Administrator: A person named by the court to handle the probate estate when there is no Will or when the Will does not name an executor. An Administrator is one type of Personal Representative, and is also described by the term, “fiduciary”.
Advance Medical Directive: A document containing instructions regarding medical treatment in situations where one is otherwise unable to communicate one’s wishes. Typically, the Advance Medical Directive consists of specific instructions, such as for the removal of life support in the event one enters a permanent vegetative state, and the appointment of an agent to make health care decisions on one’s behalf (i.e., a Medical Power of Attorney). In many jurisdictions, the term, “Living Will,” is used for a directive limited to the decisions pertaining to termination of life–prolonging procedures.
Advancement – A lifetime gift by a parent to a child that the parent intends to be deducted from the child’s inheritance. Most transfers are not intended to be advancements and are not deducted from the child’s inheritance unless there is evidence of intent to treat the transfer as an advancement.
Annual Exclusion: The amount that any individual can give to any other individual without incurring a gift tax liability. Currently set at $14,000 and indexed for inflation, the individual annual exclusions of married persons may be combined to allow a couple to give up to $28,000 to each child, grandchild, other relative (or even a complete stranger, if they wish), without any gift tax, or even being required to file a gift tax return.
Annuity – The right to receive fixed payments for life or a term of years, often in the form of an insurance-based investment contract.
Applicable Exclusion Amount: With respect to the Estate Tax, the total value of one’s estate that one can transfer at death, free of federal estate taxes by use of the estate tax exemption (formerly, the Unified Credit).
Apportionment – The allocation of death taxes among the beneficiaries interested in a decedent’s estate. Unless the decedent’s will directs otherwise, the laws of most states require that death taxes be allocated among the beneficiaries in accordance with the beneficiaries’ interests in the estate with each beneficiary receiving any deduction applicable to the beneficiary, such as the marital deduction or charitable deduction.
Ascertainable Standards: Standards used to limit a Trustee’s powers of distribution, typically to the purposes of providing for the health, education, maintenance and support of the Beneficiary. These limitations on the trustee’s discretion are designed to prevent assets from being included in the beneficiary’s estate when the beneficiary serves as trustee.
Augmented Estate: See Elective Share.
Beneficiary: A person or an institution which receives the benefits of ownership of property held in a trust. Also refers to one named to receive proceeds on death of the owner, such as a life insurance policy or IRA account.
Buy-Sell Agreement – An agreement typically entered into by the owners of a business and the business (corporation or partnership) providing for the transfer of its ownership.
Charitable Lead Trust: A method of splitting a gift between a charitable and non-charitable recipient, by which property is placed in trust to provide an income interest to the charitable beneficiary for a term of years (or a term measured by one or more lives), after which the property goes to a noncharitable beneficiary, such as the contributor or his or her children. Conceptually, this is the inverse of the Charitable Remainder Trust.
Charitable Remainder Trust: A commonly used form of charitable tax planning, in which the donor contributes property to a trust that provides income for a term (which may be measured by years or lives) to a noncharitable beneficiary, after which the property goes to the charity. A properly drafted charitable remainder trust offers a number of tax benefits, including an immediate income tax deduction for the deferred gift, and the ability to avoid taxation of capital gains on the sale of assets by the trust.
Codicil: An addition or amendment to a previously executed Will. A valid codicil must be executed with the same formal requirements as a Will.
Community Property: A legal regime adopted in a number of states (listed below) which vests an immediate one-half interest in each spouse in property deemed to be community property, which generally includes all income and assets acquired during the marriage. While each community property state adopts the same general approach, details with respect to the acquisition and treatment of each spouse’s property rights may differ from state to state. An example of an advantage of the community property approach is that all community property owned receives a full step-up in basis to the fair-market value of such property at the time of death of either spouse. The community property states are: AZ, CA, ID, LA, NM, NV, TX and WA. A similar form of title for husband and wife (marital property) is recognized in Wisconsin.
Conservator: An individual appointed by the court to administer the financial affairs of an incapacitated adult or minor. The Conservator is required to file an inventory and annual accountings with a Commissioner of Accounts, who supervises the management of the assets of the incapacitated person.
Creator: See Grantor.
Credit Shelter Trust: Also known as a “Family Trust” or By-Pass Trust, these trusts are designed to make the maximum possible use of each spouse’s individual Estate Tax Applicable Exclusion Amount. Typically, such a trust allocates assets, up to the exclusion amount, to a trust that provides support for the surviving spouse, but limits use of the trust property so that the assets will not be included in the estate of the surviving spouse. This strategy effectively doubles the amount that a couple can pass to their children free of estate tax; by making certain that each spouse’s individual exclusion amount is available.
Crummey Trust: A trust which employs a common method of making gifts qualifying for the Annual Exclusion, which allows the donor to retain effective control over use of the gifted property. Such a trust allows beneficiaries, at the time the gift is made, a time-limited right to withdraw the gifted property from the trust and take immediate possession of it. A common use of this technique is the Irrevocable Life Insurance Trust. The term “Crummey” derives from the name of the taxpayer in the legal case in which a court first approved this technique, not an opinion of the skill of an attorney who prepares such a trust.
Deferred Compensation Agreement – An agreement between an employee and a corporation that provides for the payment of compensation in the future and defers the income tax on the compensation.
Disclaimers: The refusal or rejection of any rights, interests or property offered to a person, such as a bequest in a Will or a gift of property. Assuming all the necessary conditions are met, taxpayers have up to nine months to make a qualified disclaimer of an asset from the time the gift is made (for example, nine months from the date of death in the case of a bequest in a Will). If a disclaimer is qualified, no gift tax liability will arise against the disclaiming party.
Durable Power of Attorney: See Power of Attorney.
Elective Share: The portion of a decedent’s Augmented Estate that a surviving spouse may choose to receive in lieu of what is otherwise left to him or her by a decedent spouse. The right to choose the elective share protects the surviving spouse from being disinherited. The Augmented Estate includes many types of property not included in the Probate Estate, in order to ensure that the right of election cannot be avoided by lifetime gifts, changes in beneficiary designations, and other methods of transferring property out of the estate.
ESOP – An employee stock ownership plan that provides tax benefits to the business owner on the transfer of stock to the plan.
Estate Taxes: Taxes paid on the value of property one owns at death or, more specifically, the property considered part of one’s taxable estate as defined under the Internal Revenue Code. Although the Estate Tax Applicable Exclusion Amount is free of tax, amounts in excess of this amount are taxed currently at a rate of 46%. These amounts and percentages are scheduled to change substantially over the next several years, and will likely be subject to additional changes not currently enacted into law.
Executor: The person or institution named in a Will to carry out its instructions and administer the estate (feminine is “executrix”). In some jurisdictions, this person may be referred to as the personal representative and generally as a fiduciary.
Family Limited Partnership: A business entity created by family members, often to hold assets, including ownership interests in active businesses. Among other potential advantages, such a form of ownership may allow flexibility in transferring ownership of property while maintaining control and planning opportunities with respect to income, gift and estate taxes.
Fiduciary: A description of the relationship under which one acts pursuant to the highest duty of loyalty and good faith for another, or the name of a person who so acts. Examples of persons acting as fiduciaries are trustees, executors of an estate, and corporate officers. One who acts under a legal duty to act primarily for another’s benefit. Fiduciary duties include those of competence, loyalty and good faith.
Generation Skipping Transfer Tax: A federal penalty tax on certain transfers of property between a donor and a recipient more than one generation younger. Generally, the tax is imposed to achieve a result of property being subject to tax at each generational level.
Gift Annuity – A charitable organization’s promise to pay a donor or other beneficiary a lifetime annuity in return for the donor’s gift to the charitable organization. The amount of the annuity depends upon the amount of the gift and the age and life expectancy of the donor or other beneficiary.
Gift Tax: A tax imposed on transfers of property during the donor’s lifetime. Gifts not covered by the Annual Exclusion require filing of a gift tax return; cumulative lifetime gifts up to $1 million may be protected from tax by the tax credit for gifts. During 2010 the maximum federal gift tax rate will equal 35%.
Grantor: The person who sets up or creates a trust; also called a settlor, trustor or creator.
Gross Estate: This is the value of an estate computed under the Internal Revenue Code before deductions (e.g., debts, charitable contributions). The definition of gross estate is broader than that of the Probate Estate, and may include assets not commonly considered part of the decedent’s estate, such as life insurance death benefits.
Guardian: One who is legally responsible for the care and well-being of another. Normally appointed by a court, upon his petition, the guardian serves pursuant to supervision of the court.
Incapacitated (Incompetent): Describes one who is legally unable to manage his or her own affairs, either temporarily or permanently. Incapacity may arise by law (e.g. a minor) or a determination of physical or mental inability to act.
Installment Sale – The sale of property in exchange for payments over a period of time. An installment sale receives certain favorable income tax treatment.
Inter Vivos Trust: A trust created during the lifetime of the Grantor. It is also termed a Living Trust. Such trusts are often revocable, with the grantor having the right to revoke or amend the trust at any time. Such a trust allows for continuity in management of property upon the disability or death of the grantor, and those assets avoid administration through the probate process.
Intestate: Literally, without a Will. Generally, state statutes prescribe the distribution of estate assets in cases where there is no Will, progressing from spouse and children to distant cousins.
IRA – An individual retirement account allows individuals to contribute funds that may be deductible from the individual’s income for federal income tax purposes and taxed only upon withdrawal, thus allowing growth of the account without internal taxes.
Irrevocable Trust: A trust for which the grantor retains no power to revoke, amend or make withdrawals of principal. Typically used to make transfers to heirs as part of a strategy to minimize gift, income and estate taxes.
Joint Tenancy: A form of property ownership under which each owner owns an undivided interest in all the property while each is living. Traditionally under common law, this form of ownership has been accompanied by a Right of Survivorship; however, the Commonwealth of Virginia has, by statute, abolished the implication of such right, and survivorship must now be explicitly designated in the title document.
Life Insurance Trust: Typically an irrevocable trust established in order to hold a life insurance policy and administer the proceeds upon the death of the insured. Establishment of this type of trust is motivated by the desire to allow the proceeds to escape inclusion in the taxable estate of the grantor/insured.
Living Trust: See Inter Vivos Trust.
Living Will: See Advance Medical Directive.
Marital Deduction: A deduction available for transfers of property between spouses, either as gifts during life or at death. Although unlimited in amount, the transfer must meet certain criteria; for example, the recipient must be a United States citizen, and the gift must not be “terminable,” i.e., the interest must not terminate or fail on any event or condition (however, see Qualified Terminable Interest Property).
Minor Child: A child under the legal adult age, which is typically either eighteen or twenty-one years. In Virginia, a child is legally competent at eighteen years of age.
Payable on Death Accounts: A form of bank account which allows for the designation of a beneficiary to receive the amount contained in the account upon the account holder’s death. This is a popular form of Will Substitute. It differs from a Joint Tenancy in that only the account holder has a right to use the account during his or her life.
Personal Property: Property other than real estate. It includes tangible property such as furniture, automobiles, and jewelry, as well as intangible property such as securities, intellectual property rights, or contract rights.
Personal Representative: Another name for an Executor or Administrator.
Postmortem Planning – Tax planning following the death of an individual, with transactions designed to benefit the decedent’s estate or minimize/eliminate potential tax liability for beneficiaries.
Pour-Over Will: A last Will and Testament often used together with a living trust which provides that any property not held by the trust at death is to be added to (i.e., “poured over”) to the living trust upon death.
Power of Attorney: A document by which one person (the “Principal”) grants another (the “Agent” or “Attorney-in-Fact”) full legal authority to act on the Principal’s behalf. All Powers of Attorney end upon the death of the Principal; however, Virginia law provides for a durable Power of Attorney which will continue in effect even if the Principal becomes disabled. Powers of Attorney may be general, granting the Agent the right to act in virtually all matters as the Principal; or limited, granting the Agent authority only to take the actions specifically set forth (e.g., to sign a deed, or sell a specific piece of property).
Premarital Agreement – An agreement entered into before marriage that limits the rights of one or both spouses in the property of the other upon divorce or death.
Probate Tax – A nominal tax imposed by the local government on property passing under the individual’s will or by intestacy.
Probate: The act of submitting a Will to the court, for determination that it is valid, and judicial oversight of the process of carrying out the provisions contained in the Will.
Qualified Conservation Easement – A restriction on the use of real property given in perpetuity and in favor of charitable organization that qualifies for an income tax charitable deduction.
Qualified Terminable Interest Property (QTIP) Trust: A trust containing the provisions required by the Internal Revenue Code for a transfer to qualify for the Marital Deduction, while allowing the transferor spouse the ability to control the ultimate disposition of the corpus upon the death of the transferee spouse. In particular, the transferee spouse must receive all the income from the property for his or her life, and an election must be made for the property to be considered QTIP.
Real Property: Land or property that is permanently attached to land (such as a building or house). Contrast with Personal Property.
Redemption – A sale by a shareholder of the shareholder’s stock to the issuing corporation, which then “returns” the stock to its treasury.
Remainder Interest – An interest in property that does not become possessory until the expiration of an intervening income interest, such as a life estate or a term of years.
Revocable Trust: The opposite of an Irrevocable Trust; a trust in which the person establishing the trust retains the power to change, amend or revoke the trust during his/her lifetime. See Inter Vivos Trust.
Right of Survivorship: A right traditionally resulting from ownership as Tenants by the Entireties or as Joint Tenants. Upon the death of a co-owner, the surviving co-owners would take the portion that had belonged to the departed co-owner. Ownership with a right of survivorship is commonly used as a means of transferring property outside of the probate process.
S Corporation – A corporation that has elected under the federal income tax laws to have its income taxed at the shareholder level rather than at the corporate level. An S corporation should be contrasted with a C corporation, which pays income taxes at the corporate level.
Section 2503(c) Trust – A trust established to accept gifts to minors, designed to qualify for the gift tax annual exclusion.
Separate Property – Property owned by a married person in which the person’s spouse generally has no marital rights.
Settlor: See Grantor.
Shareholder Agreement – An agreement among the shareholders of a corporation providing for matters relating to the shareholders’ interest in the corporation (also referred to as a buy-sell agreement). Typical provisions of a shareholder agreement restrict the transfer of the stock or provide for its sale upon a shareholder’s death, disability or retirement.
Specific Bequest – A gift of specific property or a specific dollar amount under an individual’s will.
Successor Trustee: A person or institution designated in a trust document to take over as trustee of the trust if the prior trustee dies, resigns or becomes unable to act.
Takers in Default – Those individuals who inherit property if the named beneficiaries are not living when the transfers occur.
Tenancy by the Entireties: A form of property ownership allowed in some states, including Virginia, under which a husband and wife each own the entire property, with the survivor taking sole ownership. A creditor of one spouse cannot act against entireties property to satisfy the debt. In addition, entireties ownership cannot be unilaterally terminated; i.e., termination requires joint action of the spouses (such as divorce).
Tenancy in Common: A form of joint property ownership by two or more persons, in equal or unequal shares, under which no party has any rights in the other parties’ interests, and any party may at any time require a severance of his interest from the property. Tenancy in Common carries with it no Right of Survivorship; i.e., upon the death of a tenant in common, his ownership interest transfers to his beneficiaries or heirs, not to the surviving co-owner(s).
Testamentary Trust: A trust established under the terms of a Will. A testamentary trust becomes effective only upon death. In Virginia, a testamentary trust is subject to the same (but continual) accounting and oversight requirements as the Will under which it is established; therefore, it is not a viable alternative for one seeking to avoid Probate. Under current Medicaid regulations, special needs trusts must be established under a Will and not a living trust.
Testate: Having executed a Will.
Testator: The person executing a Will (feminine is “Testatrix”).
Trust: A relationship in which a Grantor transfers legal title of property to a Trustee, who manages the property for the benefit of one or more third persons, the Beneficiaries. The trust may prescribe, in as much or as little detail as the Grantor desires, how the Trustee shall act in managing or distributing the property and the Trustee, once accepting such position, is required to act as a fiduciary to comply with the terms set forth.
Trustee: A person who accepts and manages property according to the terms of a Trust. A Trustee may be an institution, an individual professional such as an attorney, or a layperson. All trustees must comply with the obligations placed on Fiduciaries; in the case of a non-specialist, the duty of competence may be fulfilled by obtaining the advice and assistance of professionals.
Trustor: See Grantor.
Unified Credit: This term was formerly used to describe the credit allowed against the estate tax; although, it is still used in the heading of the section of the Internal Revenue Code granting the credit. Formerly, it was a single amount applicable to gift taxes or estate taxes. Currently, the credit is no longer “unified,” since the credit against gift taxes is substantially lower than the amount of credit allowed against estate taxes.
Unlimited Marital Deduction: See Marital Deduction.
Will Substitute: Any of several means of transferring property at death other than by a Will. Commonly used Will substitutes include ownership of property, as Joint Tenants “JTWROS” with Right of Survivorship, Inter Vivos Trusts, and Payable on Death “P.O.D.” Accounts.
Will: A document by which one provides for the disposition at death of one’s property that is not otherwise distributed. A Will has no legal effect until death, and may be revoked at any time prior to death so long as the Testator has sufficient mental capacity (the same mental capacity required to make a Will). A Will may be revoked by physical destruction, or by execution of a subsequent will which states that all prior wills are revoked.
Notice – This information is not legal advice or counsel absent an extant attorney-client relationship with the recipient; this information does not create an attorney-client relationship. Seek legal counsel before taking any action on the matters referenced above.