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Estate Planning
Definitions & Glossary
Below is a helpful list of terms and words found on this site or
related to estate and trust planning.
A
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Accounting |
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An accounting of a probate estate or a trust administration typically includes a beginning inventory of date of death values of the estate or trust, a statement of the income earned during the administration, capital gains or losses incurred, expenses and taxes paid and amount available for distribution.
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Accrued Interest |
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Interest due on a bond, note, or other interest bearing instrument since the last interest payment was made.
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AFR - Applicable Federal Rate |
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Interest rates used by the IRS when determining the value of certain split interest trust shares and other transfers. These rates are adjusted monthly as the market dictates and published in Revenue Procedures issued by the IRS.
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Alternative Valuation Date |
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For tax purposes, assets of an estate or revocable trust are generally taxed as of the grantor's date of death. However, the personal representative or trustee may elect instead to have the assets valued six months following date of death. This may be useful for estate tax purposes if the assets have declined in value between the date of death and the six month valuation date.
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Annual Exclusion Gift |
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The amount (currently $13,000 and is indexed to inflation) per year that a person is allowed to give to any person without incurring gift tax. There is no limit on the number of annual exclusion gifts one can make in any given year. To qualify for this exclusion, a gift must be of a "present interest" meaning that the recipient has the present ability to enjoy the gift, as opposed to some future right.
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Annuity Payment |
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A fixed payment that may constitute both income and principal.
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Apportionment of Expenses and/or Taxes |
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Apportionment of taxes and/or expenses refers to which assets or bequests in your will or trust bears the burden of said taxes and expenses. State law dictates whether certain bequests carry with them their proportionate burden of taxes and expenses. Many states have different laws regarding these issues.
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Attorney in Fact |
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A person who, acting as an agent under a power of attorney, is given the written authority by another person to transact business for him or her. An attorney-in-fact is often given the power to write checks, pay bills, transact business on investment accounts and sign deeds, for example. An attorney-in-fact need not be an attorney at law.
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B
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Beneficiary |
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A person who receives the benefits of a trust or of transfers under your will as provided for in the document.
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Bequest |
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Any property transferred under your will or trust.
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Board Certified Wills, Trusts & Estates Attorney |
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In many states refers to an attorney who has met practice, continuing education and rigorous testing requirements.
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C
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Capital Gain or Loss |
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Profit or loss on the sale of a capital asset
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Cash Surrender Value |
Refers to the amount of proceeds the owner of a life insurance policy will receive if he or she cancels the policy.
See also Interpolated Terminal Reserve Value
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Certificate of Trust |
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A document that provides third parties information sufficient to open accounts in the name of the trust without having to provide a complete copy of the trust itself. Many state laws now provide that third parties may rely upon a certificate of trust, when joined by a trustee's affidavit to transact business with a trustee.
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Challenging a Disposition in a Will or Trust |
The three most common methods of challenging a disposition in a will or trust include: (1) the document was improperly executed; (2) the testator was incompetent at the time of the execution of the document or (3) the testator was unduly influenced.
See also "In Terrorim Clause".
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Charitable Lead Trust |
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A trust for a fixed term of years wherein a charity is the beneficiary of an annuity payment or unitrust payment and upon the end of the term of years the remainder of the trust is distributed to individuals or other noncharitable beneficiaries.
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Charitable Remainder Trust |
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A trust for either a fixed term of years or tied to an individual's (or several individuals') lifetime(s) wherein an annuity payment or unitrust payment is paid to noncharitable beneficiaries, and upon the expiration of the trust term the remainder is paid to a charity.
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Closely Held Business Interest |
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Refers to a business entity such as a Family Limited Partnership, S Corporation, LLC or other entity that has a limited number of shareholders as opposed to a publicly traded entity that may have thousands, if not millions, of shareholders.
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Conservator |
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Generally, an individual or trust company appointed by a court to care for property. Specifically, an individual or a trust institution appointed by a court to care for and to manage the property of an incompetent person, in the same way that a guardian cares for and manages the property of a minor. Often synonymous with guardian of the estate.
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Credit Shelter Trust |
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Usually describes a testamentary trust that consumes the grantor's or testator's federal and/or state estate tax exemption amount. The credit shelter trust may be held for the surviving spouse, other beneficiaries or combination thereof. Typically the credit shelter trust may, during the surviving spouse's lifetime grow and not be subject to estate tax when distributed to the remainderman beneficiaries upon the surviving spouse's death.
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Crummey Powers |
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Crummey powers are typically found in irrevocable life insurance trusts in order to qualify contributions to the trust as gift tax free annual exclusion gifts. Named after a 1969 Court case, the court ruled that by allowing the beneficiary of an irrevocable trust a limited amount of time to withdraw a contribution to the trust made to the trust for his or her benefit, the contribution is treated as a present interest gift even if the beneficiary does not enjoy the fruits of the gift until some future date. In the case of an insurance trust, it may be several years between the date of the gift to pay the insurance premium and the receipt of the insurance proceeds, for example.
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Curator |
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An individual or a trust company appointed by a court to care for the property of a minor or an incompetent person. In some states, the curator is essentially the same as a temporary administrator or a temporary guardian.
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D
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Decedent |
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A person who has died.
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Decoupling of the State Death Tax and Federal Estate Tax Systems |
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Refers to a law established in 2005 that effectively decoupled the federal and state transfer tax systems. The effect of this law is that without proper planning, for those married individuals who are residents of or own property in states whose estate tax exemptions are less than the federal estate tax exemption there might be estate tax due upon the first spouse's death.
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Descendant |
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A person who is a relative in a direct line from another person - an issue. Typically children, grandchildren then great grandchildren
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Devise |
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Real estate transferred under a will or trust
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Discounted Value for Transfer Tax Purposes |
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Refers to the value of an asset that is reported for transfer tax purposes as less than fair market value due to a variety of factors, which may include: (1) lack of marketability; (2) minority interest; (3) lack of control and (4) restriction on transfer. Common in family limited partnerships and similar entities.
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Donee |
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A person who receives a gift. Gifts can be made to trusts as well as to individuals.
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Donor |
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A person who makes a gift.
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Durable Power of Attorney |
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A document in which you grant a certain individual (your attorney in fact) the authority to legally sign for you, even if you should become disabled. Durable Powers of Attorney are most commonly used on bank accounts, brokerage accounts and on deeds of transfer, although they may include other powers. The "durable" connotes that the power of attorney remains valid even if you become incapacitated. Durable Powers of Attorney cease at death, however.
Contrast the above with a plain (non durable) power of attorney that would not be valid in the event of your incapacity.
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Dynasty Trust |
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A trust established for descendants which is intended to remain in existence for as long as a term as is permitted under the rule against perpetuities. In other words, a trust that may last several generations. Such a trust is typically sheltered from generation skipping tax (GST) by consuming the grantor's GST exemption, so that the trust property will not be subject to gift or estate tax during its existence.
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E
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Estate Tax |
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A transfer tax that the federal (or a state) government assesses on your right to transfer assets upon your death. In 2009 the federal estate tax exemption is $3.5 million. Taxable gifts (those made during your lifetime in excess of the annual exclusion amount) reduce your estate tax exemption at the time of your death.
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Estate Tax Exemption |
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The amount of exemption your estate is entitled to before estate tax is imposed.
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Executor or Executrix |
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An individual or trust company nominated in a will and appointed by a court to settle the estate of the testator. Sometimes called personal representative in some states.
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Exempt Trust |
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Usually connotes that the trust assets will be exempt from either federal estate tax or federal generation skipping tax, or both.
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F
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Fair Market Value |
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The test used by the IRS to determine whether a transfer was appropriately valued. Fair Market Value refers to the value that a willing and unrelated seller and buyer would agree in a similar transaction.
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Family Limited Partnership |
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A partnership wherein a general partner controls the partnership property and all of the other partners are limited partners, similar to a silent investor in a business. Family limited partnerships are used to centralize the management of family owned businesses and properties through multigenerational ownership. Typically transfers of family limited partnership interests are discounted from what would otherwise be the fair market value of the underlying assets since the limited partnership interests lack control over the entity, cannot be freely traded, lack marketability and usually are minority interests.
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Family Trust |
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See Credit Shelter Trust
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Fiduciary |
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An individual or trust company held responsible for the duty of acting for the benefit of another person as to matters coming within the scope of the relationship between them. A trustee is the fiduciary for the trust's beneficiaries; a guardian is the fiduciary for his ward; and an agent is the fiduciary for her principal - all are examples of a fiduciary relationship.
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Form 1041 |
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A fiduciary trust income tax return is often referred to as a Form 1041
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Form 1310 |
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An IRS form used to claim a refund for a deceased taxpayer.
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Form 706 |
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A federal estate tax return is often referred to as a Form 706, and becomes due nine months from the date of the decedent's death. Like income tax returns, estate tax returns may be extended for a period of six months, however any estate tax due must be paid upon the original due date of the return.
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Form 709 |
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A federal gift tax return is often referred to as a Form 709. A gift tax return is due on the April 15th following the calendar year of the transaction. Although a gift tax return may be extended, the tax due must be paid by the original due date of the return.
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Form 712 |
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IRS form issued by an insurance company that reflects the value of death benefits paid and to whom the benefits were paid for estate tax reporting purposes on the Form 706.
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Funding |
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The act of "funding" your trust refers to the act of transferring assets into your trust. Bank and brokerage accounts are funded by being retitled into the legal name of the trust. Real Property is funded by means of a deed.
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The Family Estate and Legacy Solution |
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A unique process designed to transform your legal, tax and financial concerns into a coordinated and understandable estate plan.
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G
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General Power of Appointment |
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See Power of Appointment
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Generation Skipping Transfer Tax (GSTT) |
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A tax assessed on amounts above the exemption amount ($3.5 million as of 2009) to anyone at least two generations below the donor. The predeceased child exception may apply, however. The GSTT is actually a penalty tax assessed in addition to the estate tax. This is the government's attempt to limit the amount that you can pass down through the generations without it being taxed at each successive generation's deaths.
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Generation Skipping Trust |
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A trust that has beneficiaries named who are two or more generations younger than the grantor of the trust.
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Gift |
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The transfer of property without receiving something of equal value. A "sale" of your home for $1, for example, is a gift to the extent that your home is worth more than $1.
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Gift Tax |
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A tax on the value of a gift to another. Some gifts, such as annual exclusion gifts, are without tax. Gifts in excess of the annual exclusion gift amount, or those that are below the amount but are not present interest gifts may require the filing of a Form 709. Usually, one's federal gift tax exemption (in 2009 said amount is $1 million lifetime) is first consumed. Taxable gifts over said amounts require the actual payment of gift tax.
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Grantor |
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The maker and party who signs his or her trust. Also known as a "Settlor".
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Grantor Retained Annuity Trust (GRAT) |
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Typically is an irrevocable trust wherein the grantor contributes assets, money or property to the trust and retains an annuity payment for a fixed term of years. At the end of the term the trust terminates and the remainder is distributed to other beneficiaries, such as the grantor's children. So long as the grantor survives the term of the trust, the remainder is usually excluded from the grantor's estate for estate tax purposes.
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Grantor Trust |
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For income tax purposes, a trust in which the grantor is treated as the owner of the trust and is taxed on its income. A grantor trust may use the grantor's social security number as the trust's tax identification number. The trust is considered by the IRS to be the grantor, and not a separate taxpayer.
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Gross Estate |
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One's gross estate for federal estate tax purposes is equal to the fair market value of one's assets as of his or her date of death.
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Guardian |
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An individual or a trust company appointed by a court to care for the property of the person (or both) of a minor or incompetent person. When the guardian's duties are limited to the property - he is known as a guardian of the property or the guardian of the estate; when the duties are limited to caring for the person, he is known as the guardian of the person; and when his duties apply both to the property and to the person he is known as a plenary guardian or merely as a guardian. In some states the term committee, conservator, curator, or tutor is used to designate one person who performs substantially the same duties as those of a guardian.
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H
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Health Care or Medical Surrogate |
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A legal document wherein you name a person or persons to make medical decisions for you in the event you are unable to do so yourself. This document does not contemplate your immediate demise - in such event you would want a living will to work in conjunction with your health care surrogate.
For more information, click here for a brief video.
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Heirs |
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Your legal heirs at law are those persons who would inherit from your estate if you died intestate, that is, without a will. Typically your heirs include your spouse and your children.
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HIPPA - Health Insurance Privacy and Portability Act of 1996 |
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HIPPA is the law that penalizes doctors, hospitals and other medical service providers from disclosing confidential medical information to third parties. Many estate planning documents now contain HIPPA releases so that in the event of an emergency visit to a doctor or hospital the HIPPA waiver allows such medical service provider to disclose your information to your designated surrogates.
For more information, click here for a brief video.
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Holographic Will |
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Typcially a hand written will and/or one that has not been witnessed in accordance with state laws dictating the formal requirements necessary for executing a will. Generally speaking, in most states holographic wills, even ones that have been type written, are invalid.
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Homestead |
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Your primary residence. May refer to specific exemptions or protections under state law. Florida has unique and valuable homestead creditor protections and real property tax savings, for example.
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I
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In Terrorim Clause |
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A clause that penalizes a beneficiary for challenging a provision in a will or a trust. Many state laws treat such provisions as invalid, having no legal force or effect.
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Incidents of Ownership |
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All rights in an insurance policy. To remove insurance from your estate for federal estate tax purposes you must give up all incidents of ownership over the policy.
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Income |
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Usually refers to interest or dividends earned on the principal, or corpus of the trust. May get more difficult to determine when you have "wasting assets" such as annuities, or "income in respect of a decedent" items such as minimum required distributions from an IRA account. Capital gains, for example, are deemed principal under most state laws rather than income, even though capital gains are taxed on one's income tax return.
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Income with Respect to a Decedent |
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Usually refers to assets and accounts that have grown tax deferred over the lifetime of the account owner, and are taxed upon the distribution of amounts out of the account. Annuities and IRA accounts are prime examples of income with respect to a decedent. These items generally carry with them income tax that the beneficiaries will recognize.
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Inheritance Tax |
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A tax based on the value of the assets and property that a taxpayer inherits. Inheritance taxes are imposed in a number of estates. Contrast with the estate tax, which is the value on the transfer from a decedent to his or her beneficiaries.
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Inheritor's Protected Trust - The Family Estate & Legacy Inheritor's Protected Trust |
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A trust designed to limit the ability of a beneficiary's creditors or predators from taking the trust assets from the beneficiary.
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Insurable Interest |
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legally, to have the ability to purchase insurance on the life of another. Without an insurable interest, you may not be able to purchase a policy or receive the death benefits therefrom. Family members and business partners are usually deemed to have an insurable interest, while investors who are only "betting" on the life expectancy of an individual usually do not.
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Intentionally Defective Grantor Trust (IDGT) |
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Usually is an irrevocable trust that is, by design, treated as a grantor trust for federal income tax purposes (so that the grantor, and not the beneficiaries is taxed on its income) while for transfer tax purposes the value of the trust is treated as a gift and outside of the grantor's estate for federal estate tax purposes. May be used to transfer appreciated assets from the grantor to his or her beneficiaries while at the same time avoiding having the grantor recognize capital gain on the transfer.
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Inter Vivos Trust |
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See Revocable Trust. An inter vivos trust is a trust created during the grantor's lifetime; to be distinguished from a testamentary trust, one that springs into being upon the death of the grantor.
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Internal Revenue Code |
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Sometimes referred to as the "Code" or "IRC". These are statutes consisting of all federal tax laws, including income, gift, generation skipping and estate taxes. These laws are further defined and implemented by the IRS through Treasury Regulations, Revenue Procedures and Revenue Rulings. Fact specific rulings that apply only to the taxpayer requesting the ruling are known as Private Letter Rulings.
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Interpolated Terminal Reserve Value |
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Similar to the "cash surrender value" of a life insurance policy, but is the amount calculated to be the fair market value of the policy for gifting purposes when transferring an insurance policy to another person or to a trust.
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Intestate |
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To die without a will. Most states have intestacy statutes that provide who inherits your estate when you have no will that directs who you would want to inherit your assets.
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Irrevocable Life Insurance Trust (ILIT) |
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An irrevocable trust that usually holds life insurance policy contracts on the grantor's life. Usually designed to exclude the life insurance proceeds from the grantor's estate for federal estate tax purposes. May also have Crummey powers built within the trust to qualify contributions to the trust (usually for premium payments) as annual exclusion gifts for federal gift tax purposes.
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Irrevocable Trust |
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A trust by its terms cannot be revoked by its settlor and can be terminated only under the trust terms or with the consent of someone whose interest is adverse to the settlor's, such as one of the beneficiaries of the trust. Irrevocable trusts are commonly used to remove assets from the settlor's estate for federal estate tax purposes.
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J
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Joint Tenancy with rights of survivorship |
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A legal form of ownership in which you and another person own assets jointly and upon the death of one the other takes full ownership of the account or asset. This approach is too often used as a probate avoidance technique even though it has some serious disadvantages.
See also Tenants in Common; Tenancy by the Entireties
For more information, plice click here for a brief video.
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L
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Lack of Capacity |
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When a person who is signing a will or trust lacks the basic understanding of what he or she is signing. He or she is not expected to understand every legal nuance of his document, but must understand in a general sense to whom he or she is leaving property or amounts, how much of the estate or trust he or she is leaving the beneficiary, and how the amounts are left (outright as opposed to a continuing trust).
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Lack of Marketability |
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Closely held business interests generally are discounted from their true fair market value because they lack marketability. In other words, unlike publicly traded stock there is no stock exchange or ready market for the closely held business shares.
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Lapse |
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The termination of a right or bequest through the failure of some contingency. Example: I give each grandchild of mine living at the time of my death $10,000. If a grandchild should predecease me then his or her share shall lapse.
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Legacy |
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May refer to assets or property distributed to beneficiaries or legatees, however more commonly refers to a set of values, principles and way of life that one hopes one's family will cherish and carry on for future generations.
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Life Estate |
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With regard to real estate, a life estate entitles the life tenant to reside in or on the property for the rest of his or her life. The life tenant is usually required to pay for taxes, maintenance and normal expenses associated with the property.
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Life Insurance |
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A policy that pays its named beneficiaries a death benefit upon the death of the insured. See also: Cash Surrender Value; Interpolated Terminal Reserve Value; Last to Die LIfe Insurance Policy; Irrevocable Life Insurance Trust; Term Life Insurance Policy; Variable Life Insurance Policy; Whole Life Insurance Policy
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Limited Liability Company (LLC) |
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An entity that provides asset protection features like a corporation, but has flow through income tax treatment like an S Corporation or partnership.
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Limited Power of Appointment |
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See Power of Appointment
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Living Trust |
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See Revocable Trust or Inter Vivos Trust
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Living Will |
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A document that allows you to decline certain life prolonging procedures in the event that you meet the preconditions under the state statute. Those preconditions typically require you to be in an "end stage terminal condition" or "persistent vegetative state" with no hope of recovery. In such event, you can direct in the document that you do not want certain life prolonging procedures to be performed, which may include artificial nutrition and/or hydration therapies. Within the document you name a surrogate to state your desires on your behalf should you be unable to do so yourself.
For more information, click here for a brief video.
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M
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Marital Deduction |
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An exemption from the gift and/or estate tax for an unlimited amount of assets that can be transferred from one spouse to another. This approach should not be relied upon as the sole estate planning device, as when the surviving spouse dies all assets he or she has received under a marital deduction are included in his or her estate for federal estate tax purposes.
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Marital Trust |
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A trust used to hold assets for the benefit of a settlor's surviving spouse. Generally drafted to qualify for the unlimited marital deduction under the federal estate tax laws. Also see Qualified Terminable Interest Property Trust (QTIP)
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Minor |
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A person who is not old enough to be considered an adult under state law.
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Minority Interest |
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Refers to an interest in an entity that does not have a majority so it therefore lacks control over the entity's management and business affairs.
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O
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Offset |
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The amount that a gift or bequest may be reduced by, usually to account for prior gifts or bequests made to the same individual.
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P
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Pay on Death - Transfer on Death Account |
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Account established at a financial institution wherein a beneficiary is named who is entitled to the account upon the account holder's death. The beneficiary inherits the account by operation of law even if the will or trust contains contrary intent.
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Per Capita |
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A distribution made equally to the number of persons at a specific level of relationship. For example, a distribution per capita to my grandchildren would be divided into as many equal shares as I have grandchildren, without consideration as to which of my children are the parents of my grandchildren.
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Per Stirpes |
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A distribution which is made by right of representation through family lines. If I have three children and one child predeceases me with two children of his own, then his two children each receive 1/6 while my two surviving children receive 1/3 each.
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Personal Representative |
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An individual or trust company nominated in a will and appointed by a court to settle the estate of the testator. Sometimes called executor or executrix in some states.
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Pour Over Will |
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A will that serves to "pour" assets into your trust. Generally speaking, when one has a revocable living trust, most of one's assets are to be distributed pursuant to the trust terms. You do not want assets subject to the probate process. Your will serves as a "safety net" catching any such assets that you did not fund into your trust during your lifetime, and pours them into your trust.
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Power of Appointment |
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The right and authority to transfer or dispose of property that you do not own. These are usually found in trusts established by someone else for your benefit. Depending upon the terms, this right can cause the value of the assets to be included in your estate for estate tax purposes.
A Limited, or Special Power of Appointment usually is limited to an ascertainable standard so that the power holder does not recognize a gift or estate tax on the exercise of the power.
A General Power of Appointment, on the other hand, would include the assets subject to the power in one's estate, so that transfers under a general power of appointment result in either gift tax or estate tax.
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Predeceased Child Exception to the GSTT |
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The predeceased child exception limits the application of the generation skipping transfer tax (GSTT) where you leave amounts to a grandchild if said grandchild's parent who is your child has predeceased you. The grandchild steps up into the child's generation for determining whether the GSTT applies.
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Preemptive right |
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The privilege of a shareholder to maintain a proportionate share of ownership by purchasing a proportionate share of any new stock issued. In most states, an existing shareholder has the right to buy additional shares of a new issue to preserve his equity before others have a right to purchase shares of the new issue.
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Present Interest Gifts |
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A gift of a "present interest is one that the beneficiary has a current right and/or power to enjoy. Annual exclusion gifts must qualify as a gift of a present interest to be considered gift tax free. Crummey powers are often used to qualify gifts that would otherwise not be enjoyed until a future date as a present interest gift.
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Pretermitted |
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Refers to a beneficiary, usually a spouse or a child, who became a spouse or was born after the creation of the will or trust that existed at the time of the death of the testator/grantor. In such event, the law presumes that the testator/grantor would have added the spouse or child had he or she had the chance, so that individual receives as if he or she was a party to the will or trust.
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Principal |
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Refers to the assets of the trust themselves, as opposed to the income earned on those assets.
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Private Letter Ruling (PLR) |
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A taxpayer may request that the IRS issue a Private Letter Ruling for a particular transaction to determine the IRS' position on such matter. Private Letter Rulings may not be used as legal precedent for any other taxpayer, as they are valid only for the party requesting the ruling.
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Probate |
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A court process wherein your last will and testament is confirmed as such by a probate court, letters of administration are issued to your personal representative (executor) so that he or she can act as the legal representative of your estate, creditors and taxes are cleared, accountings are made and distribution to beneficiaries achieved. The probate process is public, and the files may be reviewed by the public. Revocable trusts are generally preferred to wills since they are a private process and avoid the probate court. Contrary to what many believe, probate is not a tax.
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Prudent Investor Rule |
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A trustee of a trust is held to the "prudent investor rule" when holding and investing assets for the trust beneficiaries. If the trustee violates the prudent investor rule he or she may be held personally liable to the beneficiaries for their losses or damages.
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Q
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Qualified Domestic Trust (QDOT) |
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A trust created upon the death of an individual that qualifies for the federal estate tax marital deduction where the decedent's surviving spouse is not a United States citizen. A QDOT is the only form of deduction for a decedent who leaves an alien spouse. In addition to satisfying the normal marital deduction rules, the trust instrument must require that at least one trustee be an individual who is a United States citizen or domestic corporation with trust powers, and that no distributions can be made without the consent of that trustee. An appropriate election on the federal estate tax return is also required.
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Qualified Personal Residence Trust (QPRT) |
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An irrevocable trust designed to minimize transfer (estate and gift) taxes associated with a personal residence. The grantor transfers a personal residence to the trust for a stated term of years. Upon the expiration of the term, the trust beneficiaries (typically grantor's children) own the home. So long as the grantor survives the trust term, the residence is excluded from his estate for federal estate tax purposes.
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Qualified Subchapter S Trust (QSST) |
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Trusts that may be shareholders of Subchapter S Corporations that are designed to comply with the Subchapter S shareholder requirements. If a trust holds Subchapter S corporate stock and does not qualify as a QSST, then the Subchapter S election may be destroyed, resulting in tax on the corporate earnings.
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Qualified Terminal Interest Property Trust (QTIP) |
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A trust that is held exclusively for the surviving spouse during the surviving spouse's lifetime. Can be established either during the life of the grantor (an inter vivos QTIP Trust) or at the grantor's death through his or her will or revocable trust (a testamentary QTIP Trust). In order to qualify under the marital deduction rules, the surviving spouse must exclusively have the right to all of the income earned during his or her life. This type of trust allows a grantor to qualify amounts for the marital deduction, yet ensuring that the remainder of the trust will eventually be distributed to the grantor's intended beneficiaries.
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R
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Rabbi Trust |
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A type of trust used by businesses or other entities to defer the payee's recognition of income (and therefore tax on that income) by use of contingencies tied to the receipt of said income. Otherwise known as a non-qualified deferred compensation plan. The Rabbi Trust is so named because one was originally established for a rabbi, said trust was designed to avoid the rabbi's constructive receipt of the income, thereby deferring the recognition of income and resulting tax.
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Remainderman or Remainder Beneficiary |
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The person or persons who will receive the assets of the trust after the income beneficiaries' interest ends.
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Required Minimum Distributions |
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Refers to distributions that are required from an account by law. IRA, 401(k) and other qualified retirement accounts are examples of accounts that the account owner must take required minimum distributions from.
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Residuary or Remainder |
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The assets remaining in your estate after all of the specific devises have been made and all expenses and taxes are paid. When a pour over will is used, the residuary is usually poured into your revocable living trust.
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Restriction on Transfer |
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Refers to an entity's legal documents, such as a partnership agreement, operating agreement or shareholders agreement that restricts the transfer or disposition of shares. In other words, the partner, member or shareholder does not have the legal right to sell his or her interest to anyone he or she chooses.
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Retirement Plan Trust - Family Estate & Legacy Retirement Plan Trust (TM) |
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A trust designed to act as a beneficiary under a qualified retirement plan account, such as a 401(k) or IRA. The trust is typically designed to comply with the IRS "identifiable beneficiary" rules so that the beneficiaries may stretch the tax deferred growth of their share of the retirement plan account over the remainder of their lifetimes. The trust may offer valuable creditor and predator protections.
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Revenue Procedure (Rev Proc) |
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A matter of procedural importance to both the taxpayer and the IRS concerning the administration of the tax laws. May be relied upon as precedent.
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Revenue Ruling (Rev Rul) |
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Issued by the National Office of the IRS to express an official interpretation of the tax law as applied to a specific transaction. May be relied upon as precedent.
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Reversionary Interest |
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A possible return of assets or property to you that you have given away. You have retained some interest or control over those assets or property.
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Revocable Living Trust |
A trust that can typically be amended, restated or revoked at the discretion of the Settlor or Grantor, the person who created it. Revocable Trusts are used to avoid a guardianship in the event of the grantor's disability, a probate in the event of the grantor's death, and may contain provisions to preserve and protect assets for the grantor's beneficiaries. Because the settlor has complete power over the trust, the trust assets are generally included in the settlor's estate for federal estate tax purposes and the trust usually does not offer creditor protections.
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S
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S Corporations |
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Refers to Subchapter S Corporations under the Internal Revenue Code. Subchapter S Corporations do not pay tax on corporate level earnings. Instead, the income flows through to the shareholders of the S Corporation who must recognize and pay tax on that income. The income is reported on the corporate tax return Form 1120S and the shareholder portion of the earnings is reported on a Schedule K-1.
There are restrictions on what kind of shareholders may own S Corporation stock without destroying the flow through treatment of the corporation's earnings. See Qualified Subchapter S Trusts.
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Second to Die - Last to Die Insurance |
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An insurance policy that covers a husband and wife's joint lifetimes. The policy typically does not pay to the beneficiaries unless and until both spouses are deceased. Commonly used to "prepay" estate tax liability and are commonly owned within irrevocable life insurance trusts.
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Self Proving Will or Trust |
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Provisions found in the signature pages of a will or trust that "self proves" the will or trust so that the witnesses don't have to verify their signatures after the death of the testator/grantor.
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Settlor |
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The maker and party who signs his or her trust. Also known as a "Grantor".
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Special Power of Appointment |
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See Power of Appointment
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Specific Devise |
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A gift of a specific amount or item. If your will says "I leave my home to my daughter Suzie" , this is a specific devise of your home.
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Spendthrift Provision |
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A clause in a trust or will that prohibits the beneficiary from pledging, alienating or appointing any interest in the trust or will in advance of receiving a distribution. The purpose is to limit the beneficiary's creditors from reaching trust assets before they are actually distributed to the beneficiary.
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Split Interest Trust |
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Refers to a trust that has different income and remaindermen beneficiaries.
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Spousal Elective Share |
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Where a will or trust does not leave the spouse sufficient assets or property to cover a spouse's minimum interest as provided under state law, and where no valid nuptial agreement is in place where the surviving spouse waived his or her rights to a minimum portion of the decedent's estate, state law often provides the spouse the right to make an elective share against the estate and/or trust
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Sprinkle or Spray Power |
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A trustee's right to distribute income (and sometimes principal) in any proportions to several named beneficiaries rather than equally. For example, when you establish a trust for your children, you cannot know which child may have greater needs at some future time, so the trust may give the trustee discretion to pay more income to the child most in need at any given time.
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Step Up in Tax Cost Basis |
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Beneficiaries receive a step up in tax cost basis equal to the date of death fair market value on most assets. Example: Suppose I purchase Coca Cola stock at $1/share and it has appreciated to $10/share. If I sold it the day before my death I recognize a $9/share capital gain. If instead I leave the stock to my daughter who then sells it the day after my death she gets a step up in tax cost basis to $10 share and thus there is no capital gain.
Exceptions: Income with respect to a decedent assets don't receive a step up in tax cost basis nor do holdilngs inside of certain entities, such as S Corporations.
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Successor Trustee |
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A trustee who follows the original or prior trustee, the appointment of whom is provided for in the trust instrument.
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Supplemental or Special Needs Trust |
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A type of trust that is usually established for a disabled beneficiary, to provide for the needs of the beneficiary over and above those satisfied by benefits received from federal or state programs. This type of trust may limit distributions so as not to disqualify the beneficiary from federal or state entitlement programs, such as Medicaid.
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T
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Tangible Personal Property |
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An item or object that is tangible, such as rings, watches, jewelry, china, cars, furniture and the like. In contrast, money, stocks and bonds and real estate are not tangible personal property.
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Tax Cost Basis |
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The tax cost basis is the book value of an asset. Generally speaking, your tax cost basis for any asset that you own is the original purchase price less any write offs, such as for depreciation. When determining the amount of capital gain to be recognized on the sale of an asset, you deduct the tax cost basis from the net sales proceeds.
See also Step Up in Tax Cost Basis
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Tax Court |
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IRS assessments and penalties may be appealed to the Tax Court. The Tax Court is not an arm of the federal judiciary, rather it is actually an administrative arm of the IRS. In order to make an appeal to a federal district court, the taxes, penalties and interest in dispute must first be paid to the IRS. If the taxpayer doesn't wish to pay the taxes, interest and/or penalties prior to appealing, the taxpayer must take his case to the Tax Court.
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Tenancy by the Entirety |
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A special type of joint tenancy for a husband and a wife that provides limited protection from creditors and predators, such as malpractice claimants.
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Tenants in Common |
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A form of joint ownership that can be transferred separately. If A and B own an asset together as tenants in common, and A dies, then A's portion is subject to probate and disposition as A would have in A's last will and testament.
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Term Life Insurance Policy |
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A life insurance policy that consists solely of life insurance on the life of the insured. There is no cash value and the policy is for a fixed term.
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Testamentary Trust |
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A trust established under the terms of a will, or one that springs into being from a revocable trust upon the settlor's death.
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Testator or Testatrix |
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The party who makes and signs a will or trust.
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Transfer Tax |
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Referring to a tax on the transfer of assets. Transfer taxes include gift tax, estate tax and generation skipping transfer tax.
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Treasury Regulations (Treas. Reg.) |
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Represent the IRS position interpreting provisions of the Internal Revenue Code. Their purpose is to provide taxpayers and IRS examiners with rules of general and specific application to the various provisions of the tax law.
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Trust |
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A fiduciary relationship in which one person (the trustee) is the holder of legal title to the property (the trust property) subject to the obligation to keep or use the property for the benefit of the person who created the trust (typical in a revocable trust) or for a beneficiary (another person).
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Trust Administration |
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Although revocable trusts are designed to avoid the probate process, many states impose a duty on a trustee to perform a trust administration prior to making full distribution of the trust after the death of its grantor. The trust administration requirements vary by state, but commonly include the clearing of creditors, notifying the beneficiaries of the trust provisions and inventory subject to the trust, preparing final tax returns and accounting to the beneficiaries prior to making distribution. A trustee who fails to comply with the trust administration requirements may be held personally liable for any damages incurred by an interested party.
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Trust Protector |
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A third party whose role is to modify the terms of a trust when necessary or appropriate to carry out the grantor's intent or presumed intent in response to unanticipated legal or factual changes, including changes to the tax laws.
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Trustee |
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An individual or trust company which holds the legal title to property held in trust for the benefit of someone else, and holds and distributes the trust property in accordance with the terms of the trust.
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Trustee's Affidavit |
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A notarized affidavit signed by the trustee verifying that the trust is in good standing, that the trustee has the powers to transact the business at hand at that the third party can rely upon the trustee's statements relating thereto. Many state laws provide that this document, along with a certificate of trust, is sufficient to transact business with a trustee without having to obtain a full copy of the trust instrument itself.
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U
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Undue Influence |
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A method to challenge a disposition in a will or trust. A "substantial beneficiary" may be presumed to have engaged in undue influence if the following factors (or some combination of them) are present: (1) he or she has been present at the time a new will was discussed (2) assisted in procuring the attorney who drafted the document; (3) was present during the discussions and or signing (4) assisted in procuring the witnesses to the will; (5) knew of the contents of the new will before it was executed; and (6) is in possession of the document.
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Uniform Gifts to Minors Act Account |
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A method of holding property or assets for the benefit of a minor, which is similar to a trust, but which is governed by state law. Generally speaking, the minor has the ability to take control of the asset and/or withdraw the account at age 18. Contrast with Uniform Transfer to Minors Act Account.
One has far less control over this account than one would have acting as a trustee of a trust.
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Uniform Transfers to Minors Act Account |
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A method of holding property or assets for the benefit of a minor, which is similar to a trust, but which is governed by state law. Generally speaking, the minor has the ability to take control of the asset and/or withdraw the account at the age of 21. Contrast with Uniform Gifts to Minors Act Account. One has far less control over this account than one would have acting as a trustee of a trust.
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Unitrust Payment |
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A fluctuating payment based upon a percentage of the fair market value of the assets of the trust. A five percent (5%) unitrust payment on a trust of $100,000 would be $5,000 in year one. If the trust earned $10,000 during that year, the next year's unitrust payment would be $5,250 (5% X $105,000)
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V
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Variable Annuity |
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An annuity/life insurance product where the annuity premium (usually a fixed amount of dollars paid at the inception of the policy) is immediately turned over into units of a portfolio of stocks. Upon retirement, the policyholder is paid according to the accumulated units, the dollar value of which varies according to the performance of the stock portfolio. Its objective is to preserve, through stock investment, the purchasing value of the annuity which otherwise is subject to erosion through inflation.
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Variable Life Insurance Policy |
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A life insurance policy where premium payments are invested in the stock market. The value of this policy may be extremely volatile.
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W
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Whole Life Insurance Policy |
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A life insurance policy that contains a conservative investment element within it. Premiums are usually invested in fixed income securities.
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Will |
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A legal document completed in accordance with state law that describes how your assets will be distributed upon your death. The will appoints the personal representative (executor) of your estate, may establish testamentary trusts for your spouse or children, guardians for minor children and so forth.
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