A-B Trust

Also called a by-pass trust or a credit shelter trust. The purpose of an A-B Trust is to help married couples avoid federal estate taxes. Typically a spouse leaves his/her separate assets and share of community/marital property to a trust (Trust A and Trust B) instead of to the other spouse. The surviving spouse receives the income earned on the assets of the deceased spouse's trust for life. The trustee  is also directed to pay principal  to meet the surviving spouse's need for "health, education, support and maintenance" during his or her lifetime. On the surviving spouse's death, the remaining assets of the trust are distributed to the beneficiaries  selected by the Trust Maker, typically his or her children. Because the assets of the trust never belonged to the second spouse, they are not counted as part of that spouse's estate for tax purposes.

Ademption

Extinguished or withdrawn. This term is used to describe the situation in which a special gift  of property (whether a sum of money or an item of personal property  or real property) intended for a beneficiary at a person's death can't be given. This might happen because the property was given to the beneficiary during the deceased's lifetime or because the property that was to be given as a special gift  has been sold, lost, or otherwise disposed of by the owner and is  not part of the estate  at the time of his/her death.

Administrator  (or the feminine, Administratix)

Person named by a probate court to represent the estate of a deceased person when there is no will or the will did not name an executor. The term personal representative  is also used to include an administrator and an executor.

Adult

A person who has reached the age at which he or she is able to enter into binding legal agreements. In some states, a person is regarded as an adult on his or her 18th birthday. In some other jurisdictions the age is 21.

Annulment

Made legally void, as if it never happened. A marriage that has been annulled is treated as if it never occurred (for most purposes).

Attorney-in-Fact

A person given authority to act on behalf of another person, who is called the principal. An attorney-in-fact can be any adult  who the principal selects. (He or she need not be a lawyer.) Typically, people appoint an attorney-in-fact in a written power of attorney, granting the attorney-in-fact the power to transact business (enter into agreements, contracts, make transfers of property, etc.). The authority of the attorney-in-fact cannot last beyond the life of the principal.

Back-up Trustee  (also called the Successor Trustee)

The person or institution named in a trust agreement who will assume control of the trust if the original trustee dies, resigns, or becomes unable or unwilling to act. In sporting terms, it is like someone who sits on the bench and only comes on if a regular team member is injured or plays badly. There can be several layers of back-up trustees who take over in the order the trust creator designates.

Beneficiary -

A person or organization that is to receive a benefit. The benefit may flow from an insurance policy or another contract such as a trust or a will.

By-Pass Trust  --See A-B Trust.

Charitable Lead Unitrust (CLUT)

A trust set up to benefit a charity during the donor's lifetime or for a fixed term of years. While the donor is alive the income from the trust goes to one or more charitable foundations. When the donor dies the assets in the trust go to the heirs or beneficiaries named in the trust. This kind of trust is generally for the very rich and for those whose children won't need the income until years later when the trust ends.

Charitable Trust

One of several different types of trusts that benefit a charity or the public, including Charitable Lead Trusts and Charitable Remainder Trusts. Typically , charitable trusts are established as part of an estate plan to lower or avoid imposition of federal (and some state) estate and gift taxes and/or to save capital gains tax.

Charitable Remainder Trust (CRT)

A trust where the donor receives an income from the trust assets during his or her lifetime. When the donor dies the assets of the trust go to a charity. The donor or trust creator can sell the assets without paying capital gains tax and receives an annual income. He or she will also receive a tax deduction for the charitable gift and eliminate appreciated assets from his or her estate.

Charitable Remainder Annuity Trust

A charitable remainder trust in which the trust donor is paid an annual fixed dollar amount.

Charitable Remainder Unitrust

A charitable remainder trust in which the trust donor is paid an annual fixed percentage of the fluctuating value of trust assets.

Codicil

A written change or amendment to a will; it might revoke, explain, or add to provisions in the existing will. A codicil must be executed with the same formality as an original will.

Cohabitation

Living together without being married to each other.

Commingle

To mix together. If separate property  (nonmarital property) of a husband and wife is commingled and cannot be traced to its source, the property is likely to become community property  (marital property). See also transmute.

Community Property

Property acquired during a marriage and while living in one of the 9 community property states  (see below). As a general rule, everything derived from the earnings of either spouse is shared equally by a husband and wife. Each spouse owns only one-half of the community property because the other half belongs to the other spouse. Community property rules can be modified by premarital  and postmarital agreements . See also separate property, commingle, quasi-community property, marital property, and nonmarital property.

Community Property States

States in which community property laws apply are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington State, and Wisconsin.

Conflicts of Interest

Actual or potential conflicting objectives. Conflicts of interest often arise when a course of action would benefit one spouse but restrict or negatively impact the other.

Conservator

The person appointed by a court to be legally responsible for the care and well-being of another person, typically a person who has become incompetent or incapacitated, and/or to manage the person's property and financial affairs. The court may appoint different conservators for the person and for the estate. A conservator is under the supervision of the court and must report all actions and financial dealings made on behalf of the incompetent person to the court. In some places, a conservator may be called a guardian or a curator.

Conservatorship

A court-controlled program for persons who are unable to manage their own personal and financial affairs due to physical incapacity or mental incompetence. In some respect this is akin to probate, but for a living person.

Corporate or Institutional Trustee

A corporation that handles the management of trusts. Under the laws of most states only banks and trust companies can be corporate trustees. (California also permits trust branches of title insurance companies to serve as trustees.)

Cost Basis

The tax basis  is the value that is used to determine gain  or loss for income tax purposes. Cost basis means using the amount originally paid for the property to calculate the tax basis. Generally, the tax basis will equal the  purchase price, plus the cost of capital improvements, less depreciation. Subtract this amount from the sale price of the property, and you have the amount the property has gained in value. The seller may owe capital gains tax on this amount. Once the property is transferred upon the owner's death, it is revalued as of the date of death; this is called the stepped-up Basis  for Federal Income Tax purposes.

Crummey Letter

A written notification to the beneficiaries who have withdrawal rights that contributions of money -- typically to an irrevocable life insurance trust  -- have been received on their behalf. The beneficiaries then have a period of time to withdraw the funds. Use of a Crummey Letter can avoid certain potential tax problems arising from the gift of a future interest  and is a record of the amount of gifts given for purposes of the annual gift tax exemption of $12,000 per person. [2008]

Decedent

A person who has died, also called the deceased.

Devise

A gift made by a will or a trust. A devise is made to a beneficiary  under the terms of the will or trust. In some states this term is only used to refer to gifts of real property. In other states a devise is the same thing as a bequest and can apply to any kind of property.

Domicile

A person's permanent legal residence. While a person may have more than one residence, he or she can have only one domicile. Typically, the domicile is the same place you use for purposes of voter registration. You are presumed to have your domicile in the country of your birth or where your parents were born unless you have broken ties with that country.

Durable Power

A power (typically a power of attorney) that continues despite mental or physical incapacity of the principal. A durable power may arise only when the principal becomes incapacitated. See also Power of Attorney  and Attorney-in-Fact.

Durable Power of Attorney for Health Care

A document that grants a person, sometimes known as a health care agent or health care proxy, the legal authority to make health care decisions for another in the event that the latter person is unable to make them for him/herself.

Estate

The total of all assets, all debts, and other obligations of an individual. At the time of death the total amount of benefits (life insurance, annuity, and retirement benefits) to be paid to beneficiaries are often also considered part of the estate for Federal Estate Tax  purposes

Executor  (or the feminine, Executrix)

A person or institution named in a will and appointed by a probate court to carry out the will's instructions and to manage the probate  estate. The duties of the executor include making an inventory of all property, paying debts and expenses, and distributing the remaining estate to the beneficiaries. An executor is known as the personal representative  in California.

Execution

The act of properly signing legal documents, such as a power of attorney, a Trust or a will. For example, proper execution of a will is more than "just signing" and normally requires at least two witnesses who are not beneficiaries under the will. For a power of attorney or a trust, proper execution involves having a notary public  certify your signature. State law defines the proper execution of documents. For example, some states restrict who may be a witness to documents like a durable power of attorney for health care.

Family Limited Partnership

A legal partnership agreement between members of a family for the management and control of property for the benefit of all parties. Sometimes used to minimize gift and estate taxes.

Federal Estate Taxes

Taxes imposed by the US Government on the value of a person's estate upon his or her death. To be over simplistic, the Federal Estate Tax for individual citizens is 45% on amounts in excess of the exemption amount, which is $2 million as of 2008. The exemption amount will be $3.5 million in 2009, and then the estate tax will be repealed in 2010. In 2011 the estate tax will be reinstated with an exemption amount of $1 million, unless Congress passes a new law. Some states also impose a state estate tax  or inheritance tax.

Fiduciary

A person in whom one places great confidence and upon whom one relies for his or her integrity, trust, and good faith. A fiduciary has the legal duty to act in the best interest and benefit of another and therefore is held to the very highest legal standards. A trustee   or an attorney-in-fact  is a fiduciary.

Future Interest

An interest in property that occurs in the future, after certain events have taken place. See also remainderman.

Gain

The difference between the tax basis  (the amount originally paid for property with certain adjustments) and the amount received for the property when it was sold. This value is used to determine the amount of capital gains tax due on the income from the sale. See also cost basis  and stepped-up basis.

Generation-skipping transfer tax  (GST Tax)

A 46% tax imposed on transfers of money or property, which skips a generation of family members. made during the lifetime or on the death of the decedent. For example, if a grandparent leaves money directly to a grandchild rather than to his own son/daughter (the grandchild's parent), the transfer may incur GST tax. The GST tax also applies to transfers to non-family members more than 37and a half years younger than the person making the transfer. Fortunately, each person has a lifetime GST tax exemption of $1 million. So only transfers of more than that amount per person would be subject to the tax. The $12,000 per person per year gifts that are exempt from the gift tax are also exempt from the GST.

Grantor

The person who sets up or creates the trust; also called a settlor, trust creator, trust maker, or trustor.

Gross Estate

The value of an estate before the debts are paid and without considering liens on estate property or probate costs. In a few states probate  statutory attorney fees and personal representative  fees are calculated based on the gross value of the estate. For example, the value of the home is calculated before deducting the amount due on the mortgage. If a deceased's assets are a house worth $500,000 with a $400,000 mortgage, her gross estate is $500,000, although the net value  is only $100,000.

Guardian

The person responsible for the health, education, and welfare of a minor child  and/or for handling the minor child's financial affairs. The person who makes decisions about the child's day-to-day life, such as medical care, education, and daily care, is called the guardian of the person. The person who takes care of the child's finances is called the guardian of the estate. One person can fill both roles.

Guardianship

A court-controlled relationship between a guardian and the minor child who is subject to the guardianship for the purpose of caring for and  managing the affairs of minor children.

Health care agent   or health care proxy

Person designated to make health care decisions for an individual.

Holographic will

A handwritten will that is dated and signed by the person making the will. The requirements for a valid holographic will vary from state to state and some states don't recognize them at all. Because holographic wills aren't favored by courts they should be avoided if possible.

Incapacity/incompetent

Legally unable to manage one's own affairs due to mental disability. This may be temporary or permanent.

Informed consent

An authorization to proceed by a person who has been given and understands all of the relevant facts. The concept of informed consent is often used with respect to medical decisions. If the procedures to be used and the associated risks and benefits of the procedures have been fully explained so that a person understands them, that person is in a position to give informed consent.

Inheritance tax

A tax imposed by a minority of states at the time of a person's death that is based upon the total value of the decedent's  estate.

Inter-vivos

A Latin term which means "between the living." This is used to describe trusts made during one's lifetime, such as a living trust. A living trust takes effect while the trust creator is still alive. In contrast, a testamentary trust  is a trust that takes effect after a person has died.

Interlineation

Something written in-between; often a change to a typed document that is made by crossing out words and entering in replacement words. Never change an executed will or trust by interlineation.

In-Terrorum Clause

In-Terrorum is a Latin term meaning "in fear." It is used to describe a provision of a will or trust that disinherits a person if he or she challenges the terms of the will or trust. It is sometimes called a No-Contest Clause. If the challenge to a will or trust is successful, the in-terrorum clause may also be invalid.

Intestate

Having died without a will or without providing legally binding instructions for the distribution of one's property after his or her death. See also testate  and probate.

Irrevocable

Something that cannot be altered, changed, or modified. An irrevocable trust is one that cannot be changed, canceled, or revoked once it is established.

Issue

Refers to a person's descendants--children, grandchildren, great-grandchildren, great-great-grandchildren, etc.

Joint Tenancy

A way that property may be owned by two or more people. In a joint tenancy when one of the joint owners dies, all of his/her interest in the property is transferred immediately, by operation of law, to the other surviving owner(s). If the joint tenancy exists between a husband and wife, it may be called a tenancy-by-the entirety. Compare with tenancy-in-common.

Judgment

An official court order regarding the rights or claims of the parties to a legal action or proceeding.

Legatee  --See Beneficiary.

Living trust  (sometimes called an inter-vivos trust)

A trust established during a person's lifetime into which she or he places property. The written document setting up the living trust contains instructions for management and distribution of the trust property during his or her lifetime as well as upon his or her death or disability. A living trust is typically revocable, which means a person can change it at any time, so long as the he or she remains legally competent.

Living will  (also known as a natural death declaration)

A document that defines the circumstances--such as if the person is suffering from a terminal illness with no expectation of recovery -- under which health care professionals should withhold or remove artificial life support, or refrain from using heroic measures, when the patient is unable to give informed consent  due to incapacity. See also health care agent.

Look-back period

The period of time a state will review for gifts or transfers of assets for people applying for Medicaid. The time period is 36 months, or 60 months for establishing a trust. A person may be ineligible for Medicaid if assets have been given away or transferred during this period.

Marital property

Property belonging to both spouses in a marriage in a non-community property state. This is comparable to community property in a community property state. See community property, separate property, nonmarital property, and transmute.

Medicaid

A medical insurance program funded by state and federal funds, whose benefits are based on need. Medicaid is often used to pay for nursing home and rest home care.

Medicare

A federal health care insurance available to seniors and some disabled persons. There are several different options for coverage.

Minor Child

A child under the legal age of adulthood. The age varies by state but a child is usually considered an adult by his or her 18th or 21st birthday.

Natural death declaration

A form of Living Will approved in some states, also known as Directive to Physicians. See living will.

Net-income charitable remainder unitrust (NICRUT)

A form of charitable trust in which the donor is paid a fixed percentage of the trust assets annually.  In this type of trust there is no distribution to the donor unless the trust has earned enough interest to cover the payment. In other words, the principal assets of the trust are not distributed.

Net income with makeup charitable remainder unitrust (NIMCRUT)

Same as an NICRUT but if the trust earns more than the fixed percentage during a later year, the unitrust is able to make up an earlier shortfall to the amount that its earned income is more than  its fixed percentage.

Net value

The value of an estate after all debts have been paid. Federal estate taxes  are based on the net value of an estate. Compare with Gross Estate.

Nonmarital property

Property belonging to only one spouse in a marriage in a non-community property state. This is comparable to separate property in a community property state. See community property, separate property, marital property, and transmute.

Notary public

A person who has been authorized to administer oaths and witness documents. Some legal documents, such as deeds, require the services of a notary public. The powers of a notary vary somewhat from state to state.

Ownership interest

The legal right to manage, sell, or give away property.

Per Capita

A means by which a grantor can distribute his or her estate so that each of the surviving descendants will share equally, regardless of generation. For example, if the deceased has two surviving children and two surviving grandchildren, under a per capita distribution they would each receive 25%. Compare with per stirpes.

Personal property

Movable property, including furniture, antiques, automobiles, business equipment, cash, and stocks. Compare with real property.

Personal representative  --See executor  and administrator.

Per Stirpes

A method of dividing an estate among one's surviving descendants. Each survivor receives only the amount, or a portion of the amount, that his/her immediate ancestor would have received if that ancestor had been alive at the time of the grantor's death. The following example may make this clearer: Assume a person has 4 children -- 3 sons and 1 daughter -- and leaves everything to "the children or their survivors, per stirpes." If all 4 children survive the parent, each of the 4 children would receive 25% of the estate, and the grandchildren would receive nothing. If 1 of the 3 sons and the daughter die before the parent, that leaves only 2 of the sons alive. If there is 1 child of the deceased son (a grandchild) and 2 grandchildren from the deceased daughter, under a per stirpes distribution the 2 sons would each get 25%, the 1 grandchild of the deceased son would get his/her father's share of 25%, and the 2 children of the deceased daughter would split her 25% share and receive 12.5% each. Compare with per capita.

Pooled-income fund (PIF)

These are funds from several donors that are pooled and invested by a charity. Donors get a tax deduction and annual income based on the their units of participation in the fund. When a donor dies the portion of the fund assets donated by the deceased go to the charity.

Postmarital agreement  (also called a post-nuptial agreement)

An agreement entered into between a husband and wife that defines each spouse's respective rights to property. These agreements are governed by state law and differ from state to state.

Pour over will

A short will often used with a living trust , which states that any property left out of the living trust will become part of (or "pour over" into) the trust upon death.

Power of appointment

The legal authority to decide who will receive property belonging to someone else. Often used when a person is given the authority to direct the ultimate distribution of property under the terms of another person's will or trust.

Power of attorney

A legal document that gives another person, the attorney-in-fact, legal authority to act on the principal's  behalf. This authority ends at the death of either the principal or the attorney-in-fact. A durable power of attorney  is valid through the principal's disability. If a power of attorney is unrestricted, it is called a general power of attorney. If there are restrictions, it is called a limited power of attorney, such as one for a very specific purpose (to sell a home, for instance). If the power only becomes effective upon certain conditions, it is considered a springing power of attorney.

Premarital agreement  (Also called a Pre-nuptial agreement)

An agreement entered into between a man and a woman prior to their marriage that can define the respective legal rights and obligations to property, whether acquired before or after the marriage. These agreements are governed by state law, which varies from state to state.

Principal

(1) A person who is the original source of authority, often used when the owner of property authorizes another person, through a power of attorney, to act in his/her stead. (2) Capital or original property of a trust or fund as opposed to interest or other earnings derived from that property.

Probate

The process through which the legal title to property is transferred from a decedent to the beneficiaries. If a person dies with a will (testate), the probate court determines if the will is valid, hears any objections to the will, orders that creditors be paid, and supervises the process to assure that property is distributed by the personal representative or executor  according to the terms of the will. If a person dies without a will (intestate) the probate court appoints an administrator  who receives all claims, pays creditors, and then distributes all property according to the laws of the state.

Property

Anything that is owned or possessed. See also real property  and personal property.

Quasi-Community Property

Property acquired during a marriage while not  living in one of the 9 community property states  that would have been community property if the couple were living in a community property state. As a general rule, everything derived from the earnings of either spouse in one of the non-community property states will be quasi-community property. See also community property, separate property, marital property, and nonmarital property. Quasi-community property rules can be modified by premarital  and postmarital agreements  made by the spouses.

Real property

Land and property that is "permanently" attached to the land such as a house or barn. Compare with personal property.

Remainderman

A person who receives what is left, typically from a will or trust, usually after a life estate or interest that lasts during one lifetime. Children and grandchildren are often remaindermen. For example, a husband may leave property in a trust with the income to go to his wife during her life. Upon her death, the remaining estate  goes to the couple's children or their survivors.

Revocable

Subject to alteration, change, or modification.

Revocable Trust

A trust in which the person who created it retains the power to change, cancel, or revoke the trust during his/her lifetime (assuming he or she remains competent).

Revocation

The act of terminating what has been done. Often used in connection with taking back the authority granted under a power of attorney, the termination of an inter-vivos trust  during a person's lifetime, or voiding a will.

Separate property

Property acquired by either husband or wife before a marriage or after the termination of a marriage. In addition, property acquired during a marriage by gift or inheritance by one spouse that is kept separate and distinct from community property  remains separate property. See also commingle, community property, quasi-community property, marital property, nonmarital property, and transmute.

Separation

The act of taking apart. Often used when a married couple decides that they no longer intend to live as husband and wife. This may have an important impact on community property.

Settlor

A person who owns the property that is placed into a trust. Also called a grantor, trust creator, trust maker, or trustor.

Sole ownership

Property that is owned by only one person.

Special Gift

A specifically identified item of property, such as a home, a ring, antique, or a sum of money, earmarked in a will or trust to go to a particular person or charity, before any other distribution is made.

Spouse

A husband or wife.

Springing power of attorney

A power of attorney  that becomes effective only when a specified event occurs, such one that only become effective if two physicians find that the principal  is unable to manage his/her own affairs. See power of attorney.

State estate tax  --See inheritance tax.

Stepped-up basis

The revaluation (for tax purposes) of property upon a person's death. For example, if a person bought a home in 1965 for $25,000 and at the time of his or her death in 1999 the home was worth $200,000, his or her heirs would have a tax basis of $200,000, not $25,000, in that property. The importance of a stepped-up-basis is that no income or capital gains tax is paid on the $175,000 increase in value, should the heirs sell the home for $200,000. See cost basis.

Tax basis  --See cost basis.

Tenancy -in-common

A form of ownership of property in which two or more persons share ownership (may be equal or unequal shares). At the death of a tenant-in-common his/her share in the property transfers to his/her heirs, rather than to the other surviving owner(s). Compare with joint tenancy.

Testamentary trust

A trust set up in a will that takes effect after the death of the trust creator. Compare with living trust.

Testate

The condition of a person who dies with a valid will. See also intestate  and probate.

Transfer tax

The combined federal estate and gift tax. A single exemption credit  applies whether the property was transferred during a person's lifetime (gift tax) or is held by a person at the time of his or her death (estate tax).

Transmute

This term is used to describe the transfer of separate property or nonmarital property  to community property  or marital property  (or the reverse).

Trust

A long recognized legal concept (first used in ancient Greece during the times of Socrates and Plato) in which some or all property of a trust creator  is held on behalf of a beneficiary  (which may be or include the trust creator) in the name of the trustee. The term also refers to the legal document that contains the provisions for the control, management, and distribution of property. The rights of the beneficiaries, and the rights, powers and duties of the trustee, are set forth in the trust agreement. That is why it is so important that a trust be properly prepared.

Trustee

A person or institution responsible for the management and distribution of property held in a trust. The trustee has the authority to act according to the instructions provided in the trust agreement. See fiduciary.

Trust maker  or trustor

A person who owns the property that is placed into a trust. Also called a creator, grantor, or settlor.

Unified credit exemption

The amount of property the federal government allows a person to transfer during life or after death without paying gift or estate taxes (jointly called transfer taxes). That exemption amount is $2 million in 2008 and will go up to $3.5 million in 2009. In 2010 the estate tax will be repealed and then reinstated in 2011 with an exemption of $1 million, unless Congress passes a new law. Currently, annual gifts of up to $12,000 to as many individuals as one wishes may be made in each calendar year by an individual (and gifts of up to $24,000 may be made by a married couple) without counting against the lifetime credit exemption.

Will

A written document that provides instructions for disposing of a person's property upon the person's death. A will generally also names an executor  or personal representative  to handle the estate. A will must be signed and (unless it is a holographic  will) properly witnessed in order to be valid. Upon the person's death a will must go through the probate process in order to have the deceased's instructions carried out.