Administration: The process by which assets in the name of a decedent are legally transferred to the decedent’s rightful heirs or beneficiaries. Administration can either be through a trust or by Will.
Annual Exclusion: An exclusion from gift taxes for gifts by each donor to each donee which is available on an annual basis. The annual exclusion is currently $12,000 per donor, per donee, per calendar year (indexed for inflation). That is, a couple with three children could give $72,000 per year tax free to the next generation. To qualify for the annual exclusion, the gift must be a “present interest” i.e., a gift available immediately to the donee as opposed to one not available until the future or one requiring the consent of some other person.
Applicable Credit Amount: The amount of the Unified Credit that is applied against the tax computed for a taxpayer’s estate. See also Credit Shelter/Trust Amount.
Applicable Exclusion Amount: The amount “sheltered” from federal tax by the taxpayer’s Unified Credit, which increases as the Unified Credit increases. If the value of the estate is less than the Applicable Exclusion Amount for the year of death, no federal estate tax will be due. See Credit Shelter/Trust Amount for the amount of the credit and the applicable exclusion.
Assignment: Transfer of title of an asset from one owner to another, such as from a person to a trust.
Attorney-In-Fact: A person named as an agent in a power of attorney.
Beneficiary: A beneficiary is a person who is designated to receive something as part of a legal instrument or arrangement. For example, if you designate someone to receive your life insurance proceeds, that person is the beneficiary of the life insurance policy. If you create a trust, the people who will benefit from the trust (receive trust property) are called beneficiaries.
Beneficiary Designation: When someone purchases a life insurance policy or opens a retirement account they must designate one or more beneficiaries to receive the proceeds of the policy or account. Be sure to update your beneficiary designations if your circumstances change (i.e. If you get divorced).
Bequest: A gift of property made in a will or trust.
Bond: An insurance policy that insures that a fiduciary will faithfully perform his or her duties. In probate, the principal on the bond is the personal representative, the surety is the insurance company and the insured is the estate.
Community Property: In a community property state such as Arizona, community property is all property acquired during the marriage, except by gift or inheritance.
Conservator: A conservator is someone who manages another’s financial affairs. Conservators are necessary when a person is unable to manage their own finances, usually either because the person is a minor (under age 18) or an incapacitated adult. If you have minor children and want to name a conservator, you can designate a conservator in your will.
Conservatorship: A probate court proceeding in which the judge considers whether a person has become so incapacitated that he or she needs someone to handle their money, business or financial affairs. The Court usually appoints a relative or an attorney as conservator, with a bond.
Decedent: A decedent is someone who has passed away.
Disability: A condition of helplessness preventing the person from conducting normal business, financial and personal functions, whether caused by mental or physical conditions.
DOD: A common abbreviation for date of death.
Docubank: Docubank is a nationwide electronic storage and access service for healthcare directives, including living wills, healthcare powers of attorney, HIPAA authorizations, and organ donation forms. If a person is in an accident and the hospital finds their Docubank card and calls Docubank, Docubank will fax the person’s healthcare directives to the hospital. For more information visit Docubank’s website at www.docubank.com.
Estate: A legal entity consisting of a person’s property and all the rights and responsibilities relating to it. A trustee, personal representative, or conservator administers an estate. Sometimes legally referred to as the res or corpus.
Estate Tax: Also known as the “death tax”, estate tax must be paid on estates larger than a specified amount. For 2011 and 2012, only estates valued over $5,000,000 will be subject to the estate tax. Beginning in 2013, estates valued over $1,000,000 will be subject to the estate tax. For 2011-2012, the estate tax rate is 45%. Beginning in 2013, the estate tax rate goes up to 55%.
Family / Bypass Trust: A trust which contains property on which federal taxes are paid at the death of the first spouse to die and which typically is not taxed at the second death. Where the optimum marital deduction plan is used, the tax on the property in this trust is paid by the Unified Transfer Credit, so the trust is sometimes called the Credit Shelter Trust.
Fiduciary: A person or corporation that occupies a position of trust and accountability. The word characterizes a relationship such as Trustee – Beneficiary, Attorney – Client, Doctor – Patient, Bank – Depositor, Principal – Agent, etc.
Financial Power of Attorney: A financial power of attorney is a document in which a person names an agent to manage their finances if they are incapacitated.
Funding: The process of transferring ownership or title of a trustmaker’s assets into a trust estate by signing a new real estate deed, changing beneficiary designations, assigning personal property, leases, corporations or partnerships, changing title, changing ownership of financial accounts, etc.
Gift: A gratuitous transfer of property to someone else without receiving adequate consideration in return.
Gift Program: Usually a planned program of making annual gifts to beneficiaries within the amount of the annual exclusion.
Grantor: In trust usage, the person who creates a trust (also known as Trustor, settlor). Your trust uses the term “Trustmaker” to refer to you as the creator or grantor of your trust.
Gross-Up, Gift Taxes: If gifts have been made within three years of the projected year of death on which gift taxes were actually paid out of pocket, those gift taxes will be added back to the value of the estate for purposes of computing federal estate taxes. This is called the gift tax gross up.
Guardian: A guardian is someone who has the legal authority to care for another. Guardians are necessary when people are unable to care for themselves, usually either because the person is a minor (under age 18) or an incapacitated adult. If you have minor children and want to name a guardian to care for them, you must designate a guardian in your will.
Guardianship: A probate court proceeding in which the judge considers whether a person has become so disabled that he/she needs someone else to make decisions about the person’s care. Generally, the Court appoints a relative as guardian, with a bond.
Healthcare Directive: In Arizona most people call this document a “Living Will” or a “Healthcare Power of Attorney.” A Living Will provides that you do not want to be kept alive by artificial means if you are in a terminal condition. A Living Will gives instructions to healthcare providers about your wishes during the final stages of an illness, generally requesting the withholding of extraordinary medical treatment. A Healthcare Power of Attorney nominates people to manage your health care if you cannot do so.
Healthcare Power of Attorney: A healthcare power of attorney is a document in which a person names an agent to make their healthcare decisions if they are incapacitated.
Heir: A person who inherits something from a decedent under the Law of Descent and Distribution, where the decedent had no Will. Heirs receive notice of probate court actions even if the decedent had a Will.
HIPAA Authorization: HIPAA is a federal law which prohibits medical providers from sharing your healthcare information with others. A HIPAA authorization permits medical providers to give medical information to a person’s designated agent.
Incapacity: Incapacity is the lack of physical or mental capabilities. Incapacity means that a person does not have the ability to make personal decisions, usually because of an illness or disability.
Income Beneficiary: The person who will receive the income from a trust for a specified period of time (e.g., the beneficiary’s life). See also, Remaindermen.
Inheritance Tax: Any death tax levied by a non-federal government (e.g. a state) upon the takers of the property as opposed to the estate as a whole (see estate tax). Arizona does not have an inheritance tax as of the date you signed your estate plan.
Inter Vivos: “During lifetime.” A term used to describe a Trust created during the lifetime of the grantor, distinguished from a testamentary trust created by a Will.
Inter Vivos Trust: A trust created by agreement currently, as opposed to a testamentary trust created by a Will. Such a trust can be used to hold assets during a person’s lifetime and thereby remove those assets from probate at the person’s death. Also sometimes called a “Living Trust”.
Intestate: Intestate describes someone who died without a will. For example: Bob’s children don’t know how Bob wanted his property divided since Bob died intestate.
Intestate Succession: Intestate succession is the method used to distribute the property of someone who died without a will.
Inventory: In a probate court case, a list of the assets of the decedent or disabled person, prepared and signed by the fiduciary (personal representative or conservator).
Irrevocable Life Insurance Trust: An irrevocable life insurance trust (“ILIT”) is created to hold a person’s life insurance policy. Since the trust owns the insurance policy and not the person, the life insurance proceeds will not be considered part of the person’s estate, potentially saving estate taxes. An ILIT will also protect the assets in the trust since a person’s creditors can not reach assets the person does not own.
Issue: Issue refers to a person’s descendants, like children, grandchildren, etc.
Joint And Survivor Annuity: This is an annuity payable to two people (e.g. a husband and wife) through the lifetime of the survivor of the two of them. For qualified plans, this is the type of distribution mandated by law, unless both spouses consent to a different form of payment.
Joint Tenancy With Right Of Survivorship: A form of ownership of property among natural persons, characterized by equality of ownership share and created by the same ownership document. As each owner dies that person’s interest evaporates and transfers automatically by law to the surviving joint tenants. The last surviving joint tenant will become the sole owner of the property.
Law Of Descent And Distribution: A state statute that prescribes the distribution of the property of a decedent who died without a valid Will (intestate) to the decedent’s heirs.
Legacy: A cash bequest in a Will.
Life Insurance Gift Value: The value of a life insurance policy which is given to someone else normally is its interpolated terminal reserve value, which is generally very close to the cash surrender value. In most cases, this gift value will be less than the face value of the policy. Where the insured is in bad health and could not obtain new insurance within normal cost limits, the gift value of the policy may be greater.
Living Trust: A trust created under an agreement by a trustmaker while alive that becomes effective while the trustmaker is alive, as opposed to a testamentary trust created by a Will. Such a trust can be used to hold assets during a person’s lifetime and thereby remove those assets from probate at the person’s death. Also sometimes called an “inter vivos trust”.
Living Will: A living will, also known as an advance healthcare directive, gives instructions about what types of medical actions should be taken if a person is unable to make decisions or communicate because of illness or incapacity. A living will states a person’s wishes about treatments that would artificially delay death when there is no reasonable expectation of recovery.
Lump Sum Gift: Typically a gift which is made on a one-time basis only, as opposed to a gift program which is designed to use the annual exclusion on a yearly basis.
Marginal Estate Tax Rate: The tax rate at which the top dollars in an estate are taxed.
Marital Deducation: A deduction allowed on the federal estate tax return (IRS form 706) for property passing in a qualifying manner to a surviving spouse. Before 1981, there was a maximum limit of marital deduction that could be taken. This maximum was the greater of one-half of the decedent’s separate property, or $250,000. From 1982 on, we have had an unlimited marital deduction for qualifying property (essentially property which provided the surviving spouse with a fee interest in the asset). For an exception, see Qualified Terminable Interest Property.
Mental Healthcare Power of Attorney: A mental healthcare power of attorney is a document in which a person names an agent to make their mental healthcare decisions if they are incapacitated.
Minimum Distributions: In retirement planning, a participant is required to begin making withdrawals from his or her retirement plans in the year after he or she reaches age 70-1/2. These withdrawals must meet certain minimum distribution requirements, based on the payout election the participant makes at that time. In general, the participant must withdraw the funds over his or her life expectancy (if not more rapidly).
Minor Children: In Arizona, a child is deemed a minor until he or she reaches age 18.
Net Tax: Generally the actual amount of tax which is payable in a given situation, after all deductions, credits and other adjustments have been made.
Optimum Marital Deduction: The technique by which only that amount of a decedent’s estate not “sheltered” by the decedent’s unified credit passes under the marital deduction to the surviving spouse.
Per Stirpes: Whenever a distribution is to be made to a person’s descendants per stirpes, the distribution shall be divided into as many shares as there are then living children of such person and deceased children of such person who left then living descendants. Each then living child shall receive one share and the share of each deceased child shall be divided among such child’s then living descendants in the same manner.
Personal Property: “Tangible” personal property means anything moveable that you can touch. “Intangible” personal property refers to financial assets such as stocks, bonds, bank accounts, insurance, etc.
Personal Property Memorandum: A personal property memorandum is a document separate from a will or trust in which a person can dispose of tangible personal property like jewelry, china, antiques, collectibles, art, furnishings, and the like. A person can amend their personal property memorandum at any time without having to see a lawyer to amend their will or trust.
Personal Representative: A personal representative is responsible for managing a decedent’s estate. A personal representative will collect the decedent’s assets, administer the estate and pay any necessary taxes, and distribute the assets to the decedent’s beneficiaries. Some states use the term Executor (for a Will), or Administrator (without a Will) instead of personal representative.
Pet Trust: A pet trust is a trust created to benefit and provide for pets. An Arizona pet trust allows a person to leave money or property in trust to be used by a trustee or caregiver to care for a person’s pet(s) if the person dies or becomes incapacitated.
Petition: A formal request to a court to make a finding of fact and enter an order or judgment based upon the facts and the law.
POD: An instruction to a depository institution such as a bank to pay the funds in the account to the beneficiary named in the memorandum signed by the account owner.
Pour-Over: A Will which names an existing trust as the principal beneficiary. Thus, the probate estate “pours over” into the trust estate.
Power Of Attorney: A grant of power to a person (the agent) to make or carry out the decisions of the signer of the power of attorney, under terms of a state law. A power of attorney expires on the death or disability of the signer. A durable power of attorney may become effective or may continue in effect during the signer’s disability if and only if it contains specific language required by state law. A general power of attorney contains no limitations on the grant of power. A springing power takes effect only upon the happening of an ascertainable event such as the declaration of disability of the signer.
Probate: Probate is a Superior Court proceeding by which a decedent’s estate is administered and probate assets are collected, managed, and then distributed to the beneficiaries named in the decedent’s will. If the decedent left a will, the will’s validity will also be addressed during probate.
Probate Assets: Probate Assets are those assets which are subject to and pass via probate. Probate assets do not include: 1) property that is held in trust; 2) property owned as joint tenants with right of survivorship or community property with right of survivorship; and 3) property held by third parties that passes one or more designated beneficiaries pursuant to a contract, like a life insurance policy, retirement account assets, or a financial institution’s “pay on death” account.
Qualified Plan Assets: Property held in an IRA, a 401(k) plan, money purchase pension plan, defined benefit plan or other retirement plan on which the owner has not yet paid federal income tax.
QTIP Trust (Qualified Terminable Interest Property): Although most limited or terminable interests in property (such as life estates) do not qualify for the marital deduction, in 1981 federal estate tax law was amended to allow a marital deduction for such interests if all of the income were payable to the surviving spouse in all events during the survivor’s lifetime. This type of property is known as Qualified Terminable Interest Property.
Real Property: Land, and anything permanently attached to it.
Remaindermen: The persons who will receive the benefit from a trust after the death of the current income beneficiary or beneficiaries.
Required Beginning Date (RBD): This is the date on which a retirement plan participant is required to begin making distributions from his or her retirement plan(s), and is April 1st of the year following the year the participant reaches age 70-1/2.
Residuary: The clause in a Will that disposed of all of the decedent’s property not previously mentioned. This clause usually begins, “All the rest, residue and remainder of my property, of whatsoever kind and nature, and wherever situated, I give. . .”
Separate Property: A person’s earnings while residing in a separate property state or prior to marriage in a community property state, and the assets acquired with those funds. Also, in separate property jurisdictions and most community property jurisdictions, property received by inheritance, gift or personal injury settlement or award, together with income generated therefrom.
Settlor: Same as grantor.
Spousal Rollover: Where retirement plans and IRAs are payable to a surviving spouse, the survivor will have an option to “roll over” the funds into his or her own IRA, thereby deferring the income tax on the plan funds.
Survivor: Usually refers to the surviving spouse after the death of the first spouse.
Tenative Tax: The gross value of the federal estate tax prior to application of the Applicable Exclusion Amount and the credit for gift taxes paid after 1976 (and any other applicable credits).
Testament: Same as a Will.
Testator: A testator is a person who has made a Will, or a person who has died with a Will.
TOD: Transfer on death. A memorandum attached to the ownership document of non-cash personal property, such as a car title or stock certificate, signed by the owner, changing title of the property to the beneficiary named in the memorandum at the death of the owner.
Trust: A trust is an agreement that provides for the management of property. A trust involves at least three parties: 1) the trustmaker who creates the trust; 2) the trustee who agrees to hold and manage the trust property pursuant to the terms of the trust; and 3) the beneficiary who receives the benefit of the property held in the trust.
Trustee: A person or entity appointed by a trustmaker to take control of trust property and administer it for the benefit of a beneficiary named by the grantor in the trust document. The grantor may also designate himself as the trustee and beneficiary. The trustee has a strict duty of accountability (fiduciary) to the beneficiary.
Trustmaker: As known as a trustor, a trustmaker is someone who creates a trust.
Unified Credit: A credit applicable against federal gift and/or estate taxes. The Unified Credit has been at varying levels since 1976. It is now referred to as the Applicable Exclusion Amount.
Will: A will is a document by which a person directs how his or her estate is to be distributed upon death. A will should also name a personal representative, who is responsible for administering the estate. If a person has minor children, a will should also name a guardian to care for the minor children and a conservator to manage the children’s finances.