Glossary of Estate Planning Terms

The following are a glossary of Estate Planning terms that you may find helpful in understanding the process of Estate Planning and Probate Administration: 

Administration

The process by which assets in the name of a Decedent are legally transferred to the decedent’s rightful heirs or beneficiaries. Administration can either be through a trust or by will

Advance Directive

In Texas, this term refers to a Medical Power of Attorney and/or a Living Will.

Annual Exclusion

An exclusion from gift taxes for gifts by each donor to each donee which is available on an annual basis. The annual exclusion is currently $12,000 (in 2006) per donor, per donee, per calendar year (indexed for inflation). That is, a couple with three children could give $72,000 per year tax free to the next generation. 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.

Applicable Exclusion Amount

The amount “sheltered” from federal tax by the taxpayer’s Unified Credit, which increases as the Unified Credit increases. If the value of the estate is less than the Applicable Exclusion Amount for the year of death, no federal estate tax will be due. See Credit Shelter/Trust Amount for the amount of the credit and the applicable exclusion.

Assignment

Transfer of title of an asset from one owner to another, such as from a person to a Trust.

Attorney-In-Fact

A person named as an agent in a Power Of Attorney.

Beneficiary

A person who is (or will be in the future) a recipient of benefits from a Will, insurance policy, annuity, retirement account, an Estate or a Trust.

Bequest

A gift of property made in a Will or Trust.

Bypass Trust

Please see Family/Bypass Trust, below.

Bond

An insurance policy that insures that a Fiduciary will faithfully perform his or her duties. In Probate, the principal on the bond is the Personal Representative, the Surety is the insurance company and the insured is the Estate.

Community Property

Most of the property acquired by a couple during their marriage while they resided in a community property state. Inheritances, gifts, money paid as a result of personal injuries and property owned prior to marriage is typically Separate Property. In Texas, property acquired during marriage in a non-community property state is Separate Property at death, but is considered Community Property on divorce. The Community Property states are: Texas, Louisiana, New Mexico, Arizona, Nevada, California, Washington, Idaho, Wisconsin, and in limited situations, Alaska.

Counseling-Oriented

A collaborative interaction between clients and their estate planning lawyer that begins with teaching the basics of the process and the options available to clients, and then listening to clients describe the unique dynamics of their family. This exchange defines the clients’ goals and objectives, fears and concerns, and the standard of success.

Credit Shelter Trust

Please see Family/Bypass Trust, below.

Credit Shelter Trust Amount

The amount of property of a decedent on which the tax is essentially paid by the Unified Credit; currently being increased on the following schedule:

Decedent

A person who has died.

Disability

A condition of helplessness preventing the person from conducting normal business, financial and personal functions, whether caused by mental or physical conditions.

DOD

A common abbreviation for Date Of Death.

Estate

An entity consisting of a person’s property and all the rights and responsibilities relating to it usually used in the context of a guardianship or probate. A trustee agent under a power of attorney or guardian administers an estate when a person is incompetent or disabled. A personal representative (an Executor or Administrator in probate – Trustee if probate is avoided through a Living Trust) administers the property of a person after death. For Estate Tax purposes, the estate consists of everything a person owns or controls of at the time of death anywhere on Earth. This includes life insurance payable by reason of the person’s death.

Estate Tax

Sometimes used synonymously with the federal estate tax or death tax. Generically, any tax which is levied upon the estate as a whole which exceeds the Credit Shelter/Trust Amount. For married couples, the tax usually is not levied until the second death because of the Marital Deduction.

Family / 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. Without a Family/Bypass Trust, married couples are only allowed one unified credit in total, not one for each spouse. The trust is sometimes called the Credit Shelter Trust. Using this type of planning can also result in a large degree of protection for the family in the event the surviving spouse remarries. These type trusts can be used in either a Living Trust or a Will.

Family Limited Partnership

Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs) are entities or companies which are typically created to shelter assets from creditors’ claims that result from lawsuits. If very carefully crafted, these may also provide some reduction in both gift and estate taxes.

Fiduciary

A person or corporation that occupies a position of trust and accountability. The word characterizes a relationship such as Trustee-Beneficiary, Attorney-Client, Doctor-Patient, Bank-Depositor, Principal-Agent, etc.

Funding

The process of transferring ownership or title of a Trustmaker’s assets into a trust estate by signing a new real estate deed, changing beneficiary designations, assigning personal property, leases, corporations or partnerships, changing ownership of financial accounts, etc. Properly funding a Living Trust is the only way to insure that your family will avoid a Guardianship of the estate on incapacity and Probate on death. Failing to “fund” an asset may result in a probate. Please see Pour-Over Will, below.

Gift

A gratuitous transfer of property to someone else without receiving adequate consideration in return.

Gift Program

Usually a planned program of making annual gifts to beneficiaries within the amount of the annual exclusion.

Gift Taxes

Taxes imposed by the federal government (and some states) on a person giving money or property to a non-charitable person or entity. The giver (donor) usually owes tax.

Grantor

In trust usage, the person who creates a trust (also known as Trustor, Settlor or Trustmaker).

Grossed-Up Gift Taxes

If gifts have been made within three years of death on which Gift Taxes were actually paid out of pocket, those gift taxes will be added back to the value of the estate for purposes of computing federal estate taxes. This is called the gift tax gross up.

Guardianship

A Probate court proceeding in which the judge considers whether a person has become so disabled that he/she needs someone else to make decisions about the person’s care. Generally, the Court appoints a relative as guardian, with a bond. There are two types of guardian the “guardian of the estate” manages money, and the “guardian of the person” manages medical and personal care.

Heir

A person who inherits something from a Decedent under the Law of Descent and Distribution, where the Decedent had no Will, which means that someone has died intestate. Heirs receive notice of Probate court actions even if the decedent had a will. See also Beneficiary.

ILIT

A trust designed to hold life insurance so it will not be taxed as part of the insured’s estate. It is irrevocable.

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.

Inheritance Tax

Any death tax levied by a non-federal government (e.g. a state) upon the takers of the property as opposed to the estate as a whole (see estate tax). Texas does not have a state inheritance tax at this time.

Inter Vivos Trust

“During lifetime.” A term used to describe a Trust created during the lifetime of the Trustmaker, distinguished from a testamentary trust created by a Will, which only becomes effective at death. Please see Living Trust, below.

Intestate

When one dies without a valid Will, or where a will does not dispose of all the Decedent’s property. Someone dying intestate gives up all control of their estate, and is at the mercy of the Law of Descent and Distribution. In addition, the Decedent’s family will almost always pay substantially higher attorney’s fees, and perhaps increased taxes.

Inventory

In a Probate court case, a list of the assets of the Decedent or disabled person, prepared and signed by the Fiduciary (Personal Representative or guardian). This very personal information, along with the Will is a public record which is available for inspection and copying by anyone, and is sometimes available on the internet.

Joint and Survivor Annuity

This is an annuity payable to two people (e.g., a husband and wife) through the lifetime of the survivor of the two of them. For qualified plans, this is the type of distribution mandated by law, unless both spouses consent to a different form of payment.

Joint Tenancy with Right of Survivorship

A form of ownership of property among natural persons, characterized by equality of ownership share and created by the same ownership document. When an owner dies that person’s interest automatically transfers to the survivor, who then owns the entire asset.

Law of Descent and Distribution

A state statute that prescribes the distribution of the property of a Decedent who died without a valid Will (Intestate) to the decedent’s heirs.

Life Insurance Gift Value

The value of a life insurance policy which is given to someone else normally is its “interpolated terminal reserve value”, which is generally very close to the cash surrender value. In most cases, this gift value will be less than the face value of the policy. Where the insured is in bad health and could not obtain new insurance within normal cost limits, the gift value of the policy may be greater.

Limited Liability Company (LLC)

Please see Family Limited Partnership, above.

Living Trust

A trust created by agreement currently, as opposed to a testamentary trust created by a Will. A Living Trust6 can be used to hold assets during a person’s lifetime and thereby remove those assets from probate at the person’s death. Also sometimes called a “revocable living trust” because the terms of the trust can be changed by the creators of it. It is also known as an Inter Vivos Trust which means that it is created while someone is alive, as opposed to a “testamentary trust” which is a trust created by a Will.

Living Will

A document telling friends, relatives, and health care providers how you want your process of dying managed by using or not using artificial means such as machines or even food and water to speed-up or delay the natural course of a terminal illness. In some states, the Living Will and a Medical Power of Attorney taken together are called the Advance Directives.

Lump Sum Gift

Typically a gift which is made on a one-time basis only, as opposed to a Gift Program which is designed to use the Annual Exclusion on a yearly basis.

Marital Deduction

A deduction allowed on the federal estate tax return for property passing in a qualifying manner to a surviving spouse who is an American citizen. On the death of the first spouse, it is common to give the amount of decedent’s property the exceeds the Credit Shelter Trust Amount to the surviving spouse in a “QTIP” Trust, which can result in a large degree of protection for the family in the event the surviving spouse remarries.

Medical Power Of Attorney

A grant of power to a person to make or carry out the decision of the signor of the document, under terms of a state law, to withdraw food and water during the final stages of a fatal illness. In some states, the Living Will and a Medical Power of Attorney taken together are called the Advance Directives.

Net Tax

Generally the actual amount of tax which is payable in a given situation, after all deductions, credits and other adjustments have been made.

Per Stirpes

Whenever a distribution is to be made to a person’s descendants per stirpes, the distribution shall be divided into as many shares as there are then living children of such person and deceased children of such person who left then living descendants. Each then living child shall receive one share and the share of each deceased child shall be divided among such child’s then living descendants in the same manner.

Pick-Up State

A state which does not impose an estate tax or an inheritance tax, but does “pick up” an amount equal to the federal state death tax credit. This has now been repealed.

Personal Property

“Tangible” personal property means anything moveable that you can touch. “Intangible” personal property refers to financial assets such as cash, stocks, bonds, bank accounts, insurance, etc. Please see Real Property, below.

Personal Representative

A person or institution appointed by the probate court (nominated in a will, if any) to administer the Decedent’s Estate. Also known as the Executor (for a will), or the Administrator (without a will). The term may also refer to a Trustee.

Petition

A formal request to a court to make a finding of fact and enter an order or judgment based upon the facts and the law.

P.O.D.

An instruction to a depository institution such as a bank to pay the funds in the account to the beneficiary named in the document signed by the account owner.

Pour-Over Will

A Will which names an existing Trust as the principal Beneficiary. Thus, the Probate Estate “pours over” into the Living Trust. It is usually used when someone who has created a Living Trust failed in Funding an asset into the trust. After death, the executor places that into the trust at the conclusion of probate.

Power Of Attorney

A grant of power to a person (agent) to make or carry out the decision of the signer of the document, under terms of a state law, which expires upon the death or Disability of the signer. A Durable power document continues in effect during the signer’s disability if and only if it contains specific language required by state law. A general power document contains no limitations on the grant of power. A springing power takes effect only upon the happening of an ascertainable event such as the declaration of disability of the signer. In Texas financial institutions are not required to honor powers of attorney, and if it is not honored, a Guardianship may result. This has increased the popularity of Living Trusts.

Probate

The process of Administration of a Decedent’s Estate under the authority of the probate court. At the conclusion of the process, the decedent’s Beneficiaries or Heirs are identified, the debts and taxes are paid, and the remaining property is distributed to the persons or charities entitled to it.

Qualified Plan Assets

Property held in an IRA, 401(k), 403(b) or other pension/retirement plan on which the owner has not yet paid federal income tax; sometimes called “tax-deferred.”

QTIP Trust

Please see Marital Deduction, above.

Real Property

Land, and anything permanently attached to it. Please see Personal Property, above.

Remaindermen

The persons who will receive the benefit from a trust after the death of the Income Beneficiary.

Required Beginning Date (RBD)

This is the date on which a retirement plan participant is required to begin making Required Minimum Distributions from his or her retirement plan(s), and is April 1st of the year following the year the participant reaches age 70-1/2.

Required Minimum Distributions (RMD)

In retirement planning, a participant is required to begin making withdrawals from his or her retirement plans in the year after the Required Beginning Date. These withdrawals must meet certain minimum distribution requirements, based on the payout election the participant makes at that time. In general, the participant must withdraw the funds over his or her life expectancy (but may do so more rapidly).

Residuary

The clause in a Will or a Living Trust that disposed of all of the Decedent’s property not previously mentioned. This clause usually begins, “All the rest, residue and remainder of my property, of whatsoever kind and nature, and wherever situated, I give to …”

Revocable Living Trust

Please see Living Trust, above.

Rollover

Please see Spousal Rollover, below.

Separate Property

A person’s earnings while residing in a separate property state or property owned prior to marriage in a Community Property state, and the assets acquired with those funds. Also, in separate property jurisdictions and most community property jurisdictions, property received by inheritance, gift or personal injury settlement or award is separate property. In Texas, the income generated from separate property is Community Property.

Settlor

Same as Grantor or Trustmaker.

Spousal Rollover

Where retirement plans and IRAs are payable to a surviving spouse, the survivor will have an option to “roll over” the funds into his or her own IRA, thereby deferring the income tax on the plan funds.

Surety

The guarantor of the principal’s performance on a surety bond.

Survivor

Usually referring to the surviving spouse in a husband and wife couple.

Tenants In Common

A form of ownership in which two or more persons own undivided interests in property. Each owner has rights to use the property. On the death of an owner, that owner’s share goes to his or her heirs.

Tentative Tax

The gross value of the federal estate tax prior to application of the Applicable Exclusion Amount and the credit for gift taxes paid after 1976 (and any other applicable credits).

Testament

Same as a Will.

Testator

The person who signs the Will or testament.

T.O.D.

Transfer on death. A legal instrument attached to an ownership document of non-cash personal property, such as a car title or stock certificate, signed by the owner which changes title of the property to the Beneficiary named in the document at the death of the owner.

Trust

An agreement between the Trustmaker and the Trustee, naming the trustee to control the trustmaker’s property, or some of it, for the benefit of a Beneficiary. The trust agreement defines the trustee’s powers and duties. See also Living Trust, above.

Trustee

A person or corporation appointed by a Trustmaker to take control of Trust property and administer it for the benefit of a Beneficiary named by the Trustmaker in the trust document. The Trustmaker may also designate himself or herself as the trustee and beneficiary. The trustee has a strict duty of accountability (Fiduciary) to the beneficiary.

Trustmaker

The person who creates a trust (also known as a Grantor or Settlor).

Unified Credit

A credit applicable against federal gift and/or estate taxes. It is increasing again between 2002 and 2009. It is now referred to as the Applicable Exclusion Amount. Please see Credit Shelter Trust Amount, above.

Ward

A person who is the subject of a Guardianship.

Will

A document (sometimes also called a testament) executed by a Testator, which sets out the testator’s instructions for winding up his or her affairs after death. The Will has no effect until the testator dies, and, therefore does not allow anyone named in the Will to manage the Decedent’s assets in the event of his or her Disability. Please see Power of Attorney and Living Trust, above.