Glossary of Terms


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Activities of daily living
Bathing, dressing, toileting, eating, medicating, and transferring in and out of bed or a wheelchair.
Affidavit of trust
An affidavit setting out the essential elements of a trust without disclosing the private information contained in the actual trust document. An affidavit of trust can usually be given to banks and other third parties in lieu of giving them a copy of the full trust documents.
AFR - Applicable Federal Rate
An estimated investment return that the government determines and publishes monthly. Used for calculating the value of gifts made to split-interest irrevocable trusts, such as charitable remainder trusts and grantor retained interest trusts, and the amount of the annuity payments in private annuities.
Amendment
Written changes to a trust document. If the changes are complex or extensive, the original trust may be restated as a new trust document incorporating all the changes but maintaining the name and date of the original trust to avoid having to "re-fund" assets to a new trust.
Ancillary Administration
The probate and administration of a decedent owned property in more than one state at death.
Annual exclusion
Annuity
A fixed amount of money which is paid to the annuitant (person establishing the annuity) for his or her life or for a fixed period of time.
Applicable credit
Ascertainable standards
A limitation on distributions from a trust for the "health, education, maintenance, and support" of a beneficiary.
Asset protection
Positioning property in such a way that it is not subject to the claims of a plaintiff in a lawsuit. In estate and business planning, corporations, limited partnerships, and certain trusts are used as asset protection devices.
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Bargain sale
A sale in which the property owner sells the property to be qualified charity for less than the fair market value. The difference between the fair market value and the sales price to the charity is the "bargain" part of the arrangement and is considered a gift to the charity.
Basis
Generally the cost of property. Basis can be increased by such items as capital improvements or decreased by items such as depreciation. Basis is used to compute taxable gain on the sale, exchange, or other disposition of property.
Beneficiary
One who receives property pursuant to a trust, a will, an insurance policy, an individual retirement account, or other third-party beneficiary contract.
Business succession plan
The succession plan details the steps for implementing the business owner's chosen exit strategy allowing the smooth transfer of control and ownership of the business in the event of the death, disability, or retirement of the owner.
Buy-sell agreement
A succession plan for business co-owners in the event of death, disability, disagreement, or retirement (often known as triggering events) to protect both the departing owner and the integrity of an ownership group. There are three types of buy-sell agreements: 1) cross-purchase agreement, 2) entity-purchase agreement, and 3) hybrid of the first two.
Bypass Trust
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Capital gain (loss)
The difference between the amount received in a sale or exchange of a capital asset and its basis.
Carryover basis
Generally for gifts of property made after 1976, the donee takes the basis of the donor, with some increase in the basis if the donor paid gift tax on transfer.
Charitable planning
Structuring donations into a unified plan so that donors maximize for themselves, their families, and their worthy causes the tax and nontax benefits of their gifts while they are alive and after their death.
CLAT - Charitable Lead Annuity Trust
Pronounced "klat." A charitable lead trust in which a fixed dollar amount or a percentage of the initial value of the trust assets is paid annually to a charitable beneficiary for a period of time, after which the trust principal is transferred to the noncharitable beneficiaries designated in the trust. See also CLT.
CLT - Charitable Lead Trust
An irrevocable trust in which a charity has the right to receive distributions from the trust for a period of time, after which the balance of the trust principal is paid to noncharitable beneficiaries. The charitable interest "leads" the noncharitable beneficiaries' interests in a CLT. Depending on how the distributions to the charitable beneficiary are calculated, the CLT may be a CLAT or a CLUT. A CLT can be created and operational during the maker's life (inter vivos) or created at death (testamentary) through a will or a living trust and funded.
CLUT - Charitable Lead Unitrust
Pronounced "klut." A charitable lead trust in which a fixed percentage of the value of the trust assets, revalued annually, is paid annually to a charitable beneficiary for a period of time, after which the trust principal is transferred to the noncharitable beneficiaries designated in the trust. See also CLT.
Common Trust
Often incorporated by parents into their wills or living trusts to hold assets in one common or "pot" trust for the benefit of all their children until some event occurs -which the trustmaker designates in the document- such as the youngest child reaching a certain age. Ensures that all of the parents' assets are available to care for all of the children in all circumstances until all of the children are old enough to care for themselves.
Community property
Form of ownership in which all property, real and personal, wherever located, acquired by a married person during the marriage while domiciled in a community property state is deemed to be owned equally by both spouses. The community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Each community property state has a slightly different set of rules about how and when couples acquire the community property.
Compound interest
Interest that accrues on principal and unpaid interest.
Contractual ownership
A form of ownership generally referring to a person's right to direct the disposition of an asset at death as part of the agreement that creates the asset itself; such as a life insurance policy.
Contribution base
For purposes of calculating a taxpayer's charitable income tax deduction. A taxpayer's adjusted gross income not including any net operating loss carry-back deduction.
Convenience trust
A type of trust set up under a will or a trust that permits the beneficiary of the trust to withdraw assets at any time and for any reason, without restriction.
CRAT - Charitable Remainder Annuity Trust
Pronounced "krat." A charitable remainder trust in which a fixed dollar amount or a percentage of the initial value of the trust assets is paid annually to noncharitable beneficiaries for period of time, after which the trust principal is transferred to the charitable remainder beneficiaries designated in the trust. See also CRT.
Credit shelter trust
Cross-purchase agreement
A type of buy-sell agreement in which the remaining co-owners agree to purchase the interest of a deceased or departing owner.
CRT - Charitable Remainder Trust
An irrevocable trust in which the trustmaker and/or other designated noncharitable beneficiaries (usually the trustmaker's spouse) have the right to receive payments annually for a period of time, after which the balance of the trust principal is paid to the charitable beneficiaries designated in the trust. Depending on how the distributions to the noncharitable beneficiaries are calculated, the CRT may be an annuity trust or a unitrust. A CRT can be created and operational during the maker's life (inter vivos) or created at death (testamentary) through a will or a living trust and funded with all or part of the decedent's property. See also CRAT; CRUT; NIMCRUT.
Crummey power
CRUT - Charitable Remainder Unitrust
Pronounced "krut." A CRT in which a fixed percentage of the value of the trust assets, revalued annually, is paid annually to nonchariable beneficiaries for period of time, after which the trust principal is transferred to the charitable beneficiaries designated in the trust. See also CRT.
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Death probate
The court proceeding that establishes the validity of a will; appoints personal representatives and guardians of minor children; and provides legal oversight to ensure accuracy in accounting for a decedent's assets, fairness in the treatment of heirs, and protection for the rights of the decedent's creditors.
Death tax
A phrase commonly used to refer to the federal estate tax and state inheritance and estate taxes.
Defined-benefit plan
An employer-sponsored qualified retirement plan in which the benefit that the retired employee will receive is defined as a specific dollar amount or a percentage of the employee's compensation before retirement.
Defined-contribution plan
An employer-sponsored qualified retirement plan in which the contribution, not the benefit, is defined. Employers contribute to the plan on employee-participants' behalf, and each employee has a separate account within the plan. Retiring or departing employees receive the balance of their accounts (subject to vesting rules), either in a lump sum or in come form of periodic distribution. The amount employees receive is largely a factor of investment performance. The most common defined-contribution plans are profit sharing, 401(k), SIMPLE IRA, and SEP plans.
Demand right
The right of a beneficiary to withdraw property transferred to an irrevocable trust. Used to convert a future-interest gift to a present-interest gifts so that the gift qualifies for the gift tax annual exclusion.
Disability
For legal insurance, and government purposes, to be physically or mentally disabled, or both, for an extended period of time.
Disability insurance
Insurance that provides income to an individual if he or she becomes disabled. The disability income paid is based on the premium the insured pays and the insured's age, occupation, and health status.
Disclaimer
An irrevocable refusal by beneficiary or other recipient to accept a gift or bequest.
Discounts
In estate planning, discounts reduce the value of a gift for estate and gift tax purposes. Discounts also apply in business planning in valuing a business for sale. Types of discounts include lack of marketability, lack of control or minority interest, and key person.
Donee
The person receiving a gift.
Donor
The person making a gift.
Durable power of attorney
Generally a power of attorney expires at the death or disability of the principal. If it specifically states that it is to continue upon the incapacity of the principal, the power is durable and is used in disability planning to allow the agent to act on the principal's behalf during periods of disability. Durable powers of attorney can be (1) general, granting the agent powers to deal with all of the principal's assets and to take any action on his or her behalf; and (2) limited or special, allowing the agent to perform only certain acts or to control specific property.
Durable special power of attorney for financial affairs
A power of attorney that limits the agent's power to transferring property only to the principal's living trust in the event of the principal's legal incapacity. May be titled differently by practitioners.
Durable special power of attorney for health care
A power of attorney that limits the agent's power to making health care decisions for the principal if the principal cannot make health care decisions for himself or herself because of incapacity.
Dynasty planning
Also referred to as generation-skipping transfer tax or multigenerational planning. Extending the benefits of an estate plan beyond children to grandchildren and even future generations. It is a family wealth management plan that also sustains the parents' or grandparents' values and traditions after their deals.
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Early distribution
A distribution from an employer-sponsored plan or individual retirement account taken before the participants-owner reaches 59 � years of age.
Elder law
A special area of legal practice that focuses on issues of particular relevance to senior citizens, such as Social Security, Medicare, Medicaid, and other governmental assistance programs for the elderly; guidance on planning for incapacity; long-term-care insurance; and all aspects of retirement benefits. Some elder law attorneys provide Medicaid planning to protect assets from being consumed by nursing home costs.
Elective-share statutes
Statutory provisions that give a surviving spouse a share of the assets of a deceased spouse. Can override the terms of a trust or will.
Entity-purchase agreement
Also known as a redemption agreement. A type of buy-sell agreement in which the business agrees to purchase (redeem) the interest of a deceased or departing owner.
ESOP - Employee Stock Ownership Plan
Pronounced "ee-sop." A type of qualified retirement plan for corporations and a business succession plan because the owner(s) can use an ESOP to sell the company to all employees.
Estate administration
The legal process by which assets and obligations of the decedent are ascertained, so that the decedent's obligations can be paid, and the remaining assets distributed to beneficiaries without fear of further claims against the estate. Will planning utilizes the probate process, and trust planning uses the trust administration process.
Estate planning
The process of individuals and families planning for the management and disposition of their assets and resources when they are deceased or no loner able to manage their own affairs. It incorporates family legacy, charitable, business succession, tax, disability, asset protection, retirement, gift, and elder law planning. While estate planning is about assets and minimizing income and estate taxes, it is also about people accomplishing goals during life and beyond.
Estate tax
A federal tax assessed on the net value of all property transferred at a person's death. Net value is the gross value of the decedent's assets- including home, business interests, bank accounts, investments, personal property, individual retirement accounts, retirement plans, and death benefits from life insurance that he or she owned-less debts and administration expenses. There are also state estate taxes, but they are more often referred to as inheritance or sponge taxes depending on the type of tax the states impose. See also inheritance tax or sponge tax.
Estate tax applicable exclusion
The amount that the unified credit equates to in terms of how much an individual can transfer free of estate taxes. Put another way, the applicable exclusion is the dollar value of a person's estate that is sheltered from estate taxes by the estate tax unified credit.
Estate tax unified credit
Also called estate tax applicable credit. A tax credit that reduces or eliminates a decedent's estate taxes. Once the value of a decedent's estate is determined and all of the appropriate deductions are taken, the remaining net value is the taxable estate. A tentative tax on that amount is calculated, and then credit is applied. This credit reduces the amount of the final tax due. It is a "unified" credit because transfers during life subject to gift tax reduce the amount of the estate tax unified credit available to offset transfers at death (estate tax). The estate tax unified credit equates to the estate tax applicable exclusion amount.
Ethical wills
Personal legacy or family mission statements that pass on in written form the decedents' life stories and core values; the hopes, dreams, and aspirations that they had for themselves and for their families and heirs; and messages of love and gratitude, and even prohibitions intended to influence what heirs do with their inheritances.
Executor (or executrix)
Exit Strategy
A long-range plan for how a business owner wants to divest himself or herself of the ownership of the business when any of certain events occur. Usually these events are retirements, disability, and death.
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Fair market value
The value at which property would change hands between a willing buyer and a willing seller, both having full knowledge of all relevant facts and neither being under any compulsion to buy or to sell.
Family Trust
Also called credit shelter, B, or bypass trust. In the most basic plan, on the first spouse's death, an amount of cash and property equal to the then applicable exclusion amount passes to a family trust so there is no estate tax in that amount. The family trust will often provide for income and discretionary distributions of principal to the surviving spouse; drafted so that when the surviving spouse dies, none of the trust assets are included in the surviving spouse's estate. Can be set up in a will or a living trust.
Fiduciary
A person who is entrusted with the assets of another and who is obligated to carry out the direction set forth by the person entrusting those assets. Personal representatives and trustees are examples of fiduciaries.
Financial planning
The process of individuals and families understanding their money and their total financial pictures; and planning in advance so they can financially achieve their family legacy, charitable, business, tax, disability, and retirement planning goals. Financial planning bridges tax law, elder law, estate planning, investing, accounting, actuarial science, and life insurance.
529 Plans
Savings plans for higher education. Although they are federally legislated, they are created, regulated, and administered by each state. The child can use the money to pay for his or her tuition, fees, books, and some living expenses. Each state has slightly different rules for its specific plan, so parents and grandparents need to read the details of their particular state's 529 Plan, although they can use almost any state's 529 Plan since most do not have residency requirements. Some states allow tax deductible contributions, and most states do not tax earnings within the plan; and the 2001 tax act made earnings in the 529 Plan federal income tax-free until they are distributed.
Flip unitrust
An abbreviation for charitable remainder unitrust with flip provisions. A charitable remainder trust that starts out was a charitable remainder unitrust with net income makeup provisions but "flips" to a standard charitable remainder unitrust upon the occurrence of a certain predetermined event. See also CRT; CRUT; NIMCRUT.
FLP - Family Limited Partnership
A limited partnership established under state law in which all the partners are family members or entities that are owned by family members. Typically used by the senior generation to facilitate the transfer of assets to younger family members, often at a discount (i.e., the value of the partnership interests are discounted from the value of the assets held by the partnership and represented by those partnership interests).
401(k) plan
An employer-sponsored qualified retirement plan that allows employee-participants to contribute a portion of their pay to their own retirement accounts free of withholding for income taxes.
Fraudulent Conveyance
A transfer of property that occurs shortly before or during legal proceedings against the person making the transfer. Fraudulent conveyance laws vary from state to state, but they always have the same general goal: to prevent people from making transfers with the intention of hindering, delaying, or defrauding present or subsequent creditors.
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Gift tax
A tax on the value of property that an individual gives away during life.
Gift tax annual exclusion
An annual federal tax exclusion of $11,000 per donee (2004 figure, indexed annually for inflation) for gifts of a present interest, without limit as to the number of recipients. These gifts are often referred to as annual-exclusion gifts. For married couples who consent to "split" gifts, the exclusion is double the gift tax annual exclusion allowed for the year of the gift.
Gift tax applicable exclusion
The amount of cash or property an individual can transfer gratuitously without paying gift taxes. The gift tax applicable exclusion if $1 million under the current law. If a person uses this gift tax exclusion by making taxable gifts, then it reduces, dollar for dollar, the amount of that person's estate tax applicable exclusion. See also gift tax unified credit.
Gift tax unified credit
Also called gift tax applicable credit. A credit available to offset the tax on lifetime taxable gifts. The gift tax unified credit equates to the gift tax applicable exclusion amount of $1 million in total. It is a "unified" credit because transfers during life that are subject to gift tax reduce the amount of the estate tax unified credit available to offset transfers at death (estate tax).
Grantor retained interest trust
An irrevocable trust that allows the trustmaker (the grantor) to make gifts of property while retaining the property's use and enjoyment of retaining an income interest in the property for a term of years, after which the balance of the trust assets pass to the remainder beneficiaries designated in the trust. See also GRAT; GRUT; QPRT.
Grantor Trust
Under the Internal Revenue Code, a trust for which all income, deductions, and credits of the trust are attributable directly to the grantor-trustmaker. In essence, the trust is ignored for federal income tax purposes.
GRAT - Grantor Retained Annuity Trust
Pronounced "grat." A type of grantor retained interest trust into which the trustmaker transfers appreciating or income-producing property in exchange for the right to receive a fixed amount paid at least annually for a term of years. When the term of the trust ends, any remaining balance in the GRAT is transferred to the remainder beneficiaries named in the trust.
GRUT - Grantor Retained Unitrust
Pronounced "grut." A type of grantor retained interest into which the trustmaker transfers appreciating or income-producing property in exchange for the right to receive a fixed percentage of the trust, as valued annually, paid at least annually for a term of years. When the term of the trust ends, any remaining balance in the GRUT is transferred to the remainder beneficiaries named in the trust.
GST tax - Generation-Skipping Transfer Tax
A federal tax assessed on property transferred to a donee who is more than one generation removed from the donor of the transferred property (e.g., a gift of property from a grandparent to a grandchild). This tax is in addition to gift or estate tax imposed on the transfer.
GST tax exemption
An exemption ($1.5 million in 2004) for the benefit of each transferor with respect to federal generation-skipping transfer tax.
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Honorary trusts
Trusts that some state allow individuals to create for their pets. The pet owner may leave a sum of money to someone, with the condition that he or she agreed to make the pet in and to properly care for the animal.
Hybrid agreement
Also called a two-tier buy-sell agreement. A type of buy-sell agreement in which the individual equity owners and the business itself has rights, duties, and/or obligations within the same agreement to acquire the interest of a deceased, disabled , or retiring owner.
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IGT - Irrevocable Grantor Trust
Sometimes referred to as an international grantor trust or an internationally defective grantor trust. An irrevocable trust that is drafter so that the trustmaker is treated as the owner of the trust that is drafted so that the trustmaker is treated as the owner of the trust for income tax purposes, but no to such an extent that the trust assets are inclined in the estate of the trustmaker at death. In addition, the assets in the trust appreciate outside of the maker's estate during the term of the trust.
ILIT - Irrevocable Life Insurance Trust
Sometimes referred to as a wealth replacement trust. Pronounced "eye-lit." A trust which holds life insurance as a principal asset, the death proceeds of which are neither estate-taxed in the estate of the insured nor income-taxed to the beneficiaries of the trust.
Incidents of ownership
Any rights or privileges that the insured has in a life insurance policy, such as the right to change the beneficiary of the policy or to access its cash value in any way.
Income trust
An irrevocable trust used by individuals who require nursing home care and whose monthly income exceeds the amount necessary to qualify for Medicaid.
Independent trustee
A person named in a charitable trust to perform certain duties, especially if the trust owns an annuity policy or a hard-to-value asset such as real estate. An independent trustee is someone who is not related to the trustmaker, the trustmaker's spouse, or to any other income beneficiary, and is not subordinate to or controlled by the trusmaker or these other individuals, such as an employee.
Inheritance tax
A state tax levied by state governments on the privilege of inheriting wealth. The recipient of the property and the recipient's relationship to the decedent.
Installment sale
Sale of an asset in exchange for an interest-bearing promissory note payable over 2 or more tax years.
Inter vivos trust
Interstate
Dying without a will or living trust. The decedent's property is distributed to his or her heirs under what is known as the law of intestacy of the state where the decedent resided. The law of intestacy is a statutory inheritance framework that favors spouses and family bloodlines.
IRA - Individual Retirement Account
A traditional form of retirement account authorized under the Internal Revenue Code. Contributions are usually tax-deductible when made (within limits); and both contributions and earnings accumulate on a tax-deferred basis until the owner will pay the tax at his or her then-current tax rate. Owner must begin taking withdrawals soon after reaching age 70 �.
IRD - Income in Respect of a Decedent
Income that has been earned by an individual but not yet realized prior to his or her death. Heirs are responsible for paying the taxes on this income. The most common IRD assets are qualified retirement accounts and traditional individual retirement accounts.
Irrevocable trust
A trust that the maker cannot change or amend after he or she signs it. Irrevocable trusts with the demand-right provisions are often used to qualify gifts for the gift tax annual exclusion. Also, if the trustmaker retains no rights in the trust and is not a beneficiary of the trust, the assets of the trust are excluded from the trustmaker's gross estate for estate tax purposes, thus allowing the trustmaker to lower and, at times, eliminate federal estate taxes.
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Joint tenancy with right of survivorship
A form of ownership where two (or more) people each own an equal, undivided interest in an asset and upon the death of one owner, the surviving owner(s) is vested with ownership through operation law.
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Last will and testament
See Will.
Life estate
A particular type of ownership arrangement with two different ownership interests: a life estate interest and a remainder interest.
Lifetime trust
A type of trust is set up under a will or a trust that keeps the inheritance in trust for the lifetime of the beneficiary.
Living probate
Technically known as guardianship. A legal proceeding to appoint a guardian or a conservator for a minor or other person who cannot manage his or her own affairs (ward). Provides legal oversight to ensure accuracy in accounting for a ward's assets and protection for the rights of the ward.
Living trust
Sometimes referred to as an inter vivos trust. A trust created by and operational during the maker's lifetime and surviving the maker's incapacity and death. A living trust can be either revocable of irrevocable.
Living trust-centered estate plan
A plan that uses the revocable living trust as the foundation document in lieu of a will.
Living will
Depending on the state, this may be called a medical directive or a physician's directive. Not actually a will, but a set of instructions or an expression of wishes and desires regarding the use or nonuse of medical treatments or "extraordinary" means of procedures that would artificially prolong life should the maker be in a terminal condition or a permanently unconscious state.
LLC - Limited Liability Company
A fairly recent hybrid business form that combines characteristics of a corporation and a partnership. The LLC can elect to be taxed as a partnership or a corporation. Owners are "members" and their ownership interests are percentage interests in the LLC. All members of an LLC enjoy limited liability.
Long-term care
For Medicaid purposes, assistance provided to individuals who are functionally impaired. Functional impairment means that a person is unable to perform at least two of the six activities of daily living without assistance and/or needs care because of cognitive or other impairment. Further defined as a stay of more than 30 consecutive days in Medicaid-approved adult care homes, hospitals, psychiatric facilities, and licensed nonmedical residential care facilities.
Long-term-care insurance
Covers part or all of the insured's cost of home care, nursing home care, or similar extended care should it become necessary. Designed to help pay for expenses that insureds may incur if they lose the ability to take care of their own activities of daily living due to chronic medical conditions or cognitive disabilities. Not provided by Medicare, Medicaid, Social Security, or Medicare supplemental insurance.
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Martial deduction
Unlimited deduction against estate and gift taxes on the value of property that spouses transfer to each other.
Medicaid
A joint federal and state medical assistance program for the aged, blind, and disabled with limited or no means. The federal government provides funding assistance for each state's Medicaid program, but each state makes its own eligibility rules. There are very strict eligibility requirements for this program because it was created to serve people in severe financial need. Not everyone who is poor and in need of medical care qualifies for Medicaid. It will pay for almost all long-term-care costs, some home- and community- based services, as well as many of the Medicare costs for which the insured is responsible.
Medicare
A federal health insurance program, Within the Medicare program, there are Part A, the Medicare hospitalization insurance program with deductibles, copayments, and benefit limits; and Part B, the medical (nonhospital care) insurance program that provides broader coverage, primarily for outpatient services, and also imposes deductibles and copayments. Part B is optional, and it requires a monthly premium.
Memorandum of personal property
Prepared as part of an estate plan, this document gives specific items specific items of tangible personal property, such as the rocking chair or the doll collection, to specific people. The benefit of this memorandum is that it can be changed anytime without assistance from an attorney. Is not valid in all states.
Modified carryover basis system
In 2010, replaces the step-up-in basis system for property acquired from a decedent. This means that, with come important exceptions and adjustments, the basis for property acquired from a decedent will be equal to the decedent's basis before death or the fair market value of the property at death, whichever is less.
Multigenerational planning
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NIMCRUT - Charitable Remainder Unitrust with Net Income Makeup Provisions
Pronounced "nim-krut." A charitable remainder unitrust which provides for annual distribution to the noncharitable beneficiary of the lesser of the unitrust amount or the trust's income. If and when the trust earns sufficient income, the trust can distribute additional amounts to make up for prior years when the full unitrust amount was distributed. Allows for some flexibility in income planning; often used in retirement planning. See also CRT; CRUT.
Nonqualified plans
Retirement plans that are employer-sponsored but not controlled by the Employee Retirement Income Security Act of 1974 (ERISA) or subject to Internal Revenue Code limits imposed on qualified plans. Employers can tailor these plans to meet the goals and objectives of individual participants; but in return for this flexibility, the employers and participants forgo many of the tax benefits associated with qualified plans.
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Personal representative
The modern term for executor and executrix (female executor) but is without gender. This is the person named in a will and subsequently approved by the probate court to administer and to distribute the property of a person who had died with a will.
POD designation - Payable-On-Death
Also called TOD, an abbreviation for transfer-on-death. In the states that allow this designation, it is used primarily for bank checking, savings, and money market accounts; and brokerage accounts. Similar to a beneficiary designation in that it gives ownership of an asset to a named beneficiary of living trust at the owner's death.
Pour-over will
A document that acts as a safety net to transfer any assets that you own at your own at your death outside of a revocable living trust to the trust; appoints a guardian for minor children; and revokes any previous wills and codicils so that they cannot interfere with the new estate plan.
Power of appointment
A power granted to a person allowing him or her to designate the recipient of the property controlled by the power.
Power of attorney
A document by which a principal-the person giving the power-appoints an attorney-in-fact or agent to perform specific acts on the principal's behalf. The two basic types are (1) general, granting the agent broad powers to deal with all of the principal's assets and to take any action on his or her behalf; and (2) limited or special, which allows the agent to perform only certain acts or to control specific property. A power of attorney automatically terminates when the principal dies, and, unless it is durable power of attorney, terminates when the principal becomes disabled.
Present interest
The recipient of a gift can control, use, and enjoy the gift immediately. This is a requirement for gifts to qualify for the gift tax annual exclusion.
Private annuity
An agreement under which an owner transfers an asset to a buyer in exchange for the buyer's unsecured promise to make fixed periodic payments to the seller-the annuitant-for the rest of his or her life. When the seller dies, the buyer's obligation to make payments ends. The buyer's obligation to make the annuity payments is personal and is not tied to or secured by the property transferred or its income.
Private foundation
A tax-exempt charitable entity typically established by a single contributor or a single family for carrying out charitable purposes. Does not qualify as a public charity and does not seek support from the general public. In some instances a foundation is created at death through a will or a living trust and funded with all or part of the decedent's property.
Probate
Public charity
The best known and most common type of qualified charity (churches, educational institutions, hospitals, medical research institutions, etc.). To qualify as a public charity, the organization must receive broad-based public support through contributions. Donations to public charities are subject to more generous deductibility limits than donations to most other qualified charities.
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QDOT trust - Qualified Domestic Trust
For noncitzen spouses, functions like a QTIP trust, but there are some important differences regarding who can be the trustee and how principal distributions are made from the trust.
QPRT - Qualified Personal Residence Trust
Pronounced "q-pert." A type of grantor retained interest trust into which the trustmaker transfers his or her personal residence while retaining the right to live in the residence for a term of years. At the end of the term, the property passes to beneficiaries designated in the trust. Removes the future value of the house from the trustmaker's estate.
QTIP trust - Qualified Terminable Interest Property Trust
Pronounced "q-tip." A form of marital trust in which the surviving spouse has an income interest for life. Property left for the benefit of a surviving spouse in a QTIP trust qualifies for the estate tax marital deduction. Can also be created while the trust-maker is living (inter vivos QTIP trust) to benefit the donee spouse for his or her lifetime.
Qualified charity
The Internal Revenue Code defines qualified charity in a series of complex regulations, and taxpayers only receive deductions for gifts to qualified charities. There are three basic types of qualified charity; public charities, supporting organizations, and private foundations.
Qualified plan
An employer-sponsored retirement plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. Most common types of qualified plans are defined benefit, profit-sharing, 401(k), SIMPLE IRA, and SEP plans.
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Reciprocal trust doctrine
A common-law doctrine which states that if two trustmakers create identical trusts for each other, the trusts are disregarded and the property is included in the trustmaker's estate.
Redemption agreement
Retirement planning
Formulating a plan for the time when a person will no longer be earning an income. It is individuals deciding how the want to live out their dreams for themselves and their families after retirement and planning so that those dreams come true. Retirement planning will include setting goals, analyzing income, estimating retirement income needs, budgeting, saving, investment and income tax planning, and planning for the proper distribution of retirement plan proceeds after death.
Revocable trust
A trust that the trustmaker can change or revoke after he or she signs it. See also living trust.
RMD - Required Minimum Distribution
The minimum amount that you must begin to withdraw each year from your traditional individual retirement account or qualified retirement plan beginning the year after you reach age 70 � (required beginning date). The Internal Revenue Service proscribes the rules for calculating how much the RMD must be.
Roth IRA - Roth Individual Retirement Account
A variation of the traditional individual retirement account. Contributions are not tax-deductible, but contributions and earnings grow inside the Roth IRA tax-free. No requirements for taking withdrawals (required minimum distributions) as age 70 �, so funds can continue to grow. Distributions after retirement are generally tax-free.
Rule against perpetuities
This rule can be enormously complicated, but the upshot is that, in most states, a trust can exist for only 90 or so years before it must end. Some states have abolished the rule against perpetuities altogether. In those states, a trust can go on indefinitely and never terminate.
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Salary continuation plan
An employer-sponsored nonqualified retirement plan under which the corporation promises to pay a stated benefit to the employee retirement.
Salary reduction plan:
An employer-sponsored nonqualified retirement plan under which the employee defers a portion of current compensation, and the company invests these funds to accrue benefits for the ultimate purpose of providing an income payout at the employee's retirement.
SCIN - Self-Canceling Installment Note
Pronounced "skin." A promissory note given by a buyer to a seller that calls for installment payments of principal and interest over a set period of time. It also provides that is the seller dies before the note is fully repaid, the remaining payments are automatically cancelled and the buyer owes nothing further.
Second-to-die insurance
Also called joint-life, survirorship, or last-to-die life insurance. A policy that insures two lives and only pays when both insureds are deceased. Second-to-die life insurance is far less costly than life insurance on the life of any one spouse or policies purchased separately on each spouse's life since the insurance company's risk is minimized by insuring two lives under one policy.
Self-settled trust
An irrevocable trust of which the maker can also be the beneficiary. In the past few years, a few states (Alaska, Delaware, Nevada, and Rhode Island) have passed legislation that allows a trustmaker to transfer assets to an irrevocable self-settled trust established in one of these states, and creditors are unable to make claims against those assets (even though the maker is the beneficiary), which significantly increases the asset protection of these trusts.
SEP plan - Simplified Employee Pension Plan
A low-cost, IRS-approved, employer-sponsored IRA (individual retirement account) for employees. Under a SEP plan, the employer, and in some cases, the employee, contributes funds to the IRA, which the employee owns and controls.
SIMPLE IRA - Savings Incentive Match Plan Individual Retirement Account
A low-cost, IRS-approved, employer sponsored retirement plan for employees. Allows employee and employer contributions to an IRA or individual retirement annuity, which the employee owns and controls.
Situs
The "location" of the trust-the state under whose laws the trust is established or administered.
SO - Supporting Organization
A type of charity created under the Internal Revenue Code and that operates to support the activities of one or more other public charities. As long as the SO is organized and operated exclusively to support one or more public charities, it is considered a public or from only one donor.
Social Security
A federal program that provides retirement, disability, and survivor benefits to wage earners and their spouses; former spouses, widows and widowers; ad children. A wage earner's eligibility for retirement benefits is based upon his or her work history-the years during which the wage earner paid taxes into the Social Security trust fund.
Special-needs trust
See supplemental-needs trust.
Special-use valuation
For estate tax calculations, valuing land used for farm or business purposes based on its current use instead of fair market value, resulting in reduced estate taxes.
Spendthrift provisions
Provisions in a trust that may be able to protect the beneficiary's interest in the trust from his or her creditors.
Sponge tax
Also called pickup estate tax. A state-imposed estate tax that is tied to the federal estate tax: a state tax equal to the amount the federal estate tax. The federal credit will be repealed in 2005, and many states have begun to "decouple" their estate tax from the federal tax. By decoupling the state death tax from the federal tax, a state can charge whatever amount of estate tax it chooses.
Spousal IRA
An individual retirement account for a spouse who doesn't work or who doesn't earn enough compensation income to make the maximum annual contribution to an IRA as allowed by law.
Staggered distributions
Pattern of distributions from a trust to a beneficiary over a period of years (e.g., distributions at age 30, 35, 40 etc.)
Step-up-in-basis system
When heirs inherit property, their basis in the property becomes the fair market value of the property on the decedent's date of death.
Supplemental-needs trust
Also called special-needs trust. A trust that provides items and services that are not provided by any public or private agency for the comfort and happiness of a person with disabilities. A supplemental-needs trust can enable a person with disabilities to inherit property without jeopardizing eligibility for governmental benefits.
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T-CLT - Testamentary Charitable Lead Trust
A charitable lead trust created at death through a will or a living trust and funded with all or part of the decedent's property. See also CLT.
T-CRT - Testamentary Charitable Remainder Trust
A charitable remainder trust created at death through a will or a living trust and funded with all or part of the decedent's property. See also CRT.
Tenancy by the entirety
A form of joint ownership in some states when the two joint owners are husband wife. Like joint tenancy with right of survivorship, each spouse owns an equal, undivided interest in the property and upon the death of one spouse, the surviving spouse is vested with sole ownership through operation of law.
Tenancy in common
A form of ownership between two or more individuals who each own an undivided interest in the property. Their interests may or may not be equal. Each co-owner can control who receives his or her interest in the property at death; the surviving tenant does not automatically become the sole owner.
Testamentary trust
A trust that is created under a will or a trust and does not come into existence until after the maker's lifetime, no assets can be placed in the trust until death. If it is a trust created under a will, the testamentary trust may be subject to court supervision until all assets have been distributed and all trust purposes have been completed.
Total control trust
A type of marital trust established under a will or trust for the benefit of a surviving spouse and over which the surviving spouse has total control.
Total return trust
A fairly new type of marital trust established under a will or trust for the benefit of a surviving spouse that pays the spouse the greater of the trust's income or a fixed percentage of the trust's value, determined annually.
Trust
A contract between its maker and a trustee. In the contact, the trustmaker gives instructions to the trustee concerning the holding and administering of trust assets for the benefit of the trust's beneficiaries.
Trust ownership
A form of ownership in which legal title to assets is held by the trustee of the trust for the beneficial enjoyment of use by the beneficiary or beneficiaries of the trust.
Trust protector
A person or corporation that, depending on the terms, has authority to oversee the trustees; to change provisions of the trust; to veto acts of the trustees; and, in general, to ensure that the trust is properly administered.
Trustee
A person or a licensed corporation appointed by a trustmaker to oversee the trust. The person or corporation owes a fiduciary duty to the beneficiaries of a trust. When the trustmaker appoints several persons to serve as trustees together, they are known as cotrustees. A successor trustee who the trustmaker usually appoints in the trust agreement and who takes over for a previous trustee when trustee is no longer able to perform the trustee duties, for whatever reason.
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UBTI - Unrelated Business Taxable Income
Income derived by a charity or charitable trust from any unrelated trade or business that it carries on and that is not specially excluded by statue. Typically, investment income or capital gains are not UBTI (unless the asset is debt-financed). Revenue from an active trade or business, however, is generally UBTI.
Unified credit
UTMA - Uniform Transfers to Minors Act
Also called UGMA, an abbreviation for Uniform Gifts to Minors Act. Accounts to transfer gifts to minors. With an UTMA or UGMA account, a custodian deems necessary. The account terminates and the child receives all the account's property upon reaching the age of majority.
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Vests
The point at which participants in a qualified employer-sponsored retirement plan will not forfeit the funds set aside for them if they leave their employers, no matter the reason. In some plans, the funds must vest immediately; in other plans, employers are allowed to establish vesting schedules, such as 10 percent of the funds vest if the participants are still with the company in the second year of employment.
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Wait-and-see life insurance
For spouses, an alternative to irrevocable life insurance trusts. A husband's living trust purchases and owns a policy insuring the wife's life, and wife's living trust purchases and owns a policy insuring the husband's life.
Will
A legal document containing the instructions for the disposition of one's assets after death, revoking all previous wills and codicils, and naming guardians of minor children.
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401(k) plan
An employer-sponsored qualified retirement plan that allows employee-participants to contribute a portion of their pay to their own retirement accounts free of withholding for income taxes.
529 Plans
Savings plans for higher education. Although they are federally legislated, they are created, regulated, and administered by each state. The child can use the money to pay for his or her tuition, fees, books, and some living expenses. Each state has slightly different rules for its specific plan, so parents and grandparents need to read the details of their particular state's 529 Plan, although they can use almost any state's 529 Plan since most do not have residency requirements. Some states allow tax deductible contributions, and most states do not tax earnings within the plan; and the 2001 tax act made earnings in the 529 Plan federal income tax-free until they are distributed.
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