Because Estate Planning and Asset Protection often involves uncommon terms and concepts and even common terms may have uncommon meanings when used in this context, we are providing the following simple definitions of common Estate Planning and Asset Protection terms.
A-B Trust
A common, yet fairly complex, trust arrangement used in a will or in conjunction with a living trust when a married testator has an estate with a value that exceeds his or her remaining estate tax exemption amount. The purpose of the A-B Trust is to shelter assets from estate tax. A testator creates the “A Trust” for the sole benefit of the surviving spouse for life (sometimes called a “Marital Trust”” or “QTIP Trust”) and a second “B Trust” for the benefit of the testator’s descendants or the testator’s surviving spouse and descendants for life (sometimes called the “Credit Shelter Trust” or “Family Trust”). Essentially, at the testator’s death, the B Trust is filled up to the federal estate tax exemption and the remainder of the assets go into the A Trust for the sole benefit of the surviving spouse. After the death of the surviving spouse, the remaining assets of both trusts generally pass to the testator’s descendants. The B Trust passes at the death of the surviving spouse to the beneficiaries free of estate taxes regardless of the value of the B Trust at that time. The value of the A trust is included in the surviving spouse’s estate for estate tax purposes.
Administration
The process during which the executor or personal representative collects the decedent’s assets, pays all debts and claims, and distributes the residue of the estate according to the will or the state law intestacy rules (when there is no will).
Administrator
The individual or corporate fiduciary appointed by the court to manage an estate if no executor or personal representative has been appointed or if the named executor or personal representative is unable or unwilling to serve.
Administratrix
A word denoting a female who administers an estate.
Beneficiary
A person who will receive the benefit of property from an estate or trust.
Beneficiary
A gift of property to a beneficiary under a will.
Bypass trust
The “B Trust” in A-B trust planning that is sheltered from the federal estate tax by the decedent’s estate tax exemption amount.
Charitable remainder trust
A tax-exempt trust created during lifetime or at death that distributes an annuity to one or more designated non-charitable beneficiaries for life or a term of years, with the remaining trust assets passing to charity upon termination of the trust.
Codicil
A formally executed document that amends the terms of a will so that a complete rewriting of the will is not necessary. In the modern era of word processors and high-speed printers, these are less frequently used.
Conservator
An individual or a corporate fiduciary appointed by a court to care for and manage the property of an incapacitated person.
Crummey trust
An irrevocable trust that grants a beneficiary of the trust the power to withdraw all or a portion of assets contributed to the trust for a period of time after the contribution. The typical purpose of a Crummey trust is to enable the contributions to the trust to qualify for the annual exclusion from gift tax. Named after Clifford D. Crummey who first used such an instrument, not a description of the usefulness of the trust.
Custodian
A person named to manage assets left to a minor under the Uniform Transfers to Minors Act.
Decedent
An individual who has died.
Durable power of attorney
A power of attorney that does not terminate upon the incapacity of the person making the power of attorney.
Estate planning
A process by which an individual designs a strategy and executes a will, trust agreement, or other documents to provide for the administration of his or her assets upon his or her incapacity or death. Tax and liquidity planning are part of this process.
Estate tax
A tax imposed on a decedent’s transfer of property at death. The estate tax may be levied at the state or federal level, or both.
Executor
A person named in a will and appointed by the court to carry out the terms of the will and to administer the decedent’s estate. May also be called a personal representative.
Executrix
A word denoting a female who carries out the terms of a will.
Family trust
A trust established to benefit an individual’s spouse, children or other family members.
Fiduciary
An individual or institution designated to manage money or property for beneficiaries and required to exercise the standard of care set forth in the governing document under which the fiduciary acts and state law. Fiduciaries include executors and trustees.
Generation-skipping transfer (GST) tax
A federal tax imposed on outright gifts and transfers in trust, whether during lifetime or at death, to or for beneficiaries two or more generations younger than the donor, such as grandchildren, that exceed the GST tax exemption. The GST tax imposes a tax on transfers that otherwise would avoid gift or estate tax at the skipped generational level. Some states impose a state generation-skipping transfer tax.
Gift tax
The tax on completed lifetime transfers from one individual to or for the benefit of another.
Grantor
A person, including a testator, who creates, or contributes property to, a trust. Also, a person who conveys real estate by deed. The grantor is also sometimes referred to as the “settlor,” the “trustor,” or the “donor.” Contrast with the use of the term “grantor trust” to imply a trust the income of which is taxed to the person considered the “grantor” for income tax purposes.
Grantor trust
A trust over which the grantor retains certain control such that the trust is disregarded for federal (and frequently state) income tax purposes, and the grantor is taxed individually on the trust’s income.
Guardian
An individual or bank or trust company appointed by a court to act for a minor or incapacitated person (the “ward”). A guardian of the person is empowered to make personal decisions for the ward. A guardian of the property manages the property of the ward.
Health care power of attorney
A document that appoints an individual (an “agent”) to make health care decisions when the grantor of the power is incapacitated.
Heir
An individual entitled to a distribution of an asset or property interest under applicable state law in the absence of a will.
Income
The earnings from principal, such as interest, rent, and cash dividends.
Insurance trust
An irrevocable trust created to own life insurance on an individual or couple and designed to exclude the proceeds of the policy from the insured’s gross estate at death.
Inter vivos Trust
A trust created by an individual during his or her lifetime, typically as a revocable trust. Also referred to as a living trust.
Intestate
When one dies without a valid will.
Intestate Succession Law
The law that specifies how a deceased person’s property will pass at the time of death if the person dies without a valid will.
Inventory
A list of the assets of a decedent or trust that is filed with the court.
Irrevocable trust
A trust that cannot be terminated or revoked or otherwise modified or amended by the grantor.
Joint tenancy
An ownership arrangement in which two or more persons own property, usually with rights of survivorship.
Life estate
The interest in property owned by a person (usually called the life tenant) with the legal right under state law to use the property for his or her lifetime, after which title fully vests in the remainderman, the person named in the deed, trust agreement, or other legal document as being the ultimate owner when the life estate ends.
Living Trust
A trust created by an individual during his or her lifetime, typically as a revocable trust. Also referred to as an “inter vivos” trust.
Marital trust
A trust established to hold property for a surviving spouse in A-B trust planning and designed to qualify for the marital deduction. A commonly used marital trust is a qualified terminable interest property trust, or QTIP trust, which requires that all income must be paid to the surviving spouse.
Personal representative
An executor or administrator of a decedent’s estate.
Per stirpes
A Latin phrase meaning “per branch.” It is a method for distributing property according to the family tree whereby descendants take the share their deceased ancestor would have taken if the ancestor were living. Each branch of the named person’s family is to receive an equal share of the estate. If all children are living, each child would receive a share, but if a child is not living, that child’s share would be divided equally among the deceased child’s children.
Pour over will
A will used in conjunction with a revocable trust to pass title at death to property not transferred to the trust during lifetime.
Power of attorney
Authorization, by a written document, that one individual may act in another’s place as agent or attorney-in-fact with respect to some or all legal and financial matters.
Principal
The property contributed to or otherwise acquired by a trust to generate income and to be used for the benefit of beneficiaries according to the trust’s terms. The corpus of the trust.
Probate
The legal process through which a deceased individual’s assets are distributed to that person’s heirs either in accordance with a will, if one existed at the time of death, or in accordance with the law, if the deceased individual died without a will.
Probate tax
A tax imposed by at the state or federal level, or both, on property passing under an individual’s will or by a state’s intestate succession law.
Property
Anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein.
Qualified domestic trust (QDOT Trust)
A marital trust (referred to as a “QDOT”) created for the benefit of a non-U.S. citizen spouse containing special provisions specified by the Internal Revenue Code to qualify for the marital deduction.
Qualified personal residence trust (QPRT Trust)
An irrevocable trust (referred to as a “QPRT”) designed to hold title to an individual’s residence for a term of years subject to the retained right of the individual to reside in the home for the term, with title passing to children or other beneficiaries at the end of the term.
Qualified terminable interest property (QTIP Trust)
Property (referred to as “QTIP”) held in a marital trust or life estate arrangement that qualifies for the marital deduction because the surviving spouse is the sole beneficiary for life and entitled to all income.
Remainder
An interest in property owned by the remainderman that does not become possessory until the expiration of an intervening income interest, life estate or term of years.
Residue
The property remaining in a decedent’s estate after payment of the estate’s debts, taxes, and expenses and after all specific gifts of property and sums of money have been distributed as directed by the will. Also called the residuary estate.
Revocable trust
A trust created during lifetime over which the grantor reserves the right to terminate, revoke, modify, or amend.
Self-dealing
Personally benefiting from a financial transaction carried out on behalf of a trust or other entity, for example, the purchasing of an asset from a trust by the trustee unless specifically authorized by the trust instrument.
Settlor
Term frequently used for one who establishes, or settles, a trust.
Special needs trust
Trust established for the benefit of a disabled individual that is designed to allow him or her to be eligible for government financial aid by limiting the use of trust assets for purposes other than the beneficiary’s basic care.
Spendthrift provision
A trust provision restricting both voluntary and involuntary transfers of a beneficiary’s interest, frequently in order to protect assets from claims of the beneficiary’s creditors.
Tangible personal property
Property that is capable of being touched and moved, such as personal effects, furniture, jewelry, and automobiles, but not cash, stock, or real property.
Tenancy by the entirety
A joint ownership arrangement between a husband and wife, generally with respect to real property, under which the entire property passes to the survivor at the first death and
while both are alive, may not be sold without the approval of both.
Tenancy in common
A co-ownership arrangement under which each owner possesses rights and ownership of an undivided interest in the property, which may be sold or transferred by gift during lifetime or at death.
Testamentary
Relating to a will or other document effective at death.
Testamentary trust
A trust established in a person’s will to come into operation after the will has been probated and the assets have been distributed to it in accordance with the terms of the will.
Testator
A person who makes and properly executes a will. If a female, may be referred to as the testatrix.
Transfer on death designation
A beneficiary designation for a financial account such as a checking or savings account, a retirement account, or a brokerage account that automatically passes title to the assets at death to a named individual or revocable trust without probate. Frequently referred to as a TOD (transfer on death) or POD (payable on death) designation.
Trust
An arrangement whereby property is legally owned and managed by an individual or corporate fiduciary as trustee for the benefit of another, called a beneficiary, who is the equitable owner of the property.
Trust instrument
A document, including amendments thereto, executed by a grantor that contains terms under which the trust property must be managed and distributed. Also referred to as a trust agreement or declaration of trust.
Trustee
The individual or bank or trust company designated to hold and administer trust property (also generally referred to as a “fiduciary”).
Uniform Transfer to Minors Act
A law enacted by some states providing a convenient means to transfer property to a minor. An adult person known as a “custodian” is designated by the donor to receive and manage property for the benefit of a minor. Codified in Ohio law at Ohio Revised Code §§ 5814.01 et seq. Formerly called the Uniform Gifts to Minors Act.
Will
A written instrument naming the beneficiaries who are to inherit the testator’s assets and naming a representative to execute the instructions in the will on behalf of the estate and be responsible for distributing the assets to the beneficiaries.
