Annuity
Interest
A fixed annual payment for one's lifetime or a term
for years. Usually in estate planning this is referred
to in regards to a specific type of trust, such as
a charitable remainder annuity trust. See also "Private
Annuity."
Attorney-in-fact
The person authorized to represent the principal
under a power of attorney.
Bargain Sale
A sale, typically among family members or between
an individual and a charity, at less than the full
fair market value of the property. The difference
between the sale price and the full fair market
value is considered a gift from the seller to the
buyer.
Basis
The amount representing the taxpayer's cost of an
asset, against which any amount realized on its
sale or other disposition is compared to determine
the amount of taxable gain, if any, and which may
be depreciated, if the asset is depreciable.
Beneficiary-owned
Sub-S Corporation Trust
A trust that owns stock in one or more Sub-S corporations,
and that may do so without jeopardizing the corporation's
special tax status, because the trust is treated
as owned entirely by someone other than its Grantor.
Beneficiary-owned
Trust
A trust that is treated as owned by someone other
than its Grantor.
Buy-Sell Agreement
A contract or provision in corporate documents or
a partnership agreement under which one or more
persons or entities (the partnership or the corporation)
agree to buy the interests of the other parties
to the agreement, at certain times (usually in lieu
of other lifetime sales or transfers and at death),
at a stated price and on stated terms.
Capital Gains
Gains recognized from the sale or exchange of capital
assets (most property other than inventory and certain
specifically excluded types of assets).
Charitable Lead
Trust
A charitable trust under which the charity receives
an annuity interest (a fixed dollar amount, or a
percentage (at least 5 percent) of the annual or
initial value of the trust assets), for a term of
years, after which a non-charitable person or group
receives the remainder interest.
Charitable Remainder
Annuity Trust
A charitable remainder trust under which the non-charitable
income interest is expressed as a fixed dollar amount
or percentage (at least 5 percent) of the initial
value of the trust assets, and which does not permit
subsequent additions.
Charitable Remainder
Trust
A trust under which an individual or group of individuals
receives an income or annuity interest for life
or a term of years, and a charity receives the remainder
interest thereafter.
Closely-Held
Corporation
A corporation, the stock of which is owned by relatively
few persons (often under thirty-five), rather than
being subject to public trading.
Community Property
A concurrent ownership of property between spouses
under the law of some states under which each spouse
owns an undivided one-half interest in all property
acquired during the marriage (often with specific
exceptions).
Complex Trust
A trust that does not have to distribute all of
its income currently, makes a charitable distribution,
or distributes principal and so is treated differently
for federal income tax purposes.
Concurrent Ownership
The ownership of property by more than one person
at the same time. Takes the form of community property,
tenancy by the entirety, tenancy in common, or joint
tenancy. Concurrent ownership also carries rights
to receive property outside of a will or trust,
so avoiding probate, but also causing the terms
of the will or trust to be overridden on transferring
assets at death. It is one of the most common sources
of disputes between heirs.
Controlled Corporation
A corporation, the majority of the stock of which
is owned by one or a very few persons.
Cross-Purchase
Agreement
A Buy-Sell Agreement under which the other partners
or stockholders agree to buy the interest of a deceased
or transferring partner or stockholder. Distinguished
from a Redemption Agreement.
Crummey Trust
A power granted an individual under a trust instrument,
whereby the individual can, for a limited period
following any gift to the trust (usually thirty
through ninety days), withdraw all or some stated
portion of the gift. The power is used to make gifts
to the trust present interests qualifying for the
annual gift tax exclusion.
Defective Trust
A trust that is taxed as a Grantor Trust, usually
because of a power inserted specifically to achieve
this result, as with some life insurance trusts.
Depreciation
Deduction
An income tax deduction for the wear, tear, and
obsolescence of business and investment assets having
a useful life.
Direct Skip
Gift
A gift to the Grantor's grandchild or other person
assigned to a similar or more remote generation
(see "Skip Person"), upon which a Generation-Skipping
Transfer Tax may be imposed.
Durable Power
of Attorney
A Power of Attorney that does not end on the disability
of the principal. Authorized in every state, but
not in the District of Columbia.
Estate Freeze
The use of one or more techniques (such as a recapitalization
of a corporation or partnership, or a Buy-Sell Agreement)
to fix the value of a business interest or other
property for estate tax purposes, causing all subsequent
appreciation to inure to someone other than the
interest's owner.
Executorship
This is the most limited and benign form of legal
delegation. The individual or firm has been instructed
to complete the settlement of an estate and to comply
with a discrete set of directives that the client
has authorized counsel to perform in his or her
name even if the individual is deceased. Once the
specified tasks have been completed, the Executor's
work is usually finished.
Family Attribution
Rules
Several tax rules under which stock or other interests
owned by one family member are treated as owned
by another family member, thereby limiting the possible
techniques available to transfer assets from one
generation to another that will work for unrelated
parties, but are not available for family members.
Family Corporation
A corporation in which one or more family members
are stockholders, often receiving their stock by
gifts from other stockholder/family members.
Family Partnership
A partnership in which one or more partners receive
their interests by gifts from other partners.
Funded Life
Insurance Trust
A life insurance trust that holds significant assets
other than life insurance
policies.
Generation-Skipping
Transfer
A transfer to a grandchild or other individual who
is at least two generations below that of the Grantor,
or to a trust for the benefit of such individuals,
upon which a Generation-Skipping Transfer Tax may
be imposed.
Generation-Skipping
Transfer Tax
A tax imposed on a Generation-Skipping Transfer.
Gift-Splitting
A Grantor's making of a gift as to which the Grantor's
spouse elected on a timely gift tax return (filed
on or before April 15 of the year after the gift
is made) to be treated as the Grantor of one-half
of the gift, thus enabling the use of the Grantor's
spouse's Unified Credit and annual gift tax exclusion.
Grantor
The person treated as the creator of a trust.
Grantor Retained
Annuity Trust
A trust under which the Grantor retains an annuity
interest for a term of years, followed by a transfer
of the trust funds to the named individual or individuals.
Grantor Retained
Income Trust
A trust under which the Grantor retains an income
interest for a term of years, followed by a transfer
of the trust funds to the named individual or individuals.
Grantor Trust
A trust that is treated as owned, in whole or in
part, by its Grantor. Because the Estate Tax Code
and Gift Tax Code are separate from the Income Tax
Code, it is possible to have a trust that is income
taxable to the Grantor (and from which the Grantor
can receive payments) but is excluded from the Grantor's
estate.
Guardianship
This is a more extensive and more generalized form
of legal delegation, because it usually involves
the care and maintenance of a living person and
covers an unknown set of future circumstances over
an unknowable period of time. As a result, the attorney
is given much more flexible powers than those involved
with an Executorship.
Holding Period
The length of time a taxpayer is deemed to have
held an asset. This is important in distinguishing
between long-term and short-term capital gains.
Irrevocable
Trusts
In an irrevocable trust all rights to the property
transferred to the trust are given up. The basic
difference between an inter vivos trust and an outright
gift is that the former provides the beneficiary
with competent property management and with protection
from himself and others who might misuse or waste
the gift. Since outright gifts and irrevocable trusts
differ only in terms of control over and protection
of the beneficiary, the tax consequences are basically
the same.
Installment
Gift
A gift made by selling property on the installment
basis (receiving a note calling for a series of
installment payments) and forgiving the payments
annually.
Installment
Sale
A sale in which the seller receives a note calling
for a series of installment payments, rather than
a sale wholly for cash.
Joint Tenancy
A type of concurrent ownership under which each
owner owns an undivided interest in the whole property,
and when one owner dies, the surviving joint owner(s)
succeed to his or her interest.
Personal Holding
Company
A closely-held corporation that primarily serves
to own the stock of other corporations.
Pick-up Tax
A state death tax measured by the allowable federal
estate tax credit for state death taxes.
Power of Appointment
A right held by one person to designate who shall
possess or enjoy property that person does not own.
For example, a trust may give an income beneficiary
(such as a surviving spouse) the right to designate
the remainder of the trust assets at the end of
the Trust to a specified class of beneficiaries,
such as "among my children." Estate and
gift taxations are governed by §§ 2041
and 2514.
Power of Attorney
A document authorizing one person to represent another
in specified transactions.
Private Annuity
The sale, usually by one family member to another,
of property or the payment of money in exchange
for an agreement to make a stated periodic payment,
e.g., weekly, monthly, annually, for the rest of
the seller's life.
Qualified Conservation
Contribution
A gift, deductible for income tax purposes, of a
remainder interest or perpetual restriction for
any of the following charitable purposes: 1.) preserving
land areas for outdoor recreation by the general
public; 2.) preserving land areas for education
of the general public; 3.) protecting in a relatively
natural habitat fish, wildlife, plants, or similar
ecosystems; 4.) preserving open space for scenic
enjoyment; or 5.) preserving an historically important
land area or certified historic structure.
Qualified Payment
A right to a fixed and cumulative distribution with
respect to preferred stock or a partnership interest,
the value of which is taken into account in determining
the value of a transferred interest in the same
enterprise, under the special valuation rules.
Qualified Subchapter-S
Trust (QSST)
A trust that, because it meets certain requirements,
may be a shareholder of a Sub-S Corporation.
Recapitalization
A change in the stock, partnership, or debt interests
of a corporation or partnership, sometimes accomplished
to artificially freeze the value of one party's
interest.
Redemption Agreement
A Buy-Sell Agreement under which the corporation
or partnership agrees to buy out the interest of
a shareholder or partner. Distinguished from a Cross-Purchase
Agreement or a Hybrid Agreement.
Remainder Interest
The right given a beneficiary of a trust (or the
beneficiary of certain non-trust arrangements, such
as life estates or terms for years) to receive the
trust fund upon some event, such as the death of
another beneficiary.
Reversionary
Interest (or Reversion)
A right retained by a trust's grantor (or by the
creator of certain non-trust arrangements, such
as life estates or terms for years) to receive the
trust fund upon some event, such as the death of
the beneficiary.
Right of Survivorship
A right as to property owned as joint tenants or
as tenants by the entirety, whereby one joint owner
succeeds to the interest of a deceased joint owner.
Self-Destructing
Trust Clause
A provision in a life insurance trust under which,
if any of the proceeds are included in the insured's
gross estate (as when the insured dies within three
years of having given the policy to the trustee),
the proceeds are paid back to the insured's estate
or to the insured's surviving spouse.
Self-Settled
Trust
A trust, which is established with the funds of
the beneficiary - typically, a tort victim or a
person receiving an inheritance.
Simple Trust
A trust that is required to distribute all of its
income currently, that does not pay principal and
that makes no charitable distributions.
Special Allocation
A provision in a partnership agreement by which
tax or other benefits are allocated among the partners
otherwise than in accordance with their percentages
of partnership interest generally.
Split-Gift
A gift as to which the Grantor's spouse elected
on a timely gift tax return (filed on or before
April 15 of the year after the gift is made) to
be treated as the Grantor of one half of the gift,
thus enabling the use of the Grantor's spouse's
Unified Credit and annual gift tax exclusion.
Split-Purchase
An arrangement under which two persons buy property
together, one buying a life interest and the other
buying the remainder interest.
Sprinkling Trust
A trust in which the trustee may pay income (and
sometimes principal) to any of a number of beneficiaries,
usually in any proportions the trustee deems appropriate.
Taxable Termination
When an interest of a trust beneficiary who is a
child (or similar generation) of the Grantor of
the Trust ends and that causes the trust to vest
in one or more beneficiaries who are grandchildren
(or of a generation at least two below that of the
Grantor) then the ending of the interest will result
in a
Generation Skipping Transfer Tax being imposed.
Tenancy by the
Entirety
Concurrent Ownership between spouses in which each
spouse owns an undivided interest in the whole,
with a right of survivorship, and which can be terminated
only by the consent of both spouses or the termination
of the marital relationship. To form a Tenancy by
the Entirety, the fact must be explicitly stated
on the deed or other transfer document, otherwise
the law presumes that the spouses hold the property
as joint tenants.
Tenancy in Common
A type of Concurrent Ownership of property whereby
each party owns an undivided fractional interest
in the property, with no right of survivorship.
The fractional interest need not be equal. For example,
a father could hold a 2/3 interest in land, and
the son holds 1/3. Tenancy in Common does not pass
outright to the surviving tenant (as does joint
tenancy interests) but passes under the respective
tenant's will.
Term Life Insurance
A type of life insurance that provides pure life
insurance protection and no cash values.
Three-Party
Gift / Leaseback
A Gift / Leaseback in which the Grantor gives property
to the Grantee, and then the Grantor's corporation
leases it back from the Grantee.
Two-Party Gift
/ Leaseback
A Gift / Leaseback in which the Grantor leases the
property directly from the Grantee.
Trusteeship
This is the greatest level of legal delegation of
control. Here, the trustee is provided with the
actual legal title of property - for the benefit
of another - with the most extensive powers and
the most discretion with respect to exercising those
powers. Trustees are held to the highest duty of
care and loyalty and are required to exercise their
powers only in the best interests of the beneficiaries.
Their role is defined and guided by the Trust documents
and, if the Trust is silent on an issue, by the
extensive Common Law traditions and/or statutory
authority, Trusts attempt to anticipate the future,
sometimes for several generations, and must be flexible
and not rigid to avoid falling apart - and failing
to achieve their original intent - when facing the
challenges of the future. Consequently, the need
for sound thinking, practical experience, reasoned
drafting and the right kind of law firm is paramount.
Unfunded Life
Insurance Trust
A life insurance trust that holds no significant
assets other than a life insurance policy.
Unified Credit
A credit allowed against both the federal estate
and gift taxes. To the extent the credit is not
used against an individual's lifetime gift tax liabilities,
it is available to offset estate tax obligations.
The credit in 2002 was $345,800, equivalent to an
exemption of $1 million, and in 2004 it was $1.5
million. It is scheduled to increase for estate
tax purposes to an exemption equivalent of $1.5
million in 2004, $2 million in 2006, and $3.5 million
in 2009.
Uniform Gifts
to Minors Act
A uniform law, adopted in every state, under which
gifts of cash or "securities," and sometimes
other types of property, may be given to a named
custodian on behalf of a minor Grantee.
Uniform Gifts
to Minors Act Custodian
The person who holds property for a minor under
the Uniform Gifts to Minors Act.
Uniform Simultaneous
Death Act
A uniform law, adopted in every state, that creates
a presumption of an order of death when it is impossible
to determine which of two related persons died first.
Uniform Transfers
to Minors Act
The 1984 revision of the Uniform Gifts to Minors
Act, under which more and different types of property
may be the subject of gifts to minors through custodians
and more types of transfers (by trusts and estates)
are permissible.
Will
A will is the most valuable instrument in estate
planning. A will can do many things including: designate
who should receive certain property, prescribe whether
the property should be transferred outright or by
other means, coordinate the amount transferred to
a spouse, appoint guardians for children, executors
and/or trustees, and provide the fiduciaries with
adequate powers to carry out the administration
of estate assets.
