Estate Planning Vocabulary and Terminology

Advance Health Care Directive. A document that enables an individual (the principal) to appoint another individual to make health care decisions in the event the principal can no longer make those decisions for him or herself. Unlike the Durable General Power of Attorney for Asset Management (hereinafter defined), it is valid only after the principal becomes unable to make medical or personal decisions for him or herself. This document can authorize the withholding of life sustaining procedures in the event an individual is suffering from a terminal condition.

Applicable Credit Amount. The amount of tax allowed to every individual for federal gift and estate taxes to gift during life or at death without incurring estate or gift taxes. For federal estate taxes the amount of the credit is equivalent to a taxable estate of $5,430,000 in 2015. For federal gift taxes the amount of the credit is equivalent to taxable gifts totaling $5,430,000, as well. The use of the gift tax credit amount will reduce the estate tax applicable at death.

Basis of Property. The value used to determine gain or loss for income tax purposes. The basis may be cost or a different amount, depending on the law affecting the transaction.

Beneficiary. The individual or corporation who receives the benefit of a transaction, e.g., beneficiary of a life insurance policy, beneficiary of a trust or beneficiary under a will.

By-Pass Trust. See “Decedent’s Exclusion Trust.” This is an old term no longer in common use but it is usually synonymous with Decedent’s Exclusion Trust.

By Right of Representation. A phrase which means that the property is to be distributed by branch of the family, so the property is first divided into as many shares as there are living children of the designated ancestor, if any, and deceased children who leave descendants then living. Each living child is allocated one share and the share of each deceased child who leaves surviving descendants is divided in the same manner among those grandchildren and their descendants.

California Estate Tax. California abolished its inheritance tax on June 9, 1982.

Charitable Deduction. In estate taxation, the amount of property a decedent can give outright or in trust to a qualified charitable organization without estate taxation. There are no limits to the estate tax charitable deduction as there are with respect to the income tax charitable deduction.

Codicil. An amendment to a will. The codicil may modify, add to, or revoke provisions in the will. The codicil is a separate document. It is signed with the same formalities as a will. The codicil can be changed or revoked at any time.

Community Property. Community property is property acquired during marriage from earnings and labors, or property acquired during marriage but while domiciled outside of California. Community property consists of real or personal property and is owned in common by a married couple as a kind of marital partnership in which both the spouses have a presently vested, equal and undivided interest. Community property has special legal and tax ramifications. Community property also includes all personal property wherever located while a couple is domiciled in a state with community property laws or a state with substantially equivalent marital property laws. Separate property is generally all earnings and all property acquired and owned by a spouse before marriage or that is acquired by one spouse by gift or inheritance.

Community Property With Right of Survivorship. A form of community property which passes to the surviving spouse at death without regard to the will of the decedent and without probate administration. Similar to joint tenancy property, except that in this form both halves of the community property receive a change of basis on the death of the first spouse to die to the value at that date.

Conservatorship. A court proceeding to appoint a manager for the financial affairs or the personal care of one who is either physically or mentally unable to handle either or both.

Crummey Power. A method by which gifts to a trust, such as a trust for a minor or contributions to an irrevocable life insurance trust, qualify as a present interest for purposes of the gift tax annual exclusion. The beneficiary has the power to demand all or any portion of a gift up to the amount of the annual exclusion for a limited time following a gift to the trust. If the withdrawal power is not executed, the power to withdraw lapses and the gift becomes part of the principal of the trust. The gift is no longer available to the beneficiary until such time as the trustee makes a distribution of principal or the trust terminates. Actual letters explaining the right of withdrawal, known as Crummey notices, must be in existence to qualify a gift in trust for the annual exclusion.

Custodian. An individual appointed to collect, hold, and manage all gifts of real and personal property made to a minor. The custodian must expend for the minor or pay over to the minor so much of the custodial property as the custodian deems necessary for the support, maintenance, education and benefit of the minor. Custodians are sometimes also named to receive the Crummey notice, explained above, for a minor child.

Decedent’s Exclusion Trust. A trust created on death for the benefit of a beneficiary for his or her lifetime which is not subject to federal estate tax on the death of the beneficiary.

Durable Power of Attorney for Asset Management. A general power of attorney that will continue to be valid in spite of the fact that the principal (the individual granting the power of attorney) has become incompetent or incapacitated. It is used to manage financial and business matters.

Estate Taxes – Federal. The tax imposed on an estate of a deceased individual by the federal government on the transfer of assets on death. Generally, the taxes are paid by the executor of the will or the trustee of the revocable trust. These taxes are based on the value of one’s assets at date of death and are generally due nine (9) months after the date of death.

Executor. The individual or bank nominated in a will by a testator to take care of the testator’s property after his or her death if a court supervised probate proceeding is required. An executor may also be called a personal representative. Although the executor is nominated in the will, his or her appointment must be approved by the probate court. The executor has both legal and business responsibilities and functions under the jurisdiction of the probate court. It is the executor and not the beneficiaries who chooses the attorney to do the legal work for the estate. Executrix is the term for the female executor, although executor is now used for both male and female personal representatives in probate. If an individual or bank appointed by the probate court to act as a personal representative is not nominated by a will, that individual or bank is referred to as an “administrator.”

Exemption Amount.

Gift and Estate Tax. The amount which may be transferred, in addition to the annual exclusion amount, free of gift tax during lifetime and free of estate tax at death. This amount for gifts is currently $5,430,000. The value for estates is currently $5,430,000 in 2015.

Generation Skipping Tax. The amount which may be transferred free of generation skipping tax during lifetime or at death. This amount is currently $5,430,000 in 2015 and will be tied in the future to the amount of the estate tax exemption.

Family Limited Partnership. A Family Limited Partnership is a limited partnership whose partners are generally members of the same family. The partnership is formed to own real estate, securities, and other assets, and to invest and reinvest those assets for the partners. Interests in Family Limited Partnerships are often valued at a discount for gift and estate tax purposes.

Fiduciary. A person charged with the duty of trust on behalf of a beneficiary. Executors, trustees, guardians, conservators and agents under Health Care or Asset Management powers of attorney are fiduciaries.

529 Plan. The number refers to a section of the Internal Revenue Code which allows a person to establish an account to save for a child’s higher education. The funds in the account may grow tax free, much like retirement accounts, but in addition may be removed for higher education costs income tax free. If the child does not go on to post-secondary education, and funds are not transferred to a child who is pursuing higher education, the funds upon withdrawal are subject to income tax plus a 10% excise tax. There are other rules that apply to these accounts.

Future Interest – Gift Tax. A gift by a donor to a donee of which the donee does not get the benefit, use or enjoyment until sometime in the future. Such a gift cannot take advantage of the $14,000 annual exclusion, which is available only for gifts of a present interest. Example: Crummey powers are used to convert a future interest to a present interest and thereby qualify for the annual exclusion. If a parent gives $5 in trust to be paid by the trustee to a child in three years, the gift is a future interest.

Generation Skipping Tax. A tax imposed in addition to the federal gift and estate tax if property is transferred to a relative more than one generation younger than the transferor such as a grandchild. The tax also applies to transfer to a non-relative who is more than 37½ years younger than the transferor.

Generation Skipping Trust. Generally, an irrevocable trust created for the benefit of a descendant and to avoid estate and generation-skipping transfer tax in a descendant’s estate to the extent possible within the generation skipping tax exemption.

Gift Tax. A tax imposed by the federal government upon lifetime gratuitous transfers. The gift tax must be paid on April 15th of the year following the gift. There is the annual exclusion and lifetime exemption to shelter certain gifts from tax completely. California repealed its gift tax for transfers made after June 8, 1982.

Gift Tax Annual Exclusion. The federal government allows the donor to exclude $14,000 each year from gift tax liability if the gift is of a present interest to an individual donee. A present interest gift is one in which the donee has an immediate and unrestricted right of use, benefit and enjoyment. The gift may be of cash or other property, such as securities or real property, including undivided fractional interests.

Grantor. The person who makes a grant of property to another person, e.g., grantor of a trust, grantor of a deed of property. Settlor, Donor and Trustor are frequently synonymous terms.

Guardian. The person who legally has the care and management of the person, property or both of a child during his or her minority.

Heir. The person who inherits property pursuant to state law, which controls the disposition of property of a person who dies without a will.

Inter Vivos Trust. A trust created during the lifetime of the Trustor (Grantor).

Intestate. A person who dies without disposing of his or her property by written document, such as a will or trust. The rules which determine who will inherit the property of a person who dies intestate are called the rules of intestate succession and are created in each state. Intestate succession is definitely a states rights issue.

Irrevocable Trust. A trust whose terms and provisions cannot be changed or revoked. Under certain limited circumstances, however, a court may modify or terminate such a trust.

Issue. Generally all natural and adopted descendants of unlimited generations. It could also include illegitimate descendants under certain circumstances. A testator can in his or her will or trust define issue to include or exclude any descendants.

Joint Tenancy. A form of property ownership by two or more persons designated as “Joint Tenants.” When a joint tenant dies, the joint tenant’s interest in the property automatically passes to the surviving joint tenant by operation of law. This is referred to as “with right of survivor-ship” and sometimes the acronym “WROS” will follow the joint tenancy title. Joint tenancy property cannot be disposed of by will nor does it pass to a descendant’s heirs if that person dies without a will. This means that it “avoids probate.” Holding property in joint tenancy, however, can have possible adverse tax consequences.

Marital Deduction. In estate taxation, the amount of property a decedent can give outright or in certain types of trusts to a surviving spouse without estate taxation. Currently under federal law this amount is unlimited for transfers to a spouse who is a U.S. citizen. Different rules are applicable if the surviving spouse is not a citizen. See “Qualified Domestic Trust.”

Minor. A person who is under the age of legal competence, which in California is the age of eighteen (18) years.

Personal Property. Moveable property as contrasted with real property, which is fixed. Personal property includes furniture, clothing, jewelry, automobiles, cash, securities and similar assets–anything other than real property.

Pour-Over Will. A particular type of will which accompanies a revocable trust. The will provides that any assets which are subject to probate, i.e., assets which were not transferred to the revocable trust during the decedent’s lifetime, are to be transferred to the trustee of the revocable trust which was in existence immediately before the decedent’s death.

Power of Appointment. The power or legal authority given by a deed or will of one person, the donor of the power, to a second person, the donee of the power, which enables the donee to control the disposition of property subject to the power. A power of appointment may be general or limited, as defined below.

General Power. A power of appointment which enables the donee of the power to trans-fer (“appoint”) the property over which the donee has a power of appointment to anyone, including the holder of the power. Property subject to a general power of appointment is taxable in the estate of the holder of the power.

Limited Power. A power of appointment which limits the persons to whom the donee of the power can transfer the property subject to the limited power of appointment. The limitation of appointment can be very specific, e.g., to a group consisting only of the children of the donor of the power or the children of the donee, or can be as broad as to anyone except the donee, the donee’s estate, the donee’s creditors or the creditors of the donee’s estate. Property subject to a limited power of appointment is not taxable in the estate of the holder of the power.

Probate. Probate is the legal process by which a decedent’s assets are transferred to his or her heirs, if the decedent has no will, or beneficiaries pursuant to the terms of a will. It also provides an orderly process for satisfying the decedent’s obligations. Probate lasts approximately ten months to two years or more, depending on the complexities of the estate.

Qualified Domestic Trust (QDOT) – The Non-Citizen Spouse. That portion of a deceased spouse’s estate in excess of the tax exempt amount (see “Applicable Credit Amount”) which passes to a non-U.S. citizen spouse must be transferred to a Qualified Domestic Trust (“QDOT”) in order to qualify for the marital deduction. A QDOT must require that at least one of the trustees be a citizen or domestic corporation, and that no distribution may be made without the approval of such a trustee. Distributions of principal of the trust to the non-U.S. citizen spouse will be immediately subject to estate tax.

Qualified Terminable Interest Property (QTIP Trust). This is property that a decedent may place in trust for the benefit of the decedent’s surviving spouse that will qualify for the marital deduction (sometimes referred to as a “QTIP Trust”) and defer estate tax until the death of the surviving spouse. The executor of the decedent’s estate is assumed to make an election on the federal estate tax return to treat the trust assets as qualified terminable interest property because absent such an election, the trust property would not qualify for the marital deduction. In order to qualify for the election, the trust terms must provide that the surviving spouse is entitled to all the income from the trust for life, payable at least annually, and no person can have a power to appoint the property to any third person during the surviving spouse’s lifetime. The QTIP trust is the most common marital deduction in use today because the decedent may determine who is to receive the trust property upon the death of the surviving spouse, and, therefore, is often used to control the ultimate disposition of the assets after the death of the surviving spouse.

Quasi-Community Property. Personal property wherever situated and real property situated in California that was acquired by a decedent while living outside California and that if acquired by the decedent while living in California, would have been community property. For federal estate tax purposes, quasi-community property is treated like separate property.

Real Property. An interest in land or property permanently affixed to land. If an interest in real property must be probated, it must be probated in the state in which it is located.

Revocable Trust. A trust whose terms and provisions can be changed or revoked by the person who created the trust (the “Trustor”). If the revocable trust contains provisions for the disposition of the trust property upon the death of the Trustor, it becomes a will substitute and no pro-bate of the trust assets is required.

Rule Against Perpetuities. A complicated rule whose purpose is to keep property from being frozen in a trust beyond a certain period of years. The perpetuities “savings” clause in wills and trusts provides that the trusts contained in the documents will terminate automatically at the required time.

Section 2503(c) Trust. A type of trust established for gifts to minors that will qualify as a present interest for purposes of the gift tax annual exclusion. The terms of the trust must permit the beneficiary to demand all of the property from the trust within a limited period of time after the beneficiary reaches the age of 21, in default of which the trust is automatically extended until the beneficiary reaches a later specified age or dies.

Separate Property. In California, a type of property that may be owned by a married person that is not community property. Property acquired and owned before marriage, and gifts and inheritance received during marriage are usually considered separate property.

Sprinkling Trust. A trust in which the trustee is given the power to “sprinkle” or “spray” the income or principal of the trust among the trust beneficiaries. A trustee with a sprinkle power can pay the income or principal of the trust to or among the beneficiaries in unequal amounts in response to the different needs of the beneficiaries. Sprinkle trusts are often used to support the testator’s minor children and are referred to as “Family Pot Trusts.”

Tangible Personal Property. Tangible personal property includes furniture, furnishings, art, clothing, jewelry, automobiles, boats, pets, works of art and similar items. Often tangible personal property is referred to as “belongings.”

Tenancy in Common. A form of holding title to real or personal property by two or more per-sons who need not be related. Unlike joint tenancy, there is no “right of survivorship” and a deceased tenant may dispose of his or her undivided interest as he or she wishes by will or revocable trust or allow it to pass to his or her heirs by intestate succession. Although a married couple may hold property as tenants in common, it will have different legal and tax ramifications than community property.

Testamentary Trust. The trust that comes into being only as a result of the death of a person whose will or revocable trust provides for the creation of the trust after death; hence, the term “testamentary.”

Testator. The person who signs the will which disposes of that person’s property. Testatrix is the female term, but it is common to use the term testator for either a man or a woman.

Totten Trust. A bank account held in a person’s name as Trustor for a beneficiary where the relationship is established by the form of the account and the deposit agreement with the financial institution. This type of account is revocable by the Trustor. The Trustor can deposit and withdraw funds from the account during the Trustor’s life. The balance remaining in the bank account at the decedent Trustor’s death passes to the beneficiary named on the account.

Transmutation Agreement. California law requires a written agreement when spouses decide for tax or other reasons to change the character of property from separate to community or community to separate property. Any oral agreement between spouses will not be effective in the event of divorce or respected by the IRS in the event of death.

Trust. A legal entity established either by a trust agreement signed by a person during the person’s life or arising after death in accordance with the terms of will or revocable trust. The trust is governed by the terms in the trust agreement or the will, as the case may be.

Trustee. The individual or corporation who in a trust has bare legal title to the assets and has the power given in the trust to carry out the wishes of the person or persons (the Trustor or Trustors) who created the trust. The trustee has fiduciary obligations to the trust’s beneficiaries. Although the trustee has legal title for management and control, the beneficial or equitable title is in fact held by the beneficiaries. When there is more than one trustee, the trustees are called co-trustees.

Trustor. The person who establishes the trust. There can be more than one Trustor of a single trust and a person may establish more than one trust.

Uniform Transfers to Minors Act. This Act allows individuals to make lifetime or testamentary gifts of real and personal property for the benefit of a minor. The property is managed by a custodian but the legal title to the property vests in the minor. The custodianship normally terminates when the minor reaches the age of 18 years. In California, the termination of a custodianship can be delayed until age 21 in the case of lifetime gift or delayed until age 25 in the case of a gift at the death of the donor. Other states may refer to these laws as “Uniform Gifts to Minors Acts.” Many parents set these accounts and later regret the requirement to give the assets to the child at age 18 or age 21.

Will. The document a person signs to provide for the orderly disposition of his or her assets after death. Wills can also be drafted to incorporate an estate plan designed to minimize death taxes.

REQUIRED TAX NOTICE: In accordance with United States Treasury Regulations which became applicable to all tax practitioners as of June 20, 2005, please note that absent an express statement to the contrary in the text of this web page, any advice contained in this communication was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed on a taxpayer under any tax law.