Estate Planning Glossary of Terms

A-B Trust: A joint, revocable living trust for a married couple that divides into two trusts at the death of the first spouse: (A) a revocable survivor’s trust, and (B) an irrevocable credit by-pass trust designed to hold the deceased spouse’s assets up to the amount of the decedent’s available estate tax exclusion.

Acknowledgment: A statement you make in front of a notary public or other person who is authorized to administer oaths stating that a document bearing your signature was actually signed by you.

Advance Medical Directive: The legal instrument in which a person nominates another to make medical decisions when one is unable to do so, and also expresses the person's wishes as to the extent of "extraordinary" medical care desired in case of imminent death from an irreversible condition, or in the case of a persistent vegetative state (the "Karen Quinlan" situation). Advance Medical Directives include both a "living will" and a "durable power of attorney for health care decisions."

Adult: In most situations, any person 18 years of age or older.

Advocate: An advocate is a person or institution who will serve as a friend and look out for the best interests of the person with a disability. The advocate is not court-appointed.

Age of Majority: Adulthood in the eyes of the law. After reaching the age of majority, a person is permitted to vote, make a valid will, enter into binding contracts, enlist in the armed forces and purchase alcohol. Also, parents may stop making child-support payments when a child reaches the age of majority (except if the child is disabled). In most states the age of majority is 18, but this varies depending on the activity. For example, in some states people are allowed to vote when they reach the age of eighteen, but can't purchase alcohol until they are 21.

Agent: A person authorized to act for and under the direction of another person when dealing with third parties. The person who appoints an agent is called the principal. An agent can enter into binding agreements on the principal’s behalf and may even create liability for the principal if the agent causes harm while carrying out his or her duties. (See also attorney-in-fact).

Alternate Beneficiary: A person, organization or institution that receives property through a will, trust or insurance policy when the first named beneficiary is unable or refuses to take the property. For example, in his will Jake leaves his collection of sheet music to his daughter, Mia, and names the local symphony as alternate beneficiary. When Jake dies, Mia decides that the symphony can make better use of the sheet music than she can, so she refuses (disclaims) the gift, and the manuscripts pass directly to the symphony. In insurance law, the alternate beneficiary, usually the person who receives the insurance proceeds because the initial or primary beneficiary has died, is called the secondary or contingent beneficiary.

Annual Exclusion Gift: The maximum gift that may be given by one person to another person in any year which will not be subject to gift tax.

Assignment: A short document that transfers your interest in assets from your name to another. Often used when transferring assets to a trust.

Attorney-in-fact: A person named in a written power of attorney document to act on behalf of the person who signs the document, called the principal. The attorney-in-fact's power and responsibilities depend on the specific powers granted in the power of attorney document. An attorney-in-fact is an agent of the principal.

Beneficiary: A person or organization legally entitled to receive benefits through a legal device, such as a will, trust or life insurance policy.

By-Pass Trust: A trust designed to lessen a family’s overall estate tax liability. An A-B trust is the most popular kind of by-pass trust.

Children’s Trust: A trust included in your living trust. If, when you die, a beneficiary is not of legal age, the child’s inheritance will go into this trust. The inheritance will be managed by the trustee you have named until the child reaches the age at which you want him/her to receive funds.

Class Discretionary Trust (also called Pot Trust): A trust for children in which the trustee decides how to spend money on each child, taking money out of the trust to meet each child's specific needs. One important advantage of a pot trust over separate trusts is that it allows the trustee to provide for one child's unforeseen needs, such as a medical emergency. But a pot trust can also make the trustee's life difficult by requiring choices about disbursing funds to the various children. A pot trust may end when the youngest child reaches a certain age, usually 18 or 21.

Codicil: A supplement or addition to a will. A codicil may explain, modify, add to, subtract from, qualify, alter or revoke existing provisions in a will. Because a codicil changes a will, it must be signed in front of witnesses, just like a will.

Comfort Care: Medical care intended to provide relief from pain and discomfort, such as pain control medication, but not intended to prolong life.

Contingent Beneficiary: 1) An alternate beneficiary named in a will, trust or other document. 2) Any person entitled to property under a will if one or more prior conditions are satisfied. For example, if Fred is entitled to take property under a will only if he's married at the time of the will maker's death, Fred is a contingent beneficiary. Similarly, if Ellen is named to receive a house only in the event her mother, who has been named to live in the house, moves out of it, Ellen is a contingent beneficiary.

Corporate Trustee: An institution, like a bank or trust company, that specializes in managing trusts.

Credit Shelter Trust: A trust (usually equal in value to a person’s unified credit) that can benefit a spouse, under certain conditions, and other beneficiaries designated in the trust.

“Crummey” Power: A name taken from a court case (Crummey v. IRS) used to describe the beneficiary’s right of withdrawal provision during a window period in an irrevocable trust. The amount of withdrawal is usually limited to the annual exclusion of the additions to a trust.

Crummey Trust: An irrevocable trust established to qualify contributions for the annual federal gift tax exclusion (currently $11,000) for gifts of a present interest. So-called because the trust contains "Crummey Powers," enabling a beneficiary to withdraw assets contributed to the trust for a limited period of time.

Deed:  A document that lets you transfer title of your real estate to another person(s). Types of deeds:

Quit-Claim Deed: With a quit-claim deed, the person transferring the title makes no guarantees, but transfers all his/her interest in the property.

Warranty Deed: With a warranty deed, the person guarantees that the title being transferred is clear (free of any encumbrances). If the title is defective, the person making the transfer is liable.

Designated Beneficiary: An individual beneficiary of a retirement account (IRA, 401(k), 403(b), etc.) who qualifies as a person whose life expectancy may be used, either jointly or singly, for determining minimum annual distributions.

Disinherit: To deliberately prevent someone from inheriting something. This is usually done by a provision in a will stating that someone who would ordinarily inherit property -- a close family member, for example -- should not receive it. In most states, you cannot completely disinherit your spouse; a surviving spouse has the right to claim a portion (usually one-third to one-half) of the deceased spouse's estate. With a few exceptions, however, you can expressly disinherit children.

Discretionary Powers: Powers that allow a trustee to exercise reasonable judgment in managing a trust's assets in order to accommodate different situations.

Do Not Resuscitate (DNR) Order: A physician's order entered into a patient's medical record to indicate that, in the event of a cardiac arrest or other life-threatening event, the patient is not to be resuscitated.

Durable Power of Attorney: A document in which one person (the principal) gives legal authority to another person (the agent or attorney-in-fact) to act on the person's behalf. It lets you appoint an agent (usually your spouse or child) to manage all or part of your business or personal affairs. It is “durable” if it has language which states it will remain valid if the principal later becomes incapacitated.

Durable Power of Attorney for Health Care: A document by which one person gives another person the ability to make medical decisions on their behalf if they become incapacitated and cannot make decisions for themselves.

Estate: All property, both real and personal, that a person owns at the time of death. Includes your home and other real estate; tangible personal property, such as cars and furniture; and intangible property, such as insurance, bank accounts, stocks and bonds, and pension and Social Security benefits.

Estate Tax: Taxes imposed by the state or federal government on property as it passes from the dead to the living. All property you own, whatever the form of ownership, and whether or not it goes through probate after your death, is subject to federal estate tax. In 2004, federal estate tax would only be due only if your property is worth at least $1.5 million when you die, including reportable gifts made during your lifetime. This threshold gradually rises to $3.5 million in 2009. The estate tax is scheduled to be repealed for one year, in 2010. After that, the tax will return, with a threshold of $1 million, unless Congress extends the repeal. Any property left to a surviving spouse (if he or she is a U.S. citizen) or a tax-exempt charity is exempt from federal estate taxes. A handful of states also impose estate taxes; these are usually called inheritance taxes.

Exclusion Amount: The new term -"applicable exclusion amount"- used by the Taxpayer's Relief Act of 1997 to identify the amount of property owned by a decedent effectively exempt from the federal estate and gift tax. ($1,500,000 in 2004.) See "Unified Credit."

Family Trust: A trust established to benefit one's spouse, children and/or other family members. Often used in reference to the By-Pass Trust discussed above.

Fiduciary Responsibility: The responsibility imposed upon one who manages another individual’s affairs, requiring the utmost degree of integrity and prudence in dealing with the property entrusted to the fiduciary (e.g., Trustee, Administrator, Executor, Guardian, Conservator).

Generation Skipping Transfer Tax (GSTT): A federal tax imposed on money placed in a generation-skipping trust. Currently, there is a $1 million exemption to the GSTT; that is, each person may leave $1 million in a generation-skipping trust free of this tax. The GSTT is imposed when the middle-generation beneficiaries die and the property is transferred to the third-generation beneficiaries. Every dollar over $1 million is subject to the highest existing estate tax rate--currently 55%--at the time the GSTT is applied.

Gift: A voluntary transfer of property for which nothing of value is received in return. If the Internal Revenue Service is to recognize a transfer as a gift, the donor(s) must unconditionally transfer all title and control of the property to the recipient(s) at the time the gift is given.

Gift Taxes: Federal taxes assessed on any gift, or combination of gifts, from one person to another that exceeds $11,000 in one year. Several kinds of gifts are exempt from this tax: gifts to tax-exempt charities, gifts to your spouse (limited to $110,000 annually if the recipient isn't a U.S. citizen) and gifts made for tuition or medical bills. In addition to the $11,000 annual gift tax exclusion, there is a $1 million cumulative tax exemption for gifts. In other words, you can give away a total of $1 million during your lifetime -- over and above the gifts you give using the annual exclusion -- without paying gift taxes.

Grantor: Someone who creates a trust. Also called a trustor or settlor. “Creator” in some states.

Guardian: A person who is eighteen years of age or older, a corporation, or a public agency appointed by a court to act on behalf of an incapacitated person. The guardian appointed by a probate court manages the legal, financial and day-to-day affairs of a legally incompetent person. The guardian may also have personal custody of that individual. In some circumstances, a guardianship may be a "guardianship of the person only" or a "tailored guardianship," in which case it only covers personal decision-making with respect to the incapacitated person. The types of guardianship are:

Full Guardianship: The guardian can make all decisions for another person. Generally used for people who are legally incompetent to make informed decisions.

Limited Guardianship: The guardian has authority to make decisions for a limited time when a legal problem arises from a specific situation.

Public Guardian: A state-appointed person who assumes the role of guardian for a person who has no friend or family to act as guardian.

Corporate Guardianship: A corporation serves as guardian and appoints a professional staff person or volunteer to carry out guardianship responsibilities for the person. Parents can contract with the corporation to provide services after their death or when they no longer are able to care for their child.

Health Care Power of Attorney: A document that allows the appointed agent to make medical decisions if you should become incapacitated, but does not give him or her control over your bank account and other non-medical affairs.

Heir: The person entitled to distribution of an asset or property interest under applicable state law, in the absence of a will. (Note that "heir" and "beneficiary" are not synonymous, though they may refer to the same individual in a particular case.) Your heirs are the ones who will inherit your property if you die with no valid will or trust in effect.

Incapacitated/Incompetent: Unable to manage one’s own affairs, either temporarily or permanently. Lack of legal power.

Income Beneficiary: Generally, the person under the terms of a trust agreement who will receive the income (but not the principal) from the trust during his or her lifetime.

Insurance Trust: A tax-saving trust in which trust assets are used to buy a life insurance policy whose proceeds benefit the grantor's beneficiaries.

Intangible property: Personal property that has no physical existence, such as stocks, bonds, bank notes, trade secrets, patents, copyrights and trademarks. Such "untouchable" items may be represented by a certificate or license that fixes or approximates the value, but others (such as the goodwill or reputation of a business) are not easily valued or embodied in any instrument.

Inter Vivos Trust: Trust established by the grantor during his or her lifetime. Also called a Living Trust.

Intestate Succession: The method by which property is distributed when a person dies without a valid will. Each state’s law provides that the property be distributed to the closest surviving relatives. In most states, the surviving spouse, children, parents, siblings, nieces and nephews, and next of kin inherit in that order.

Irrevocable Trust: A trust that cannot be changed or terminated before the time specified in the trust, but the loss of flexibility may be offset by savings in taxes. The trust typically prohibits the grantor from taking action to regain any of the property or funds in that trust.

Issue: A term generally meaning all your children and their children down through the generations, including grandchildren, great-grandchildren, and so on. Also called “lineal descendants.” (Note: The term “issue” includes adopted children who were under 18 years of age at the time of the adoption. A child adopted after attaining 18 years of age is not viewed as being your “issue” unless you specifically state in writing – such as in your last will and testament – that the adopted child is to be considered your “issue.”)

Joint Tenancy with Right of Survivorship: A way for two or more people to share ownership of real estate or other property. When two or more people own property as joint tenants and one owner dies, the other owners automatically own the deceased owner's share. For example, if a parent and child own a house as joint tenants and the parent dies, the child automatically becomes full owner. Because of this right of survivorship, no will is required to transfer the property; it goes directly to the surviving joint tenants without the delay and costs of probate. In the case of real property, an affidavit of survivorship and certified copy of the death certificate must be recorded.

Letter of Intent: A tool used by parents of children with disabilities to shape the actions of a designated guardian in the event of the parents' death. These memoranda of suggestions or instructions, although probably lacking any legal authority, reflect the parents' thinking on a range of issues related to their child with a disability. Also referred to as a Letter of Instruction.

Life-Prolonging Procedures: Medical procedures used to extend the life of someone who is terminally ill or permanently comatose. These procedures may include the administration of blood or blood products, tube feedings, cardio-pulmonary resuscitation (CPR), diagnostic tests, dialysis, antibiotics, surgery or a respirator. Also called life-sustaining procedures or “extraordinary measures.”

Living Trust: A trust you can set up during your life. Living trusts are an excellent way to avoid the cost and hassle of probate because the property you transfer into the trust during your life passes directly to the trust beneficiaries after you die, without court involvement. The successor trustee--the person you appoint to handle the trust after your death--transfers ownership to the beneficiaries you named in the trust according to the provisions of the trust. Living trusts are also called "inter vivos trusts."

Living Will: A legal document in which you state your wishes about certain kinds of medical treatments and life-prolonging procedures. The document takes effect if you can't communicate your own healthcare decisions. A living will may also be called a healthcare directive, advance directive or directive to physicians.

Marital Deduction: A deduction allowed by the federal estate tax laws for all property passed to a surviving spouse who is a U.S. citizen. This deduction (which really functions as an exemption) allows anyone, even a billionaire, to pass his or her entire estate to a surviving spouse without any tax at all.

Marital Deduction Trust: A trust designed to hold marital deduction property. The trust benefits the grantor's spouse during the spouse's lifetime.

Memorandum of Trust: A condensed version of a living trust document, which leaves out details of what is in the trust and the identity of the beneficiaries. You can show an abstract of trust to a financial organization or other institution to prove that you have established a valid living trust, without revealing specifics that you want to keep private. In some states, this document is called a "certification of trust" or “abstract of trust.” If there is real property titled in the name of the trust, the Memorandum of Trust should be recorded.

Minor: In most states, any person under 18 years of age. All minors must be under the care of a competent adult (parent or guardian) unless they are "emancipated"--in the military, married or living independently with court permission. Property left to a minor must be handled by an adult until the minor becomes an adult under the laws of the state where he or she lives.

Next of Kin: The closest relatives, as defined by state law, of a deceased person. Most states recognize the spouse and the nearest blood relative as next of kin.

Notary Public: A public officer whose function it is to administer oaths, to attest and certify documents, and to take acknowledgments.

Payable-on-death (POD) Designation: A way to avoid probate administration for bank accounts, government bonds, individual retirement accounts and, in many states, securities or a car. To create a payable-on-death designation, you simply name someone on the ownership document (such as the registration card for a bank account) to inherit the property at your death. You retain complete control of your property while you are alive, and you can change the beneficiary (payee) at any time. At your death, the property is transferred directly to the beneficiary, free of probate.

Per Capita: A way of distributing your estate so that your surviving descendants will share equally, regardless of their generation.

Per Stirpes: A way of distributing your estate so that your surviving descendants will receive only what their immediate ancestor would have received if he/she had been living at your death.

Personal Property: All property other than land and buildings attached to land. Cars, bank accounts, wages, securities, a small business, furniture, insurance policies, jewelry, patents, pets and season baseball tickets are all examples of personal property.

Personal Representative: The person responsible for administering an estate. Sometimes referred to as an executor.

Pooled Trust: A separate account is maintained for each disabled beneficiary by a nonprofit corporation, but the trust funds are pooled for purposes of investment. Upon the death of the beneficiary, any funds remaining in the trust account must either stay in the trust or first be used to repay the state for any Medicaid expenditures it has made on behalf of the person with the disability, even if repayment empties the trust account.

Pour-over Will: A will that "pours over" property into a trust when the will maker dies. Property left through the will must go through probate before it goes into the trust.

Power of Appointment: The legal authority to decide who will receive someone else's property, usually property held in a trust. Most trustees can distribute the income from a trust only according to the terms of the trust, but a trustee with a power of appointment can choose the beneficiaries, sometimes from a list of candidates specified by the grantor. For example, Karin creates a trust with power of appointment to benefit either the local art museum, symphony, library or park, depending on the trustee's assessment of need.

Power of Attorney: A power of attorney, either financial or medical, gives another person the right to make decisions for you (the “principal”). If the agent or attorney-in-fact is authorized to act in all matters, he or she has a "general power of attorney." If the agent or attorney-in-fact is authorized to act only in limited matters, he or she has a "special power of attorney." A power of attorney terminates at the death of the principal and, unless it is a "durable power of attorney," will also terminate upon disability/incapacity of the principal.

Qualified Terminable Interest Property Trust ("QTIP"): A type of trust for wealthy married couples that allows a surviving spouse to postpone estate taxes. A QTIP trust allows the surviving spouse to make use of the trust property tax-free. Taxes are deferred until the surviving spouse dies and the trust property is received by the final trust beneficiaries who were named by the first spouse to die.

Real Property: Real estate, i.e., buildings, land (excludes personal property).

Remainderman: The person(s) or institution(s) who will receive the remainder (what is left over) of the trust after the primary or income beneficiary has died and the trust ends.

Required Minimum Distribution (RMD): The amount you are required to withdraw each year from your tax-deferred plan after you reach your required beginning date. It is determined by dividing the value of your tax-deferred accounts by the life expectancy of you and your beneficiary. The intent is that, by the time you and your beneficiary are both expected to die, your tax-deferred savings will be fully withdrawn.

Residuary Estate: The property that remains in a deceased person's estate after all specific gifts are made, and all debts, taxes, administrative fees, probate costs, and court costs are paid. The residuary estate also includes any gifts under a will that fail or lapse. For example, Connie's will leaves her house and all its furnishings to Andrew, her VW bug to her friend Carl, and the remainder of her property (the residuary estate) to her sister Sara. She doesn’t name any alternate beneficiaries. Carl dies before Connie. The VW bug becomes part of the residuary estate and passes to Sara, along with all of Connie's property other than the house and furnishings. Also called the residual estate or residue.

Retirement Accounts: Any of the various accounts, funds or plans established to provide retirement benefits for an individual, created pursuant to federal laws and regulations and providing for tax-deferred accumulation during the life of the account, including IRAs, 401(k)s, 403(b)s, Pension and Profit Sharing Plans, etc. These accounts, with the exception of the new "Roth IRAs" and "Education IRAs," are subject to income tax upon withdrawal. They are also includable in the estate of the owner for estate tax purposes.

Revocable Trust: A trust that can be changed, or even terminated, at any time by the grantor. Though most living trusts are revocable, a living trust and a revocable trust are not synonymous.

Revocable Living Trust: A trust established by an individual, or a married couple, that becomes effective immediately upon establishment while the grantor is still alive (thus "living"), remains revocable (able to be terminated) and amendable during the lifetime of the grantor (thus "revocable"), and is used to (1) avoid probate; (2) facilitate some tax planning; (3) provide for management during periods of incapacity without need for guardianship or conservatorship; (4) address family circumstances; and (5) provide for ultimate distribution of the estate.

Specific Bequest: A specific item of property that is left to a named beneficiary under a will. If the person who made the will no longer owns the property when he or she dies, the bequest fails. In other words, the beneficiary cannot substitute a similar item in the estate. Example: If John leaves his 1954 Mercedes to Patti, and when John dies the 1954 Mercedes is long gone, Patti doesn't receive John's current car or the cash equivalent of the Mercedes.

Special Needs Trust or Medicaid Payback Trust: A trust created for a disabled individual under the age of 65 by a parent, grandparent, legal guardian or a court. Funds in this trust are intended to pay for “supplemental services” or “special needs.” Upon the death of the beneficiary, any funds remaining in the trust must first be used to repay the state for any Medicaid expenditures it has made on behalf of the person with the disability, even if repayment claims the entire amount left in the trust.

Spendthrift Trust: A trust created for a beneficiary the grantor considers irresponsible about money. The trustee keeps control of the trust income, doling out money to the beneficiary as needed, and sometimes paying third parties (creditors, for example) on the beneficiary's behalf, bypassing the beneficiary completely. Spendthrift trusts typically contain a provision prohibiting creditors from seizing the trust fund to satisfy the beneficiary's debts. These trusts are legal in most states, even though creditors hate them.

Springing Durable Power of Attorney: A durable power of attorney that takes effect only when and if the principal becomes incapacitated.

Successor Trustee: This person(s) takes over the responsibility of managing the trust after the death, legal incompetence or resignation of the initial trustee(s).

Supplemental Services Trust: Under Ohio law, a trust that provides funds to a person with developmental disabilities without disrupting government benefits. The assets of a Supplemental Services Trust are not considered as "available assets" for the purpose of determining whether an individual shall be eligible for governmental benefits. This type of trust can be funded with a maximum of $220,000 in 2004; at the death of the beneficiary, one-half the trust property must be paid to the state.

Tangible Personal Property: Personal property which ordinarily has no registered ownership attached to it, e.g., furniture, clothing, jewelry, antiques, collections, etc., but not cash or other financial assets.

Testamentary Trust: A trust established under a will to take effect after the death of the testator or testatrix.

Testate: The circumstance of dying after making a valid will. A person who dies with a will is said to have died “testate.” See “intestate.”

Trust: A legal relationship created by one person, called the grantor, in which another individual, called the trustee, owns and manages property for the benefit of a third person, called the beneficiary. The property can be any kind of real or personal property - money, real estate, stocks, bonds, collections, business interests, personal possessions, and other tangible assets. If you establish a living trust, you will be the grantor and may choose to be the initial trustee and beneficiary.

Trust Estate: The assets transferred to the trustee by re-registering their legal titles in the name of the trustee. The trust estate can include real estate, bank accounts, stock, bonds, brokerage accounts, partnership interests, tangible personal property, and many other types of financial and legal interests.

Trustee: An individual, or corporation such as a trust company, who manages the trust according to the terms of the trust document. A trustee's purpose is to safeguard the trust and distribute trust income or principal as directed in the trust document. In a living trust, the person who creates the trust is also the initial trustee.

Unified Credit: The cumulative amount of property that can be transferred during lifetime and at death before any federal gift or estate tax will be payable.

Will: A legal document that provides instructions for distributing an estate upon death. By making a will you can decide who shall receive what property, how much of it, how they shall own it, and to some extent, what they can do with it. A will usually designates someone as an executor to carry out the will's instructions.

Witness: A person who signs one’s name to a document (such as a will, trust, power of attorney, deed, etc.) for the purpose of attesting to its authenticity.