A type of Living Revocable Trust used by married couples. In this type of living trust, two trusts (trust A and trust B) are created at the time the first spouse dies. By dividing the couple’s estate into trusts at the first death, each spouse can pass the maximum amount of property allowed to avoid federal estate taxes.
The situation in which a decedent’s estate is inadequate to finance all the bequests under the will. The order of abatement specifies the gifts that will be funded first and those that will abate or fail.
ADJUSTED GROSS ESTATE
Calculated by deducting estate settlement costs from the gross estate, also known as the taxable estate.
ADJUSTED GROSS INCOME (AGI)
An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.
A person appointed by the court to settle an estate when there is no will.
Legal process pursuant to state statute in which a child’s legal rights from the natural parents are terminated and similar rights and duties toward their adoptive parents are substituted.
AFTER TAX RETURN
The return from an investment after the effects of taxes have been taken into account.
ALTERNATIVE MINIMUM TAX
A method of calculating income tax that disallows certain deductions, credits, and exclusions. This was intended to ensure that individuals, trusts, and estates that benefit from tax preferences do not escape all federal income tax liability. People must calculate their taxes both ways and pay the greater of the two.
ANNUAL EXCLUSION (OR ANNUAL PER DONEE GIFT TAX EXCLUSION)
A gift tax exclusion of $14,000 per donee for gifts made in 2017. The gift must be of a present interest. Direct payments for medical or tuition expenses do not impact or reduce the annual exclusion gifts one can make.
ANCILLARY PROBATE ADMINISTRATION
Probate administration in a jurisdiction other than the Decedent’s domicile.
The method by which a tax liability- typically estate tax — is shared by the beneficiaries of an estate.
Anything owned that has monetary value.
ASSET PROTECTION PLANNING
The term “asset protection” has traditionally been used in referring to techniques that offer protection from the claims of personal and business creditors. However, today the term is used to describe a wide array of planning techniques, including those intended to reduce or eliminate income and estate taxes as well as claims from future creditors. These techniques can range from the fairly simple to the very complicated, but are premised on deterring potential creditors from going after you and/or your heirs, generally by making it difficult or impossible to access your assets or collect judgments against you. Asset protection techniques must be implemented before the need for it arises.
Method by which the owner of an asset transfers ownership of the asset to another person or entity.
The clause in a will in which the witnesses certify that the will has been signed before them and describes how all parties signed the will.
An individual, institution, trustee or other entity designated in a will or trust to receive something of value.
A gift of personal property made in a will or trust.
The net value of a company’s assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock’s market value.
BUSINESS EXIT PLANNING
Business Exit Planning is the process that a business owner or owners develop to systematically exit their business in a manner that will allow them to achieve their financial and family goals. For most business owners this requires them to focus on: 1) when they want to leave the business, 2) who they want to leave or sell the business to (insiders or third party buyers), and 3) how much recurring after tax income do they need or want. After goals are set, exit planning focuses on operational and tax issues related to selling the business, contingency plans in the event that the owner becomes disabled or dies during the exit process and estate planning in the event that the owner dies or chooses to pass the business on at his death.
A buy-sell agreement is an arrangement between two or more parties that obligates one party to buy the business and another party to sell the business upon the death, disability, or retirement of one of the owners.
CAPITAL GAIN OR LOSS
The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.
CASH SURRENDER VALUE
The amount that an insurance policyholder is entitled to receive when he or she discontinues coverage. Policyholders are usually able to borrow against the surrender value of a policy from the insurance company. Policy loans that are not repaid will reduce the policy’s death benefit and cash value by the amount of any outstanding loan balance plus interest.
CHARITABLE LEAD TRUST
A trust established for the benefit of a charitable organization under which the charitable organization receives the “lead” or income interest for a term of years or for the grantor’s lifetime. Upon the termination of the income interest the trust balance transfers to the grantor or to his or her designated beneficiary or beneficiaries. This type of trust can reduce estate taxes and allows the grantor’s heirs to retain control of the assets.
Charitable estate planning combines philanthropic, financial, estate and tax planning. It is a process that can help you make gifts to causes dear to you, often with dramatic tax and financial rewards.
CHARITABLE REMAINDER TRUST
A trust established for the benefit of a charitable organization under which the grantor or other named beneficiary(ies) receives income from an asset for their lifetime or lifetimes or for a term of years. At the death of the income beneficiary or beneficiaries or at the end of the term of years, the trust balance transfers to the charitable organization. The grantor receives a charitable contribution deduction in the year in which the trust is established, and the assets placed in the trust may avoid capital gains taxes.
The Consolidated Omnibus Budget Reconciliation Act is a federal law requiring employers with more than 20 employees to offer terminated or retired employees the opportunity to continue their health insurance coverage for 18 months at the employee’s expense. Coverage may be extended to the employee’s dependents for 36 months in the case of divorce or death of the employee.
Technically a written addition or amendment to a will. Must be executed according to all of the formalities that govern a will itself to be valid.
State laws vary, but generally in community property states all property acquired during marriage is considered community property, and each partner is entitled to one half. This includes debt accumulated. There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In addition, Alaska is an elective community property state.
Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually.
An individual appointed by a court to manage the affairs of an adult who is no longer competent. Also a person appointed by a court to manage the assets of a minor.
Court process whereby a conservator is appointed by the court to manage the monetary affairs of a person who is unable to manage his/her own affairs.
Beneficiary of a trust or will who is entitled to receive certain property only if the primary beneficiary dies or otherwise is rendered unable to take the property.
CORPUS OF A TRUST
Literally “the body” of the trust. Used to refer to the money or property placed in a trust. Distinguished from the income produced by the trust.
CRUMMEY NOTICES or CRUMMEY LETTERS (FOR TRUST)
When a Trustmaker intends to make gifts to an irrevocable trust in the future for estate tax planning purposes, it is common for the trust to include a withdrawal right provision whereby when a gift is made to the trust, the trust beneficiaries must be notified that they have the right to withdraw the gift amount for a short period of time (often thirty days) after which their right to withdrawal lapses. The purpose of this withdrawal provision and notice requirement is to allow the gift to qualify as a “present interest” gift, thus allowing the gift to qualify under the Donor’s Annual Gift Exclusion. By allowing the gift to qualify for the Annual Gift Exclusion, the Donor may not use up their Unified Credit Amount (Applicable Exemption Amount) that would otherwise be available to reduce the Donor’s estate taxes at death.
An irrevocable trust in which a beneficiary possesses a right to withdraw some or all of the property contributed for a period of time (usually 30 days), after which time the power lapses and the property is governed by the terms of the trust document; the beneficiary’s right to withdraw is considered a gift of a present interest for gift tax purposes, thereby qualifying contributions for the gift tax annual exclusion; irrevocable life insurance trusts (see below) are usually Crummey trusts. The name “Crummey” originated from an old tax court case that held that such withdrawal rights and notice provisions in an irrevocable trust could allow gifts to that trust to qualify as present interest gifts. Crummey Notices or Letters are often used in Irrevocable Life Insurance Trusts (ILITs) to allow the Trustmaker to make annual gifts to cover insurance premiums for insurance on his or her life that is owned by the Trust with the trust as owner and beneficiary of the insurance policy.
A person who died.
An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.
DEFINED BENEFIT PLAN
A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed to inflation.
DEFINED CONTRIBUTION PLAN
A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee’s compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee’s account.
Refers to an inheritance under a will, or when used as a verb, to dispose of property by will.
A person or entity designated in a will to receive a devise.
An outright generation-skipping transfer, either by gift or at death, to a recipient, known as a “skip person”, who is two or more generation levels below the transferor. This type of property transfer prompts the generation-skipping transfer tax.
To cut a person off from his or her inheritance in an estate where he or she would have been a natural heir.
The state of a person’s principal residence. An individual’s domicile determines which state law applies to their estate. Each person can have only one domicile. Generally determined based on where the individual intended to make their permanent home.
One who receives a gift.
An individual who makes a gift. Also referred to as a trustor, grantor or settlor in certain circumstances.
DURABLE POWER OF ATTORNEY
A written legal document that lets an individual designate another person to act on his or her behalf, in the event the individual becomes disabled or incapacitated.
DURABLE POWER OF ATTORNEY FOR HEALTH CARE
A written legal document that gives another person the authority to act on the author’s behalf in making health care decisions.
The portion of a decedent’s estate that a surviving spouse can elect to receive if the amount left to the surviving spouse does not meet a minimum statutory amount. In most states the surviving spouse must make the election during the first nine months after the decedent’s death.
EMPLOYER-SPONSORED RETIREMENT PLAN
A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.
The value of a person’s ownership in real property or securities; the market value of a property or business, less all claims and liens against it.
The Employee Retirement Income Security Act is a federal law covering all aspects of employee retirement plans. If employers provide plans, they must be adequately funded and provide for vesting, survivor’s rights, and disclosures.
The process by which a decedent’s property is transferred to the state government in which the individual was domiciled. Happens when the decedent dies intestate without heirs.
An entity consisting of a person’s property and all the rights and responsibilities relating to it. A Personal Representative administers an estate.
Activities coordinated to provide for the orderly and cost-effective distribution of an individual’s assets at the time of his or her death. Estate conservation often includes the use of wills and trusts.
ESTATE (DEATH) TAX
Upon the death of a decedent, federal and some state governments impose taxes on the value of the estate left to others (with limitations). 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). Colorado does not currently have an inheritance or state estate tax.
The person (male/female) named in a will to manage a decedent’s estate. The more modern term is a “personal representative” which removes any reference to the sex of the person.
401(k) & 403(b) Plans
A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59Â½.
A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59Â½.
FAMILY LIMITED PARTNERSHIP
A limited partnership in which one or more family members own partnership interests.
FEE SIMPLE OWNERSHIP
Outright ownership of property with absolute rights to dispose of or gift it to anyone.
A person with the legal duty to act primarily for another’s benefit in a position of trust, good faith, candor, and responsibility.
The duty of a fiduciary to act in a position of trust, good faith, candor and responsibility, on behalf of another. The duty is one of the best defined responsibilities under the law and is very strictly enforced by the courts.
The process of transferring ownership or title of a trust maker’s assets into a trust 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.
An ownership interest in property in which unlimited possession or enjoyment of property is delayed until some future time.
GENERAL POWER OF APPOINTMENT
The power given to a person, by appointment in a will or a trust, to distribute the property that passes through the will or trust at the discretion of the person appointed. Other than to give the appointed person the authority to make the distribution, the will or trust does not make distribution of the property.
GENERAL POWER OF ATTORNEY
A legal document that gives one person (the agent) the legal authority to act on behalf of another (the principal). The scope of the document can be as broad or narrow as the principal desires. A general power of attorney becomes invalid when the principal dies or becomes incompetent.
A transfer to a grandchild or other individual who is at least two generations (or for unrelated persons where the transferee is 37.5 years younger than the donor) below that of the Grantor, or to a trust for the benefit of such individuals, upon which a Generation-Skipping Transfer Tax may be imposed.
A gratuitous transfer of property to someone else without receiving adequate consideration in return.
A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. Donors are allowed to make gifts up to $14,000 per donee in 2017. By agreement, couples may make gifts up to $28,000 per married couple in 2017. Gifts above the annual exclusion amount reduce the amount of the donor’s applicable exemption amount. Aggregate gifts above $5,490,000 million (in 2017) will result in gift taxes due. Some states also impose a gift tax. The gift tax exemption is indexed annually for inflation.
In trust usage, the person who creates a trust (also known as Grantor, settlor or trustmaker).
The Grantor Retained Annuity Trust (“GRAT”) is a type of irrevocable trust that permits the Grantor to make a lifetime gift of assets to an irrevocable trust in exchange for a fixed payment stream for a specified term of years. At the end of the term of years, the balance of the trust property is transferred to the remainder beneficiaries named in the trust, typically children or grandchildren. The Grantor Retained Annuity Trust may reduce estate taxes by removing assets from those that are counted in the Grantor’s estate for estate tax purposes if the Grantor outlives the specified term of years.
The total value of all property owned by a decedent at the time of his or her death.
A person appointed by a court to the care for a minor. The guardian may or may not also serves as conservator of the minor’s estate.
A court proceeding in which the Court determines whether a person is so incapacitated, due to lack of capacity or lack of legal age, that s/he needs a guardian appointed to make decisions related to a person’s wellbeing.
HEALTH CARE POWER OF ATTORNEY
A grant of power to a person to make or carry out the decision of the signor of the instrument, under terms of a state law, when one is unable to make decisions concerning selection of health care providers, treatment options, pain control and implementation of a Living Will.
A person who inherits something from a Decedent under a state intestacy statute in circumstances where the decedent died intestate (without a will or with a will that did not fully dispose of the Decedent’s assets). Heirs receive notice of probate court actions even if the decedent had a will.
Those persons who are entitled under the statutes of intestate succession to the property of a decedent. Also used to refer generally to beneficiaries of a will. Also known as “next of kin”.
The Health Insurance Portability and Accountability Act (HIPAA) was enacted by the U.S. Congress in 1996. Title II of HIPAA, known as the Administrative Simplification (AS) provisions, requires the establishment of national standards for electronic health care transactions and national identifiers for providers, health insurance plans, and employers. The Administration Simplification provisions also address the security and privacy of health data. The standards are meant to improve the efficiency and effectiveness of the nation’s health care system by encouraging the widespread use of electronic data interchange in the US health care system HIPAA restricts the ability of health care providers to disseminate “Protected Health Information” without authorization. Health Care Powers of Attorney should contain a “HIPAA Authorization” allowing health care providers to communicate with the designated agent or agents. Alternatively, a separate Standalone HIPAA Authorization may be used to augment a Health Care Power of Attorney not containing a HIPAA Authorization.
A handwritten will, authorized in a few states including Colorado.
State laws which entitle a surviving spouse or minor children to certain assets of the decedent’s estate.
The lack of ability to act on one’s own behalf. One who lacks capacity is generally unable to execute a testamentary plan.
A beneficiary whose interest is limited to income earned.
INCOME IN RESPECT OF A DECEDENT
Income earned by a decedent or income to which the decedent had a right prior to death, but which was not properly includible in his or her gross income prior to death.
To receive property from a deceased person.
An irrevocable trust used to hold insurance and pass it on to beneficiary without any estate taxes on the death benefits of the policy. Sometimes referred to as an Irrevocable Life Insurance Trust (ILIT).
Literally means during life. Refers to transactions, such as gifts, made during a person’s lifetime.
INTER VIVOS TRUST
Legal name for a “between the living” trust. The trust is set up by a grantor during his or her lifetime.
The distribution of property to heirs according to the statutes of the state of residency upon the death of a person who owned the property, but who did not leave a valid will.
A trust that cannot be changed or terminated after it is established.
The condition of an estate left by a decedent without a valid will. State law then determines the disposition of the property to individuals based on his/her legal relationship to the decedent.