Estate Planning Glossary
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7
706
The IRS form for the Estate Tax.
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709
The IRS form for the Gift Tax.
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7520 Rate
An Applicable Federal Rate which is 120% of the Mid-Term Rate. The 7520 Rate is used to calculate Transfer Tax effects of GRATs, Charitable Remainder Trusts, Charitable Lead Trusts and Qualified Personal Residence Trusts.
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A
AFR
See Applicable Federal Rate.
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Annual Gift Exclusion
Currently $13,000 worth of gifts to an individual per calendar year is excluded from the Gift Tax. The $13,000 amount is increased by inflation in $1,000 increments. If a donor wants to make gifts of $13,000 each to five individuals in one calendar year, then the Annual Gift Exclusion will shelter $65,000 from Gift Tax. However, the gift must be of a Present Interest. Also called the Annual Exclusion.
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Annuity Amount
Is a percentage amount based upon the value assets originally contributed to the trust.
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Anti-Contest Clause
Forfeiture clauses for beneficiaries who unsuccessfully challenge the terms of a Will or Trust. California enforces Anti-Contest Clauses in cases of direct contests without probable cause. Most of the time frustrated beneficiaries will challenge a Will or Trust on the grounds of lack of capacity or undue influence.
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Applicable Exclusion Amount
The amount that is exempt from Estate Tax. This amount was $3.5 million in 2009. For decedents dying in 2010, the estate has the choice of using an exemption amount of $5 million with a Basis Step-Up or an unlimited amount with a limited Basis Step-Up of $1.3 million to any beneficiary plus an additional Basis Step-Up of $3 million for the surviving spouse. In 2011 and 2012, the Applicable Exclusion Amount is $5,000,000. Use of the Lifetime Gift Tax Exclusion reduces the Applicable Exclusion Amount. For example, if one uses $1.5 million of the Lifetime Gift Tax Exclusion, then one will have only $3.5 million of the Applicable Exclusion Amount remaining.
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Applicable Federal Rate
The IRS-required minimum interest rate for loans. There will be adverse income tax and transfer tax consequences if any loan does not have the IRS-required Applicable Federal Rate. Also know as the AFR. See also Transfer Tax consequences if any loan does not have the IRS-required Applicable Federal Rate. Also known as the AFR. Also seeShort-Term Rate, Mid-Term Rate, Long-Term Rate and 7520 Rate.
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Ascertainable Standard
A Trust where the Trustee is limited to making distributions of income or principal for the beneficiary’s health, education, maintenance or support.
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B
Basis
Is the value of property used to calculate gains and losses for income tax purposes. Generally, the Basis in property is the purchase price for property. Property obtained by gift has a Carry-Over Basis, and property obtained from a decedent has a Stepped-Up Basis. The value of Basis is adjusted by depreciation.
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Beneficiary Designation
The transfer of an asset is done by a designation of beneficiary form. Qualified Plans, IRA and insurance policy proceeds are transferred by Beneficiary Designation. These assets are not transferred by Will, Trust or operation of law.
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Blended Rate
The Blended Rate is the IRS-required interest rate for Demand Notes or loans. The IRS publishes the Blended Rate in a Revenue Ruling every June based on the January and July semi-annual Short-Term Rate.
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Bypass Trust
This trust is created after the death the first spouse. The Separate Property and one-half of the Community Property of the first spouse is eligible to be transferred to the Bypass Trust. If properly structured, the assets of the Bypass Trust are not subject to estate taxes upon the second spouse’s death. The surviving spouse is usually, but not necessarily, the beneficiary of the Bypass Trust. The amount of the Bypass Trust may be up to the Applicable Exclusion Amount minus any Taxable gifts. For example, if the Applicable Exclusion Amount was $5 million and the first spouse to die made taxable gifts of $600,000, then the Bypass Trust could hold up to $4.4 million of assets. Also called a “Credit Shelter Trust” or “Exemption Trust.”
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C
Cancellation of Indebtedness Income
If one is released from a debt obligation, one is must pay income tax the amount of the debt cancelled. For example, if one was released from paying $200,000 note, one is subject to pay income tax on the $200,000.
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Captive Insurance
Casualty insurance where the insured has ownership of the insurance company insuring the risk. In order for payments to the Captive Insurance to be deductible for income tax purposes, there must be risk shifting and risk distribution. The Captive Insurance Company must actually take on some risk and share risk with other insureds. Captive Insurance is used to cover risks that are not covered by commercial casualty companies or can be more efficiently insured by the Captive Insurance company than by commercial casualty carriers.
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Carry-Over Basis
The Basis in property remains the same in the hands of the transferee and the transferor. The basis for gifts is Carry-Over Basis. However if the fair market value of the gifted property is lower than in the hands of the donor, the Basis of the gifted property will be the fair market value.
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Change in Ownership
A Change in Ownership triggers a reassessment of Property Taxes based on the current value of the property. In estate planning, one must make sure that transfers of real property to trusts, partnerships or limited liability companies does not trigger a Change in Ownership. The Change in Ownership rules are complex.
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Clayton Election
Decision by an independent executor or trustee to make or not make a QTIP Election. The Clayton Election is an alternative to using a Formula Clause to allocate the deceased spouse’s property between a Bypass Trust and a Marital Trust.
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CLT
Charitable Lead Annuity Trust
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Common Trust
The Beneficiaries of a Common Trust are affected by the disbursement to another Beneficiary. The Trustee may make different distributions of income or principal to each beneficiary and make payments of income or principal to some Beneficiaries while excluding payments of income or principal to other Beneficiaries. None of the disbursements of income or principal from a Common Trust are charged against any Beneficiary. Instead, all disbursements are charged against the Common Trust.
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Community Property
Property that is acquired during a marriage is usually Community Property owned equally by both spouses. Upon death of one spouse, the community property is divided into Separate Property of the deceased spouse and Separate Property of the surviving spouse. Upon the death of the first spouse, the Community Property could be divided pro-rata or non pro-rata. Also upon death of the first spouse, there is a double Step-Up in Basis, where both the deceased spouse’s and the surviving spouse’s basis in the Community Property is stepped-up to current market value.
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Complex Trust
An income tax term where trust income may be distributed to beneficiaries or accumulated in the trust.
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Contingent Beneficiary
A Beneficiary who takes an interest in property upon an event that might or might not happen. A Contingent Beneficiary has no interest in a trust until such event happens. For example, a parent might leave his or her property upon the parent’s death to the parent’s children. If his or her children or not living at the parent’s death, then his or her property will go this his or her grandchildren. The grandchildren are Contingent Beneficiaries, because one does not know whether or not the children will predecease the parent.
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Corporate Trustee
A trustee that is a corporation. Corporate Trustees can be used when there are no family members or friends qualified to be a trustee. In many cases, Corporate Trustees are used as backup successor Trustees, so the office of Trustee never is vacant.
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Credit Shelter Trust
This trust is created after the death the first spouse. The Separate Property and one-half of the Community Property of the first spouse is eligible to be transferred to the Credit Shelter Trust. If properly structured, the assets of the Credit Shelter Trust are not subject to estate taxes upon the second spouse’s death. The surviving spouse is usually, but not necessarily, the beneficiary of the Bypass Trust. The amount of the Credit Shelter Trust may be up to the Applicable Exclusion Amount minus any Taxable Gifts. For example, if the Applicable Exclusion Amount was $5 million and the first spouse to die made taxable gifts of $600,000, then the Credit Shelter Trust could hold up to $4.4 million of assets. Also called a “Bypass Trust” or “Exemption Trust.”
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CRT
Charitable Remainder Trust
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Crummey Powers
The person who won the case to make transfers to trusts with Withdrawal Powers a Present Interest was actually named “Crummey.”
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CRUT
Charitable Remainder Unitrust
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D
Demand Note
A note where the lender can demand payment at any time.
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Direct Skip
A Generation Skipping transfer made directly to a Skip Person. The GST Tax is Tax Exclusive for Direct Skips.
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Disclaimer
A refusal of a beneficiary to receive a gift. The gift goes automatically to the Contingent Beneficiary.
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Discretionary Trust
The Trustee has complete discretion whether or not to pay income or principal to the beneficiary. If the beneficiary is not the creator of the trust, a discretionary trust has some asset protection for the beneficiary, because the beneficiary does not have a right to trust income or principal.
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E
Educational-Medical Exception
Payments made for qualified tuition and medical expenses paid directly to the provider of such services are excluded from Gift Tax. Unlike the Annual Exclusion, the Education Medical Exception can be used to pay for multiple years of tuition as long as the provider has the absolute right to the payment. Furthermore any payments that qualify for the Educational-Medical Exception for benefit of grandchildren or other Skip Persons are not subject to the GST Tax.
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Estate Freeze
A transaction that removes Post Transaction Appreciation from one’s taxable estate.
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Estate Tax
A tax on the transfer of property upon death. The transferor (the estate or trust) is liable for the tax. The Estate Tax is Tax Inclusive. Please note that burial plots and mausoleums are not subject to the Estate Tax, because those properties are not transferred by the decedent at death.
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Executor
A person who administers an estate during Probate. A woman Executor has been referred to as an “Executrix.”
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Exemption Amount
Now called the Applicable Exclusion Amount.
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Exemption Trust
This trust is created after the death the first spouse. The Separate Property and one-half of the Community Property of the first spouse is eligible to be transferred to the Exemption Trust. If properly structured, the assets of the Exemption Trust are not subject to estate taxes upon the second spouse’s death. The surviving spouse is usually, but not necessarily, the beneficiary of the Exemption Trust. The amount of the Exemption Trust may be up to the Applicable Exclusion Amount minus any Taxable gifts. For example, if the Applicable Exclusion Amount was $5 million and the first spouse to die made taxable gifts of $600,000, then the Exemption Trust could hold up to $4.4 million of assets. Also called a “Bypass” or “Credit Shelter Trust.”
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F
FLLC
Family Limited Liability Company
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FLP
Family Limited Partnership
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Formula Clause
A clause that divides a deceased spouse’s estate between an Exemption Trust and a Marital Trust
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Fractional Formula
A Formula Clause that divides a deceased spouse’s estate between an Exemption Trust and a Marital Trust by giving a fraction of each asset to each trust.
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G
General Power of Appointment
An Estate Tax term: The beneficiary who holds the power of appointment may appoint (direct) that the trust property be transferred to his or her: creditors, estate or creditors of the estate. If the beneficiary holds a General Power of Appointment, the trust property subject to the general power of appointment will be in the beneficiary’s estate.
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General Power of Appointment Trust
The trust beneficiary holds a General Power of Appointment that makes the property subject to the general power of appointment includable in the beneficiary’s estate. A General Power of Appointment Trust is eligible for the Unlimited Marital Deduction or a Generation Skipping Annual Gift Exclusion.
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Generation Skipping Transfer Tax
An additional Transfer Tax in addition to the Estate Tax for transfers to individuals who are two or more generations from the transferor, also known as Skip Persons. There are exceptions to the GST Tax for transfers to Skip Persons such as: the GST Exemption the GST Annual Exclusion and payments pursuant to the Education-Medical Exception. The tax rate is at the highest Estate Tax rate. In 2011 and 2012 that rate is 35%.
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Gift Splitting
A method to use both spouses’ Annual Gift Tax Exclusions when all or most of the gift is provided by one spouse. The spouse who does not provide the funds for the gift must consent to using his or her Annual Gift Tax Exclusion on the following year’s 709
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Gift Tax
A tax on the transfer of property by gift. The Gift Tax is Tax Exclusive. There are exceptions to the Gift Tax: Annual Exclusion, Educational Medical-Exception and the Lifetime Gift Tax Exclusion.
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Grantor
A creator of a Trust. Also called “Settlor” or “Trustor.” Usually used in the income tax context.
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Grantor Trust
A trust that does not exist for income tax purposes. The Grantor is liable for the income tax on the trust’s income and gains. The Grantor is may also take the trust’s losses for income tax purposes.
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GRAT
Grantor Retained Annuity Trust.
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GST Annual Exclusion
In order to Qualify for the Gift Tax Annual Exclusion for GST purposes, the gift must be made to the Skip Person outright or if given in Trust, the gift must follow the following requirements: there must be only one beneficiary (or each beneficiary must have a Separate Trust Share) and the transferred asset must be includable in the beneficiary’s estate.
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GST Exempt Trust
Any distributions from a GST Exempt trust is free from GST Tax. The GST Exempt Trust has a GST Inclusion Ratio of zero.
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GST Exemption
An amount that is exempt from the GST Tax. The amount for 2011 and 2012 is $5 million for combined gifts or bequests to Skip Persons
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GST Inclusion Ratio
The percentage of the Trust that is subject to the GST Tax. For example, if a gift in trust for grandchildren is worth $7.5 million and none of the $5 million of the GST Exemption is used, the GST Inclusion Ratio would be 25%. However, estate planners attempt to have the GST Inclusion Ratio be either zero % or one (100%).
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GST Tax
See Generation Skipping Transfer Tax.
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H
Health Education Exclusion Trust
A trust where most of the beneficiaries are Skip Persons. All payments are limited to payments that qualify for the Educational Medical Exception. In order to prevent a Taxable Termination and be subject to the GST Tax, at least one beneficiary must be a Non-Skip Person who receives at least 5% to 10% of the trust’s income. Usually the Non-Skip Person is a charity. The purpose of this trust is to provide funds for tuition and pay medical expenses for descendants without using any GST Exemption.
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HEET
Health Education Exclusion Trust
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Heggstad Petition
A petition to transfer property to a Trust without probate, because the decedent evidenced an effort to transfer property to a Trust during his or her lifetime.
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I
IDGT
Intentional Defective Grantor Trust. There is nothing defective about the trust. See Intentional Grantor Trust.
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IGT
See Intentional Grantor Trust.
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ILIT
Irrevocable Life Insurance Trust
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Incentive Trust
A Trust that rewards Beneficiaries by distributing income or principal for certain accomplishments such as graduating college or earning income. An Incentive Trust could make on one-time payment for graduating college or graduate school, or it can it can annually distribute an amount to a Beneficiary that matches earned income.
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Income and Principal
A trust’s income and principal is determined by the State’s Income and Principal Act.
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Income in Respect of a Decedent
Income that is earned during lifetime, but not paid until after death. Income taxes must be paid on such income. Upon death Qualified Plans and IRA are subject to income tax, because such items are Income in Respect of a Decedent.
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Individual Retirement Plan
Individual Retirement Plans follow the rules for Qualified Plans. Contributions to the IRA are not subject to income tax. Funds in the IRA grow income tax free. Withdrawals from the IRA are subject to income tax, and the IRA plan owner must take minimum distributions at 70-1/2. Unlike a Qualified Plan, the IRA is created by the individual and not an employer.
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Inheritance Tax
Is a Transfer Tax upon the recipient of inherited property. California constitutionally prohibits Inheritance Taxes, but some other states impose Inheritance Taxes.
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Installment Method
A method of accounting for income tax purposes used when the payment of principal is paid in future tax years from the date of the transaction. For example, if the seller gives an Installment Note with the following terms: interest only payable each year on the anniversary of the note, and a balloon payment on the day before the ninth anniversary of the note, the seller would pay income tax on the interest each year. However, the seller would not pay income tax on the principal of the note until nine years later. The Installment Method allows deferral of income tax. However, if the purchasing party is related to the selling party and the purchasing party transfers the asset within two years, the selling party is liable immediately for the income tax. The Installment Method of accounting must be used unless the taxpayer elects out of the Installment Method.
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Installment Note
A loan where loan principal is paid in future tax years from the date of the loan. A typical Installment Note is interest paid annually from the date of the loan and principal is due at the end of note term. The term of an Installment Note should not be longer than the lender’s life expectancy or twenty years.
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Intentional Grantor Trust
A Grantor Trust for income tax purposes, yet the trust assets will not be in the Settlor’s Estate.
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Intestate
A person dies without a Will. The property subject to Probate is distributed according to state law.
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IRA
See Individual Retirement Account.
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IRA Stretch-Out
A technique that uses the income tax free growth in an IRA to benefit the beneficiary of an IRA.
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IRD
See Income in Respect of a Decedent
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Irrevocable Trust
A trust that cannot be amended, altered or revoked. In California all trusts are revocable, unless trusts states that it is irrevocable. Therefore all California Irrevocable Trusts must state that they are irrevocable.
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J
Joint Tenancy
Jointly held property that is transferred to the survivor by operation of law. Such property cannot be transferred by Will or Trust.
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L
Leverage
A transaction that removes the difference between the Post-Transaction Appreciation and the post-transaction obligation from one’s taxable estate. For example, if one sells an asset that will appreciate 7% per year for a note that requires interest only of 3% per year with principal payable at the end of 9 years, the leverage is created by the 4% spread each year.
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Life Estate
A Beneficiary has an interest in property for his or her lifetime. After he or she dies, the property is transferred to the Remainder Beneficiary.
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Lifetime Gift Tax Exclusion
The amount that is excluded from the Gift Tax in addition to the Gift Tax Annual Exclusion and the Educational Medical Exception. From 2002 until 2010, the Lifetime Gift Tax Exclusion was $1 million. In 2011 and 2012, that amount has been increased to $5 million. Use of the Lifetime Gift Tax Exclusion reduces the Applicable Exclusion Amount. For example, if one uses $1.5 million of the Lifetime Gift Tax Exclusion, then one will have only $3.5 million of the Applicable Exclusion Amount remaining.
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Lifetime Trust
A Separate Trust Share that is set up for the term of a Beneficiary’s lifetime. There is no requirement to disburse the Trust Principal of the Beneficiary’s share at any particular age.
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Limited Power of Appointment
An Estate Tax term: A Limited Power of Appointment prohibits the beneficiary who holds the Power of Appointment from appointing (directing) that the trust property be transferred to his or her: creditors, estate or creditors of the estate. If the beneficiary holds a Limited Power of Appointment, the trust property subject to the limited power of appointment will not be in the beneficiary’s estate.
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Long-Term Rate
The Long-Term Rate is the IRS-required interest rate for loans with a term greater than 9 years.
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M
Marital Trust
A trust that is eligible for the unlimited Estate Tax marital deduction. If the deceased spouse’s estate is larger than the amount that could be transferred to an Exemption Trust, then the balance of the deceased spouse’s property will be transferred to a Marital Trust. For example, if the first spouse to die had a taxable of estate of $6 million, the Applicable Exclusion Amount was $5 million and there were no Taxable Gifts, $5 million of the first spouse to die’s estate would be allocated to an Exemption Trust, and the balance of $1 million would be allocated to a Marital Trust. Since the Bypass Trust shelters the Applicable Exclusion Amount from Estate Tax, and the Marital Trust provides for an unlimited Estate Tax deduction, normally there is no Estate Tax due on the first spouse’s death. A marital trust could be a General Power of Appointment Trust or a QTIP Trust.
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MEC
See Modified Endowment Contract.
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Mid-Term Rate
The Mid-Term Rate is the IRS-required interest rate for loans with a term greater than 3 years and 9 years or less.
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Minimum Distributions
After age 70½, Qualified Plans and IRAs must pay out minimum distributions to the plan participant or IRA owner. The amount the Minimum Distribution from Qualified Plans or IRAs are based upon the amount in the plan or IRA and the age of the plan participant or IRA owner (and his or her spouse, if the primary beneficiary of the plan or IRA is the spouse).
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Modified Endowment Contract
A life insurance policy that does not require enough payments according to IRS rules. A classic Modified Endowment Contract is a one-pay life insurance policy. If a life insurance policy is considered a Modified Endowment contract, life insurance policy loans are subject to income tax and a further income tax payment.
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N
Non-Exempt GST Trust
Distributions from a Non-GST Exempt Trust are subject to the GST Tax. Usually the Non-GST Exempt Trust has a GST Inclusion Ratio of one.
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Non-MEC Policy
A life insurance policy that requires enough payments according to IRS rules. The owner of the life insurance policy may take loans from the life insurance policy income tax free.
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Non-Probate Transfers
Are transfers upon death that are not subject to Probate. Some examples of Non-Probate Transfers are: transfers by Trust, Beneficiary Designations and Joint Tenancy Property.
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Non-Qualified Plan
A retirement plan that does not meet the requirements of a Qualified Plan under the IRS’ and Department of Labor Rules. Normally these plans discriminate in favor of highly compensated employees. Employer payments in to Non-Qualified Plans do not receive an income tax deduction.
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Non-Self Settled Trust
The Beneficiary is not the creator of the Trust. The Beneficiary may have Spendthrift Protection, if the Trust provides Spendthrift Protection in the document.
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Non-Skip Person
Any person who is not a Skip Person. This includes persons who are one generation below the transferor (or any number of generations above the transferor. A Non-Skip Person may also include a charity.
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P
Parent-Child Exception
$1 million in assessed value of real property transferred from parent to child is an exception to Change in Ownership.
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Pecuniary Formula
A Formula Clause that divides a deceased spouse’s estate between an Exemption Trust and a Marital Trust with a monetary formula.
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Portablility
Since 2013, one can use a deceased spouse’s unused Application Exclusion Amount. For example if a spouse died in 2014 when the Applicable Exclusion Amount was $5.3 million, and the spouse only used $3.3 million of Application Exclusion amount when the spouse died, and the surviving spouse died in 2015 when the Applicable Exclusion Amount will be $5.4 million; the surviving spouse will have $7.4 million of Applicable Exclusion Amount.
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Post Transaction Appreciation
The appreciation in asset value after it has been transferred to a Trust. For example, if the value of an asset was $1 million when it was transferred to a trust for the benefit of junior family members, and 10 years later the value of the asset was $1.5 million, the Post Transaction Appreciation is $500,000. Post Transaction Appreciation is not subject to Estate Tax, and is one of the main principles of advanced estate planning.
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Pot Trust
See Common Trust.
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Power of Appointment
The ability of a trust beneficiary to direct where trust property will be transferred upon the beneficiary’s death. It is similar to a Will for property outside of a trust. Whether or not to grant Powers of Appointment must be carefully considered. For example, if the surviving spouse is given a power of appointment over an Exemption Trust or a Marital Trust, there is the ability to completely disregard the deceased spouse’s testamentary wishes. This could be a disaster in a second marriage. However, powers of appointment for children of the Settlor, usually do not raise these types of concerns.
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Predeceased Ancestor Exception
Unfortunately, sometimes children die before parents. For GST Tax purposes if this occurs, a transfer from a grandparent to a grandchild whose parents predeceased the grandparent is not subject to the GST Tax
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Present Interest
The recipient of a gift must have the immediate ownership rights of the gift. The recipient must not have to wait to exercise his or her right in the future.
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Private Placement Life Insurance
Variable life insurance policy with more customized options for investments in segregated accounts. Investment gains in a life insurance policy are income tax free, so long as the carrier follows the complex IRS guidelines. Usually Private Placement Life Insurance is purchased outside the United States.
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Probate
A state mandated court procedure to transfer property upon death. Property that is transferred by Will is subject to Probate.
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Proposition 13
California Constitutional Provision that limits increases in property taxes as long as there is not a Change in Ownership.
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Q
QDOT
Qualified Domestic Trust. This trust is used to preserve the unlimited marital deduction for a Marital Trust when the decedent’s spouse is a non-United States citizen. There are special rules, such as one Trustee must be a United States Person (a Trustee who is a citizen of the United States or a United States Bank, as defined in the Internal Revenue Code or Regulations) and tax withholding on distributions. The purpose is to make sure that a non-United States citizen surviving spouse does not escape United States Estate Taxation after no Estate Tax was paid on the first spouse’s death.
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QPRT
Qualified Personal Residence Trust
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QTIP Trust
Abbreviation for Qualified Terminal Interest Property Trust. A QTIP Trust is eligible for the Unlimited Marital Deduction if the following requirements are met: the surviving spouse is entitled to the all the income of the trust; the surviving spouse has the right to compel the trustee to make the property of the QTIP Trust productive; the surviving spouse is the only beneficiary; and the executor must elect QTIP status. The property remaining in the QTIP Trust at the surviving spouse’s death will be in the surviving spouse’s estate.
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Qualified Disclaimer
A Qualified disclaimer must be in writing, made within 9 months of the gift or bequest, and the recipient must not have had any benefit of the gift. If a recipient has made a qualified disclaimer, the transfer to the Contingent Beneficiary is not a gift by the person making the qualified disclaimer.
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Qualified Plan
A retirement plan where employee contributions to the plan are not subject to income tax, and contributions to the plan by the employer are deductible for income tax purposes. Funds in the Qualified Plan grow income-tax free. Qualified Plans must follow complex IRS and Department of Labor rules. Withdrawal of funds by employees (the plan participants) are subject to income tax. At age 70-1/2 plan participants must make Minimum Distributions. Some examples of Qualified Plans are Defined Contribution Plans, 401k’s, Profit Sharing Plans, and Defined Benefit Plans. In addition, funds from a Qualified Plan can be rolled over to an Individual Retirement Account income tax free, if IRS regulations are followed.
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Quasi-Community Property
Property that would have been Community Property if the couple were living in California. Quasi-Community Property is acquired by a married couple when they resided outside of California.
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R
Rabbi Trust
A non-Qualified Retirement plan. The employee is not subject income tax for the money that is set aside for him or her, and such funds set aside for the employee must be available to the employer’s creditors. The arrangement is called a Rabbi Trust, because this arrangement was originally created for a Rabbi.
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Remainder Beneficiary
A Beneficiary who takes an interest in property after another Beneficiary. For example, a trust for a married couple will give the assets to the surviving spouse upon the first spouse’s death. Upon the second spouse’s death, the trust property either will be held in trust or distributed to the couple’s children. The children are the Remainder Beneficiaries
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Retained Interests
Property that is transferred to others but is subject to the Estate Tax. Some examples are: the power to receive income, the power to amend, alter or revoke the gift, or the transferor has a large enough reversionary interest in the gift.
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Revocable Trust
A trust that can be amended, altered or revoked. In California all trusts are revocable, unless trusts states that it is irrevocable.
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Right of Reimbursement
When there is a Transmutation of Property, the person who transmuted the property has a Right of Reimbursement in the case of divorce. For example, one spouse transmutes his or her Separate Property interest in the couple’s primary residence to Community Property when the residence was worth $1 million. Ten years later the property was worth $1.4 million when the couple divorced. In the property settlement, the $400,000 increase of the community property interest is divided equally between the spouses, so each spouse receives $200,000. The spouse who transmuted the property is reimbursed for the $1 million. However if the spouse who made the transmutation of the primary residence from Separate to Community Property waived the Right of Reimbursement, each spouse would receive $700,000.
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Risk Premium
A Risk Premium must be used for Self-Cancelling Installment Notes. Either borrower must increase the principal value of the note by using IRS tables and the Applicable Federal Rate for the SCIN, or the borrower must pay a higher interest rate than the Applicable Federal Rate using IRS tables and pay the normal principal values. By using Risk Premium, the borrower is losing some of the value of Leverage.
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Roth IRA
Is a special kind of Individual Retirement Account. Contributions to Roth IRA’s are not deductible, but withdrawals are income tax free. As with traditional IRA’s, the funds in the Roth IRA grow income tax free. In addition, Roth IRAs do not require Minimum Distributions. When converting a traditional IRA to a Roth IRA, the IRA owner is liable for income tax on the amount transferred from the traditional IRA to the Roth IRA.
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S
SCIN
See Self-Cancelling Installment Note.
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Self Settled Trust
The Beneficiary of the trust is the creator of the trust. Except for in a few states a Self-Settled Trust has no Spendthrift Protection.
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Self-Cancelling Installment Note
A note where the obligation of the borrower is extinguished upon the death of the lender. Self-Cancelling Installment Notes are used in Estate Planning with sales to an Intentional Grantor Trust. The loan to such trust is extinguished on the lender’s death, and there are no income tax consequences, because such trust does not exist for income tax purposes. However, there is a risk with Self-Cancelling Installment notes, because the borrower must pay a Risk Premium. The Self-Cancelling Installment Note is used when the lender is in poor health and is expected to live beyond one year.
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Separate Property
Property that was acquired before marriage or during marriage that was a gift or bequest. It also can be property acquired during marriage if the source of funds were Separate Property. Separate Property is owned solely by one spouse.
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Separate Trust Share
The disbursement of income or principal for one Beneficiary does not affect the other Beneficiaries. The disbursement of income or principal is only charged against the Beneficiary of the Separate Trust Share.
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Settlor
A creator of a Trust. Also called “Grantor” or “Trustor.”
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Share
See Separate Trust Share.
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Short-Term Rate
The Short-Term Rate is the IRS-required interest rate for loans with a term of less than 3 years.
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Simple Trust
An income tax term where all trust income must be distributed each year to the beneficiaries.
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Skip Person
A Skip Person is two or more generations below the transferor for GST Tax purposes. If the transferee is not related to the transferor, then the transferee is a Skip Person if he or she is 37-1/2 years younger than the transferor.
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Special Needs Trust
A Trust for the benefit of a beneficiary who is receiving governmental benefits because of a disability. The goal of the Special Needs Trust is to improve the life of the disabled beneficiary without disqualifying the disabled beneficiary from receiving public benefits. Therefore, the Special Needs Trust may not pay for any items that are provided by public benefits, and the disabled beneficiary must not have any right to the assets in the Special Needs Trust.
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Specific Reference
Used with a Power of Appointment. The Specific Reference requires the beneficiary who holds the Power of Appointment to specifically refer to the section of the trust that grants the Power of Appointment in order for the Power of Appointment to be legally effective.
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Spendthrift Protection
The trust provides that the Trustee may not make expenditures for creditor claims of a Beneficiary.
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Split Dollar Insurance
The use of a loan to pay for life insurance. There are two methods of taxing the loan arrangement: The economic benefit regime or loan regime. These arrangements are too complicated to define here.
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Split-Interest Trust
A Trust that is designed to give a Life-Estate or a Term of Years to one person and the Remainder Interest to another person. Some examples are: (1) a GRAT where payments during the initial period are made to the Settlor, and any property remaining after the initial period is distributed to the Remainder Interest; (2) a Charitable Remainder Trust where the non-charitable beneficiary receives an Annuity Amount or Unitrust Amount during the income period and a charity receives the Remainder Interest, (3) a Charitable Lead Trust, where the charitable interest receives the Annuity Amount or Unitrust Amount during the income period and the non-charitable beneficiary receives the Remainder Interest, and (4) a Settlor is able to live in a residence during the initial period, and afterwards the residence is transferred to the Remainder interest.
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Step-Up in Basis
Upon a person’s death the value of the person’s Basis in his or her property is adjusted to the fair market value at his or her death. For Community Property assets, the value of the property has a “Double Step-Up.” Both the deceased spouse’s and the surviving spouse’s interest in Community Property has the basis in their property adjusted to fair market value at death.
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Support Trust
A Trust where the Trustee makes distribution of income or principal for the beneficiary’s health, education, maintenance or support.
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T
T-CLAT
Testamentary Charitable Remainder Trust
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Tax Exclusive
Tax Exclusive means that there is no tax on the tax. For example, if one wants to give a person $1 million, the tax rate is 45% and the tax is tax exclusive; the total outlay will be $1,450,000. Under the same facts, if the tax were Tax Inclusive, the total outlay would be $2,222,223.
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Tax Inclusive
Tax Inclusive means that there is a tax on the tax. For example, if one wants to give a person $1 million, the tax rate is 45% and the tax is tax inclusive; the total outlay will be $2,222,223. Under the same facts, if the tax were Tax Exclusive, the total outlay would be $1,450,000.
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Taxable Distribution
A GST Distribution from a Non-Exempt GST Trust. The GST Tax for Taxable Distributions is Tax Inclusive.
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Taxable Gift
Any Gift made in excess of the Lifetime Gift Tax Exclusion Amount, the Gift Tax Annual Exclusion or the Education Medical Exception and is subject to the Gift Tax.
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Taxable Termination
When all the interests of all Non-Skip Persons terminate in a Non-Exempt Trust. There is a GST Tax and it is Tax Inclusive
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Tenants in Common
Jointly held property. Unlike Joint Tenancy Property, Tenants in Common Property can be transferred by Will or Trust
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Term Note
A note that has a definite date by which all the loan proceeds must be paid to the lender.
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Term of Years
A Beneficiary has an interest in property for a time certain. After that time certain ends, the property is transferred to the Remainder Beneficiary.
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Testate
A person dies with a Will. The property will be distributed according to the terms of a valid Will in Probate.
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Testator
An individual who creates a will. A woman Testator has been referred to as a “Testatrix.”
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Transfer Tax
are the Estate Tax, the Gift Tax, and the Generation Skipping Transfer Tax. An Inheritance Tax is also a Transfer Tax.
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Transmutation of Property
Property can be changed from Separate Property to Community Property or vice versa. In addition, property can be transmuted from the Separate Property of one spouse to the Separate Property of the other spouse. All Transmutations of Property must be in writing. The mere transferring property to a trust does not Transmute property to a trust unless there is other clear written evidence that the transferred property has been Transmuted.
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Trust Income
The income generated by the trust property. See also Income and Principal.
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Trust Principal
Trust Principal is the property in the Trust. See also Income and Principal.
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Trustee
A Trustee manages the trust property for the benefit of the beneficiary. The Trustee has a fiduciary duty (highest duty of care) to the beneficiary. The Trustee is also the legal owner of the trust property.
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Trustor
A creator of a Trust. Also called “Grantor” or “Settlor.”
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U
Unitrust Amount
Is a percentage of the assets remaining in a trust at the end of the year. This amount is adjusted each year. Each year during the duration of the initial period or income period of a Split-Interest Trust, the Unitrust Amount is revalued. Also in non-Split-Interest Trusts, a Beneficiary could receive a Unitrust Amount in lieu of receiving a fixed percentage of Income or Principal. For example, the Settlor creates an interest which provides that the Beneficiary receive a Unitrust Amount equal to 5% of the fair market value of the trust valued annually. The Settlor funds the trust with $100,000, and the Beneficiary will receive $5,000 in the first year. If in the second year, the interest is valued at $110,000, then the Beneficiary will receive the Unitrust Amount equal to $5,500. However, if the interest were valued at $95,000, then the Beneficiary will receive a Unitrust Amount equal to $4,750.
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W
Withdrawal Powers or Right
The right of Beneficiaries to withdraw money or property gifted to an Irrevocable Trust within a short period after such money or property is gifted to the Irrevocable Trust. Generally transfers to an Irrevocable Trust for the benefit of junior family members do not qualify for the Gift Tax Annual Exclusion, because such transfers are not of a Present Interest. Generally, junior family members do not have a right to funds gifted to an Irrevocable Trust until many years in the future. In order to make such transfer a gift of a Present Interest, the junior family member (or his or her legal representative) are given notice at the time of the gift that that he or she has the right to withdraw the amount of the money or property gifted to the Irrevocable Trust within a period of time (usually 30 days).
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