KLAPACH & KLAPACH, P.C.
Estate Planning for a Lifetime®.
NOTE: This section will help address many of your questions about estate planning. However, the information contained in this section is for educational purposes only and does not serve as legal advice or opinion. Your particular circumstances or changes in the law may affect whether the information in this section applies to you. You should consult with a tax or estate planning professional licensed in your state before using or relying on any of the information in this section.
AB TRUST: See Exemption Trust.
ADVANCE HEALTH CARE DIRECTIVE: A legal document whereby a person authorizes another (his or her “agent”) to make medical decisions on the person’s behalf in the event the person is no longer able to make such decisions him or herself. In California, one’s physician can act on an agent’s orders pursuant to a valid Advance Health Care Directive without incurring liability for doing so.
AGENT: A person who acts for another by the latter’s authority. The distinguishing characteristics of an agent are that the agent acts on behalf of the principal, the agent does not own title to the principal’s property, and the agent has a duty to follow the principal’s instructions.
ANNUAL EXCLUSION: The amount of property (presently $15,000, or $30,000 for a married couple) that may annually be given to a donee, regardless of the donee’s relationship to the donor, free of gift tax. Only gifts of present interests qualify for the annual exclusion.
ANNUITY: The amount payable according to contract or trust annually or at other regular intervals for either a certain or an indefinite period, as for a stated number of years or for life. An Annuitant is another name for the beneficiary of an annuity.
APPLICABLE EXCLUSION AMOUNT: Sometimes also referred to as the credit shelter amount or exemption equivalent. In 2019, the federal exclusion amount is $11.4 million per person. Any assets transferred during life or on death in excess of the exemption amount will be subject to gift or estate taxes. See also Estate Tax.
APPLICABLE FEDERAL RATE: The statutory interest rate that must be charged for most loans and installment agreements to avoid imputation of income under the Internal Revenue Code.
ASSETS: The property of a person subject to the payments of his or her debts and gifts.
ASSET PROTECTION TRUST: An asset protection trust, commonly referred to as an “APT,” is a trust arrangement using the laws of a jurisdiction with favorable asset protection laws for such trusts.
ASSIGNEE: A person appointed by another or by the court to do some act or enjoy some right, privilege, or property.
ASSIGNMENT: The transfer in writing by one person to another of the title to personal property. The assignment of stocks or registered bonds may be effected by filling in the form printed on the reverse of the certificate or by the execution of a separate assignment form.
ASSIGNOR: A person who makes a transfer of title or interest in writing.
ATTORNEY IN FACT: An agent who is given written authorization by a principal to transact business for the principal (e.g., through a Durable Power of Attorney).
BENEFICIARY: (1) The person for whose benefit a trust is created. (2) The person to whom the amount of an insurance policy or annuity is payable.
BEQUEATH: To give personal property by Will.
BUY-SELL AGREEMENT: An agreement between owners of a business where they arrange to transfer their shares upon death or the occurrence of another event to the other owners or back to the business. A buy-sell agreement is intended to provide continuous control and certainty in the event that one or more owners is unable to run the business.
BYPASS TRUST: See Exemption Trust.
CAPITAL GAINS and LOSSES: A computation for tax purposes that usually equals the difference between the purchase price and the sales price.
CHARITABLE BEQUEST: A gift of personal property to a legal charity by Will.
CHARITABLE DEVISE: A gift of real property to a legal charity by Will.
CHARITABLE LEAD TRUST: A trust for a fixed term of years where a charity is the income beneficiary (of an annuity of a sum certain for a set term or for the life of a beneficiary or a unitrust payment of a fixed percentage of the trust assets paid annually) and the remainder goes to a non-charitable beneficiary.
CHARITABLE REMAINDER TRUST: A trust arrangement where a remainder interest passes to a charity upon the termination or failure of a prior interest.
CHARITABLE ANNUITY TRUST: A trust that provides a sum of not less than five percent of the initial fair market value of the principal, to be paid at least annually to a non-charitable beneficiary, with the remaining principal paid to a charity.
CHARITABLE REMAINDER UNITRUST: A trust that provides a fixed percentage, not less than five percent of the net fair market value of the principal, valued annually, to be paid at least annually to a non-charitable beneficiary, with the remaining principal paid to a charity.
CHARITABLE TRUST: A trust created for the benefit of a legal charity.
CLASS GIFT: A gift to members of the same class (e.g., a class consisting of one’s grandchildren).
CLAYTON TRUST: This type of trust uses what is known as a Clayton election (after the family that first successfully used this method). Like the Disclaimer Trust approach, it requires assertive action to implement. The Clayton election operates to distribute the assets of the first spouse to die to a QTIP Trust. The Trustee allocates any property elected out of this treatment on the decedent’s federal estate tax return to the Exemption Trust. If the surviving spouse does not want to elect out of this treatment, there will only be two trusts: the Survivor’s Trust and the QTIP Trust.
CODICIL: An amendment to a Will executed with all the formalities of the Will.
COMMUNITY PROPERTY: Property in which husband and wife each have an undivided one-half interest by reason of their marital status. California is a community property state, which means that upon the death of a person with a spouse or registered domestic partner, one-half of the community property belongs to the surviving spouse or partner and the other half to the decedent. Each spouse or partner may dispose of his or her half of the community property in his or her will or trust, or otherwise.
COMPLEX TRUST: A trust in which income may be accumulated or distributed, in the trustee’s discretion. Complex trusts are also known as discretionary trusts or accumulation trusts.
CONSERVATOR (OR GUARDIAN OF AN ESTATE): Generally, an individual or institution appointed by a court to care for property (e.g., of an incompetent person or a minor).
CONTINGENT BENEFICIARY: A beneficiary whose interest is conditioned upon a future occurrence that may or may not take place. Unless or until the condition takes place, the interest is only contingent.
CORPUS: The principal of an estate, as distinguished from the income.
COST BASIS: The original cost of property usually based on the purchase price or, in the case of property received from an estate (with a few exceptions), on the fair market value of the property at the death of the deceased.
CREDIT SHELTER TRUST: See Exemption Trust.
CREDITOR’S NOTICE: In probate, the notice published stating the decedent’s death and the name of the executor or personal representative to whom claims should be presented for payment.
CRUMMEY POWER or CRUMMEY TRUST: A limited power of withdrawal by a beneficiary over trust property that ordinarily lapses within a specified period of time. Since property transferred to a trust may not otherwise create a present interest in a beneficiary, a Crummey power is used to create a present interest and secure an annual exclusion for the donor of the property. See Annual Exclusion.
CUSTODIAN: A person who has the duty to safeguard, conserve, and account for property in his or her care.
DEATH TAXES: Taxes imposed on property or on the transfer of property at the owner’s death; a general term including estate taxes, inheritance taxes, and all succession or transfer taxes connected with the death of the owner of the property.
DECLARATION OF TRUST: An acknowledgement by one holding or taking title to property that he or she holds the property in trust for the benefit of someone else.
DEED OF TRUST: A deed (usually for real property) conveying property to a trustee; usually used to secure a mortgage interest in real estate.
DEFECTIVE GRANTOR TRUST: An irrevocable trust that is treated as a grantor trust for income tax purposes. Usually it is the creator of the trust, or the grantor, who wants to be taxed on the income from the trust, thereby allowing the trust to grow tax-free.
DEFINED BENEFIT PLAN: A pension plan that guarantees the payment of a specified benefit at retirement age and provides for annual contributions equal to an actuarially determined amount that is sufficient to produce the specified benefit. Typically these plans are governed by federal laws. The primary governing federal laws being ERISA and the Internal Revenue Code section 412.
DEFINED CONTRIBUTION PLAN: A pension plan that provides for an individual account for each participant and for benefits based upon the amount contributed to the participant’s account including any income, expenses, gains, or losses. Typically these plans are governed by federal laws. The primary governing federal laws being ERISA and the Internal Revenue Code section 401.
DEVISE: A gift of real property by Will; to be distinguished from bequest.
DIRECT HEIR: A person in the direct line of ascent or descent of the decedent (e.g., a father, mother, son, daughter).
DIRECT SKIP: A generation skipping transfer either by gift or at death to someone (known as a “skip person”) who is two or more generations below the transferor. Such a transfer may trigger a generation skipping transfer tax.
DISCLAIMER: A refusal of any interest in or claim to property. Often done by an heir or beneficiary of an estate for estate planning or tax avoidance purposes.
DISCRETIONARY POWERS: Powers that are left to the judgment/discretion of the trustee under the terms of the trust. Discretionary powers give the trustee the right, but not necessarily the duty, to perform or omit certain actions. Sometimes the discretionary powers are written with certain ascertainable limitations.
DISCRETIONARY TRUST: A trust in which the trustee has discretion to decide how much of the trust income and principal to distribute to a beneficiary.
DISTRIBUTABLE NET INCOME (DNI): All income generated by a trust, less all deductible expenses paid by a trust (whether charged against principal or income). This is a term used to determine the amount of income tax due from the trust or the beneficiaries, depending upon who is to be taxed on such income.
DISTRIBUTION STANDARD: Trust provisions that set a standard for discretionary distributions of a trustee to a beneficiary.
DONEE: One who receives a gift.
DONOR: One who makes a gift.
DONOR ADVISED FUND: An account with a community trust, foundation, or charity that permits a donor to make gifts to the entity and direct where, when, and to whom his or her gifts are distributed. This avoids the need for a donor to create a private foundation in order to direct his or her gifts.
DURABLE POWER OF ATTORNEY: A Power of Attorney that remains effective after the disability or incapacity of the person granting the power. Typically, a person granting a Power of Attorney will provide that it is exercisable only upon his or her disability or incapacity; this is commonly referred to as a “springing durable power of attorney.”
DYNASTY TRUST: See Perpetual Trust.
ELECTING SMALL BUSINESS TRUST: A trust that is eligible to own shares of Subchapter S corporations.
ELECTION: The choice of an alternative right or course; for example, the right of a widow to take the share of her deceased husband’s estate to which she is entitled under the law, despite a contrary provision in the Will, is known as the widow’s election.
EMPLOYEE BENEFIT PLAN: A plan established or maintained by an employer or employee organization, or both, for the purpose of providing employees a benefit, such as a pension, profit-sharing, stock bonus, medical, dental, accident, or disability benefits.
EQUITABLE OWNERSHIP: The interest of a person who has a beneficial right to enjoy property, the legal ownership of which is in another person or entity. A person who holds this interest has “Equitable Title.”
ERISA: An acronym for the Employee Retirement Income Security Act of 1974, which set up federal minimum standards for employee benefit plans. The Act also established an insurance program designed to guarantee workers receipt of pension benefits if their defined benefit pension plan should terminate.
ESTATE: See Gross Estate.
ESTATE FREEZE: An estate planning strategy designed to prevent the value of an owner’s interest in appreciating property from increasing for federal estate tax purposes.
ESTATE PLAN: A definite plan for the administration and disposition of one’s property during one’s lifetime and at one’s death; usually set forth in a Will and one or more trust agreements. It is also designed to minimize costs and taxes to one’s estate.
ESTATE TAX: The federal estate tax is imposed on the “taxable estate” of every decedent who is a citizen or resident of the United States. For individuals dying in 2019, the federal estate tax applies to taxable estates of $11.4 million or more, after adjusting for taxable gifts made during lifetime. This amount will be adjusted for inflation each year. California does not have an estate tax. Senate Bill 378, introduced on March 26, 2019, creates a California estate tax, but with a lower exemption rate of $3.5 million (not adjusted for inflation). If passed by the Legislature, SB 378 will appear on the November 2020 ballot and will apply to all transfers made by California residents after December 31, 2020.
EXECUTOR: An individual or a trust institution nominated in a Will and appointed by a court to settle the estate of the testator. If a woman, she is an executrix. Also referred to in some states as a “Personal Representative.”
EXEMPTION AMOUNT: See Estate Tax.
EXEMPTION TRUST: Also known as a Bypass Trust and Credit Shelter Trust. This type of trust structure requires the Trustee to allocate the assets belonging to the first spouse to die to an irrevocable trust called an Exemption Trust (up to the available exemption amount on the first spouse’s date of death). The excess, if any, will be allocated to the Survivor’s Trust or to a QTIP Trust.
FAMILY LIMITED PARTNERSHIP: A limited partnership that is used to manage family investments. Useful for passing interests to other family members and possibly receiving discounts for estate tax purposes. If set up and managed properly, these can also provide asset protection for a family’s wealth.
FIDUCIARY: An individual or a trust institution that has a duty to act for the benefit of another party as to matters coming within the scope of the relationship between them. Examples of some fiduciary relationships include a guardian and his ward, an agent and her principal, an attorney and her client, one partner and another partner, a trustee and a beneficiary.
FIDUCIARY RETURN: An income tax return prepared by a fiduciary on behalf of a trust or estate.
“FIVE BY FIVE” POWER: A non-cumulative general power of a beneficiary or donee to appoint in each calendar year the greater of $5,000 or five percent of the value of the trust at the end of the year.
FORMULA CLAUSE: The provision of a Will or trust agreement stating a formula whereby the executor or trustee can determine the federal estate tax value of property in order to divide an estate to minimize taxes. It is usually employed in connection with the unlimited marital deduction and credit equivalent amounts.
FOUNDATION: A permanent corpus established and managed for charitable, educational, religious or other benevolent uses and purposes.
FUNDED INSURANCE TRUST: An insurance trust in which, in addition to life insurance policies, cash and securities have been placed in trust to provide sufficient income for the payment of premiums and other charges on or assessments against the insurance policies.
GENERAL POWER OF APPOINTMENT: The power of the donee or beneficiary (the one who is given the power) to pass on an interest in property to whomsoever he pleases, including himself or his estate. See also Power of Appointment.
GENERATION-SKIPPING TAX: A tax imposed on any generation-skipping transfer at a flat rate computed with reference to the maximum federal estate rate applicable at the time of the transfer.
GENERATION-SKIPPING TRANSFER: Any taxable distribution or taxable termination with respect to a generation-skipping trust or any direct skip from a transferor.
GENERATION-SKIPPING TRUST: Any trust having beneficiaries who belong to two or more generations younger than the grantor.
GIFT TAX: A tax imposed by the federal government since 1932 and by some states on transfers of property by gift during the donor’s lifetime. Gifts, under this law, may include transfers to irrevocable trusts.
GRANTEE: A person to whom property is transferred by deed or to whom property rights are granted by means of a trust instrument or some other document.
GRANTOR: A person who transfers property by deed or who grants property rights by means of a trust instrument or some other document.
GRANTOR RETAINED ANNUITY TRUST: An irrevocable trust whereby the grantor sets an annual dollar amount (the annuity) for a fixed term and gives the principal to others, including relatives, at the end of that term. If the grantor survives until the end of the annuity term, all of the trust principal will be excluded from the grantor’s estate for death tax purposes. Sometimes referred to as a “GRAT.”
GRANTOR RETAINED INCOME TRUST: An irrevocable trust whereby the grantor retains the right to all of the trust income for a fixed term and gives the principal to others, including relatives, at the end of that term. If the grantor survives until the end of the income term, all of the trust principal will be excluded from the grantor’s estate for death tax purposes. A grantor retained income trust is often referred to as a “GRIT.”
GRANTOR RETAINED UNITRUST: The grantor retains a right to receive a yearly amount equal to a fixed percentage of the value of the trust principal and gives the principal to others at the end of the term. If the grantor survives until the end of the term all of the principal will be excluded from the grantor’s estate for estate tax purposes. Referred to as a “GRUT” and is a variation of the GRAT.
GRANTOR TRUST: For purposes of the income taxation of trusts and estates, a trust in which the grantor or a third party is treated as the owner of the trust and taxed on the income at their own individual income tax rate. A grantor trust is not treated as a separate entity for income tax purposes. Usually seen with Revocable Living Trusts and Defective Grantor Trusts.
GROSS ESTATE: All of a decedent’s property before debts, taxes, and other expenses or liabilities have been deducted; to be distinguished from net estate which is what is left after these items have been taken into account.
GST EXEMPTION: An exemption for generation skipping transfers from generation-skipping tax equal to the applicable exclusion amount in the aggregate for transfers by an individual either during life or at death.
GUARDIAN: An individual or institution appointed by a court to care for the property or the person (or both) of a minor or an incompetent person.
GUARDIAN AD LITEM: A person appointed by a court to represent and defend a minor or an incompetent person in connection with court proceedings, sometimes called a special guardian.
HEIR: A person who inherits real property; to be distinguished from next of kin and from distributee.
HOLOGRAPHIC WILL: A handwritten Will of the testator. Usually presents problems during the probate process.
IMMEDIATE BENEFICIARY (Present Beneficiary, Primary Beneficiary): A beneficiary of a trust who is entitled to receive immediate benefits from the trust property, whether or not limited to Income.
INCENTIVE STOCK OPTION: A bonus or profit-sharing arrangement designed to attract or retain key employees which allows employees to purchase stock of the employer at less than market price; the number of shares which an employee may purchase is often tied to specific performance objectives.
INCOME: The returns from property, such as rent, interest, dividends, profits, and royalties; different than corpus, principal or capital.
INCOME BENEFICIARY: The beneficiary who is entitled to receive the income from a trust.
INCOME IN RESPECT OF A DECEDENT (“IRD”): Income that the decedent had a right to receive at the time of his or her death. The same income tax consequences apply in the hands of the decedent’s estate.
INDEPENDENT EXECUTOR: An executor of a Will who, after filing his or her inventory, does not make a further accounting to the probate court; often called Executor with non-intervention powers.
INDIVIDUAL RETIREMENT ACCOUNT (“IRA”): A retirement savings program for individuals to which yearly contributions up to a specified limit can be made that are either tax deductible (traditional IRA) or not deductible (Roth IRA). The amounts contributed to a traditional IRA are not taxed until withdrawal. The amounts contributed to a Roth IRA are withdrawn free of income tax. In either case withdrawal is not permitted, without penalty, until the individual reaches age 59-1/2.
INHERITANCE TAX: A state tax on the right to receive property by inheritance; to be distinguished from an estate tax.
INHERITANCE TAX RETURN: The return that the executor or personal representative is required to make to the state on the basis of which the inheritance tax due the state is calculated and paid; different from the federal estate tax return.
IN LOCO PARENTIS (In the place of a parent): A phrase meaning a person who takes the place of a child’s parent, usually one who is not a legally appointed guardian. Parents may use a legal document to temporarily assign this power to another for the care of their child. It can be used for things such as acquiring medical treatment, registering a child for school and other necessary administrative matters.
INSURANCE TRUST: An irrevocable trust composed partly or wholly of life insurance policy contracts. Often used to remove the death benefit from a decedent’s estate.
INTANGIBLE PROPERTY: Property which cannot be touched nor realized with the senses, such as a legally enforceable right. The right possessed by the holder of a promissory note, a bond, a stock certificate, a patent, a copyright, or a trademark is intangible property, a paper writing or governmental registration being evidence of that right.
IN TERROREM CLAUSE: A provision of a Will or trust agreement intended or, at any rate, designed to intimidate a potential beneficiary from contesting the provisions of a Will or trust.
INTER VIVOS GIFT: A gift of property by one living person to another. To make such a gift effective, there must be actual delivery of the property during the lifetime of the donor and without reference to his death.
INTER VIVOS TRUST: See Living Trust.
INTESTACY: The condition resulting from a person’s dying without leaving a valid Will.
INTESTATE: (adjective) (1) Without having made and left a valid Will. (2) Not devised or bequeathed; not disposed of by Will. (3) (noun) A person who dies intestate.
INTESTATE SUCCESSION: The state law mandated descent and distribution of property of a person who dies without a valid Will. The statute usually provides for a surviving spouse first, if no surviving spouse then surviving children, if no surviving children then surviving parents, if no surviving parents then surviving siblings. Each state’s law varies.
IRREVOCABLE TRUST: A trust which, by its terms, (1) cannot be revoked by the settlor or (2) can be terminated by the settlor only with the consent of someone who has an adverse interest.
ISSUE (or Descendants): All persons who descend from a common ancestor; a broader term than children.
JOINT AND SURVIVORSHIP: A phrase usually applied to annuities under which during the lifetime of both husband and wife, they are joint beneficiaries of the annuity and, after the death of either, the survivor becomes the sole beneficiary.
JOINT TENANCY: The holding of property by two or more persons such that on the death of one of them, the other or others own the property by operation of law. Distinguished from tenancy by the entirety, tenancy in common, and community property.
JOINT TRUST: A trust usually created by a husband and wife that contains provisions of the disposition of their joint estate upon their deaths. Both joint and separate property may be contributed. Commonly used in community property states.
KEY MAN INSURANCE: Insurance purchased for the protection of a business from the financial loss caused by death or disability of a vital member of the firm.
KIDDIE TAX: A tax on the unearned income of a minor child who has not reached the age fourteen before the close of the taxable year and who has at least one living parent, under which all unearned income exceeding a certain minimum amount will be taxed to the child at the rates that apply to trusts and estates.
LACK OF MARKETABILITY DISCOUNT: A discount that is frequently applied to units or interests in closely held entities such as limited partnerships, limited liability companies or corporations due to the restrictions placed on the transfer of those interests or the lack of a market for those interests.
LAND TRUST: An unincorporated association for holding real property by putting the title in one or more trustees for the benefit of the members whose interests are evidenced by certificates or copies of the trust documents.
LAPSE: The falling of a gift into the residuary estate by reason of the death of the donee or beneficiary during the testator’s lifetime.
LAST WILL AND TESTAMENT: A legally enforceable declaration of a person’s wishes regarding matters after his or her death and not operative until death; usually but not always relating to property; revocable (or amendable by means of a codicil) up to the time of death or loss of mental capacity to make a valid Will.
LEGACY: A gift of personal property by Will; the same as a bequest. A person receiving such a gift is called a legatee.
LEGAL CHARITY: One that comes within the legal definition of a charity. Not automatically a 501(c)(3) for federal tax purposes.
LETTERS OF CONSERVATORSHIP OR GUARDIANSHIP: A certificate of authority issued by the court to an individual or corporate fiduciary to serve as conservator or guardian of the property of a person.
LETTERS TESTAMENTARY: A certificate of authority to settle a particular estate issued by the appointing court to the executor named in the Will; to be distinguished from letters of administration.
LIEN: An encumbrance on property-as to secure the payment of money.
LIFE BENEFICIARY OR LIFE INTEREST: The beneficiary of a trust usually for the term of his or her own life, but it may be for the life of some other person. Life interest is the estate or interest that a person has in property that will endure only during his or her own or someone else’s lifetime.
LIFE TENANT: One who owns an estate in real property for his or her own life or for another person’s life or for an indefinite period limited by a lifetime.
LIMITED GUARDIANSHIP: Some states have created a limited guardianship which allows a partially disabled or incompetent person to delegate limited powers and authority to the limited guardian.
LIMITED POWER OF APPOINTMENT: A power of the donee (the one who has the power) to appoint an interest in property within a limited time frame or to a limited class of people or entities; also known as special power; the opposite of general power of appointment; all powers that are not general are limited or special powers.
LIVING TRUST: A trust created during the settlor’s lifetime; different from a trust created in a Will, which is called a testamentary trust (same as Inter Vivos Trust).
LIVING WILL: A document which allows a person to state In advance his or her wishes regarding the use or removal of life-sustaining or death-delaying procedures in the event of a terminal illness or injury.
MARITAL DEDUCTION: The portion of a decedent’s estate that may be given to the surviving wife or husband without its becoming subject to the federal estate tax levied against the decedent’s estate; a term that came into general use under the Internal Revenue Act of 1954.
MARITAL PROPERTY: A term generally referring to property acquired by either spouse during the course of the marriage, in which each spouse possesses an interest in the event of death or marital dissolution
MARITAL RIGHTS: The rights that a husband and wife have in each other’s property.
MARKETABLE TlTLE: A title which a reasonably prudent person, knowing all the facts, regards and accepts as good.
MASSACHUSETTS TRUST: An unincorporated organization created for profit under a written instrument or declaration of trust, by the terms of which the property held in trust is managed by compensated trustees for the benefit of persons whose legal interests are represented by transferable certificates of participation or shares; also called business trust.
MINOR: A person under legal age, that is, under the age at which he or she is accorded legal rights.
MINORITY DISCOUNT: A discount applied to the value of an ownership interest in an entity that is not publicly traded, such as a limited partnership, limited liability company or corporation. The discount reflects that a minority interest in an entity usually has less value than a controlling interest.
NATURAL GUARDIAN: The parent of a minor; originally the father but now either the father or the mother. Natural guardianship relates only to the person of a minor.
NOMINEE: A person named for an office, position, or duty; in trust business, usually the person, firm, or corporation in whose name registered securities are held.
NON-SKIP PERSON: For generation-skipping tax purposes, any person or trust that is not a skip person. For example, the child of a transferor is a non-skip person.
PARTNERSHIP: An association of two or more persons for the conduct of an enterprise other than in corporate form. The rights, duties, responsibilities of the people so associated may be covered by a partnership agreement or, if not, they are determined by law.
PARTNERSHIP FREEZE: A method of restricting (“freezing”) the growth in value of an estate for federal estate tax purposes of a higher-bracket taxpayer’s business or investment interests which are not in corporate form. The higher bracket taxpayer receives a limited, but preferential interest in a partnership holding the business or investment interests, while the future appreciation in the assets passes to the other partners who are usually lower bracket taxpayers.
PENSION TRUST: A trust established by an employer (commonly a corporation) to provide benefits for incapacitated, retired employees, with or without contributions by the employees.
PERPETUAL TRUST: A trust for descendants which is intended to remain in existence for as long a term as is permitted under state law (especially where there is no rule against perpetuities). Such a trust is typically sheltered completely from generation-skipping tax by the grantor’s GST exemption so that the trust property will remain entirely free of transfer tax during its existence. This trust is also referred to as a Perpetuities Trust or a Dynasty Trust.
PER STIRPES (by the branch): A term used in the distribution of property; distribution to persons as members of a family (per stirpes) and not as individuals (per capita). Usually means that a child of a deceased beneficiary will take his or her parent’s share.
POSTHUMOUS CHILD: A child born after the father’s death; to be distinguished from after-born child.
POUR-OVER: A term referring to the transfer of property from an estate or trust to another estate or trust upon the happening of an event as provided in the instrument.
POWER OF ALIENATION: The power to assign, transfer, or otherwise dispose of property.
POWER OF APPOINTMENT: A right given to a person to dispose of property which he or she does not fully own. A power of appointment may be general or limited. Under a general power of appointment, the donee may exercise the right as he or she sees fit. A limited (or special) power, by contrast, limits the donee as to those in favor of whom he or she may exercise the power of appointment. A wife who is given the power to appoint only among her children has a limited power of appointment.
POWER OF ATTORNEY: A document, sometimes witnessed and acknowledged, authorizing the person named therein to act as his agent, called attorney in fact, for the person signing the document. If the attorney in fact is authorized to act for his principal in all matters, he has a general power of attorney; if he has authority to do only certain specified things, he has a special power of attorney. If the authority granted in the power of attorney survives the disability of the principal, the attorney in fact has a durable power of attorney. If the authority granted in the power of attorney commences in the future only upon the occurrence of a specific event or contingency, the power of attorney is known as a springing power.
POWER IN TRUST: A power which the donee (the trustee) is under a duty to exercise in favor of the beneficiary of the trust.
PRENUPTIAL AGREEMENT: An agreement defining the interests in property of a couple to be married. Also known as premarital or antenuptial agreement.
PRESENT INTEREST: An unrestricted right to the immediate use, possession or enjoyment of property or income property (such as a life estate or the right to receive income for a term of years). A Crummey power is also used to create a present interest for gift tax purposes.
PRETERMITTED CHILD: A child to whom the parent’s Will leaves no share of the parent’s estate without an affirmative provision in the Will showing an intention to omit. It frequently is an after-born child, a posthumous child, or a child erroneously believed to be dead or one unintentionally omitted.
PRETERMITTED HEIR: An heir not included in the descent of the parent’s estate.
PRINCIPAL: (1) One who employs an agent to act for him. (2) One who is primarily liable on an obligation. (3) The property of an estate other than the income from the property; the same as capital.
PRINCIPAL BENEFICIARY: (1) The beneficiary who is ultimately to receive the principal of the estate; (2) the beneficiary who is the settlor’s primary concern .
PRIVATE FOUNDATIONS: In general, all charitable foundations except those deriving substantial support from the public. There are two categories: (1) Private operating foundations, those such as museums and (2) Private non-operating foundations, which include most family foundations.
PRIVATE TRUST: (1) A trust created for the benefit of a designated beneficiary or designated beneficiaries; as a trust for the benefit of the settlor’s or the testator’s wife and children; opposed to a charitable (or public) trust. (2) A trust created under a declaration of trust or under a trust agreement; as, a living trust or an insurance trust; as opposed to a trust coming under the immediate supervision of a court.
PROBATE (verb): To present a Will to the court for appointment of the executor or administrator, which is the first step in the settlement of an estate.
PROBATE OF WILL: Presentation of proof before the proper officer or court that the instrument offered is the last will of the decedent
PUBLIC CHARITY: A charitable foundation that receives substantial support from the public and receives favorable income tax treatment as contrasted with a private foundation.
QUALIFIED CONSERVATION EASEMENT: An easement in real property, a portion of which can be excluded from a decedent’s estate for federal estate tax purposes and can also potentially receive a charitable donation income tax deduction.
QUALIFIED DOMESTIC TRUST (QDOT): A trust created upon the death of an individual and qualifying for the federal estate tax marital deduction where the decedent’s surviving spouse is not a United States citizen. A qualified domestic trust is the only form of transfer that will qualify for the marital deduction for a decedent who leaves an alien spouse. In addition to satisfying the normal marital deduction rules, the trust instrument must require that at least one trustee be an individual who is a citizen of the United States or a domestic corporation, and that no trust distributions may be made without the consent of that trustee. An appropriate election on the estate tax return is also required.
QUALIFIED PERSONAL RESIDENCE TRUST (QPRT): A form of grantor retained income trust sanctioned by the Internal Revenue Code in which the grantor transfers a personal residence to an irrevocable trust which gives the grantor the right to use the residence and receive whatever income it generates for a specified term and gives the remainder interest to others, such as the grantor’s children. If the grantor survives the term, the principal will be excluded from the grantor’s estate for death tax purposes.
QUALIFIED PLAN OR TRUST: An employer’s trust or plan that qualifies under the Internal Revenue Code of 1986 for the exclusive benefit of his employees or their beneficiaries in such manner and form as to entitle the payments made by the employer to the plan or trust to the deductions and income tax benefits as set forth in that Code.
QUALIFIED STATE TUITION PROGRAM: A college savings account program which the Internal Revenue Code permits states to establish and which provide income tax benefits. Also known as a 529 Plan.
QUALIFIED SUBCHAPTER S TRUST: A trust that is an eligible shareholder in a Subchapter S Corporation because there is only one income beneficiary, all income is distributed to that beneficiary currently and no principal is distributable during the income beneficiary’s life to anyone other than the income beneficiary.
QUALIFIED TERMINABLE INTEREST PROPERTY (QTlP): A terminable interest that will qualify for the marital deduction if an appropriate election is made by the donor or executor. In order to be Qualified Terminable Interest Property, the surviving spouse must be entitled to all of the income of the property during the spouse’s life and no person, including the spouse, may have the right to appoint the property to anyone other than the spouse during the spouse’s life. The major benefit of a QTIP marital trust to a grantor is that, at the surviving spouse’s death, the remaining trust property is not subject to a general power of appointment in the spouse, but instead passes to beneficiaries selected by the grantor.
QUITCLAIM DEED: A form of conveyance of real property whereby the grantor conveys and the grantee receives only the title that was vested in the grantor, but without warranty of title by the grantor.
RABBI TRUST: A form of employee benefit in which an employer establishes a trust to provide nonqualified deferred compensation to certain key employees. The trust usually contains restrictions on revocation and is subject to claims of general creditors of the employer. Employer contributions are not taxable as income to the employee at the time of contribution. Any income earned prior to distribution to the employee is taxed to the employer. The name “rabbi” originated because the first plan of this type reviewed by the IRS concerned a trust established for a rabbi.
REAL ESTATE INVESTMENT TRUST (“REIT”): An organization, usually corporate, established for the accumulation of funds for the purpose of investment in real estate holdings, or the extension of credit to others engaged in construction. The funds are usually accumulated by the sale of share of ownership in the trust
REMAINDER: A future estate or interest in property that will become an estate or interest in possession upon the termination of the prior estate or interest created at the same time and by the same instrument.
REMAINDER BENEFICIARY: The beneficiary of a trust who is entitled to the principal outright after the interest of the prior beneficiary has been terminated.
RESIDUARY ESTATE: The property that remains after all other gifts in the Will have been satisfied. Those who take the residuary estate are known as residuary beneficiaries.
REVOCABLE TRUST: A trust which may be amended or revoked by the settlor or by another person; opposed to an irrevocable trust.
SECONDARY BENEFICIARY: A beneficiary whose interest in a trust is postponed or is subordinate to that of the primary beneficiary.
SEPARATE PROPERTY: The property which one person owns free from any rights or control of another.
SETTLEMENT: (1) The winding up and distribution of an estate by an executor or an administrator; to be distinguished from the administration of an estate by a trustee or a guardian. (2) A property arrangement, as between a husband and wife or a parent and child, frequently involving a trust.
SETTLOR: A person who creates a trust to become operative during his lifetime; also called donor, and grantor, and trustor.
SIMPLE TRUST: A term known only in tax laws to describe a trust that is required to distribute all of its income currently and that does not provide for any charitable distribution; opposed to complex trust.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP): An arrangement meeting the requirements of See. 408(k) of the Internal Revenue Code under which an employer makes contributions to an individual retirement account or individual retirement annuity of an employee Under a SEP, the employer deducts contributions made to the SEP and includes such amounts in the employee’s gross income on Form W-2. The employee, in turn, is entitled to an offsetting deduction on his or her tax return.
SKIP PERSON: With respect to a generation-skipping transfer, a recipient or beneficiary who is at least two generation levels below that of the transferor.
SPECIAL GUARDIAN: A guardian appointed by a court for a particular purpose connected with the affairs of a minor or an incompetent person; sometimes a guardian ad litem is known as a special guardian.
SPECIAL USE VALUATION: Valuation of family-owned farms or other business operations involving real estate based on actual use rather than highest and best use for estate tax purposes.
SPENDTHRIFT CLAUSE: The provision in a Will or trust instrument which limits the right of the beneficiary to dispose of his interest, as by assignment, and the right of his creditors to reach it, as by attachment.
SPLIT GIFT: A gift made by a husband or wife to a third person may be treated as having been made one-half by each if the other spouse consents to the gift.
SPOUSE’S ALLOWANCE: Allowance made to the surviving husband or wife by the court having jurisdiction over a decedent’s estate, usually for the purpose of providing him or her with funds for living expenses during the period of settlement of the estate.
SPRINKLING TRUSTS: Trusts in which the income or principal is distributed among the members of a designated class in amounts and proportions as may be determined in the discretion of the trustee; also called spraying trusts.
TRUST: A fiduciary relationship in which one person (the trustee) is the holder of the legal title to property (the trust property) subject to an equitable obligation to keep or use the property for the benefit of another person (the beneficiary).
TRUST AGREEMENT: A written agreement between settlor and trustee setting forth the terms of a trust.
TRUST FUND: Technically, only money held in trust; but frequently applied to all the property held in trust in a given account.
TRUST INSTITUTION: A trust company, state bank, national bank, or other corporation engaged in the trust business under authority of law.
TRUSTEE: An individual or a trust institution which holds legal title to property for the benefit of someone else.
TRUSTOR: A person who creates a trust; a broad term which includes settlor and testator.
TRUST UNDER WILL: A trust created by a valid Will, to become operative only on the death of the testator; also known as a testamentary trust.
ULTIMATE BENEFICIARY: A beneficiary of a trust who is entitled to receive principal of the trust property in final distribution; also called principal beneficiary; opposed to immediate beneficiary and income beneficiary.
UNFUNDED INSURANCE TRUST: An insurance trust in which the premiums on the policies are to be paid by the insured or by some third person and not by the trustee; to be distinguished from a funded insurance trust.
UNIFIED CREDIT: See Applicable Exclusion Amount.
UNIFORM SIMULTANEOUS DEATH ACT: An act providing that each person is presumed to be the survivor of the other with respect to testamentary disposition of his property in the event of simultaneous death. See also Simultaneous Death.
UNIFORM TRANSFERS TO MINORS ACT: An act adopted in many states to replace the more restrictive Uniform Gifts to Minors Act which provides a means of transferring property to a minor, wherein the designated custodian has the legal right to act on behalf of the minor without the necessity of a guardianship.
WILL: See Last Will and Testament.