A Teaching Glossary

Prepared by John R. Phillips


§ 2503(b) QUALIFYING MINOR’S TRUST
This variation of the 2503 Trust creates a “present interest” by requiring that all income from the trust be distributed annually. The distribution of income can be made to the child directly or to a custodial account where it can be accumulated or used for the child’s benefit. The principal can be held in the trust until after the child reaches age 21.

The key difference between a 2503(c) Trust and a 2503(b) Trust is the distribution requirement. Parents who are concerned about providing a child or another beneficiary with access to trust funds at age 21 might be better off with a 2503 (b), since there is no requirement for access at age 21. In fact, assets may be held long into the child’s adulthood. The main disadvantage to a 2503(b) is that the annual distribution requirement may limit growth of the trust principal.

§ 2503(c) QUALIFYING MINOR’S TRUST The Section 2503(c) Qualifying Minor’s Trust is named after the section of the Internal Revenue Code upon which it is based. Under Section 2503(c), a gift to a trust established for a minor qualifies for the gift tax exclusion if the child has the right to withdraw the money at age 21. However, a child can be granted the right to continue the trust term beyond age 21. This trust essentially enables a parent or grandparent (or any other individual) to transfer property that would be subject to income or estate taxes into a trust that is taxed separately. The principal and any interest earned can be used for the child’s benefit, such as college expenses.

In order to be a valid 2503(c) Trust, the trust must meet these additional requirements: (1) the trust must have only one beneficiary; (2) the principal and income of the trust must be available to the trustee for the benefit of the child during the term of the trust; and (3) if the child dies before age 21, the assets must be distributed to his or her estate.

“A” TRUST A common term for the portion of a trust, which would qualify, for the marital deduction upon death while the “B” Trust incurs a transfer tax equal to, or less than, the decedent’s available Unified Credit (see below). Together, the system of creating theses two trusts (actually the A trust is only created if there are more assets than can be accommodated in the B trust) is referred to as the A/B trust system. The purpose is to allow the first spouse to die to utilize as much of his or her Unified Credit as possible while leaving those assets for the use of the surviving spouse.

ADEMPTION Disposition by testator of specific property (real or personal) bequeathed to a beneficiary in a will, so that at testator’s death the property is no longer part of the estate. The beneficiary receives nothing unless the will substitutes another asset for the deemed property.

ADJUSTED-BOOK-VALUE METHOD A valuation method in which the value of closely held corpo­ration assets is adjusted to reflect the difference between true market value and book value

ADJUSTED GROSS ESTATE An amount calculated for the purpose of determining the availability of certain tax benefits (such as installment payment of estate taxes) and arrived at by reducing the gross estate by allowable debts, funeral as well as medical costs, and administrative expenses

ADJUSTED TAXABLE ESTATE The phrase previously used in computing the state death tax credit. It is the taxable estate reduced by $60,000.

ADJUSTED TAXABLE GIFT The total amount of gifts (less the charitable deduction, the marital deduction, and the annual gift tax exclusion) the decedent made after December 31, 1976-except for those gifts that were required for any reason to be included in the decedent’s gross estate, such as gifts with retained interests or gifts of life insurance made within 3 years of death

ADMINISTRATION EXPENSES Normal and reasonable costs, fees and expenses incurred in the administration of a decedent’s estate. May be deductible on either the estate’s 706 return (see below) or the 1041 (see below), but not both.

ADMINISTRATOR-EXECUTOR/EXECUTRIX An administrator is appointed by the court to settle an estate. An executor is named by the estate owner in the will as the one to settle that estate. The administrator is always appointed by the court, and the executor is always named by the deceased in the will.

ADMINISTRATIVE POWERS Authority held by the grantor of a trust to deal with trust income or corpus for less than adequate consideration, which causes taxation to the Grantor.

ADVANCE MEDICAL DIRECTIVE A directive issued according to state law in which a competent person may direct future medical decisions. Usually involves a durable power of attorney for health care, allowable medical decisions (i.e. Do Not Resuscitate, No Heroic Measures, etc.), and end of life directives (usually also known as Living Wills.) Each state is different as to the amount of enforceability is given to decisions made today for events which have not yet happened and whether or not a named agent is required, authorized, or merely empowered to make specific decisions at a later date.

alternate value For federal estate tax purposes, the value of the gross estate 6 months after the date of death, unless property is distributed, sold, exchanged, or otherwise disposed of within 6 months. In that case, the value of such property is determined as of the date of such disposition. The alternate value may be taken only in certain circumstances and if taken, the entire estate is valued similarly.

ANCILLARY PROBATE (ANCILLARY ADMINISTRATION) A proceeding in a state other than the decedent’s state of domicile and where a decedent owned property

annual exclusion An amount that a donor may give to any number of recipients each calendar year and not have to report the gift or pay tax on the gift. The statutory amount is $10,000 which is annually adjusted for inflation (in $1,000 increments) based on 1998 as the base year. The current number is determined annually by the Treasury Department, published in December for the next calendar year. To qualify, a gift must be of a Present Interest (see below).

Inflation caused the annual exclusion to be determined to be $11,000 for 2002 – 2005, and $12,000 starting in 2006.

annuity A right to receive one or more payments for life or for a term of years. Often called a “pure” annuity or commercially, an “immediate” annuity. Contrast with the typical commercial “deferred” annuity where the right to receive payments is deferred while the tax on the growth and income produced inside the annuity is deferred as well until such time as a payment is made.

antenuptial agreement Also known as a Pre-Nuptial Agreement. A contract entered into by a couple prior to marriage and usually pertaining to issues of support and property distribution in the event of a subsequent dissolution of marriage or death of either party. All states allow these agreements, although states differ in required formalities and enforceability of various terms and provisions.

ANNUAL EXCLUSION An exclusion from gift taxes which is available on an annual basis. The annual exclusion is currently the first $11,000 per donor, per recipient (donee), with the number of recipients being unlimited. In order to qualify for the annual exclusion, the gift must be a “present interest” i.e., a gift available immediately to the donee as opposed to one not available until the future or one requiring the consent of some other person. Medical expenses and tuition paid directly to the providers or schools do not count against the annual exclusion and may be given in addition to the annual exclusion amount.

APPLICABLE CREDIT AMOUNT The amount of unused unified credit (see below) which the individual or the estate of an individual is entitled, which can be directly applied against the gift or estate tax incurred by the individual while alive (gift tax) or because of the death of the individual (estate tax.)

APPLICABLE EXCLUSION AMOUNT The equivalent fair market value of an individual’s or an estate’s property the tax on which is offset by the Applicable Credit Amount. In layman’s terms, this is the amount that the individual, or estate, can transfer without having to send any money to the IRS because the gift or estate tax liability was settled by the application of the individual’s or the estate’s available unified credit against such tax liability.

APPOINTEE The person who receives a benefit under a power of appointment. This may or may not be the holder of the power.

ARM’S-LENGTH TRANSACTION A transaction between unrelated parties in which the parties act in their own self-interests and have no normal and natural reason to want to benefit either or both parties.

ASCERTAINABLE STANDARD A standard that can be ascertained, or rather, it can be determined from available objective evidence whether or not a transfer was made according to the standard. The term is used most often in context of limiting a power that allows an individual to consume or invade property for his or her own benefit, but the power is limited by a standard having a value that is ascertainable, such as the power to use or invade property for the individual’s health, education, support, and/or maintenance

ASSIGNMENT The transfer of title or ownership of any kind of property. However, an assignment is generally related to the transfer of rights in property, as distinguished from the property itself.

ATTESTATION CLAUSE A paragraph at the end of a Will signed by the witnesses indicating that they affirm by their signatures that they have heard the testator declare the instrument to be his or her will and have witnessed the signing of the will. If a will has this clause, it is called a “Self Proving” will. It will not be necessary to later call the witnesses to testify as their signed and notarized affidavit will stand as proof of the legitimacy of their statement as to their belief as to the capacity of the testator/testatrix and the signing of the will absent of observable undue influence or duress.

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“B” TRUST a common term for the portion of a trust which would not qualify for the marital deduction upon death thus incurring a transfer tax equal to, or less than, the decedent’s available Unified Credit (see below). Any excess is placed in an “A” Trust. Together, the system of creating these two trusts (actually the A trust is only created if there are more assets than can be accommodated in the B trust) is referred to as the A/B trust system. The purpose is to allow the first spouse to die to utilize as much of his or her Unified Credit as possible while leaving those assets for the use of the surviving spouse.

BASIS The amount attributed to an asset for income tax purposes for determining gain or loss on sale or transfer and for determining the value of a gift in the hands of a donee. Usually the original acquisition cost adjusted up (usually via capital improvements or incremental taxes paid) or down (usually through depreciation.)

BENEFICIARY The one for whose benefit something is done., or the person(s) who is, or will be, a recipient of benefits from a trust, insurance, or a retirement plan, etc.

BEQUEST A gift by will of personal property as distinguished from a gift of real estate, although often used to cover a gift by will of either personal property or land, or both. “To bequeath” generally means to dispose of property of any kind by will. (See also devise and legacy.)

BUY-SELL AGREEMENT A contract between owners of an entity used for the disposition and continuation of small business interests upon the occurrence of an event (usually the incapacity, retirement, or death of a principal.) The goals are the acquisition of a principal’s interest by one or more remaining principals or by the entity itself. It often sets the criteria to determine the timing and value of business interests or stock for transfer tax purposes.

BYPASS TRUST: A trust which contains property on which federal taxes are paid at the death of the first spouse to die and which typically is not taxed at the second death. Where the optimum marital deduction plan is used, the tax on the property in this trust is paid by the Unified Transfer Credit, so the trust is sometimes called the Credit Shelter Trust, the B trust in an A/B trust system, or a Family Trust. While the surviving spouse is given interests in the bypass trust, the interests are not enough for the bypass trust property to be included in the surviving spouse’s estate.

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CARRY-OVER BASIS The basis of gifted property that is carried over from the donor to the donee. If estate tax repeal occurs (as mandated in EGTRRA for calendar year 2010), the current adjustment in basis (often referred to as “Step-up” in basis) will be replaced by carry-over basis for heirs, subject to certain adjustments.

CHARITABLE DEDUCTION a deduction allowed for gifts to qualified charities. There are 2 major types of charitable deductions: a deduction for Federal Income taxes and a deduction for Gift and Estate taxes. To qualify, a charity must be a 501 c(3) organization. For income tax purposes, the deduction is limited to 50% of Adjusted Gross Income (AGI) for gifts of cash or of unappreciated property, and 30% of AGI for gifts of appreciated property. For gifts to a Family Foundation the deduction is limited to 30% for cash or unappreciated property, 20% for appreciated publicly traded stock or securities, but limited to the donor’s basis for all other appreciated property. Any deduction not used in the year of the gift may be “carried forward” and used in any of the next 5 years. Charitable deductions made at death (via a will or trust) do not qualify for a income tax deduction, but there is no limit on the amount of the gift and subsequent deduction from estate taxes.

CHARITABLE LEAD TRUST (CLT) A tax planning device in which the donor transfers property wither while alive or at death via a will to a trust to an entity whose earnings go to a charity for a certain period, after which the trust corpus reverts to the donor or some other party. See also CLAT and CLUT. A CLT may be either a Grantor Trust or a Non-Grantor Trust (see below).

CHARITABLE REMAINDER ANNUITY TRUST (CRAT) A specific charitable trust arrangement under §664 in which a fixed-income interest (which by stature must be at least 5 percent of the initial net fair market value of the property paid in trust) is paid at least annually to one or more non-charitable beneficiaries. At the death of the last income beneficiary or at the end of a term of years not greater than 20 years (whichever is dictated by the terms of the trust), the remainder interest passes to a qualified charity. Qualifying as a CRAT under §664 of the IRS code makes this a statutory trust and thus not subject to traditional trust taxation, rather it is taxed under the provisions of §664 as long as it continues to meet the provisions of §664.

CHARITABLE REMAINDER TRUST (CRT) A specific charitable trust arrangement under §664 which is a ‘split-interest’ trust which gives income to a non-charity (usually the Grantor or the Grantor and Spouse)for either life, or for a term of years not exceeding 20 years, with a charitable gift at the end of the designated period. A donation to a CRT must result in an immediate charitable deduction of at least 10% of the contribution. The CRT is itself not a tax-paying entity, there is no taxation on the income or capital gains realized by the CRT. However the payments received by the income recipients have income tax ramifications. At the end of the term of the trust, the remainder goes to one or more charities. While the balance of the CRT is included in the life income beneficiary’s gross taxable estate at death, a corresponding and equal charitable deduction is allowed to the estate. The trust will be either an Annuity trust (CRAT) or a Unitrust (CRUT or NIMCRUT). Qualifying as a CRT under §664 of the IRS code makes this a statutory trust and thus not subject to traditional trust taxation, rather it is taxed under the provisions of §664 as long as it continues to meet the provisions of §664.

CHARITABLE REMAINDER UNITRUST (CRUT) A specific charitable trust arrangement under §664 in which a fixed percentage (at least 5 percent of the net fair market value) of the trust assets as may be revalued annually is paid at least annually to one or more non-charitable income beneficiaries and at the death of the last income beneficiary or at the end of a term of years not greater than 20 years, the remainder interest passes to a qualified charity. See also NIMCRUT. Qualifying as a CRUT under §664 of the IRS code makes this a statutory trust and thus not subject to traditional trust taxation, rather it is taxed under the provisions of §664 as long as it continues to meet the provisions of §664.

CHARITABLE TRUST An income tax-exempt organization operated exclusively for charitable purposes as specified in Sec. 501(c)(3). These are subject to specific IRS rules. The primary reason to qualify a trust as a charitable trust is to allow income tax deductions for contributions to the trust.

CLOSELY HELD CORPORATION A corporation whose stock is owned by a relatively small group of shareholders, often family members. The IRS often subjects closely held corporations to special scrutiny and statutory control because of their potential for tax abuse.

CODICIL A document which changes, adds to, or in any way alters a previous will. A codicil must be executed with all the same formalities as would be required of a will.

COLATERAL RELATIONS A phrase used primarily in the law of intestacy to designate uncles and aunts, cousins, and so forth (for example, those relatives not in a direct ascending or descending line, like grandparents or grandchildren, the latter of which are designated as lineal relations)

COMMON LAW STATE A term generally used to distinguish a state that does not have community property.

COMMON TRUST FUNDS Commingled or collected investments in which several trusts or beneficiaries have interests. Usually done for ease of administration and investing.

COMMUNITY PROPERTY This is property acquired during marriage in which both husband and wife have an undivided one-half interest. Not more than one-half can be disposed of by either party individually by will. The concept of community property came from Civil Law and remains at present in ten community-property states for federal tax law purposes: Arizona, Alaska (recently enacted opt-in system), California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin (quasi-community property) plus Puerto Rico.

Many states have enacted provisions for dissolution of marriage which mimic community property outcomes.

The one fundamental difference today in community property states and non-community property states is the treatment of basis of property inherited by a surviving spouse from a decedent spouse. In community property states, the basis is the full date of death value (or alternative date value if applicable) while in non-community property states, the surviving spouse retains his or her basis on the half of the property they owned prior to the death of the decedent spouse, but gets an adjustment in basis to the date of death value (or alternative date value if applicable) for the half acquired from the decedent spouse.

In most community property states, community property is the rights spouse’s have rather than a method of titling property (such as fee simple, joint tenancy, or tenants in common, all of which see).

Some non-community property states have enacted laws which allow property acquired in a community property state to retain the community character even while being held in the non-community property state.

COMPETENCE The ability to do a certain thing. For estate planning purposes, usually characterized as Legal Competence (see below) or Mental Competence (see below).

COMPLETED GIFT or TRANSFER A transfer during life that, from the viewpoint of the donor, the donor has relinquished “dominion and control.” The importance of whether a transfer is, or is not, “complete”, is that at the instant that a transfer becomes complete, the tax consequences, if any, of the transfer attach. A transfer that is not yet “complete” has not yet been made for tax purposes.

COMPLEX TRUST An IRS income tax definition of any trust where the trustee (by the terms of the trust or by state law if the trust is silent as to the issue) is allowed to and does, or is required to either accumulate (i.e. hold and not distribute) trust income and/or to distribute trust principal in a particular tax year. A trust which is not a complex trust is called a “simple” trust for IRS income tax purposes.

A trust may, or may not, be either simple or complex in any one year, and be the other in another year, depending on the rights and responsibilities inherent in the trust document, and the conduct of the trust in that particular year. The difference between the two is primarily the amount of the personal exemption allowed on the trust income tax return (form 1041, see below). A complex trust is allowed a $100 exemption, a simple trust is allowed a $300 exemption, and an estate is allowed a $600 exemption.

CONSERVATION EASEMENT A voluntary restriction placed on the use of land that is created to protect the land form some level of future development or use. Typically, a donor and a charitable organization enter into an agreement describing the restrictions that will limit the use. The charity enforces the agreement for the public. The difference between the fair market value (see below) of the land without the restriction and the value of the land with the restriction on it is the value of the easement. Usually the donor receives a charitable income tax deduction for the full value of the easement.

CONSERVATOR A Person (natural or non-natural) appointed by the court to manage the assets of a minor or legally incompetent person. Some states call this position the Guardian of the Estate, or Administrator. The appointed conservator is a fiduciary with responsibility to the protected person and must report to the court.

CORPUS The traditional Latin term used to describe the principal of a trustee as distinguished from the income generated from the corpus. Also called a Res. Under traditional trust law, a trust had to have a corpus or a res (the terms are interchangeable) in order to exist. More modern law (as created by statute in a number of states) may allow a trust to exist without a current corpus. Any income generated which is not distributed and upon which the trust pays income tax, now becomes corpus or principal.

CPR DIRECTIVE Cardio-Pulmonary Resuscitation directives are designed to limit the artificial or extraordinary measures to be used in a life-sustaining emergency treatment. Often known as a “Do Not Resuscitate” order, their validity and legality, as well as terms and conditions, vary widely from state to state. Usually, they should be included in an individuals medical records as a medical directive authorized by the attending physician irrespective of whether or not a state allows a written directive from the individual.

CREDIT EQUIVALENT EXEMPTION AMOUNT The amount or value of property a decedent may give during life or pass at death which will result in a transfer tax equal to the then current Unified Credit amount. In 2007 and 2008, since the Unified Credit is $555,800, the Credit Equivalent Exemption Amount is $2,000,000 since the tax on $2,000,000 is $555,800. Note that in 2006, 2007, and 2008, a person may only use up to $345,800 of their Unified Credit while alive. Thus the amount you can make as a taxable gift and have it be offset by the Unified Credit for those years is $1,000,000.

CREDIT FOR TAX ON PRIOR TRANSFERS In order to avoid double taxation on inherited assets on which estate tax was paid within the previous 10 years, a credit allowed against the federal estate tax paid by the present decedent as a result of inherited property included in the decedent’s gross estate. The amount of credit is pro-rated for the length of time since the original tax was paid.

CREDIT SHELTER TRUST: A trust which contains property on which federal taxes are paid at the death of the first spouse to die and which typically is not taxed at the second death. Where the optimum marital deduction plan is used, the tax on the property in this trust is paid by the Unified Transfer Credit, so the trust is sometimes called the By-Pass Trust, The B trust of an A/B trust system, or a Family Trust. While the surviving spouse is given interests in the bypass trust, the interests are not enough for the bypass trust property to be included in the surviving spouse’s estate.

CRUMMEY POWER A power which is named after the court case which allowed it (Crummey v. Commissioner) which allowed a beneficiary the presently exercisable right to withdraw transferred property from a trust. The purpose of the power was to give the beneficiary a “present interest” (see below) over the transfer which would otherwise have been a “future interest” (see below). If the transfer to the trust is construed to be a “present interest”, then it could qualify for the Annual Exemption (see above) where it could not so qualify if it were construed to have been a “future interest.”

CY PRES A traditional common law doctrine created to prevent the failure of trusts that cannot be applied to their original charitable purpose. When applying cy pres, the court attempts to find another charitable purpose similar to the settlor’s initial charitable intention.

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DECEDENT A person who has died.

DECEDENT’S ESTATE The assets or estate of a person who has died.

DECEDENT’S FINAL RETURN The form 1040 for a decedent which accounts for the income tax obligations incurred between the time of the last tax return and the date of death.

DECOUPLING Legislative action taken by many states to disassociate state death tax legislation from federal transfer tax legislation as provided under EGTRRA 2001. Previously, many states had tied their state inheritance tax to the maximum credit allowed under the federal estate tax laws. These were known as “Pick-Up” states.

DEDUCTION FOR IRD An income deduction allowed to the taxpayer who is responsible for the income tax on Income In Respect of a Decedent (IRD), see below) upon which estate tax was actually paid (i.e. not a tax obligation covered by the use of the Unified Credit). The deduction is the amount of estate tax actually caused by the inclusion of IRD. This is calculated as the estate tax actually paid (i.e. money physically sent to the IRS, less the theoretical amount of estate tax that would have been incurred had the IRD items not been included in the decedent’s estate. The deduction is distributed pro rata to the beneficiaries if IRD items and may be used by each beneficiary as the IRD income is recognized. The deduction is a “before the line” adjustment to income and is not subject to an 2% floor or threshold. The deduction may be taken dollar-for-dollar as IRD is recognized and need be apportioned over the entire IRD amount.

DE MINIMIS RULE A common law doctrine that the law does not concern itself with very small, unimportant matters. Obviously what is considered to be small and unimportant can vary greatly depending on who is deciding.

DEED A written instrument that conveys an interest in real property from the Grantor (see below) to a grantee (see below). States differ as to the formalities required and whether or not a deed must be recorded in order to be valid. In all cases, a deed must, at a minimum, be in writing, signed by the Grantor, and delivered to the Grantee. Note that recording a deed with the county where the property is located is considered to be constructive delivery.

DEFECTIVE GRANTOR TRUST A trust where the current income is inherently taxable to the grantor but the corpuse of the trust will not be included in the Grantor’s taxable estate. The “defect” is the intentional causation of Grantor Tax (see below) status for income purposes (under §§671 – 679) but not so that the assets will be included in the decedent’s taxable estate under §§ 2033 – 2043.

DESCENT AND DISTRIBUTION Descent refers to the passing of real estate to the heirs of one who dies without a will. Distribution refers to the passing of personal property to the heirs of one who dies without a will. Technically, the laws of descent relates to real property; those of distribution relate to personal property. Modern usage has substituted Intestate (see below) to designate the legal effect of dying without a will.

DEVISEE A person who receives real property through a will.

DEVISE A gift of real property under a will, as distinguished from a gift of personal property.

DIRECT-SKIP TRANSFER For purposes of generation-skipping transfer tax, this is a direct (i.e. not through a trust) transfer to a skip person.

DISCRETIONARY TRUST A trust that empowers the trustee to accumulate income for later distributions to the income beneficiaries, for the addition to the trust’s corpuse, or both. Inherently it is a Complex Trust.

DISCLAIMANT The person who executes a formal refusal to accept benefits given by a will, trust, or by operation of law.

DISCLAIMER A formal refusal to accept benefits given by a will, trust, or by operation of law. Previous interpretations treated a disclaimer as a receipt of the gift and subsequent transfer. However, now a disclaimer has the effect of treating the transfer exactly as it would have occurred had the person making the disclaimer (i.e. the disclaimant) predeceased the transfer. It must be made in a timely manner (within 9 months from date of death for federal estate tax purposes) and without consideration or without directions as to what happens to such disclaimed property (which goes to those person(s) who would have taken the property had the disclaimant actually predeceased the transfer.

DISTRIBUTABLE NET INCOME (DNI) For fiduciary income tax purposes (i.e. trusts and estates), the taxable income of the estate or trust for any taxable year, computed with certain modifications (See Code Sec. 643(a)). The income tax obligation goes with the distribution. The distribution is reported on a form K-1 (see below), which accompanies the form 1041 (see below).

DOD A common abbreviation for “date of death.”

DOMICILE Similar to place of residence but adds the element of intent, i.e. where you intend to eventually return and make your home. Domicile usually is same as residence, but can be different. Intent must be supported by sufficient contacts and actions to establish domicile.

DONATIVE INTENT The legal standard to determine whether someone has made a gift. The intent is the intent of the donor to exhibit ‘detached or disinterested generosity out of affection, respect, admiration, charity or like impulses” rather than to compensate for services rendered. The difference is whether or not the recipient will be subject to income taxation on the receipt or not.

DONEE The recipient of a gift. The term also refers to the recipient of a power of appointment.

DONOR The person who makes a gift. The term also refers to the person who grants a power of appointment to another.

DURABLE POWER OF ATTORNEY: A creation of modern statutory law in each state which designates an attorney-in-fact or agent and is not affected by the subsequent incapacity of the person executing it. General and Special Powers of Attorney may be made “durable” by the addition of the language as specified in the controlling state statute.

DURESS: Force, pressure, or excess influence which results in someone doing something that they would not have otherwise done. A Court or jury will decide when the line was crossed from permissible influence or persuasion to duress. Actions taken under duress can be either void or voidable.

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EQUITABLE APPORTIONMENT The common law doctrine requiring that apportionment of taxes be made in the proportion that the value of the interest of each person interested in the estate bears to the total value of the interests of all persons interested in the estate. The language of the will or trust may override this provision and require the taxes to be borne by specific interests.

EQUITABLE OWNERSHIP The beneficial interest of a beneficiary under a trust, which may include the right to use, possess, and enjoy the property and/or have the income generated by the property

ESCHEAT The reversion of property to the state in the absence of legal heirs.

ESTATE An interest in real or personal property that is or may become possessory or ownership measured in terms of duration.

ESTATE ADMINISTRATION EXPENSES All expenses incurred in the collection and preservation of probate assets, the payment of estate debts, and the distribution of probate assets to estate beneficiaries. These are generally fully deductible from either the estate tax (on Form 706, see below), or from the estate income tax (on Form 1041, see below) but not on both.

ESTATE PLANNING The process of planning the accumulation, conservation, and distribution of an estate. Also usually includes planning for alternative decision making in the event of mental incapacity.

ESTATE TAX: Generally refers to the Federal Gift and Estate tax. Generically, any tax which is levied upon the estate as a whole, prior to distribution, as opposed to an “Inheritance” tax which is levied upon the takers of inherited property and is generally used by States.

EXECUTOR/EXECUTRIX: Traditionally, the person appointed by the testator to administer or “execute” the instructions of the will. Executor for males, executrix for females. In more modern states which have adopted the Uniform Probate Code, the term now used is “Personal Representative.”

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FAIR MARKET VALUE The value a willing buyer would pay a willing seller, both of whom have knowledge of all material facts, and neither of whom are under any compunction to buy or sell. This is the theoretical value for all transfers for transfer tax purposes and all valuation methodologies are simply techniques designed to arrive at this theoretical value.

FAMILY ALLOWANCE An allowance of money from the estate to the family for support during administration. Applicability and amounts will vary from state to state.

FEDERAL ESTATE TAX An excise tax levied on the right to transfer property at death, imposed upon and measured by the value of the taxable estate left by the decedent.

FEE SIMPLE ESTATE An estate in which the owner is entitled to absolute ownership of property, with unconditional power to dispose of it during lifetime as well as the power to bequeath it to anyone at death

FIDUCIARY One who occupies a legally defined position of trust (for example, an executor, an administrator, or a trustee). It is generally the highest level of responsibility one person owes to another. The fiduciary must put the interests of the beneficiary over their own in all cases.

FIDUCIARY INCOME TAX ACCOUNTING The rules for reporting income tax obligations of fiduciaries in trusts and estates. Reported on an IRS form 1041 annually. It is one of the fundamental responsibilities of a fiduciary to report and settle tax obligations and the fiduciary may be held personally liable for any penalties and interest caused by their failure to appropriately report and pay the tax.

FIDUCIARY INCOME TAX RETURN The income tax return (Form 1041) filed by the fiduciary of an estate or a trust

FISCAL YEAR A 12-month period ending on the last day of any month other than December.

FIVE WISHES A popular, readily available (over the internet) type of advance medical directive provided by a well meaning non-profit organization, that attempts to provide a format valid in most all states where an individual may to express their end-of-life wishes to loved ones and other concerned people. May have differing legal applications in differing states. Well done, and very well meaning, but not a substitute for appropriate professional assistance in the planning process.

FORM 706 The IRS form for reporting a decedent’s estate tax obligation. A form is required to be filled out when the GROSS estate (plus prior lifetime reported taxable gifts) for a decedent exceeds the then current Credit Equivalent Exemption Amount (see above). The form is due nine months from the date of death and payment in full must accompany the form if any tax is due. A 6 month extension is available just by requesting it, however, any tax due must be paid by the 9 month deadline to avoid underpayment penalties and interest.

FORM 709 The IRS form for reporting lifetime gifts and generation skipping transfers. Each person must file a form 709 on or before April 15 each year for all reportable transfers of the previous calendar year. There is no joint Form 709, each person must file for themselves, although spouses can file consent on their spouses 706 when doing gift splitting which results in no tax obligation.

FORM K-1 The IRS form for reporting distributions from pass through entities (LLCs, Partnerships) and distributions of income from trusts.

FORMULA BEQUEST A clause in wills or living trusts, that can provide, by formula, an amount or share of estate that effectively utilizes the estate owner’s applicable credit amount and coordinate with the unlimited marital deduction

FORMULA CLAUSE A clause in wills or living trusts that is aimed at dividing assets between one or more of: direct non-spousal distribution; distribution to a credit-shelter trust (see above); to a QTIP trust (see below); and/or outright to a surviving spouse. The purpose is to achieve the appropriate marital deduction shifting all property in excess of that amount so that it will not be taxed again in the surviving spouse’s estate

FRACTIONAL-SHARE BEQUEST A provision in a will under which a spouse gives a fraction of or her residuary estate that is sufficient to reduce the federal estate tax (after applicable ere( to the lowest possible amount.

FUNDED INSURANCE TRUST A method no longer used (due to adverse income tax implications) where an irrevocable insurance trust is presently funded with cash, securities, or other assets the income from which is used to pay premiums on the policies held in the trust.

FUTURE INTEREST GIFT When the recipient of a transfer does not have the immediate present right to the use or enjoyment of the subject matter of the transfer but rather for any reason, the right to the use and enjoyment of the subject matter of the transfer is postponed for any length of time. It is always from the viewpoint of the recipient, and only occurs when the transfer is complete. All future interest transfers are subject to gift tax and do not qualify for the annual gift exclusion.

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GENERAL POWER OF APPOINTMENT A power given to someone which gives the donee a right at any time to designate the property to parties that may include the donee, the donee’s estate, the donee’s creditors, or the creditors of the donee’s estate. Contrast this to a Special, or Limited Power appointment where the power does not include the rights to direct the assets to any of: the donee, the donee’s estate, the donee’s creditors, or the creditors of the donee’s estate. The difference is that at death, any assets over which the decedent had a General Power of Appointment is included in his or her taxable estate (although not usually in a probate estate) while assets over which the decedent had a Limited Power of Appointment is not included in his or her taxable estate. There also may be transfer tax consequences to a Release (see below), an Exercise (see below), a Waiver (see below), or a Lapse (see below) of a General Power of Appointment

GENERATION SKIPPING TRANSFER A completed transfer (see above) to a skip person (see below) which is a: direct transfer, a taxable distribution, or a taxable termination from a generation-skipping trust or its equivalent.

GENERATION SKIPPING TRANSFER TAX (GSTT) The tax, enacted in 1976, or generation skipping transfers. This tax is in addition to any and all tax obligations caused by the transfer itself. The Generation Skipping Transfer has its own exemption ($1,000,000 from 1976 through 1998, $1,000,000 as adjusted for inflation from 1999 to 2003, and thereafter matches the then current Credit Exemption Equivalent Amount (see above) – Note that if the provisions of EGTERRA 2001 are allowed to expire by their own terms, after 2010, the GSTT exemption will be $1,000,000 adjusted for inflation based on 1998 as the base year.) A taxpayer may not use the Unified Credit to satisfy GSTT obligations.

GENERATION SKIPPING TRUST As generally defined in IRC Sec. 2611(b) as any trust that has junior generation beneficiaries in more than one generation below the grantor’s generation.

GIFT For gift tax purposes, it is property or property rights or interests gratuitously passed transferred for less than an adequate and full consideration in money or money’s we (except for bona fide sales) to another, in trust or otherwise, whether made directly or indirectly. A gift is a completed transfer (see above) made while the donor is alive while a transfer made by reason of death is a part of the decedent’s estate.

GIFT CAUSA MORTIS A gift that is conditional upon the donor’s dying.

GIFT PROGRAM A planned program of making annual gifts to beneficiaries within the amount of the Annual Exclusion Amount (see above).

GIFT SPLITTING A provision of the IRS code which allows couple who were married at the time of the transfer(s) to treat a gift made by one of them to a third party as having been made one-half by each. Gift-splitting may be chosen year-by-year, but in a year where gift splitting is chosen, all transfers by each of them during that year are considered to be made half by each. If this results in no tax consequences because the gift splitting causes each transfer to fall under the Annual Exemption Amount (see above), then either of them may file a Form 709 (see above) and the other may consent to the gift splitting. If any tax is incurred, both parties must file separate Form 709 even if Unified Credit (see below) is utilized by either or both to satisfy the tax obligation.

GIFT TAX A transfer tax imposed on completed transfers of property by gift during the donor’s lifetime.

GIFT TAX CHARITABLE DEDUCTION A deduction from gift tax obligation received for making a lifetime transfer property to a qualified charity. This is separate and apart from any income tax deduction which might be applicable to the charitable transfer. There is no limitation as to the amount of the gift tax deduction, but there are limitations as to the amount of income tax deduction that can be taken in any one calendar year.

GIFT TAX MARITAL DEDUCTION An unlimited deduction allowed for a gift made by one spouse to another, provided: 1) the recipient spouse is a US Citizen and 2) the property is not of a Terminal Interest (see below) unless it qualifies under one of the terminal interest exceptions.

GRANTOR 1) A person (natural or non-natural – see below) who transfers property, most often used in a deed for real property; 2) a person who creates a trust; also called settlor, creator, trustmaker, or trustor (all such terms are interchangeable), 3) any person who contributes or adds property to a trust is a grantor as to that contribution.

GRANTOR-RETAINED ANNUITY TRUST (GRAT) An advanced estate planning device in which a grantor donated assets to an irrevocable trust and retains the right to receive income from the trust bases on an ANNUITY payment (see above). At the end of the term of the trust, the remaining principal goes to the remainderman. At the time of the creation of the trust (i.e. the time of the original transfer of assets to the trust) the value of the transfer (i.e. the amount of taxable gift) is the calculated present value of the remainder interest. This gift is inherently of a future interest (see above) and does not qualify for the Annual Exemption Amount (see above). If the donor should die during the period where the donor is entitled to receive income, the entire value of the trust at the time of the donor’s death is included in the donor’s taxable estate due to the operation of the provisions of IRS Code §2036.

GRANTOR-RETAINED INCOME TRUST (GRIT) An advanced estate planning device in which a grantor donated assets to an irrevocable trust and retains the right to receive income from the trust bases on any formula other than an annuity payment or a unitrust payment. At the end of the term of the trust, the remaining principal goes to the remainderman. Due to the provisions of §2702 (Chapter 14 – Anti Freeze Statutes), at the time of the creation of the trust (i.e. the time of the original transfer of assets to the trust) if the remainderman is a “related party” (see below) the value of the retained interest is, by statute, valued at zero. Thus the value of the transfer (i.e. the amount of taxable gift) is the present fair market value of the total transfer. This gift is inherently of a future interest (see above) and does not qualify for the Annual Exemption Amount (see above).

If the donor should die during the period where the donor is entitled to receive income, the entire value of the trust at the time of the donor’s death is included in the donor’s taxable estate due to the operation of the provisions of IRS Code §2036.

GRANTOR-RETAINED UNITRUST (GRUT) An advanced estate-planning device in which a grantor donated assets to an irrevocable trust and retains the right to receive income from the trust bases on an UNITRUST payment (see below). At the end of the term of the trust, the remaining principal goes to the remainderman. At the time of the creation of the trust (i.e. the time of the original transfer of assets to the trust) the value of the transfer (i.e. the amount of taxable gift) is the calculated present value of the remainder interest. This gift is inherently of a future interest (see above) and does not qualify for the Annual Exemption Amount (see above). If the donor should die during the period where the donor is entitled to receive income, the entire value of the trust at the time of the donor’s death is included in the donor’s taxable estate due to the operation of the provisions of IRS Code §2036.

GRANTOR TRUST Under IRS definitions a “Grantor Trust” is a trust in which the Grantor (see above) retained one or more powers as listed IRS Code §67 et. seq. The importance is that the income tax obligations occasioned by the trust are not recognized by the trust but rather “pass through” to the Grantor (similar to the way income tax obligations of a proprietorship or a partnerships pass through to the owners. This is true whether or not the trust is revocable (as is the typical Revocable Living Trust) or irrevocable. Contrast this with a non-grantor trust (either an irrevocable trust where the grantor did not retain any of the listed powers or where the grantor has died), which is a tax paying and reporting entity itself.

GROSS ESTATE The amount determined by totaling the date of death (or alternate valuation date if appropriate) fair market value of all assets that the decedent had an interest in, which are required to be included in the estate by the Internal Revenue Code without taking into consideration any debts or obligations. The value of the Gross Estate determines whether or not a Federal Estate Tax Form 706 (see above) must be filed. If the value of the Gross Estate (including prior lifetime reported taxable gifts) exceeds the Credit Equivalent Exemption Amount (see above) in effect on the date of death, a Form 706 is required even if it is known that the tax obligation will be reduced (even to zero) due to debt, marital deduction, and or charitable deduction.

GROSS-UP RULE The process whereby a decedent’s gross estate is increased by the amount of any gift tax the decedent or the estate paid on a gift made by the decedent or the decedent’s spouse after December 31, 1976. This is done to determine the appropriate tax rate brackets for the assets remaining in the estate as the lower tax rate brackets were used previously in calculating the tax (offset by use of the Unified Credit) for the prior gifts. There will be a calculation later in the form 706 (see above) where the Unified Credit previously used or Gift Tax previously paid will be credited (at the tax rates in effect as of date of death) so that there will not be double taxation.

GUARDIAN The person named by a court of competent jurisdiction to represent the interests of minor children or disabled or “protected” individuals. The court may also appoint a Conservator or a Guardian of the Assets to manage the financial affairs of the minor or protected person. In appointing a Guardian, the court will normally look to the person(s) appointed in writing by the deceased or incapacitated parent of the minor, or by the adult individual prior to becoming incapacitated. If there is no such person, or if the Court does not determine that it is in the best interest of the protected person to officially empower such named person, the Court will then look to the state’s statutory list of priority (usually some variation of nearest relative) to find someone who is willing to serve as Guardian. The appointed person is now a fiduciary with responsibility to the protected person, and with continuing responsibility to the appointing court.

GUARDIAN AD LITEM A special guardian appointed by the court for a particular purpose such as defending a specific lawsuit or a legal proceeding involving a minor or legally incapacitated person.

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HANGING POWER A power to withdraw some or all of the addition to a trust up to the maximum annual gift tax exclusion, which power lapses at the end of the notice period mandated for withdrawals using a 5 and 5 power. The remaining part of the power “hangs,” rather than disappears, and is designed to solve estate and gift tax problems associated with paying the premiums owed on large life insurance policies that are held in trust.

HEALTH CARE PROXY A medical directive appointing an agent to make medical treatment deci­sions for a patient. The laws vary greatly from state to state as to the forms and formalities allowed or required, and the decisions that can be made ahead of time (i.e. will the agent be required, or only allowed to make certain decisions in certain circumstances).

HEIR A person designated by law to receive assets of a decedent in the case of intestacy.

HOLOGRAPHIC WILL A will which, depending on the requirements of state law, is either: 1) entirely in the handwriting of the testat(or)(rix); or 2) the material portions are in the handwriting of the testat(or)(rix).. In some states, such a will is not recognized at all. In others, it may not be recognized unless it is published, declared, and witnessed as required by statute for other written wills. In all cases, it will need to be signed and dated by the testat(or)(rix).

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INCIDENTS OF OWNERSHIP These are elements of ownership or degree of control over a life insurance policy, which would cause the full face value of the policy to be included in the taxable estate of the insured. When estate-planning attempts to have life insurance proceeds pass outside of estate taxation, it is necessary to insure that the decedent had no incidents of ownership at death. Incidents of ownership can be imputed to the insured by the insured’s conduct. If a policy over which the insured has any incident of ownership is transferred to a third party or to a trust, if death occurs within 3 years of the transfer, it is treated for estate tax purposes as if the incident of ownership existed as of date of death.

INCLUSION RATIO For Generation Skipping Transfer Tax purposes, when a transfer is made into a trust (as opposed to being a direct skip, or a transfer directly to a skip person, see below) in which trust a skip person (see below) has an interest, it is necessary to determine how much of the transfer has had the transferor’s Generation Skipping Transfer Tax Exemption applied to it. This determination is known as the Inclusion Ratio.

The inclusion ration allows you to calculate the Generation Skipping Transfer Tax at a later date when a distribution is made to a skip person (see Taxable Distribution, below) or when the interest of all non-skip persons are terminated for any reason (see Taxable Termination, below).

The inclusion ratio is a number, between 0 and 1 which is determined by creating a fraction and then converting the fraction to a decimal amount (such as ½ = .5). The numerator of the fraction is the dollar amount of the trust which is subject to Generation Skipping Transfer Tax (i.e. how much was transferred to the trust which did not have the donor’s Generation Skipping Tax Exemption applied to it).

The denominator of the fraction is the total amount of assets transferred to the trust. Whenever a taxable distribution or a taxable termination is made, the amount of the distribution (or the total amount of the trust in the event of a termination) is multiplied by the applicable inclusion ration to determine the amount that is subject to GSTT.

Multiply this amount by the then current GSTT rate (which is the highest marginal estate tax rate then in effect) to determine the GSTT tax that is owed. In the event of a taxable distribution, the recipient of the distribution is responsible for paying the tax. In the event of a taxable termination, the trust pays the tax.

INCOME BENEFICIARY: The person who will receive the income from a trust for a specified period of time (e.g., the beneficiary’s life). See also, Remaindermen.

INCOME IN RESPECT OF A DECEDENT (IRD) This is any asset which passes due to someone’s death that has not been previously subject to income tax. Normally, receipt of assets by reason of death is not income (§201 of the IRS Code). However, if the recipient receives an asset upon which the decedent has not paid income tax, and the decedent would have had to pay income tax had the decedent been alive, then the assets is characterized as Income in Respect of a Decedent, and will be subject to income taxation by the recipient, at the recipient’s tax rate.

Typical examples of IRD are: All retirement plans (401K, IRA, etc.), gains on an annuity, royalties, patent payments, installment sale payments. There is an income tax deduction for IRD which is the amount of tax caused by the inclusion of IRD in the decedent’s estate. This deduction is distributed to the recipients of IRD on a pro-rata basis and is taken on a dollar for dollar basis (as a ‘before the line” deduction and not as a credit) as the recipient recognizes the income (i.e. receives payments or makes withdrawals – voluntary or involuntary – from retirement plans.)

INCOME FIRST RULE Income tax rule that requires that all distributions from a trust or from a decedent’s estate are deemed to be paid out of that years recognized income first, even if the executor, administrator, or trustee actually distributes corpus in the form of cash or property.

INHERITANCE TAX: Any death tax which is levied by a state government upon the takers of a Decedent’s property as opposed to a tax on the estate as a whole. See also, Estate Tax.

INSURANCE TRUST A trust composed partly or wholly of life insurance policy contracts.

INTANGIBLE PERSONAL PROPERTY Personal (i.e. not interests in real estate) property which itself has no intrinsic value in and of itself. The property only evidences a right or an interest, such as stock certificates, leases, mortgages, and bonds.

INTANGIBLE PROPERTY Property that itself does not have physical substance (for example, a stock certificate or bond). The thing itself is only the evidence of value.

INTER VIVOS: Made during life.

INTER VIVOS TRUST A trust created during the settlor’s lifetime. It became operative during lifetime as opposed to a trust created under a will (testamentary trust, see below), which does not become operative until the testator. An inter vivos trust can be either revocable or irrevocable. The Revocable Inter Vivos trust is the commonly called Living Trust. Irrevocable inter vivos trusts are usually advanced tax planning tools (ILIT, CRUT, CRAT, GRUT, GRAT, etc., all see above).

INTESTATE: Dying without a valid will. A state’s laws of distribution will control who gets what.

INTESTACY LAWS The laws in each state, which provide for distribution of the property of a person who has died without leaving a valid will.

INTESTATE The term for a person who dies without a valid will or for the condition of dying without a valid will.

IRREVOCABLE: Once made, cannot be changed or amended by the Grantor without a court order.

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) A trust arrangement in which the trust owns one or more life insurance policies on an insured’s life within the trust. The insured usually creates the trust and relinquishes all control so that transfers of life insurance or of cash will be treated as Complete Transfers. The purpose is to have transfers of cash treated as present interests transfers subject to the Annual Exclusion Amount (see Crummey Powers, above) and have the insured have no Incidents of Ownership (see above) so that the full face value of the policy(ies) will pass to the beneficiaries (or stay in trust for the beneficiary’s benefit) and not be included in the insured taxable estate.

IRREVOCABLE TRUST A trust created when the grantor permanently transfers property to the trustee and cannot alter, amend, revoke, or terminate the arrangement or reclaim the property. Usually, it is designed so that the donor has relinquished Dominion and Control, thus making all transfers of property to the trust Complete Transfers (see above) to which tax consequences attach now

IRREVOCABLE WILL A will which has one or more provisions which were created with consideration from a third party to the effect that the testator will not later change this provision. If found to be valid under state law (most states do not like to enforce them unless necessary), if the subject will provision is later changed, that act then creates a debt of the estate to the third party for the named asset or amount.