Estate Planning Glossary
A trust that includes a tax-planning provision that lets you provide for your surviving spouse and keep control over who will receive your assets after your spouse dies. It also lets both spouses use their federal estate tax exemptions. This can save a substantial amount in estate taxes and leave more money for your beneficiaries. For example, in 2012, when the federal estate tax exemption is $5 million, an A-B trust will let a married couple transfer up to $10 million to their beneficiaries estate tax- free, saving up to $1,750,000 in estate taxes.
Amount you can give someone each year without having to file a gift tax return or pay a gift tax. Currently $13,000 per recipient ($26,000 if married). The amount of tax-free gifts is tied to inflation and may increase from time to time.
Certificate of Trust
A shortened version of a trust that verifies the trust’s existence, explains the powers given to the trustee, and identifies the successor trustee(s). Does not reveal any information about the trust assets, beneficiaries, or their inheritances.
A trust included in your living trust. If, when you die, a beneficiary is not of legal age, the child’s inheritance will go into this trust. The inheritance will be managed by the trustee you have named until the child reaches the age at which you want him/her to inherit.
Assets a husband and wife acquire by joint effort during marriage if they live in one of the eight community property states. (Wisconsin also has a similar law, but does not use the term "community property.") Each spouse owns half of the assets in the event of divorce or death.
One who is legally responsible for the care and well-being of another person. If appointed by a court, the conservator is under the court’s supervision. May also be called a guardian. (Duties and titles can vary by state. For example, in Missouri, there is a guardian of the person and a conservator of the estate.)
Durable Power of Attorney for Asset Management
A legal document that gives another person full or limited legal authority to sign your name on your behalf in your absence. Valid through incapacity. Ends at death.
Durable Power of Attorney for Health Care
A legal document that lets you give someone else the authority to make health care decisions for you in the event you are unable to make them for yourself. Also called a health care proxy or medical power of attorney.
Federal Estate Tax Exemption
Amount of an individual's estate that is exempt from federal estate taxes. In 2012, the exemption is $5,120,000. If Congress does not act by the end of 2012, on January 1, 2013 the exemption will be $1 million.
Generation Skipping Transfer Tax (GSTT)
A steep tax on assets that "skip" a generation and are left directly to grandchildren and younger generations. In 2012, the GST exemption is the same as the federal estate tax exemption (double for a married couple) with a tax rate of 35%. If Congress does not act before the end of 2012, on January 1, 2013 the GST exemption will be $1 million with a top tax rate of 55%.
A form of ownership in which two or more persons own the same asset together. Types of joint ownership include joint tenants with right of survivorship, tenants in common, and tenants by the entirety.
Often used for privacy. Title is transferred to a corporate trustee or corporation, but you keep control over how the property is managed. Because the title is in the name of the corporate trustee or corporation, no one knows the property belongs to you. In all financial transactions and dealings, your personal name never comes up. Also called a title holding trust.
A written legal document that creates an entity to which you transfer ownership of your assets. Contains your instructions for managing your assets during your lifetime and for their distribution upon your incapacity or death. Avoids probate at death and court control of assets at incapacity. Also called a revocable inter vivos trust. A trust created during one’s lifetime.
A deduction on the federal estate tax return that lets the first spouse to die leave an unlimited amount of assets to the surviving spouse free of estate taxes. However, if no other tax planning is used, and the surviving spouse’s estate is more than the amount of the federal estate tax exemption in effect at the time of his/her death, estate taxes will be due at that time.
The assets that go through probate after you die. Usually these include assets you own in your name and those paid to your estate. Usually does not include assets owned jointly, payable-on-death accounts, insurance and other assets with beneficiary designations. Assets in a trust also do not go through probate.
Legal, executor, and appraisal fees and court costs when an estate goes through probate. Probate fees are paid from assets in the estate before the assets are fully distributed to the heirs.
Qualified Terminable Interest Property (QTIP)
A trust that delays estate taxes until your surviving spouse dies so more income will be available to provide for your spouse during his/her lifetime. You can also keep control over who will receive these assets after your spouse dies.
Document that allows you to transfer title to real estate. With a quitclaim deed, the person transferring the title makes no guarantees, but transfers all his/her interest in the property.
Required Beginning Date (RBD)
The date you must begin taking required minimum distributions from your tax-deferred plans. Usually, it is April 1 of the calendar year following the calendar year in which you turn age 70 1/2. If your money is in a company-sponsored plan, you may be able to delay your RBD beyond this date if you continue working (providing you are not a 5% or greater owner of the company).
Required Minimum Distribution (RMD)
The amount you are required to withdraw each year from your tax-deferred plan after you reach your Required Beginning Date. This amount is determined by dividing the year-end value of your tax-deferred account by a life expectancy divisor found on a chart provided by the IRS.
Special Needs Trust
Allows you to provide for a disabled loved one without interfering with government benefits.
Protects assets in a trust from a beneficiary’s creditors.
Husband or wife.
Assets are given a new basis when transferred by inheritance (through a will or trust) and are re-valued as of the date of the owner’s death. If an asset has appreciated above its basis (what the owner paid for it), the new basis is called a stepped-up basis. A stepped-up basis can save a considerable amount in capital gains tax when an asset is later sold by the new owner. Also see "Basis."
Subchapter S Corporation Stock
Stock in a corporation which has chosen to be subject to the rules of subchapter S of the Internal Revenue Code.
The spouse who is living after one spouse has died.
See "A Trust."
Person or institution named in the trust document who will take over should the first trustee die, resign, or otherwise become unable to act.
A retirement savings plan (like an IRA, 401(k), pension, profit sharing, or Keogh) that qualifies for special income tax treatment. The contributions made to the plan and subsequent appreciation of the assets are not taxed until they are withdrawn at a later time -- ideally, at retirement, when your income and tax rate are lower.
Generally, a gift of more than $13,000 in one year to someone other than your spouse. The value of the taxable gift is applied to your federal gift tax exemption. After you have used up your exemption, additional gifts will be taxed, usually at the highest estate tax rate in effect. In 2012, the gift tax exemption is the same as the federal estate tax exemption (double for married couples) and the tax rate is 35%. If Congress does not act before the end of 2012, on January 1, 2013 the exemption will be $1 million and the tax rate will be 55%.
A form of joint ownership in which two or more persons own the same property. At the death of a tenant-in-common, his/her share transfers to his/her heirs.
A form of joint ownership in some states between husband and wife. When one spouse dies, his/her share of the asset automatically transfers to the surviving spouse.
A trust in a will. Can only go into effect at death. Does not avoid probate.
One who dies with a valid will.
Document proving ownership of an asset.
Tax on assets when they are transferred to another. The estate tax, gift tax and generation skipping transfer tax are all transfer taxes.
An entity that holds assets for the benefit of certain other persons or entities.
An institution that specializes in managing trusts. Also called a corporate trustee.
Person or institution who manages and distributes another’s assets according to the instructions in the trust document.
A "pay-on-death" account. A bank account that will transfer to the beneficiary who was named when the account was established. The terms "transfer on death" ("TOD"), "in trust for" ("ITF"), "as trustee for" ("ATF"), and "pay on death" ("POD") often appear in the title.
The amount each person is allowed to deduct from federal estate taxes owed after death. In 2012, the credit is $1,772,800. This is the amount of estate taxes that would be due on $5,120,000 in net assets. After applying this credit, the result is that $5,120,000 is "exempt" from estate taxes in 2012.
Uniform Transfer to Minors Act (UTMA)
Law enacted in many states that lets you leave assets to a minor by appointing a custodian. In most states, the minor receives the assets at legal age.
Your living trust is unfunded if you have not transferred assets into it.
Document that allows you to transfer title to real estate. With a warranty deed, the person guarantees that the title being transferred is clear (free of any encumbrances). If the title is defective, the person making the transfer is liable. Compare to quitclaim deed.
A written document with instructions for disposing of assets after death. A will can only be enforced through the probate court.
Disclaimer Notice: It is my intention that the comments, articles, and other information provided on this website are intended to provide you with general information which may be interesting and of value to you. You should not construe any of this information as legal advice or my opinion as it may relate to your specific circumstances. Please feel free to contact me directly if you would like to discuss your own situation and your estate or business planning needs.