Important terms for Wills, Trusts and Estates

by Stephen Haas

Adverse Party: A person who has a competing interest to the subject with regard to trust assets. For example, two parties who each may receive discretionary distributions from a trust our adverse parties to each other, because distribution to one decreases the trust assets that are available to the other.

Ascertainable Standard: A provision in a trust that specifies the circumstances under which a discretionary distribution can be made. For example, a trust may allow for a distribution from a trust for the “health, education, maintenance and support” of a beneficiary. This limitation is an ascertainable standard.

Bequest: Personal Property that is gifted in a Will. While a gift of real property is known as a “devise,” a gift of personal property is a “bequest.” There is little or no substantive difference between a bequest and a devise for legal purposes.

Capital Gain: The amount that property is sold for in excess of the adjusted cost basis. This is also the amount that can be subject to capital gains tax.

Caregiver Child Rule: The rule that allows a residence to be given by a person to his or her adult child who cares for the donor without such transfer causing a five year look back period for Medicaid eligibility purposes.

Charitable Trust: A trust that, by its own terms, benefits charitable organizations and/or may only be used for charitable purposes. Charitable trusts may be considered tax-exempt for income and transfer tax purposes.

Codicil: A testamentary instrument that is executed as a will, but is not intended to be an entire will. Rather, it is intended to supplement a previously existing will.

Conservator: a person company (such as a bank or trust company) appointed by a court to be responsible for a child or incapacitated person’s property.

Cost Basis: The purchase price of an asset; used to determine the capital gain or loss that is realized upon selling the asset. The cost basis can be adjusted by factors such as improvements made to the property, depreciation and death of the holder of the assets.

Cy Pres: The doctrine that allow assets in a charitable trust to be used for a similar trust purpose when the initial charitable purpose of the trust becomes obsolete or irrelevant.

Disclaimer: A legal maneuver by which an estate or trust beneficiary renounces any benefit from the trust or estate, thereby causing the assets to be distributed as though the disclaiming party was deceased with no heirs.

Distribution: The spending of assets from a trust or estate to or on behalf of a beneficiary.

Domestic Asset Protection Trust: A trust established within a United States jurisdiction whose goal is to protect the trust corpus from the creditors of the grantor who established the trust.

Domicile: A person’s permanent residence. The laws of the state of a person's domicile determine what happens to that person's property at death. A domicile is established by: a) presence; and b) intent to remain there permanently.

Donee: The recipient of a gift

Donor: The giver of a gift.

Estate: The fictitious legal “person” that is created upon a person’s death. The deceased person’s assets are held by this fictitious person, pending their distribution through probate or administration.

Estate, Taxable: This is the amount of assets of a decedent that is subject to federal or state estate tax. Note that assets not in a person’s probate estate can still be taxable. For example, assets held by the deceased in a revocable trust are taxable under estate tax rules, but is not part of the deceased’s probate estate.

Estate Planning: This is the process of arranging a person’s financial affairs, including diverse steps such as setting up trusts, executing a will, transferring assets, etc. Estate planning can also include personal measured such as signing a living will, healthcare proxy or power of attorney.

Estate Tax: Transfer tax assessed by a federal or state government of a percentage of the assets held or controlled by a deceased person at the time of his or her death.

Executor: A person (or institution) appointed by a court to administer the estate of a deceased person who died with a will. If the person died without a will, the person is usually referred to as an “administrator.”

Fiduciary: A person who is entrusted with control of assets on behalf of another. In estate planning terms, fiduciary generally refers to an administrator, executor or trustee.

Future Interest: An interest in property that does not vest immediately, but will vest at a future time or upon the occurrence of an event or condition.

Fraudulent Transfer: A transfer of assets that is done to remove the assets from the grantor's name so as to make them inaccessible by then existing creditors of the grantor. A fraudulent transfer can be “actual” if it is done with the intent to hinder, defraud or delay creditors. It can also be “constructive” even if not done with intent, under certain conditions.

Generation Skipping Transfer Tax: A federal transfer tax imposed on certain gifts or bequests to grandchildren or great-grandchildren of the donor or deceased person, or to other people or entities that may be considered “skip” persons.

Gift Tax Annual Exclusion: The first $14,000 (as of 2014) in gifts that an individual can give tax free to each other person during any given calendar year.

Grantor: The person that establishes an inter-vivos (living) trust.

Grantor Trust: A trust whose assets are considered the assets of the grantor for federal income tax purposes.

Guardian: A person appointed by a court (or by a Will, in the case of guardianship for a minor), who is responsible for a child or incapacitated person's care and finances.

Heir: Any person that inherits property from the estate of a deceased person. Note that a living person has no heirs since heirs are identified only at death.

Intestate: A person dies intestate when he or she dies without an effective will.

Irrevocable Trust: A trust that, by its terms, cannot be revoked by the grantor. An irrevocable trust can still be amended or controlled in some cases by the grantor, depending on the provisions of the trust instrument.

Joint Tenancy: Ownership of property by two or more people in equal shares with rights of survivorship. This means that when one joint tenant dies, his or her share passes by operation of law to the remaining joint tenant(s).

Life Insurance Trust: A trust that is created for the purpose of holding one or more life insurance policies. Life insurance trusts are typically irrevocable and are usually established so that their policies are outside the taxable estate of the grantor.

Living Trust (a/k/a/ Inter-Vivos Trust): A trust that is established by a person during his one's lifetime; usually by written instrument. This is the counterpart to the “testamentary” trust, which is established by Will and only takes effect after death of the testator.

Living Will: A document that lay out a person’s wishes regarding end of life medical procedures and whether the person wishes to be kept alive on life support in various scenarios. A “DNR” (do not resuscitate) document is a form of a living will.

Marital Deduction: The amount of a gift or estate that is not subject to transfer tax because it is made for the benefit of the spouse of the donor. At present, there is an unlimited marital deduction regarding gifts to spouses who are United States citizens and a limited marital deduction for gifts to spouses who are not United States citizens.

Medicaid: A joint federal and state health care program that pays for the healthcare of indigent people. Creating eligibility for Medicaid for elderly people who may have large medical expenses, such as nursing home bills, is a key facet of the estate planning for many clients.

No Contest Clause (a/k/a “in terrorem” clause): A clause in a will that discourages beneficiaries from challenging the validity of the will by stipulating that any person who challenges the validity of the will shall not receive any benefit from the assets governed by the will.

Power of Attorney: A document authorizing one or more persons to act as the agent for another (the "principal") regarding financial matters. A power of attorney can be “general” or be limited to specific tasks that may be carried out for the principal.

Power of Appointment: A power held by any individual to dispose of or determine the disposition of assets held in trust or in other forms. A power of appointment can be “general” if the holder has the authority to distribute the assets to himself, his creditors or his estate. Otherwise, the power of appointment is a “limited” or “special” power of appointment.

Principal: Can refer to the individual who gives authority an agent to act on his or her behalf. In matters of finance, the principal refers to the amount of money in a trust or account before interest is earned in a given year.

Probate: The process by which a court determines whether a deceased person left a valid will, who may administer the estate of a deceased and whether any purported will is valid.

"Prudent Investor" Rule: The responsibility of a fiduciary, such as an executor or trustee, to manage assets in a trust or estate conservatively said that the assets are preserved for the beneficiaries.

Qualified Personal Residence Trust (QPRT): A trust that holds residential real estate in which the grantor lives and whose provisions allow its assets to be outside the taxable estate of the grantor under certain conditions.

Qualified subchapter S trust (QSST): A trust that is eligible to hold Subchapter S Corporation shares, in spite of the general rule that only individuals can be Subchapter S Corporation shareholders. QSST’s are characterized by having a single beneficiary who is entitled to all of the income generated by the trust.

Qualified Terminable Interest in Property (QTIP): An interest in a trust that must be held by a spouse in order for transfers to that trust to be eligible for the estate tax marital deduction. A QTIP is characterized by an income interest along with the disallowance of any other beneficiary’s ability to receive assets from the trust during the lifetime of the spouse.

Remainder Interest: An interest in a trust or other disposition that follows certain temporary interests of other interest holders, including a life estate or term of years.

Revocable Trust: A trust that maybe revoked by the grantor or from which the grantor may remove assets at will. For all legal intents and purposes, assets in any revocable trust are considered assets of the grantor. Revocable trusts often become irrevocable at the occurrence of an event, such as the death of the grantor.

Rule Against Perpetuities: The common law rule that is designed to prevent trusts from lasting forever. The rule states that certain future interests must vest, if at all, within 21 years after the death of a life in being at the time the interest is created.

Settlor: A person who established a living trust; another term for the grantor.

Spendthrift trust: A trust whose beneficial interest, by its own terms, cannot be assigned by the trust beneficiaries and whose assets are not vulnerable to the creditors of the beneficiaries.

Supplemental Needs Trust: A trust established for the benefit of a disabled person and whose assets can only be used for expenses that would not otherwise be paid for by government assistance programs. Examples of such expenses would be entertainment, travel, etc.

Testator: A person who makes a will.

Title: Ownership of property. Title may consist of legal title, which means the legal ownership of the property and equitable title, which means the right to beneficial enjoyment of the property. A trust splits title amongst the trustee, who owns legal title, and the beneficiary who owns equitable title in the trust assets.

Trust: An arrangement that splits ownership of a trust amongst a trustee, who holds legal title and manages the trust assets, and the beneficiaries, who hold equitable title and for whom the trust assets are being held.

Trustee: A person or institution that holds legal title to trust assets. This person (or persons) is responsible for the administration of a trust.

Trust Corpus: Money or property held in trust. The term is sometimes used to mean trust principal, as opposed to interest earned by the trust in a given year.

Undue influence: Influence that a person has over a testator that is so strong that the holder of the influence is considered to have substituted his or her own will for that of the testator. If shown, a gift to a person with undue influence or an entire will may be invalidated.

Will: A written and executed document that disposes of one's property at death. The will may be used to nominate personal representatives, express burial and funeral instructions and designate a guardian for minor children. To be valid, a will generally requires witnesses and formal procedures that may vary from state to state.

Wrongful Death: A cause of action brought by the heirs or family of the deceased person against a person allegedly responsible for his or her death, seeking damages caused to them by the death of the deceased person.

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