Glossary Of Estate Planning Terms
A statement in front of a person who is qualified to administer oaths (a notary) that a document bearing the person’s signature was actually signed by the person.
A type of planning utilizing irrevocable trusts used by married couples. In this type of trust arrangement, two trusts (trust A and trust B) are created at the time the first spouse dies. By dividing the decedent’s estate into two trusts at the first death, each spouse can pass the maximum amount of property allowed to avoid federal estate taxes. One trust, usually trust A, is often referred to as the marital deduction trust and the other trust, usually trust B, is often referred to as the credit shelter trust or bypass trust.
Abstract of trust:
A condensed version of a trust that includes only key parts such as who are the trustees and successor trustees. An abstract of trust is used to establish that a valid trust has been established without disclosing specifics either the trustee or beneficiaries want to keep confidential.
A trust where trust income is retained and not paid out for longer than a year to beneficiaries until certain conditions have been satisfied. These types of trusts are also known as complex trusts.
Under a will, ademption is the failure of a specific gift of property to take effect because the property is no longer owned by the person at the time of his death.
Administration of an estate:
The distribution of the probate estate of a deceased person. The person who manages the distribution is called the executor or personal representative if there is a will. If there is no will, this person is called the administrator. In many states, the level of supervision may vary according to whether the probate procedure is formal (a high level of court supervision) or informal (a low level of court supervision).
Administration of a trust:
The process of handling the affairs of a trust. Typically, the administration of a trust is not under the supervision of a court.
A probate proceeding conducted in a state other than the state where the decedent lived and the primary probate occurs.
The amount of property the IRS allows a person to gift to another person during a calendar year before a gift tax is assessed and/or a gift tax return must be filed. The amount is increased periodically. There is no limit to the number of people you can give gifts to which qualify for the annual exclusion. To qualify for the annual exclusion, the gift must be one that a recipient can enjoy immediately and have full control over.
Payment of a fixed sum of money to a specified person, by contract, at regular intervals (usually monthly).
A contract between two potential marriage partners specifying how the property owned by each prior to marriage and owned individually or jointly during marriage will be divided should the couple divorce. This type of contract is also frequently known as a prenuptial agreement.
An IRS-accepted standard that governs the use of trust property and prevents the property from being considered part of the trustee’s property for estate tax purposes. The standard is defined as “health, education, maintenance and support” of the beneficiaries under the trust.
This is a tax term relating to the valuation of property for determining profit or loss on sale. If you buy a property for $150,000, your tax basis is $150,000. If you later sell it for $250,000, your taxable profit is $100,000. Certain tax provisions such as Internal Revenue Code section 1031 permit tax to be deferred under certain condition.
An individual, institution, trustee or estate that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, another contract or by some other means such as the intestacy laws of a state in which case the beneficiary is known as an “heir.” A primary beneficiary is a person who will benefit from a will or trust if living at the decedent’s death. A contingent beneficiary is a person who may or may not receive property, depending on the terms of the will or trust and what happens to the primary beneficiaries. For example, a contingent beneficiary may receive nothing unless and until the primary beneficiary dies.
A legal term for a will provision leaving personal property to a specified person. (See also demonstrative bequest, general bequest, specific bequest)
An insurance policy used to ensure a person having a position of trust (frequently called a fiduciary) will do their job and not misuse or steal funds they are controlling. The bond guarantees that a certain amount of money will be paid if a party is injured due to improper acts of the person having the position of trust. Thus, if an executor, personal representative, trustee or guardian, who is bonded, wrongfully deprives a beneficiary of his or her property, the bonding company will replace it, up to the limits of the bond. Bonding companies issue bonds in exchange for premiums averaging 10 percent of the face amount of the bond. The requirement for a bond is often waived by the maker of a will or grantor of a living trust because of the high cost and usually low risk. Additionally, most states have very strict fiduciary laws.
Any trust that created a life estate for a life beneficiary, with the trust principal going to the final beneficiary when the life beneficiary dies. See AB trust, marital life estate trust, spousal bypass trust or a marital exemption trust.
By right of representation:
Common terminology for the Latin term, per stirpes. This is the most common way of distributing an estate such that if one of the beneficiaries is dead, his children share equally in his share of the estate distribution. This term is often summarized by the phrase, “if the parent is dead, his children stand in his shoes.”
Any trust designed to make a substantial gift to a charity. Most charitable trusts can provide significant income and estate tax savings for the grantor.
Charitable remainder trust:
A trust used to make large donations of property or money to a charity so the person making the gift or donation can obtain a tax advantage. In a charitable remainder trust, the donor reserves the right to use the trust property during his life or some other specified time period, and when the agreed period is over the property goes to the charity.
By law in most states, one’s children are: (1) biological offspring, (2) children who were legally adopted, (3) children born out of wedlock and (4) children born to the maker of a will after the will is made, but before his or her death. Stepchildren are not children of the stepparent unless they have been legally adopted.
A separate legal document that, after it has been signed and properly witnessed, changes an existing will. An amendment to a will.
Common law marriage:
In a minority of states, couples may be considered married if they live together for a certain period of time and intend to be husband and wife. In some states, all that is required is an intent to be married and the holding out to others that they are married.
Several states follow a system of marital property ownership called “community property.” The specifics of how property in a community property state is defined may vary according to that particular state. In general, all property acquired after marriage and before permanent separation is considered to belong to both spouses equally, except for gifts to and inheritances by a spouse. Also, income from community property is community property income. The eight states with such laws are known as community property states. These eight states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Puerto Rico also uses the community property system. Additionally, Wisconsin has a modified community property system.
Someone appointed by a court to manage the affairs of a mentally incompetent person or a minor. A conservator is a person at least 21 years of age, resident or nonresident, who is appointed by a court to manage the estate of a protected person.
Taxes levied on the property of a person who died. Federal death taxes are called “estate taxes.” State death taxes (if any) go by various names, including “inheritance tax.” These taxes are generally known as “transfer taxes.” Several other closely linked transfer taxes are the federal Gift Tax and the federal Generation-Skipping Transfer Tax.
A person who has died.
A written document used to evidence ownership and/or transfer title to real estate
A bequest of a particular amount of money or property to be distributed first from one source in the estate and then from other sources to the extent that the first is insufficient.
A person who is an offspring, however, remote. The children, grandchildren, great-grandchildren and all descendants of each of the original parents.
A legal term referring to real estate that passes through a will.
A clause in a will or trust that gives away property.
The parting with or giving away of property.
Cutting a person off from his or her inheritance in an estate where he or she would have been a natural heir.
Doctrine of independent significance:
The legal power to make reference in one document to an independent document that stands alone. By making reference to the independent document, the law will allow the independent document to be incorporated into the document making reference to it. This is also known as incorporation by reference.
The state or county that is the primary residence of a person.
The refusal of a beneficiary to accept property willed or passing to them under a trust. When a disclaimer is made, the property is generally transferred to the person next in line under the will or trust. Sometimes there is a tax advantage when a gift is disclaimed. A disclaimer is also called a renunciation.
Someone who receives a gift.
Someone who gives a gift.
Durable power of attorney:
A power of attorney that remains effective even if the person who created it (called the “principal”) becomes incapacitated. The person authorized to act (called the “attorney-in-fact”) can make decisions for the principal as defined in the document.
Durable power of attorney for health care:
A document established by an individual (the principal) granting another person (the agent) the right and authority to handle matters related to the health care of the principal.
A clause in a mortgage document which requires that the mortgage be paid in full if the encumbered property is transferred.
A legal word that describes the situation where property transfers to the ownership of the state government because there are no legal inheritors to claim it.
Generally, all the property you own when you die. There are different ways to measure estates: The taxable estate (property subject to estate taxation), the probate estate (property that must go through probate) and the net estate (the net value of the property).
The art of reducing or minimizing estate taxes and property subject to probate while passing your property on to loved ones in a way that minimizes time, legal fees, aggravation and other costs.
Taxes imposed on the “privilege” of transferring property by reason of death. Estate tax is most commonly used in reference to the tax imposed by the federal government rather than the state government. See death taxes.
The person (male/female) named in a will to manage a decedent’s estate. The more modern term is a “personal representative,” which removes any reference to the sex of the person. If you die without a will, the probate court will appoint such a person, called the administrator of the estate.
When property is given as a gift or passed to heirs as part of an estate, it is subject to federal estate and gift tax laws. Each person is given a tax credit that can be used to offset the tax assessed against a specific amount of property. The amount of property that results in a tax exactly equal to the credit is known as the “exemption equivalent.” Technically, no property is exempt from federal estate and gift taxes, but the term exemption equivalent is commonly used. Stated another way, the credit is equal to the amount of tax due on a gift or estate transfer of property that has a value equal to the exemption equivalent amount.
People or institutions designated to receive life estate trust property outright upon the death of a life beneficiary.
Funding a trust:
Transferring ownership of property to a trust in the name of the trust or trustee.
A person with the legal duty to act primarily for another’s benefit in a position of trust, good faith, candor and responsibility. “Fiduciary” is often used as an alternative term for “trustee,” although a trustee is but one type of fiduciary.
The duty of a fiduciary to act in a position of trust, good faith, candor and responsibility, on behalf of another. The duty is one of the best-defined responsibilities under the law and is very strictly enforced by the courts.
A bequest that is to be distributed from the general assets of the estate and that is not a particular asset.
A tax-saving trust, where the principal is left in trust for one’s grandchildren (or any beneficiary two or more generations removed from the grantor), with the current beneficiaries (often the children) receiving only the trust income.
Tax on gifts made during a person’s lifetime. Many gifts are exempt from tax: Gifts to tax-exempt charities or the giver’s spouse (if the recipient spouse is a U.S. citizen), and gifts of $11,000 or less to a single recipient each calendar year.
The person or persons who create a trust. Also called the trustor, settlor or creator.
A trust in which the person establishing the trust retains enough “ownership rights” or “incidents of ownership” that the person is treated by the IRS as the owner of the trust assets for tax purposes. The right to revoke the trust is sufficient to make the trust a grantor trust.
The total value of an estate at the date of the decedent’s death. The value is determined before debts and other “deductions” are subtracted from the estate value.
A party who guarantees repayment of a loan, using their own assets if necessary.
Guardian of the estate:
An adult appointed by a court who assumes legal responsibility for an incompetent person’s or a minor’s property. See conservator.
Guardian of the person:
An adult appointed or selected to care for a minor child if no biological or adoptive parent (legal parent) of the child is able to do so. If one legal parent is alive when the other dies, the child will automatically go to that parent unless a court determines that the best interest of the child requires something different. This term can also apply to an adult appointed or selected to care for an incapacitated person.
Persons who are entitled by law to inherit from an estate if there is no will to pass property at death.
A personal possession that usually has a sentimental value that exceeds its monetary value.
A will that is completely handwritten by the person making it. While legal in some states, it is rarely advised except as a last resort.
A person who is legally incapable of managing his or her own business affairs. A person may be permanently or temporarily incapacitated. A probate court usually decides if a person is incapacitated or not. “Incapacitated” is often used interchangeably with “incompetent.”
Incidents of ownership:
All or any management control over a trust or an insurance policy. In relation to an insurance policy, incidents of ownership include the right to change the beneficiaries, borrow cash value and change the ownership, among other rights.
A tax assessed on income or gain made by an individual or entity.
A person who is legally incapable of managing his or her own business affairs. A person may be permanently or temporarily incompetent. A probate court usually decides if a person is incompetent or not. “Incompetent” is often used interchangeably with “incapacitated.”
To receive property from one who dies intestate. This term is also used to refer to the act of receiving property distributed under a will.
To die without a will.
The method by which property is distributed when a person fails to distribute it in a living trust or will. In such cases, the law of each state provides that the property be distributed in certain shares to the closest surviving relatives. The intestate succession laws may also be used if an heir is found to be pretermitted (not mentioned or otherwise provided for in a living trust or will). The laws of intestate succession are often referred to as the laws of descent and distribution.
Document; sometimes used to refer to the document that creates a living trust.
Inter vivos trust:
Latin for “between the living.” A trust that is created and comes into existence during the grantor’s lifetime.
A trust which cannot be changed or undone.
One’s direct descendants such as children, grandchildren, etc.
A method of taking title to real or personal property. When two or more people own property as joint tenants, each owns 100% of the property. When one of the owners dies, the deceased owner’s share is extinguished, leaving the remaining 100% owners.
The document issued by a probate court authorizing the executor or personal representative to discharge his or her responsibilities.
Letters of administration:
The document issued by a probate court authorizing the administrator to discharge their responsibilities.
A person who receives the use of trust property and the benefit of trust income for his or her life, but who doesn’t own the trust property itself (the principal). A life beneficiary generally does not have any power to dispose the trust property upon his or her own death.
A property interest that gives the right to use trust property and receive income from it during one’s lifetime.
Life insurance trust:
An irrevocable trust designed to own life insurance and reduce the size of the original owner’s taxable estate. Frequently known as an ILIT (irrevocable life insurance trust).
Cash or assets that can be readily turned into cash.
A trust set up while a person is alive and which remains under the control of that person until death or disability. Also referred to as an “inter vivos trust.”
Living trust with marital life estate:
A living trust that provides for a life estate to benefit the spouse with the corpus of the trust to be distributed to other final beneficiaries.
A document, directed to physicians, in which you state the level and extent to which certain life-prolonging measures are to be taken.
A deduction allowed by the federal estate tax law for all property passed to a surviving spouse who is a U.S. citizen. This deduction (which really acts like an exemption) allows anyone to pass his or her entire estate to a surviving spouse without any tax at all. This may be a good idea if the surviving spouse is relatively young and in good health.
If the surviving spouse is likely to die in the near future, however, tax problems can be made worse by relying on the marital exemption. This is because the second spouse to die will normally benefit from no marital deduction, which means the combined estate, less the standard estate tax exemption, will be taxed at a high rate. Well-drafted estate planning documents can minimize the tax.
Marital deduction trust:
The trust which “receives” property passed under the marital deduction laws from the deceased spouse’s estate for the surviving spouse’s benefit. Property in the marital deduction trust may be included as part of the surviving spouse’s estate (for estate tax purposes) when he or she dies. Various forms of marital deduction trusts are: Marital appointment trusts, qualified terminal interests trust and qualified domestic trust.
In most states, a person under 18 years of age. A minor is not permitted to make certain types of decisions (for example, enter into most contracts). All minors are required to be under the care of a competent adult (parent or guardian) unless they qualify as emancipated minors (in the military, married or living independently with court permission). Property left to a minor must be handled by a guardian or trustee until the minor becomes an adult.
Next of kin:
The closest living relation.
The legally prescribed process of making someone aware of a legal proceeding or matter.
The affirmation of an agent (the notary) of the state affirming that the signature on the document being “notarized” is in fact the signature of the person purportedly signing the document.
A person who has state-granted authority to certify the validity or authenticity of the signature being made on a document.
All property other than land and buildings attached to land.
A method of distributing an estate such that all of the surviving descendants share equally in the property. Also known as pro rata.
The most common way of distributing an estate such that if one of the beneficiaries is dead, his or her children share equally in his or her share. Also known as by right of representation.
Perpetuities savings clause:
A “safety net” clause included in most trusts, which automatically terminates the trust at the last possible moment to prevent any possible violation of trust law caused by the general terms of the trust not properly providing for a termination of the trust as required by law. Under most state laws, a trust must have a finite “life” and end prior to the time required by law.
A bank account that is designed to avoid probate. It is a contract between the bank and the account holder guaranteeing that, upon the account holder’s death, the bank will pay the balance of the account to whoever is designated to receive the account.
A will that “pours over” property into a living trust at death. Property left through the will generally must go through probate before it goes into the trust.
Power of appointment:
Having the legal authority to decide who shall receive someone else’s property — usually property held in a trust. The power given to a person, by appointment in a will or a trust, to distribute the property that passes through the will or trust at the discretion of the person appointed. Other than to give the appointed person the authority to make the distribution, the will or trust doesn’t make distribution of the property.
Power of attorney:
A legal document that allows you to authorize someone else to act for you. See durable power of attorney.
A child (or the child of a deceased child) who was born after a will was executed.
Property owned by a trust, as distinguished from the income generated by that property. Also known as “corpus.”
A court proceeding in which: (1) the authenticity of a will is established, (2) an executor, personal representative or administrator is appointed, (3) the decedent’s debts and taxes are paid, (4) heirs or intended beneficiaries are identified, and (5) the property in the probate estate is distributed according to the will or if there is no will, the property is distributed in accordance with the laws of intestate succession.
All of an individual’s property that will pass through probate. Generally, this means all property owned by the decedent at death less any property that has been placed in joint tenancy, a living trust, a bank account trust with a POD designation or in life insurance payable to beneficiaries other than the decedent’s estate.
Fees paid from a decedent’s estate to an attorney during probate. In some states, there are statutory fee schedules while in other states the fees may either be charged on a flat fee basis or by the hour.
Property control trust:
A trust that imposes limits or controls over the rights of beneficiaries for various reasons. These trusts include:
Spendthrift trusts designed to prevent a beneficiary from being able to waste trust principal.
Special needs trusts designed to assist disabled persons with special physical or other needs.
Sprinkling trusts that authorize the trustee to decide how to distribute trust income or principal among different beneficiaries.
Proving a will:
Getting a probate court to accept the fact, after your death, that your will really is your will.
A trust used to postpone estate taxes when one spouse is a noncitizen of the U.S.
A marital trust with property left for use of the surviving spouse as life beneficiary. No estate taxes are assessed on the trust property until the death of the life beneficiary spouse.
A rule that applies to married couples who have moved to California. All property acquired by them during their marriage in other states is treated as community property at their death.
All land and items attached to the land, such as buildings, stationary mobile homes, fences and trees, are real property or “real estate.” All property that is not real property is personal property.
The process of filing a copy of a deed or another document with the county recorder’s office. Recording creates a public record of all changes in ownership of property.
Right to die:
The right to decide not to have life prolonged by extraordinary, artificial means.
Rule against perpetuities:
A rule of law limiting the duration of a trust or another gift of an unvested property interest. Some trusts can go on in perpetuity (forever), but most types of trusts have a maximum duration or life established by law.
Section 2503 trusts:
A type of irrevocable trust, authorized by section 2503 of the IRS code, often established for children. Section 2503 allows annual gifts up to $11,000 to be made to the trust, rather than directly to the child, and still have the gift qualify for the $11,000 annual gift tax exclusion.
A will that has been properly witnessed (by either two or three witnesses depending on state laws) where the witnesses have signed an affidavit before a notary public stating that all of the proper formalities of the will’s execution have been complied with. This usually makes it very easy for the court to “prove” the will.
All property that is not community property. See community property.
A bequest of a particular item or part of an estate or that is payable only from a specified source in the estate and not from the general assets
The tax basis of appreciated property received due to the death of the decedent is “stepped up” to the market value of the property at the decedent’s death. The result is substantial tax savings upon the subsequent sale of the appreciated property.
The person (or institution) who takes over as trustee of a trust when the original trustee(s) has died, resigned or become incapacitated.
The portion of your estate that is subject to federal or state estate taxes.
A trust created by a will.
Someone who dies leaving a valid will dies “testate.”
A document that proves ownership of property.
A simple savings bank trust, revocable at any time before the death of the depositor in which the owner designates who would receive the account upon the death of the owner. (Also called “pay-on-death” account).
A legal arrangement under which one person or institution (called a trustee) controls property given by another person (called a grantor, settlor or trustor) for the benefit of a third person (called a beneficiary). The property itself is the principal of the trust. When forming a living trust, the trustee and grantor may be the same person.
The person or institution who manages trust property under the terms of the trust document. With a revocable living trust, the creators of the trust (grantors) are usually the original trustees.
Trust corpus or res:
Latin for the “property” transferred to a trust.
The provisions in a trust document defining what the trustee may and may not do.
A legal document in which a person directs what is to be done with his or her property after death. It may also designate guardians for your children. With some exceptions, property passed by will must go through the probate process. See probate.
By: Bruce Alan Danford with editorial assistance by Daniel Kapsak and Russell Lombardy