable trusts is reversionary the transfer will be deemed incomplete (see above) or if it is complete, will likely cause inclusion in the taxable estate under the provisions of IRS Code Â§Â§2036-2039. Most trusts that are reversionary are typically designed for a term of years with the trust becoming non-reversionary at the end of the term thus obviating the negative estate tax consequences at that time. (See QPRT, GRAT, GRUT)
REVOCABLE: Can be changed or amended.
REVOCABLE INTER VIVOS TRUST: See Revocable Living Trust, below.
REVOCABLE LIVING TRUST (RLT): A trust, created in the lifetime of the grantor(s) who retains the right to revoke, amend, or terminate the trust at the discretion of the grantor. Also technically known as a revocable inter vivos trust. Often used in estate plans of moderate to complex sophistication as a will substitute. Serves as an asset-management tool while the grantor is alive (he/she usually manages the assets as long as possible with a carefully chosen successor to take over in the event of mental incapacity), and with whatever instructions the grantor desires for distribution after death. Assets properly titled in the name of the RLT will avoid probate (although some state’s laws allow RLT assets to be reached in a probate action to satisfy creditors from an insufficient probate estate.) Is often used to avoid probate in a costly probate state, and to avoid probate in multiple states where out of state real estate interests are owned. A RLT (with appropriate ancillary documents, such as living wills, powers of attorney, etc.) is the typical basic estate-planning tool of choice for many, if not most, more sophisticated estates.
RULE AGAINST PERPETUITIES (RAP): A traditional common law limitation that restricts a person’s power to keep property in trust beyond their lifetime for a period measured by a life or lives in being at the creation of the trust (usually the death of the grantor) plus 21 years (may be extended by the 9 month gestation period in some states.) This rule was developed to keep assets from being ruled by the “dead hand of the grave” for too long and required that at some reasonable time, the trust must end and the assets be distributed back into society so that they can be managed and controlled by contemporaries with knowledge of current circumstances. Traditionally, a trust was void from the beginning (ab initio) if, under any possible circumstances the trust could possible violate the rule. The rule has been being eroded over the years with many states adding statutes to make a trust void only if it actually did violate the rule. Many states have recently enacted legislation revoking the rule or allowing a trust to choose to “opt out” of the rule. This rush to modify this long-held (and thoroughly confusing) rule may be more motivated out of a desire to attract trust management (and their assets) to the state than through any thoughtful analysis of why the rule was there in the first place.
SECOND-TO-DIE, OR SURVIVORSHIP LIFE INSURANCE: A type of life insurance. Instead of buying individual life insurance foe either a husband or wife, the life insurance purchases covers both spouses with the policy only paying a benefit after the second spouse dies. The premiums payable for the second-to-die policies are often lower than they would be for single life insurance policies because the death benefit on the second-to-die policy is delayed until after the second spouse dies, thus affording the insurance company more time to invest the premiums. The downside, however, is that even though the annual premiums may be smaller, they may be payable for a much longer time. Second-to-die policies make sense where life insurance proceeds are needed to provide liquidity to pay estate taxes at the death of the surviving spouse. This can be important in situations where the bulk of the estate consists of illiquid assets, such as a family business, farm, or art collection, which otherwise would have to be sold to pay the estate tax. With the second-to-die policy in place, the estate taxes can be paid and the remainder of the estate left intact for the heirs. Buying second-to-die policies also makes sense if one of the spouses is sick. The cost of buying life insurance once someone has become sick may be prohibitive, whereas spreading the risk over the lives of a healthy spouse and an unhealthy one will result in lower premiums.
SELF-CANCELING INSTALLMENT NOTE (SCIN): A type of an installment note that provides that the note is canceled automatically if the seller dies before all remaining principal payments are made. The interest or the principal should contain a reasonable “premium” to compensate the note holder for the risk that all of the note will not be repaid. The term of the note must be for a time frame in which the note holder could reasonably expect to live (taking into account standard mortality tables and foreseeable health issue for the following 18 months.)
SELF-PROVING WILL: A will which contains an “Attastation Clause” which is a paragraph at the end of a Will signed by the witnesses indicating that they affirm by their signatures that they have heard the testator declare the instrument to be his or her will and have witnessed the signing of the will. It will not be necessary to later call the witnesses to testify as their signed and notarized affidavit will stand as proof of the legitimacy of their statement as to their belief as to the capacity of the testator/testatrix and the signing of the will absent of observable undue influence or duress.
SEPARATE PROPERTY: In most jurisdictions, a person’s earnings (prior to marriage) and the assets acquired with those funds, property received by inheritance, gift or personal injury settlement or award, together with income generated there from.
SEPARATE TRUSTS: The traditional method in non-community property states of having husband and wife each have their own trust. At death, the assets could either flow to the surviving spouse or to a Credit Shelter Trust (see above) for the surviving spouse’s benefit, or to heirs (either directly or in trust.) Compare with the use of a Joint Trust (see above) for a married couple. In more modern plans, in non-community property states, joint trusts tend to be used more often when the couple think of assets and heirs as “ours” while separate trusts are more often used when either spouse wants to create a more definite “pipeline” for their assets and/or their heirs.
SETTLOR: Person who creates a trust (also known as Grantor, Trustee, or Trustmaker).
SIMPLE TRUST: Also called “distributable” trust. A simple trust is one in which the trust terms (1) require the trust distribute all of its income currently for the taxable year (it distributes no corpus), and (2) do not provide that any amounts may be paid, permanently set aside, or used for charitable purposes. A simple trust is primarily a conduit of income. Therefore, the trust takes a deduction for the income that is required to be distributed currently, and the beneficiaries include that amount in their gross income, whether or not actually distributed. The terms of the trust instrument and state law determine what is income for this purpose.
SIMPLE TRUST: An IRS income tax definition of any trust where the trustee (by the terms of the trust or by state law if the trust is silent as to the issue) must, or does, distribute all trust income and/or is not allowed or does not distribute any trust principal in a particular tax year. A trust which is not a simple trust is called a “complex” trust for IRS income tax purposes.
A trust may, or may not, be either simple or complex in any one year, and be the other in another year, depending on the rights and responsibilities inherent in the trust document, and the conduct of the trust in that particular year. The difference between the two is primarily the amount of the personal exemption allowed on the trust income tax return (form 1041, see below). A complex trust is allowed a $100 exemption, a simple trust is allowed a $300 exemption, and an estate is allowed a $600 exemption.
SITUS: Physical location, usually of property or trust administration. Important in determining which courts and which state laws govern.
SKIP PERSON: A fundamental term in generation-skipping transfer tax to describe a person who is either a) more than one generation below; or b) two or more generations below the generation of the donor. Note that both definitions mean exactly the same thing. Only a transfer to a skip-person is subject to GSTT. Also, note that the determination of who is and who is not a “skip person” is made at the time a transfer is complete and remains in place for the duration of that transfer (i.e. the trust) irrespective of later changes in the generations.
If at the time a transfer is complete, an intervening generational member has died, the lower generations “move up” to fill in the gap. Thus if at the time a grandfather dies and his will establishes a trust for the grandchildren, the children are “skip persons” if the parent (who is the child of grandfather) is alive, but are “non-skip” persons if the parent (who is the child of grandfather) is not alive at the time of the transfer. If the grandchildren are “skip persons” at the time of the transfer, and while the trust is in being, the parent (who is the child of the grandfather) dies, the children still remain “skip persons” as to that original transfer and do not become “non skip” for that transfer, although they would be “non skip” for a transfer made after the parent died.
SOLE OWNERSHIP: When the ownership of a property interest is vested in only one person.
SPECIAL OR LIMITED POWER OF ATTORNEY: Powers granted by the principal that enables the attorney-in-fact to act only with regard to one or more specific tasks or for a specified period of time. Is inherently limited in either scope (i.e. what powers are being conveyed) or duration (i.e. how long the power will last.)
SPECIAL-USE VALUATION: Also generally known as Â§2032A election which is available under specific circumstances to use for federal estate tax purposes a value of certain real property which is less than the “highest and best use” (see above) Fair Market Value (see above). The theory is to determine the special use by taking into consideration how the property currently is utilized instead of how it might be used if placed in its best and most profitable use. To qualify, the property must be either a farm or a closely held business and consist of at least 50% of the decedent’s adjusted gross estate (see above); the real property must be at least 25% of the adjusted gross estate; the property being qualified must have been in active use by the decedent or a family member of the decedent for 5 of the last 8 years immediately prior to the death of the decedent; the property qualifying for special use valuation must pass to a qualified heir (i.e. a family member or spouse of a family member); all heirs must sign the estate tax return agreeing to be liable for the tax savings if it should need to be recaptured; and the property must continue in the special use by qualified heirs for 10 year following death.
SPENDTHRIFT TRUST: Also called a minor’s trust. Use a spendthrift trust if you are worried that your heirs will not be able to manage the estate, either because they are too young, or might spend it unwisely. The terms of the trust can specify the investment objectives that the trustee must follow. In addition, the trust can spell out the criteria for eventually distributing the estate to the heirs, often when they reach a certain age.
SPLIT-DOLLAR INSURANCE: A method of funding an insurance policy in which the premiums and benefits are shared by two parties, primarily an employer and employee. Recent IRS rules make this previously very popular method to be difficult and generally not appropriate.
SPLIT-INTEREST: The division of an interest into two or more component parts, such as a life estate and a remainder interest, or an income interest and a remainder interest, etc.
SPOUSAL ELECTIVE SHARE: The right in most states of a surviving spouse to elect to take a statutory share instead of the amount in the will or trust. Usually, it is the share they otherwise would have gotten from the state’s laws of intestate distribution instead of the share they were left in the will or trust. Usually, spouses cannot be disinherited in a will or trust, while other heirs can be. States differ on who can challenge a will or trust and how it can be challenged for an elective share.
SPOUSAL ROLLOVER: Where retirement plans and IRAs are payable to a surviving spouse, the surviving spouse’s option to “roll over” the funds into his or her own IRA, thereby deferring the income tax on the plan funds. The spouse then administers the IRA as if they had earned the funds placed in the IRA, setting the beneficiary designations
SPRINGING POWER OF ATTORNEY: A power of attorney (either a traditional or a durable, see above), which becomes operative only when a specified event occurs, such as the principal’s physical or mental incompetence or disappearance. While it appears to give the Principal more protection, it practice, it may be much more difficult for the Agent to use as it inherently requires the Agent to prove the incapacity of the Principal with all of the inherent privacy and release issues that proof might entail.
SPRINKLE OR SPRAY POWERS: Powers granted in a trust which gives the trustee discretionary power to distribute any part or all of the income or corpus among the beneficiaries in equal or unequal shares.
STATE DEATH TAX CREDIT: A dollar for dollar credit against the federal estate tax for a portion or all estate, inheritance, legacy, or succession taxes actually paid to a state when attributable to property included in the gross estate. Was phased out of the federal estate tax system starting in 2002 and replaced with a deduction for state tax paid. The phase-out was a part of the EGTRRA bill of 2001 that is currently scheduled to “Sunset” on 12-31-2010 and revert to the previous system. Stay tuned.
STEP-UP BASIS: The often used, and misused terms to describe the new basis acquired by the recipient of an inheritance in which the decedent’s property is increased to fair market value of the asset on the date of death. It is more properly referred to as an “Adjustment to Basis” as it could easily be a Step-down in basis if the date of death fair market value is below the decedent’s adjusted basis. The estate (nor the recipient) gets any tax loss for such downward adjustment.
SURVIVOR: Usually referring to the surviving spouse in a husband and wife couple. The spouse who survives the decedent’s death.
TANGIBLE PERSONAL PROPERTY: Property which is not Real Property (see above) that has physical substance-that is, it may be touched, seen, or felt. Contrast with Intangible property such as bank accounts, stock certificates, etc., which merely indicate value or an interest.
TANGIBLE PROPERTY: Property that itself has physical substance as opposed to something that is only evidence of value.
TAXABLE DISTRIBUTION: A type of distribution from a trust which causes a generation-skipping-transfer-tax to be paid. This is a distribution from a trust, which could (either by the terms of the trust or at the discretion of the trustee) pay to either a Non-Skip Person (see above) or a Skip Person (See above). If the distribution is to a Skip Person, the amount of the distribution is multiplied by the Inclusion Ratio (see above) to determine the taxable amount, which is then multiplied by the then-current GSTT rate (the highest marginal estate and gift tax marginal rate then in effect) to determine the tax due. The recipient of the distribution is responsible to pay the tax. Contrast with the other two types of GSTT distributions: Direct Skip (see above) and Taxable Termination (see below)>
TAXABLE ESTATE: An amount determined by subtracting the allowable deductions from the gross estate. This is the number that is used to calculate the amount of tax that is owed. Note that you calculate tax on the entire amount and later subtract the Unified Credit (see below) which accounts for the amount which one can pass without paying estate tax. Never subtract the Credit Equivalent Exemption Amount before calculating the tax.
TAXABLE TERMINATION: When the interests of all possible Non Skip Persona (see above) have terminated and only Skip Persons are potential beneficiaries of a GSTT trust, the termination of such interest creates a taxable event since it is now certain that all of the trust will go to Skip Persona. The tax is paid by the trust The amount of the trust is multiplied by the Inclusion Ratio (see above) to determine the taxable amount which is then multiplied by the then-current GSTT rate (the highest marginal estate and gift tax marginal rate then in effect) to determine the tax due. The trust is responsible to pay the tax. Contrast with the other two types of GSTT distributions: Direct Skip (see above) and Taxable Distribution (see above),
TENANCY: How title to property is held; the estate of a tenant. Can be in the name of one person (natural or non-natural, see above) or in multiple ownership (see Joint Tenancy and Tenants in Common, below)
TENANCY BY THE ENTIRETY: A way of holding tile to property (allowed in only some states), which is a variant of Joint Tenancy (see above). The survivorship provision is the same as in Joint Tenancy (see above). Tenancy by the Entireties is only available for married couples and requires both parties consent to break the Tenancy by the Entireties. This provides a bit of additional asset protection as a judgment creditor of only one party cannot force that party to sever the Tenancy by the Entirety to create a Tenants in Common (see below) where the creditor could execute on the tenants in common interest. Of the states where Tenancy by the Entirety is recognized, some recognize it only for real property while others recognize it for real and personal property. Some states only recognize it for domiciles of those states, others for any married owners of real property in that state.
TENANCY IN COMMON: A way of more than one person (natural person or non-natural person) holding title to property. Each tenants has an undivided interest, which can be sold or gifted at any time (voluntarily or involuntarily), and upon the death a tenant, that tenant’s interest is passed to that tenant’s designated beneficiary via the deceased tenant’s will (or by intestacy) and does not pass automatically to the surviving tenants in common. This is the default way of titling real property in more than one name unless specified to the contrary. Ownership may be in equal or unequal parts, but will be deemed to be equal unless specified otherwise.
TENTATIVE TAX: The gross value of the federal estate tax prior to application of the Unified Credit, the credit for gift taxes paid after 1976, and any other applicable credits.
TERMINABLE INTEREST PROPERTY: Property, the interest in which will terminate by reason of death, and will then be directed to someone else. Terminable Interest Property does not qualify for the unlimited marital deduction unless it is “Qualified” i.e. kept in a trust (QTIP Trust, see above) that gives the surviving spouse the rights to a qualified income interest (see above) for life.
TERMINABLE INTEREST RULE: IRS tax rule that allows the marital deduction to apply to a decedent spouse’s property only when the nature of the property or the interest in property passing to the surviving spouse is such that, if retained until the surviving spouse’s death, it will be taxed in the surviving spouse’s estate, i.e. there is no marital deduction for any property going to a surviving spouse when the interest of the surviving spouse would terminate by any reason other than death and the someone else would direct who would receive the property. Note that by giving a surviving spouse either a General Power of Appointment (see above) or a qualified income interest for life (see above) one can qualify such Terminal Interest Property for a marital deduction (i.e. the QTIP, see above.)
TESTAMENTARY: The term which refers to a document, gift, or power not to take effect irrevocably until the death of the maker
TESTAMENTARY CAPACITY: The mental capacity necessary to create a valid document that disposes of a person’s asset as a result of their death. The components and tests of this capacity are a function of state law and vary from state to state.
TESTAMENTARY TRUST: A trust created by the operation of a Will. Does not come into being until the person dies and the will successfully passes through probate.
TESTATOR/TESTATRIX: The person making a will. Testator for males, testatrix for females.
THEFT LOSS The loss of a decedent’s property, resulting from its unlawful taking by another during the administration of the estate.
THIRD-PARTY BENEFICIARY CONTRACT: Contract between two people or entities for the benefit of a third person or persons (i.e. a life insurance contract or a trust).
TOTAL RETURN TRUST: A trust where the trustee is authorized to invest for the greatest total return, irrespective of whether the return is ordinary income or capital gains, and then fairly allocate the earned return between the income beneficiary and the remainder beneficiary (as principal). Some states’ P & I Act (see above) allow this inherently, and in other states, the trust document must specifically allow this.
TOTTEN TRUST: A revocable transfer in which a donor makes a deposit in a bank savings account for a donee. The donor acts as trustee of the account and no gift occurs until the donee makes a withdrawal. Used in states which do not statutorily have POD (see above) or TOD (see above) accounts.
TRACING: The method of determining the tax character of property by identifying the source from which it came.
TRANSFER-ON-DEATH (TOD) ACCOUNT: A method of providing for a beneficiary-like transfer at death of accounts at a securities institution which does not need probate. This needs to be authorized by state securities law. Not all states have TOD arrangements. In states without such laws, one can use a “Totten Trust” (see above) to provide a similar result. For banking institutions, the corresponding method is known as Pay on Death or POD.
TRANSFER TAKING EFFECT AT DEATH: Any transfer of an interest in property from the decedent, in trust or otherwise (except to the extent for full and adequate consideration in money or money’s worth), if three conditions have been met: (1) possession or enjoyment of the property that could have been obtained only by surviving the decedent; (2) the decedent had retained a reversionary interest in the event the donee predeceased the transferor; and (3) the value of the reversionary interest immediately before the decedent’s death exceeded 5 percent, actuarially determined, of the value of the entire property. Property transfers taking effect at death are included in the decedent’s gross estate.
TRANSFER TAX: An excise tax (gift, estate, or generation-skipping transfer tax) on transfers of money or other assets of value for less than adequate and full consideration in money or money’s worth
TRANSFER WITH A RETAINED LIFE ESTATE: Any property that the decedent has transferred in trust or otherwise (except to the extent that the transfer was for full and adequate consideration in money or money’s worth) if a decedent retained or reserved such and interest (1) for life, (2) for any period not ascertainable without reference to his or her death, or (3) for any period that does not in fact end before his or her death, the use, possession, right to income, or other enjoyment of the transferred property or the right, either alone or in conjunction with any other person, to designate the person who will enjoy the transferred property or its income. If the decedent retained or reserved an interest or right with respect to all of the property transferred, the amount included in the decedent’s gross estate is the value of the entire property interest. If the decedent retained or reserved any interest or right with respect to only a part of the property, the amount to be included in the decedent’s gross estate is only that portion of the property.
TRANSMUTATION: Change of the character of property by spouses for community-property law purposes from separate to community or vice-versa.
TRUST: A legal entity which is generally used to hold assets instead of giving them outright to a beneficiary, either to permit tax avoidance or deferral (as in a marital deduction or generation-skipping trust) or to provide investment guidance or protection for the beneficiaries, particularly minor or younger children. A right to property, real or personal, held by one party for the benefit of another.
TRUST TERMS: The set of powers, usually administrative, that may establish the scope of the rights, responsibilities and duties of the respective parties to a trust.
TRUSTEE: The holder of legal title to property which is being held for the use or benefit of another.
TRUSTOR: One who creates a trust. Same as Settlor or Grantor for trusts.
UNFUNDED INSURANCE TRUST: A trust designed to hold life insurance that is not provided with assets to pay the life insurance premium bur rather will need subsequent contributions of cash or assets to be able to pay premiums.
UNDISTRIBUTED NET INCOME: The basis on which the throwback tax is imposed on distributions of prior accumulations of trust income. The term is defined on a cumulative year-by-year basis as distributable net income (DNI), minus various taxes imposed on the trust with respect to the undistributed DNI and required and discretionary (first- and second-tier) distributions for the year. All or a portion of taxes (other than the alternative minimum tax) imposed on the trust for the throwback year attributable to an accumulation distribution are deemed distributed along with the accumulation distribution. Once undistributed net income (UNI) for prior years is determined, the beneficiary’s tax is determined on the basis of deemed distributions of UNI from previous years.
UNIFIED CREDIT: A credit applicable against federal gift and/or estate taxes. The Unified Credit has been at varying levels since 1976, but reached a level of $345,800 in 2002.
UNIFIED CREDIT EXEMPTION EQUIVALENT TRUST: A testamentary trust created according to the terms of a person’s will after he or she dies, typically consisting of one spouse’s separate property, and half the total property owned by both spouses in an amount equal to an equivalent of the unified credit amount. This type of trust may grant the surviving spouse an income interest for life, but not a general power of appointment over trust property nor any power to withdraw trust assets. These powers would result in inclusion of the assets in the trust in the estate of the surviving spouse.
UNIFORM PROBATE CODE: A model or uniform law for states regarding probate. Not federally sponsored. UPC reduces the burden and cost of probate. Enacted in about 18 states, mostly mid-western. Each state where it is enacted has its own version. However, concepts from the UPC can be found in many state’s laws which have not enacted the full UPC. Colorado has the UPC without many local modifications. However, on July 1, 1995, Colorado enacted portions of UPC II, with many local variations.
UNITRUST PAYMENT: A right to receive one or more payments from a trust for life or for a term of years. The amount of the payment is a fixed percentage of the value of the trust principal as revalued annually. Typically used in CRUTs (see above), CLUTs (see above), and GRUTs see above)
UNITRUST AMOUNT: An amount of payable, at least annually, equal to a fixed percentage of the net fair-market value of the trust’s assets to the beneficiary of a charitable remainder unitrust. If the proper unitrust amount is not disbursed from the trust, then the grantor of the trust could lose income, estate, or gift tax deductions for the transfer to the trust. The trust instrument may direct the trustee to pay the lesser of the trust income or the stated annual percentage payout. These trusts are often referred to as net income or income-only unitrusts. They are commonly used to fund charitable remainder trusts, whose payouts are deferred until the grantor retires.
UNITRUST INTEREST: An irrevocable right, established by the trust instrument, to receive payment, whether out of income or corpus, of a fixed percentage of the net fair-market value of the trust’s assets, determined annually. Fair market value may be determined on the basis of several valuation dates. Gifts of remainder interests in trusts that are unitrust interests qualify for charitable contribution deductions.
UTMA/UGMA: (Uniform Transfers to Minors Act/Uniform Gifts to Minors Act) Laws in each state (either UTMA – the more modern, or UGMA – the original. Each state will have one or the other) that authorize the transfer of property to a custodian who holds the transferred property for a minor and distributes all property and income to the minor when he or she reaches adulthood under local law (21 in all but one state.) By statute, a transfer to a UTMA or UGMA account is treated as a “present interest” (see above) for gift tax purposes. However, if the donor remains as the Custodian of the account, the value of the account will be included in the donor/custodian’s taxable estate if the donor/custodian should die while assets are still in the UTMA or UGMA account.
VESTED INTEREST: An interest in real or personal property which is absolute, fixed and not contingent, although the right to possession and enjoyment may be postponed until some future date or until the occurrence of some event.
VESTED REMAINDER: A current interest in property that is the absolute right to receive the remainder of property or a trust after the current use or income interest has ended. A remainder interest has current economic value and may be sold or transferred. However, since the use of the subject matter of the property is inherently delayed, a gift of a remainder interest is always a gift of a future interest (see above).
WARD: A person who has been determined by a court of competent jurisdiction to need the protection of the court and has thus been placed by the court of law under the care of a guardian. The assets of the protected person may be placed by the court under the care of a Conservator (or Guardian of the Estate in some jurisdictions.)
WIDOW’S ELECTION: Community-property election for the surviving spouse to defeat the decedent spouse’s testamentary disposition of the entire community-property interest and thereby make claim to the one-half community-property interest to which the surviving spouse is entitled under community-property law
WILL: The document in which a person declares his or her property shall be distributed upon death.
WILL CONTEST: A legal dispute regarding elements of a decedent’s will. The dispute could be over whether or not the Will was validly executed, or was a product of duress, fraud, or undue influence, or over ambiguous terms or provisions, which are not consistent with the governing law.
WILLING BUYER-WILLING SELLER RULE: The standard for valuation of property usually defined as the price at which a willing buyer would buy and willing seller would sell, neither of whom are under any compulsion to either buy or sell, and both being fully informed of the material facts surrounding the transaction.
ZERO-OUT GRAT: A GRAT that gives the grantor a tiny or zero retained interest by carefully structuring the remainder interest.
ZERO VALUE RULE: A nickname for an estate freeze concept under which a retained interest is not assigned any value, and therefore increases the gift tax liability of the transferor because the transferred property is not reduced by the retention. The zero value rule does not apply to qualified interests, but does apply in cases of incomplete transfers and transfers to certain trusts holding personal residences where the resident has a term interest in the trust.