This is a special trustee whose job is limited to keeping documents and records for the trust, often for the purpose of establishing an adequate connection between the trust and the desired state where the law should apply. (Infrequently used.)
This document is the equivalent of a “Living Will” and is a statement of the healthcare decisions that you would make when you are no longer able to do so yourself. If you are competent to make end of life decisions, then what you say will be taken under consideration. It is only after you are no longer able to speak for yourself that the Living Will will come into effect.
This is the amount that someone can give to another person during the calendar year without having to pay gift tax. Originally under IRC Sec. 2503 the annual gift exclusion was set at $10,000 but this figure is regularly adjusted for inflation and every few years is increased by $1,000. As of 2023, the annual gift tax exclusion is $17,000 up from $16,000 in 2022. For 2018-2021, the annual gift tax exclusion amount had been $15,000 per beneficiary. For gifts in 2014-2017 the annual exclusion was $14,000 per beneficiary.
This is a type of third-party settled trust (a trust funded with assets never held by the trust beneficiary) designed: (1) to give the Inheritor’s Trust primary beneficiary control and beneficial enjoyment of trust property such that the primary beneficiary can use and manage the trust assets without compromising the trust’s ability to avoid transfer taxes at the primary beneficiary’s death, (2) to protect the trust assets from the primary beneficiary’s creditors; (3) and yet be structured in a way that it is still taxable to the grantor for income tax purposes.
This is the person, entity, or group for whom a trust is established. Not all beneficiaries are created equal however as their interests can be vested and certain, contingent and future or something in between. For example, a beneficiary may be a present interest beneficiary, entitled to receive distributions from a trust right now, or a future interest beneficiary, entitled to receive distributions at some point in the future. They may also be vested, where their rights under the trust cannot be taken away, or contingent, where their rights are still subject to conditions that may or may not occur in the future.
This is the portion of the deceased spouse’s property that gets charged against the decedent’s AEA (Applicable Exclusion Amount). The bypass trust can provide benefits for the surviving spouse or other beneficiaries (or a combination thereof). Generally, bypass trusts are designed so that they are not included in the surviving spouse’s estate when he or she later dies.
A CLAT is the opposite of a CRAT. With a CLAT, the grantor establishes a trust and names a charity to receive an annuity amount from the trust for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the grantor or to other non-charitable beneficiaries named in the trust.
This election is derived from the tax court case, Estate of Clayton v. Commissioner, 97 T.C. 327 (1991). It is a very popular method of determining the amount of a deceased spouse’s estate that will be set aside for the surviving spouse. It requires a trustee or personal representative to decide during the trust administration process how big the marital deduction should be. The property set aside for the marital deduction gets transferred to the marital trust, which is set up as a QTIP trust. A 706 (Federal Estate Tax Return) is required to notify the IRS of the QTIP election and disclose the amounts going into the marital QTIP and bypass trusts. The Clayton election is a very flexible marital deduction planning tool and is frequently used for clients who have moderate to nearly-taxable estates, or in times of significant uncertainty in the estate tax.
Under the terms of a CLT, a donor donates an asset’s income stream for a period of years to a charity instead of the remainder interest. Upon the end of the lead period, the remainder interest can then pass to another beneficiary determined by the grantor such as a child, grandchild, etc.
This is basically the opposite of the CRUT. With a CLUT the grantor establishes a trust and names a charity to receive a percentage of the trust’s value for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the grantor or to other non-charitable beneficiaries named in the trust.
This is a special type of joint revocable trust that takes advantage of special laws in certain community property states (most commonly, Tennessee and Alaska) that allow people to opt in to the state’s favorable community property laws. The value behind the strategy is to allow a married couple to get a “double step-up” in basis – a step up in the deceased spouse’s property AND in the surviving spouse’s property – both at the time of the first spouse dies as well as when the second spouse dies.
Under a CRAT, a grantor establishes a trust and puts property in, keeping the right to receive an annuity payment from the trust for an initial term – either for a term or years or for the grantor’s life. After the initial term the amount remaining in the trust (the “remainder”) is distributed to a charity named in the trust.
A CRT is an irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. The whole idea of a charitable remainder trust is to reduce taxes. This is done by first donating assets into the trust and then having it pay the beneficiary for a stated period of time. Once this time-frame expires, the remainder of the estate is transferred to the charities deemed as subsequent beneficiaries.
With a CRUT, a grantor establishes a trust and puts property in, keeping the right to receive a percentage, or unitrust amount, of the trust assets for an initial term – either for a term or years or for the grantor’s life. After the initial term the amount remaining in the trust (the “remainder”) is distributed to a charity named in the trust.
This is a type of irrevocable trust that allows a client to set aside assets in trust and protect those assets from creditor claims. The DAPT is established under the laws of a state that has favorable asset protection laws. There are 17 states that currently allow individuals to set up DAPTs. Typically, DAPTs are usually set up under the laws of Delaware, South Dakota, Alaska, or Nevada, the initial states having laws supporting DAPT’s creation.
This is the process by which a trustee exercises the power to distribute property from one trust (the “originating” trust or the “inception” trust) into a new trust for the benefit of a beneficiary. Decanting is an increasingly popular strategy to allow a trustee to create new, more favorable trust terms for a beneficiary – albeit consistent with the trustee’s fiduciary obligation to the beneficiary established in the inception trust.
Refers to a technique, when intentionally implemented, allows a trust to extend the timeframe of a trust beyond what would be the limit of the original Rule of Perpetuities (RAP) of a trust by allowing a beneficiary to exercise a limited power of appointment in a way that extends the RAP of the trust even further. The upshot is that the person who exercises the power causes the property subject to the power to be included in their estate (getting a basis adjustment) when they die. The DTT “loophole” is found in IRC sec. 2041(a)(3) when someone who holds a limited power of appointment exercises it in a way that “…postpone[s] the vesting of any estate or interest… or suspend[s] the absolute ownership or power of alienation of [the interest]… for a period ascertainable without regard to the date of the creation of the power.” In other words, if someone who holds a limited power of appointment exercises that power to give someone else a presently-exercisable general power of appointment (referred to as a “PEG” power), the person who exercised the limited power of appointment will have estate inclusion over the property for which the PEG power was granted to the other person. Effectively drafting to take advantage of the DTT often requires modifying a trust’s RAP clause and eliminating any limitation that would otherwise prevent the exercise of a limited power of appointment this way.
These are all state specific flavors of an irrevocable trust that works primarily as an income tax / capital gains tax minimization strategy. The trust is set up in a state that does not impose state income tax so any highly-appreciated assets sold by the trust will avoid state capital gains tax. Any assets remaining in the trust when the client dies will be included in the client’s gross estate, causing a step-up in basis for those assets.
Disclaiming is a formal technique whereby someone can choose to not receive property and it will be treated as if they have never received it. It’s a technique under IRC Sec. 2518 that allows someone who is entitled to receive property to disclaim that property, allowing it to be distributed somewhere else. In the context of marital deduction planning, the disclaimer method allows the surviving spouse to disclaim property into a bypass trust, providing some flexibility in marital deduction planning.
This is a special trustee whose job is limited to making distributions from the trust to beneficiaries.
This refers to the amount of AEA that is leftover after the estate has allocated part of a deceased spouse’s estate exemption to a bypass trust.
A power (financial or medical) granted by a person (‘the donor’) to another (‘the attorney’) giving the attorney authority to act on the donor’s behalf. Power has effect when the donor loses his or her mental capacity. The power ceases when the person dies.
Assets owned by the deceased at the date of his or her death.
This is the person who is named in a will or otherwise appointed by the court to administer the estate of a deceased person. The trustee administers the trust; the executor or personal representative administers the probate estate.
This is a more advanced form of asset protection trust that is established under the laws of a foreign country having even more favorable asset protection for clients than within the United States. The Isle of Man, the Cook Islands, and/or the Cayman Islands are all frequently used as situses for overseas trusts.
This describes the nature of a relationship where one party owes a series of duties to another party and is held legally responsible for the outcomes of their actions. As it relates to estate planning there are a number or roles used in the estate planning process that have or may have fiduciary duties.
The Financial Power of Attorney is a separate document where you are designating an “attorney in fact” to handle your financial and legal affairs.
A type of partnership where assets are pooled into a family owned business of which family members own shares. FLPs allow for shares to be gifted to family members and rely on minority discount valuations to help minimize estate taxes and take advantage of gift tax exemptions.
This is a power that can either be reserved by the grantor or given to someone else to direct how property in a trust gets distributed. General powers of appointment are included in the power holder’s estate under IRC sec. 2041(b)(1). To be a “general” power of appointment, the person holding the power must be able to appoint the property to either themselves, their estate, their creditors, and/or the creditors of their estate.
These nearly synonymous terms refer to the individual who establishes a trust.
A GRAT is a type of irrevocable trust that is designed around a sophisticated gifting & wealth transfer strategy. In a GRAT, the grantor establishes a trust putting property in and taking back an annuity (calculated as a dollar amount) for a specific amount of time based on the value of the property in the trust. After the annuity period ends the GRAT pays out to other beneficiaries.
A GRIT is similar to a GRAT except that the grantor receives the income stream from the trust assets, rather than a fixed annuity amount from the trust for a specified period of time. After the initial term ends the GRIT pays to other beneficiaries.
A GRUT is similar to a GRAT but instead of taking out an annuity interest the Settlor receives a percentage of the trust (called a unitrust amount) for a specific amount of time based on the value of the property in the trust. After the initial term ends the GRUT pays to other beneficiaries.
You have the right to determine who should become guardian of any minor children and any incapacitated individuals. Please understand that being a guardian is not the same as being a trustee. The guardian is the person that watches out for the personal needs of the child or incapacitated person. The guardian will also be involved with any medical or other needs as they may arise until the child has reached the age of 18. Rules that govern the distribution of a deceased’s estate where the deceased has died intestate (without having made a valid Will disposing of their property).
This refers to the court proceedings that are undertaken when an individual lacks the legal capacity to make decisions for themselves or otherwise protect their own interests. That lack of legal capacity can be due to mental or physical illness or because the person is a minor child. A guardian or conservator is a fiduciary appointed by the court to make decisions on behalf of the legally disabled person (who is called the “ward”). That fiduciary must provide periodic reports to the court and the guardianship/conservatorship continues until the ward (disabled person) dies or is no longer under the legal disability. Durable powers of attorney and trust-oriented planning helps avoid guardianship/conservatorship proceedings.
Authorizes trusted individuals to receive your protected health information for specified purposes.
This is a form of irrevocable trust that gets the value of the trust assets out of the client’s estate but allows the client to continue to be treated as the owner for income tax purposes only. One of the main advantages is that the (often wealthy) client can add value to the trust by paying the income tax that is due on the income in the trust without those tax payments being treated as additional taxable gifts to the trust. Also, it means that the trust income will generally be taxed at lower rates since the fiduciary income tax brackets are typically higher.
This is a very popular form of irrevocable trust that is designed to own high-value life insurance. A client establishes an ILIT and pays enough money into the trust to allow the trustee to buy life insurance on the life of the client (and often, the client’s spouse). When properly structured and funded, when the insured person dies, the death benefit of the life insurance is paid into the trust but is not included in the gross estate of the client – avoiding any estate tax liability.
This describes the condition of someone who dies without having a will in place. If you have assets/property that is not otherwise planned for and no will, the outstanding property will pass through the laws of intestacy in the state where you resided. The laws of intestacy vary from state to state and are set forth in state statutes.
This is a special trustee whose job is limited to making investment decisions for the trust.
A trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.
A land trust is a simple, inexpensive method for handling the ownership of real estate. The recorded deed to the real estate is held by a trustee, but all the rights and conveniences of ownership are exercised by the beneficiary.
Your final wishes for your dependents and arrangements, with specific references to the details outlined in your Trust.
A LEPA trust is a form of marital deduction-qualifying trust that serves as an alternative to a QTIP trust. This form of trust is authorized under IRC sec. 2056(b)(5) and unlike the QTIP, does not require a form 706 (Federal Estate Tax Return) to establish. The LEPA trust must entitle the surviving spouse to receive all income during life, and the life income interest must be over all property for which the marital deduction is sought. The spouse must have the lifetime power to appoint property in the trust to themselves or a power (lifetime or testamentary) to appoint the property to his or her estate. Like a QTIP trust, the spouse is the grantor for income tax purposes (IRC sec. 678) and the value of the trust property is included in the spouse’s estate (getting a basis adjustment) when the spouse dies (IRC secs. 2041, 1014(a))
Also known as an “advance directive”, a living will is intended to allow a person to specify the nature and extent (including refusal) of medical treatment they receive should they become incapable of doing so in the future.
This is a power to appoint property to someone else, but in a way that does not cause the property “subject to that power” to be included in the power holder’s estate. Any powers of appointment that are not “general” powers of appointment are limited powers.
It’s an irrevocable trust that is structured and funded in a way that means the assets transferred to the trust are protected from counting as resources for Medicaid qualification purposes; it can be drafted a number of ways to take advantage of tax benefits.
The marital deduction allows a married individual to leave property to his or her surviving spouse free of estate tax. U.S. citizens can leave an unlimited amount for their surviving spouse, assuming the survivor is also a U.S. citizen, and assuming the gift qualifies under IRC Sec. 2056. There are lots of different ways a trust or will can determine the amount set aside for the marital deduction, including:
The marital trust refers to the deceased spouse’s property that is transferred into a trust qualifying for the marital deduction. When the surviving spouse later dies the value remaining in the marital trust is included in that spouse’s estate.
The Advanced Medical Directive is state specific —it may include both the Living Will as well as the appointment of an agent to make medical decisions for you when you are unable to do so yourself. This person will be the one to process the Living Will and will follow your instructions accordingly. The medical power of attorney will also speak on your behalf if medical treatment is required to improve your quality of life.
A National Firearms Act compliant NFA Gun Trust is a standard trust that is designed to be used with NFA firearms in mind. A NFA Gun Trust is written with specific language that tailors to the National Firearms Act and the Gun Control Act rules and regulations.
A NICRUT annually pays to the Recipient(s) the lesser of the trust’s net income or an annual “Uni Amount”. The Uni Amount is a fixed percentage of the value of the trust assets at the beginning of the trust’s tax year. Because the Recipient(s) receive the lesser of the trust’s net income and the Uni Amount and because the Uni Amount is a percentage of the value of the trust assets at the beginning of the trust’s tax year the annual amount distributed to the Recipient(s) will vary with variations in the trust’s income and the value of the trust. Additional contributions may be made to a net income charitable remainder unitrust if that option is selected.
Used as a type of CRT. This trust annually pays to the Recipient(s) the lesser of the trust’s net income or an annual “Unitrust Amount” in a manner similar to the NICRUT. However, if the net income of the trust is less than the Unitrust Amount in a given year the amount by which the Unitrust Amount exceeds the value of the net income is added to a “deficit account.” If the net income of the trust is greater than the Unitrust Amount in a given year that excess amount can be distributed to the Recipient(s) up to the amount of the deficit account. To the extent excess income is distributed to the Recipient(s) the deficit account is reduced. The amount of excess income that can be distributed to the Recipient(s) is limited by the size of the deficit account. Additional contributions may be made to a net income charitable remainder unitrust if that option is selected.
A power that can be immediately exercised by the power holder to appoint property to that person’s self, their estate, their creditors, or the creditors of their estate. Possession of a PEG power causes the value of the property over which the power may be exercised to be included in the power holder’s estate. PEG powers are used in many contexts, including the application of the Delaware Tax Trap (DTT), discussed above.
Depending on your state of residence, the “executor” may be called a personal representative (PR). The job of the executor or PR is to collect and evaluate the decedent’s assets, pay any taxes, reimburse for funeral expenses and other priorities as assigned by your state of residence. Next would be determining and paying any legally enforceable debts and, at the end of the time allowed under the code, make the final distribution.
The concept of portability allows married couples to effectively combine their individual AEAs, allowing them to pass up to $10,000,000 (adjusted for inflation) to their heirs. If a spouse dies and doesn’t use all of his or her AEA in their estate plan, the amount they don’t use is called the DSUEA, and the surviving spouse is allowed to use that amount in their own estate tax planning. In order to take advantage of portability the trustee of the deceased spouse’s estate must file a federal estate tax return to claim
This is a special strategy designed generally for couples in blended families who live in a community property state and where the couple’s planning objectives are really different from each other. The couple will establish a joint RLT to hold their community property or other jointly-owned property, and they will each establish a separate RLT to hold their separate property. When the first of that couple dies, the joint RLT terminates and “pours over” the joint RLT assets into the separate trusts. Those separate trusts then manage the distribution of the property.
Assign someone (an agent) to manage your personal and business responsibilities if you are away or incapacitated.
The court proceeding that must be undertaken to transfer the property of a dead person to surviving beneficiaries. Probate procedures vary widely from state to state but generally they’re public proceedings and can be time consuming and rather expensive. One of the objectives of trust-based planning is to avoid probate. This is done primarily to save time, minimize the likelihood of disputes among heirs, and preserve privacy.
This is a form of marital trust used to take a deduction that can be used for estates where surviving spouses are not citizens of the U.S. The QDOT rules are found under IRC sec. 2056A and generally function to defer estate tax on the property transferred to the QDOT until it’s distributed from the trust.
A QPRT works like a GRAT except that the property transferred to the trust is the grantor’s personal residence. The grantor keeps the right to live in the home for a specified number of years and after that term ends, the grantor must move out or begin paying rent to the trust, since other beneficiaries are entitled to the trust property after the initial term.
The QTIP election (qualified terminable interest property) refers to an election made allowing a grantor to set aside property for the surviving spouse in a trust in a way that qualifies for the unlimited marital deduction. (IRC Sec. 2056(b)(7).)
This is a creation of the common law that is used to determine how long a trust can legally remain in effect. The original rule is based on the notion of “lives in being” (that is, people who are alive or who can be easily identified) at the time the trust becomes irrevocable plus an additional 21 years. An increasing number of states have greatly expanded the timeframe of the rule against perpetuities, and several have eliminated it completely. Simply put, if the rule against perpetuities applies the trust can’t last forever. It can last for hundreds of years sometimes, but it must end and distribute at some point for the trust to be valid and enforceable.
The central hub of your estate plan with provisions for the management, control, and distribution of your assets during life and after death.
This is the main document & planning solution most trusts & estates attorneys implement for their clients. The client transfers their property to the RLT during their life so that their trustee can manage that property for the client if the client becomes disabled and when the client dies. Because the trust owns the property, probate is not necessary to transfer property after the client dies.
A listing of assets that you hold in the Trust are subject to the provisions of the Trust. This can be easily updated as you add or remove Trust assets.
The “self-cancelling” feature means that if you die during the note’s term — which must be no longer than your actuarial life expectancy at the time of the transaction — the buyer (that is, your children or other family members) is relieved of any future payment obligations.
A type of CRT, a standard charitable remainder unitrust Trust (SCRUT) pays an annual “Uni Amount” to the Recipient(s). The Uni Amount is a fixed percentage of the value of the trust assets at the beginning of the trust’s tax year. Because the Uni Amount is a percentage of the value of the trust assets at the beginning of the trust’s tax year the annual amount distributed to the Recipient(s) will vary with variations in the value of the value of the trust.
Unlike community property, separate property receives a basis adjustment only when the owner of that separate property dies. For married couples in separate property or common law states, they may own their property jointly, but it is not treated the same as community property. All states that are not community property states are separate property states.
This is a special type of trust designed to set aside assets for the benefit of a beneficiary whose disabilities may allow the beneficiary to receive public assistance for medical and other care expenses. There are generally two types: first-party trusts that someone establishes for their own benefit, and third-party trusts that someone establishes for the benefit of someone else, like a spouse, child, parent, etc.
This is a special type of trust designed to receive “qualified retirement accounts” like IRAs, 401(k)s, etc. It can be set up as either revocable or irrevocable, and it’s designed to allow trust beneficiaries to continue to defer or “stretch out” income tax on the account balance for as long as possible. SRTs also provide a lot of protection for retirement account balances after they’re inherited by beneficiaries which is particularly important since Clark v. Rameker, a case which made clear that inherited 401(k)s do not enjoy bankruptcy protection.
This term only applies in the context of a joint RLT plan. The survivor’s trust is the surviving spouse’s share of the joint trust property, plus any separate property the surviving spouse had. The deceased spouse’s property will typically flow into the marital and/or bypass trusts. The survivor’s trust is fully revocable by the surviving spouse for the remainder of the survivor’s life. It’s treated just as if the surviving spouse had established his or her own individual RLT.
A Testamentary Trust is a Trust under your Will. This means directions for how the Trust should be set up are outlined in advance in your Last Will and Testament. It’s important to understand that a Testamentary Trust doesn’t become established until you pass away. You use your Will to appoint an executor and to state other directions for the Trust, including who the trustee and beneficiaries should be and what assets the Trust should hold. Upon your passing, the Trust can then be seamlessly established and funded.
This describes the condition of someone who dies WITH a will.
A “trust” is really just a formal relationship where someone (the grantor) appoints someone else (the trustee) to hold title to and manage trust property for the benefit of one or more people (the beneficiaries).
This is a special type of power holder who can control certain aspects of irrevocable trusts. Comparatively speaking this is a relatively newer area of the law and it is still evolving. Trust protectors are generally treated as an agent of the Grantor and protectors can be used in a variety of ways to ensure the intentions of the grantor are complied with in the administration of the trust. There are a variety of subtypes of Trust Protectors or Trust Advisors with different scopes of duties.
This is the day-to-day decision maker for a trust. The trustee has a series of fiduciary duties to the beneficiaries to make sure that the trust is administered properly according to the trust’s terms and governing law, and that the beneficiaries’ interests are protected. There must always be a trustee for a valid trust to exist, and all trustees are always held to a fiduciary standard.
A VA trust is an intentionally defective grantor trust and can be considered as an option for clients who are wartime Veterans or the surviving spouses of a wartime Veteran. This type of trust is designed to meet the eligibility requirements from the Veterans Administration (VA) of a complete gift or complete relinquishment.
A written document detailing the terms on how a person’s estate should be managed and distributed after his or her death.