Estate Planning Definitions

A-B Trust

An arrangement used by spouses to take advantage of the marital deduction estate tax by creating a marital trust, or A trust, at the first spouse's death. This creates a benefit to the surviving spouse for life and a bypass, or B, trust equaling the assets from the deceased spouse’s remaining unified credit-exclusion amount. The B trust can be referred to as a credit shelter trust and is usually held for the lifetime of the surviving spouse, benefitting the surviving spouse and the couple’s descendants. Upon the death of the surviving spouse, the beneficiaries typically take the assets free from estate tax, regardless of the value of the B trust.


Administration

A process during probate wherein the personal representative collects the decedent’s assets, pays all debts, taxes, and claims, and distributes the estate according to the terms of the will or intestacy law.

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Administrator

A person or corporate fiduciary appointed by the court to manage an estate if no personal representative has been appointed, or if the named personal representative is unable or unwilling to serve in the appointed capacity.

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Advance Directive

A form that allows you to set up a health care power of attorney, commonly referred to as a living will. This Advanced Directive allows you to designate someone to make informed decisions on your behalf in case of your incapacity. It also allows someone to access your medical records and argue on your behalf with the health insurance company despite HIPAA protections.

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Annual Exclusion

The amount an individual can give to a family member or other beneficiary per year and still avoid federal gift taxes and IRS reporting requirements. The annual exclusion is $13,000 per donee for 2009. If a parent pays tuition or medical expenses directly to a provider, the transaction is not treated as a gift for gift tax calculations.

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Applicable Exclusion Amount

A different name for the unified credit, which shelters a certain amount from both the federal estate and gift tax.

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Attorney-in-fact

The person identified as an agent in a Power of Attorney to make decisions about the financial affairs of another.

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Beneficiary

A person named to receive a benefit from the assets in an estate or trust.

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Bequest

The act of leaving personal property to someone in a will. It is like leaving a gift in a will. Similar to devise.

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By-pass Trust

The B trust in the A-B trust plan that shelters, by the unified credit exclusion, an amount from the federal estate tax and thereby bypasses the estate taxes at the deaths of both spouses.

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Carryover Basis

A method for determining the tax value (or basis) of a transferred or gifted asset. The carryover basis transfers the tax basis of the asset from the original owner to the heir, and is used to calculate capital gains if and when the asset is sold.

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Charitable Lead Trust (CLT)

A trust that is designed to reduce a non-charitable beneficiary's taxable income by first donating a portion of the trust to a charity in the form of annuity payments over a specific term. At the end of the term, the remainder of the trust is then passed to the non-charitable beneficiary.

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Charitable Remainder Trust (CRT)

A tax-exempt trust designed to reduce a non-charitable beneficiary's taxable income by first donating assets into the trust and then having the trust pay non-charitable beneficiaries for a specific term. At the end of the term, the remainder of the trust is passed to a designated charitable beneficiary.

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Codicil

A properly, formally executed addition or amendment to the terms of a will, which allows the addition or amendment to be valid without completely rewriting the original will.

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Community Property

In certain states, the law imposes a form of ownership that deems all property acquired during a marriage to be jointly owned. Most important to Oregon residents is that all of our surrounding states are community property states.

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Conservator/Guardian

An individual or corporate fiduciary, appointed by the court system, who manages the property of an incapacitated person. In a similar manner, a guardian is appointed and cares for the person and wellbeing of that same incapacitated person.

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Credit Shelter Trust

Another name for the by-pass or B trust in an A-B trust.

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Crummey Trust

An irrevocable trust that is set up to allow a beneficiary to withdraw all or some portion of the asset/s that are held by the trust to up to the annual gift tax exclusion to take advantage of the annual exclusion.

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Decedent

A person who has died.

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Descendants

The children, grandchildren, and other persons who are also related by blood or adoption. A person’s spouse, stepchildren, parents, grandparents, and siblings are not descendants.

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Devise

The act of leaving real property (as in real estate) in a will to another. Similar to a bequest.

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Domestic Partnership Registry

A registry that grants same-sex couples (domestic partners or a partner wife or husband) who file a Declaration of Domestic Partnership some limited rights.

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Electing Small Business Trust (ESBT)

A trust that is granted a few unique allowances. The ESBT may hold shares of an S corporation, have multiple beneficiaries, and either distribute or accumulate income.

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Estate Planning

A process to determine a plan for: minimizing estate tax, providing liquid assets for immediate needs, executing a will or trust agreement, and ensuring that beneficiary designations work in partnership with your overall plan.

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Estate Tax

A tax imposed on an estate that transfers property at death. An estate tax is different from an inheritance tax imposed by the state.

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Estate Tax Exemption Amount

A different name for the unified credit amount, applicable exclusion amount, and/or credit shelter amount.

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Family Limited Partnership

A method of transfering shares of a family business to younger generations while allowing older generations to retain control of business operation. An FLP allows the family business to avoid paying high gift taxes and other serious tax issues when transfering shares of the business between generations.

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Fiduciary

A person who owes a special duty to another due to the position they are holding. The fiduciary who has accepted fiduciary duties is required to act for the sole benefit the party who has entrusted them with this legal and ethical relationship.

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Generation-Skipping Tax (GST)

A federal tax imposed on present day gifts and/or transfers into a trust to or for the benefit of beneficiaries two or more generations younger than the donor.

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Gift Tax

A transfer tax on lifetime gifts.

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Grantor

A person who creates or contributes property to a trust. Also referred to as the settlor, the trustor, or the donor.

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Grantor Retained Annuity Trust (GRAT)

A trust designed to minimize or eliminate gift taxes paid on an asset transfer to a family member. The grantor donates assets to the trust and then receives an annuity payment for a specified term. At the end of the term, the remainder in the trust is then given to the trust beneficiary.

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Gross Estate

A term associated with federal estate tax, which includes all property owned at the time of death, as well as certain property transferred by a decedent during their lifetime that may be subject to federal estate tax.

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GST Exemption

An amount of generation-skipping transfers that can be made without incurring a generation-skipping tax.

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Health Care Power of Attorney

A document that allows you to appoint a person (an agent) to make health care decisions for you if you become incapacitated.

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HIPAA*

The Health Insurance Portability and Accountability Act of 1996 (HIPAA). The HIPAA Privacy Rule provides federal protections for personal health information held by covered entities, and it gives patients an array of rights with respect to that information. At the same time, the Privacy Rule permits the disclosure of personal health information needed for patient care and other important purposes. This rule does not allow a friend or family member to access your records unless you give them permission in a form such as an Advanced Directive.

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*Definition taken from the U.S. Department of Health and Human Services website: http://www.hhs.gov/ocr/privacy/hipaa/understanding/coveredentities/index.html

Inheritance Tax

A tax that is in addition to the federal estate tax and Oregon gift and estate tax. This is a fractional tax that is applicable to both residents and non-residents. The tax applies to: 1) tangible personal property located in Oregon, 2) real property located in Oregon, and 3) any intangible personal property regardless of location. The tax is calculated based on the entire taxable estate and then multiplied by a fraction determined by the sum of three categories.

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Insurance Trust

An irrevocable trust created to own life insurance for a person, a married couple, or business partners, and drafted to ensure that the proceeds are excluded from the probate estate and the insured’s gross estate at death.

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Intentionally Defective Grantor Trust (IDGT)

A trust that is used to freeze assets for the purpose of estate taxes, but not income taxes. The grantor of an IDGT sells assets that are expected to appreciate in value to the trust in exchange for a promissory note, so that the assets in the trust are not included in the estate. The grantor still has to pay income taxes on the trust, but the assets in the trust are allowed to grow for the benefit of the grantor's heirs without being subject to estate tax.

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Intestate

When someone dies without a valid will, the decedent’s estate is distributed in accordance with statutory requirements. Spouses, children and other relatives are highest priority, and the State is the last resort.

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Inventory

A list of the decedent’s assets or assets of a trust, typically filed with the court and provided to interested parties.

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Irrevocable Life Insurance Trust (ILIT)

A trust that is specifically designed to hold life insurance. An ILIT prevents the proceeds of the life insurance policy from being subject to estate taxes after the death of the insured and from creditor claims during the insured's lifetime.

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Joint Tenancy

A planning technique used to avoid probate and estate taxes, whereby two or more persons chose to own property together and have rights of survivorship.

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Life Estate

The legal right to use property for your life or the life of another. After the life estate terminates, title fully vests in the remainderman.

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Marital Deduction

A federal estate and gift tax deduction allowing qualified property to pass to a spouse without any federal estate tax or gift tax being paid.

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Per Stirpes

A method for distributing property whereby descendants take the share that their deceased ancestor would have received if the ancestor did not pre-decease the decedent. For example, if the decedent (Don) had three children (Abby, Bob, and Charlie) and Charlie died in 1995, and then Don dies in 1997, Charlie's children could take Charlie’s share of Don’s estate.

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Personal Representative

A fiduciary named in a will and later appointed by petition to administer a decedent’s estate.

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Pour-Over Will

A will used together with a revocable trust that passes title to property not transferred to the trust during the decedent’s lifetime.

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Power of Attorney

A document that authorizes that one or more individuals may act on another’s behalf as attorney-in-fact. The document can be used for all legal and financial matters or for something specific and limited, i.e. a real estate transaction or the sale of a car. A Power of Attorney terminates upon the death of the grantor.

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Probate

A court-reviewed, -supervised and/or -mandate process of administering the will or estate of a person who died intestate. The process includes proving the validity of a will and collecting and distributing property.

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Qualified Personal Residence Trust (QPRT)

An irrevocable trust that holds title to a residence for a term of years. The grantor retains the right to reside in the home and potentially lease back the home if their life exceeds the term. The trust allows the title to pass to children, heirs, or other beneficiaries at the expiration of the term.

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Qualified Subchapter S Trust (QSST)

A trust that is allowed to be shareholder of an S corporation. A QSST must have only one beneficiary and must distribute, rather than accumulate, all income to the one income beneficiary.

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Qualified Terminable Interest Property (QTIP)

A marital trust or life estate that qualifies for the marital deduction because the surviving spouse is the sole beneficiary for life.

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Remainderman

The person who receives property remaining in a trust account after all other obligations have been fulfilled, such as those to the beneficiary and expenses. Also known as the "holder of a remainder."

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Residue

A term that refers to the property that may remain in a decedent’s estate after payment of the estate’s debts, taxes, and expenses and after all specific gifts have been distributed.

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Revocable Living Trust

A trust with many limitations for the goal of asset-protection that is created in the lifetime of the grantor, during which time the grantor reserves the right to terminate, modify, or amend the trust.

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S Corporation

An LLC or corporation that has made an IRS Subchapter S election to be taxed as a pass-through entity, typically treating the corporate income as taxable at the personal income rate of the person receiving the income.

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Special Needs Trust

A trust established for a disabled person, monitored by the state, and designed to allow the disabled person to be eligible for government benefits and assistance by limiting the use of trust assets for purposes other than the beneficiary’s basic care or otherwise government-paid care.

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Spendthrift Provision

A provision in a trust restricting transfers to a beneficiary in order to protect assets either from claims of the beneficiary’s creditors or from bad behavior.

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Step-up in Basis

A way to lessen the burden of capital gains tax by readjusting an appreciated asset's value to the current market price instead of the original purchase price. In 2010, there is no step-up in basis for federal estate tax.

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Surrogate Medical Decision Making

When a person is given primacy under the law to make end-of-life medical decisions in the absence of an Advanced Directive naming a health care power of attorney.

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Tax-favored Trust

A term that refers to many different types of trusts that are designed to help minimize taxes paid on an estate.

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Tenancy by the Entirety

A joint ownership of real property between a husband and wife that allows the property to pass to the surviving spouse. There are restriction about sale, mortgaging, and other matters that will require approval of both.

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Tenancy in Common

An ownership method wherein each owner possesses an undivided interest in the property, which allows each owner to sell, give, or bequest his or her undivided interest.

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Trust

When property is legally owned and managed by a fiduciary, called a trustee, for the benefit of another, called a beneficiary.

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Trust Instrument

A document creating a trust.

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Trustee

A person designated or appointed to hold and administer trust property. A trustee is a fiduciary and therefore has the duty to act in the best interests of the trust and the beneficiaries.

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