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Special Needs Trust Creation and Management Guide

For parents and by those who serve as trustees or managers of Special Needs Trusts. Get your copy now!


Glossary of Estate Planning and Estate Planning Terms

AB Trust - A type of Revocable Living Trust used by married couples. In this type of living trust, two trusts (trust A and trust B) are created at the time the first spouse dies. By dividing the couple's estate into two trusts at the first death, each spouse can pass the maximum amount of property allowed to avoid federal estate taxes. One trust, usually trust A, is often referred to as the Survivor’s Trust or Marital Deduction Trust, and the other trust, usually trust B, is often referred to as the Exemption Trust, Bypass Trust, or Credit Shelter Trust.

Advance Health Care Directive - A document established by an individual (the principal) granting another person (the agent) the right and authority to handle matters related to the health care of the principal.

Annual Exclusion - The amount of property the IRS allows a person to give to another person during a calendar year before a gift tax is assessed and/or a gift tax return must be filed. The amount is increased periodically. There is no limit to the number of people you can give gifts to which qualify for the annual exclusion. To qualify for the annual exclusion, the gift must be one that a recipient can enjoy immediately and have full control over.

Annuity - The periodic payment of a definite sum of money, with such payments to continue for life or for a definite number of years.

Asset Protection - Protecting your property from legal problems and taxes during your life and after your death.

Assets - All types of property which can be made available for the payment of debts.

Basis - A tax term, which refers to the original or acquisition value of a property, used to determine the amount of tax that will be assessed. The basis is deducted from the sales price of the property when it is sold to determine the profit or loss.

Beneficiary - The person(s) or organization(s) who receive(s) the benefits of trust property held under the terms of a trust.

Bequest - An old legal term meaning a gift or property given under the terms of a will.

Bypass Trust – see Exemption Trust

Charitable Lead Trust (CLT) – An irrevocable trust where a charity receives a certain amount of income during a fixed term. When the term expires, the remainder is distributed to individual beneficiaries.

Charitable Remainder Trust (CRT) – An irrevocable trust where individual beneficiaries receive a certain amount of income during a fixed term. When the fixed term expires, the remainder is donated to a charity.

Charitable Remainder Unitrust (CRUT) – A Charitable Remainder Trust where individual beneficiaries receive a fixed percentage (i.e. 4%) of the trust principal each year during the term of the trust.

Charitable Remainder Annuity Trust (CRAT) – A Charitable Remainder Trust where individual beneficiaries receive a fixed dollar amount (i.e. $40,000) each year during the term of the trust.

Charitable Trust – An irrevocable trust having a charitable organization as a lifetime beneficiary (Charitable Lead Trust) or a death beneficiary (Charitable Remainder Trust).

CLT – See Charitable Lead Trust

Community Property – Some state laws require that all assets acquired during a marriage belong equally to both spouses, except for gifts and inheritances given specifically to one spouse. The eight states with such laws, including California, are known as community property states.

Consideration - Something which has value, such as real or personal property or a promise given in exchange for another promise.

CRAT – See Charitable Remainder Annuity Trust

Credit Shelter Trust – See Exemption Trust

CRT – See Charitable Remainder Trust

Crummey Trust – An irrevocable trust that allows a limited withdrawal by the trust’s beneficiary during a short time period each year. Such trusts qualify for the annual gift tax exclusion. The beneficiary typically does not withdraw the gift during the withdrawal period, and the money remains in the trust until the beneficiary reaches the designated distribution age. Crummey trusts are often used in conjunction with life insurance and Irrevocable Life Insurance Trusts (ILITs).

CRUT – See Charitable Remainder Unitrust

Decedent - The person who has died.

Death taxes - Taxes levied on the property of a deceased person. Federal death taxes are usually referred to as estate taxes. Local and state death taxes are often referred to as inheritance taxes, or simply death taxes.

Deed - A written document used to evidence ownership and/or transfer title to real estate.

Disclaimer - The refusal of a beneficiary to accept property willed to him. When a disclaimer is made, the property is generally transferred to the person next in line under the will. A disclaimer is also called a renunciation.

Donor - A person who makes a gift.

Durable Power of Attorney - A document established by an individual (the principal) granting another person (the agent) the right and authority to handle the financial and other affairs of the principal. The Durable Power of Attorney survives through the period of incompetency of the principal.

Dynasty Trust - A trust designed to pass down family wealth for many generations while avoiding transfer taxes (estate tax and generation-skipping tax) to the greatest extent possible.

Estate - The aggregate of all assets and debts held (owned) by an individual during his or her life or at the time of his or her death.

Estate Planning - The process by which a person plans for transferring his or her assets at death.

Estate Taxes - Taxes imposed on the "privilege" of transferring property by reason of death. Estate tax is most commonly used in reference to the tax imposed by the Federal Government rather than the state government. Estate taxes are intended to raise revenue for the government and break up a family's wealth, so that the nation's wealth doesn't concentrate in the hands of a few families.

Exemption Trust – An irrevocable trust that captures the maximum level of estate tax protection for the first spouse to die, holding the assets of that spouse from a married couple’s estate. See AB Trust for further explanation.

Family Foundation – An entity into which assets are transferred, removing those assets from your taxable estate. Family members can serve as officers and directors of the foundation, and help to achieve its charitable objectives.

Family Limited Partnership (FLP) - A way to transfer business assets to the next generation at a discounted rate, while retaining control over the assets and/or a right to income.

Family Protection Trust (FPT) – See Dynasty Trust

FLP – See Family Limited Partnership

FPT – See Family Protection Trust

Generation Skipping Transfer (GST) Tax - A federal tax imposed on large amounts of money given or left to a grandchild or great-grandchild. Its purpose is to keep families from avoiding the estate tax that would be due if the oldest generation left property to their children, who then left it to their children (the original giver's grandchildren).

Generation Skipping Transfer (GST) Trust – See Dynasty Trust

Gift Taxes - Taxes levied by the Federal Government on gifts. Gift taxes and estate taxes have been "merged" into a single tax called the "unified tax."

Grantor – See Settlor

Grantor Retained Annuity Trust (GRAT) – An irrevocable trust where the grantor of the trust property (e.g., highly-appreciating stock) receives a fixed income stream during a term of years, and the remaining assets are distributed tax-free or at a discount to the beneficiaries.

Grantor Retained Interest Trust (GRIT) - An irrevocable trust where the grantor of the trust property (e.g., a personal residence) receives an income for a fixed period of time.

Gross Estate - The total value of an estate at the date of the decedent's death. The value is determined before debts and other "deductions" are subtracted from the estate value.

Heir - A person entitled to inherit a portion of the estate of a person who has died without a Will.

IDIT – See Intentionally Defective Irrevocable Trust

ILIT - See Irrevocable Life Insurance Trust

Inheritance Tax - A tax imposed upon the transfer of property from a deceased person's estate. "Inheritance Tax" is a term which is usually applied to the taxes charged by a state, where as the taxes imposed by the Federal Government are usually referred to as estate taxes.

Intentionally Defective Irrevocable Trust (IDIT) - An irrevocable trust in which the grantor retains a controlling interest in trust-owned assets. It often offers significant tax advantages.

Inter Vivos Revocable Trust - One name for a living trust. "Inter vivos" is Latin for "between the living."

Irrevocable Life Insurance Trust (ILIT) - A type of irrevocable trust used to hold life insurance. When a life insurance policy is held in an insurance trust, it is protected from estate taxes when the insured dies, provided the trust is established properly, managed properly, and the insured does not retain any "incidents of ownership."

Irrevocable Trust - A trust that cannot be changed, canceled, or "revoked" once it is set up. A "living trust" is not an irrevocable trust. Insurance trusts, GRITs and Dynasty Trusts are examples of irrevocable trusts. Irrevocable trusts are treated by the IRS very differently than revocable trusts.

Insurance Trust - An irrevocable trust used to hold insurance and pass it on to heirs without any estate taxes on the death benefits of the policy.

Issue - A legal term used in wills and trusts meaning one's children, grandchildren, etc., either through birth or adoption.

Life Estate - The right to have all of the benefit from a property during one's lifetime. The person with the right does not own the property, and when he or she dies, the property is not included in his or her estate.

Limited Liability Company (LLC) – A type of business whose owners actively participate in the organization’s management and are protected against personal liability for the organization’s debts and obligations.

Limited Liability Partnership (LLP) – A type of partnership in which individual partners are protected against personal liability for certain partnership liabilities.

Living Trust - A type of revocable trust used in estate planning to avoid probate, help in situations of incompetency, and allow "smooth" management of assets after the death of the grantor or person who established the trust. The trust can be effective in eliminating or reducing estate taxes for married couples. Revocable Living trusts are established during the life of the grantor, who retains the right to the income and principal and the right to amend or revoke the trust. When the grantor dies, the trust becomes irrevocable and acts as a substitute for a traditional will.

LLC – See Limited Liability Company

LLP – See Limited Liability Partnership

Marital Deduction - The unlimited deduction allowed under federal estate tax law for all qualifying property passing from the estate of the deceased spouse to the surviving spouse. The value of the property passing to the surviving spouse under the marital deduction is "deducted" from the deceased spouse's estate before federal estate taxes are calculated on the estate. Proper planning and use of the deduction allows more property to pass estate tax-free to the family.

Marital Deduction Trust – See Survivor’s Trust.

Personal Property - Property other than real estate (land and permanent structures on the land). Cars, furniture, securities, bank accounts, and animals are examples of personal property.

Personal Residence Trust (PRT) – See Grantor Retained Interest Trust

Pour-over Will - A will which contains a clause that transfers some or all of the assets that pass through the will into a trust for final distribution from the trust. The will's assets are said to "pour over" into the trust.

Power of Appointment - The power given to a person, by appointment in a will or a trust, to distribute the property that passes through the will or trust at the discretion of the person appointed. Other than to give the appointed person the authority to make the distribution, the will or trust doesn't make distribution of the property.

Prenuptial Agreement - A contract between two potential marriage partners specifying how the property owned by each prior to marriage and owned individually or jointly during marriage will be divided should the couple divorce.

Probate - The legal process which facilitates the transfer of a deceased person's property whether they leave a will or die without a will.

PRT – See Personal Residence Trust

QDOT – See Qualified Domestic Trust.

QPRT – See Qualified Personal Residence Trust

Qualified Domestic Trust (QDOT) – A type of trust that allows taxpayers who are not U.S. citizens to claim the marital deduction for estate tax purposes.

Qualified Personal Residence Trust (QPRT) – See Grantor Retained Interest Trust

Reversionary Interest – An interest that a grantor transferred to another person or entity, but which will revert back to the grantor if and when a certain event occurs.

Revocable Trust - A trust which can be amended or revoked by the person(s) who established the trust.

Revocable Living Trust - See Living Trust

Real Property - Land and attachments to the land, such as buildings, fences, etc.

Rule Against Perpetuities (RAP) – An old legal rule that if a person is designated as the future transferee, or beneficiary, of a property, that property must be transferred to him or her not later than 21 years after the death of the transferor.

Settlor - A person who establishes a trust. The term settlor is used interchangeably with the terms "trustor" and "grantor."

Stepped-up Basis - The new basis established for a property after the owner’s death if the property is in the owner’s estate.

Successor Trustee - The trustee who takes over when the initial trustee can no longer function.

Surviving Spouse - The husband or wife that lives after the death of his or her spouse.

Survivor’s Trust - A revocable trust that contains the surviving spouse’s property interest, over which that spouse has total control.  See AB Trust for further explanation.

Taxable Estate - The portion of an estate that is subject to federal or state estate taxes.

Trust - A legal document in which property is held and managed by a trustee for the benefit of another known as a beneficiary. A trust is a relationship in which property is held by one person for the benefit of another.

Trust Corpus or Res - The property of a trust.

Trustee - The person or institution that manages the trust property under the terms of the trust.

Trustor – See Settlor

Unified Credit - A tax credit is given to each person by the IRS to be used during his or her life or after his or her death. The tax credit equals the amount of tax (gift or estate) which is assessed on the exemption equivalent value of property. It is considered the "unified" credit because it applies to both gift taxes and estate taxes and results from the IRS's effort to unify these two taxes or make them consistent.

Valuation Discount – A discount or reduction in the value of an asset for estate valuation purposes.  It can be based on a lack of marketability, limited control, loss of control, or the inability to quickly sell the asset at a known price with minimal transaction costs.