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.
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.
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.
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.
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.
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.
Income – The earnings from principal, such as interest, rent, and cash dividends.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
Uniform transfers 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.