Glossary of Estate Planning
and Tax Terms

ESTATE PLANNING TERMS

ADMINISTRATION: Specifically, the legal process in which the court supervises the marshaling of a decedent's assets, the payment of the decedent's debts and taxes, and orders the property distributed to the decedent's heirs. Such proceedings are conducted when the decedent does not leave a WILL. If the decedent leaves a WILL, the proceeding is called a PROBATE. As a practical matter, the terms "PROBATE" and "ADMINISTRATION" are used interchangeably.

ADMINISTRATOR: The person or institution appointed by the court to handle the ADMINISTRATION of the decedent's ESTATE. When an Administrator is appointed, he or she is given "Letters of Administration." With these "Letters" the Administrator can collect the assets of the decedent and take the other actions necessary to wrap up the decedent's affairs. In California an administrator need not be a resident of the State.

AGENT: A person appointed to act on another person's behalf. An agent owes a duty of trust to the person on whose behalf the agent acts.

ANCILLARY ADMINISTRATION: An administration of a decedent's property located in a state other than the state of the decedent's domicile. This administration is in addition to the administration conducted in the state where the decedent lived at the time of his or her death.

ATTORNEY-IN-FACT: A person whom is an agent or representative of another person. See also the definition of AGENT above.

BENEFICIARY: The person or entity who receives the benefit of a transaction (e.g., the recipient of any gift or the beneficiary of a life insurance policy or a TRUST).

CODICIL: An addition to a WILL that may modify, add to, subtract from, qualify, alter or revoke provisions in the WILL. The codicil is a separate document. It is signed with the same formalities as a WILL. The codicil can also be changed, revoked, canceled or destroyed in the same manner as a WILL.

COMMUNITY PROPERTY: Property that is owned in common by a husband and wife. All property acquired during marriage from earnings, and the earnings themselves, are community property. Property acquired by gift or inheritance is not community property. Spouses can by written agreement change the character of property from separate to community or vice versa.

CONSERVATOR: Similar to a GUARDIAN of a MINOR. The person who is under conservatorship (the "Conservatee") need not be declared legally incompetent in order for the conservatorship to be established. It need only be shown that the person is incapable of properly managing his or her own affairs. In California, a person may nominate his or her own conservator in advance of any need for such and, unlike a GUARDIANSHIP of a minor, the court must appoint the nominee if he or she is willing and capable to serve.

DISCLAIMER: A refusal to accept or the renunciation of an interest, such as a BEQUEST, which is made in a prescribed manner and time which can alter the estate tax consequences of a person's WILL or TRUST.

DOMICILE: The specific location of a person's permanent residence, which determines, for many purposes, the laws which govern his or her affairs. A person may have many residences, but only one domicile.

DONEE: A person who receives a gift of property from another.

DONOR: A person who makes a gift of property to another.

ESTATE: Generally, everything that a person owns, directly or indirectly, at any particular time. One's PROBATE ESTATE comprises those assets which come into the possession of a decedent's PERSONAL REPRESENTATIVE for the purpose of paying debts and for distribution to HEIRS or LEGATEES. One's TAXABLE ESTATE comprises those assets which are subject to estate tax.

EXECUTOR: The individual or entity appointed in a WILL by a TESTATOR to take care of the testator's property and to carry out the directions and requests in the WILL. An EXECUTOR is called a PERSONAL REPRESENTATIVE. The executor is confirmed by the PROBATE COURT and is issued "Letters Testamentary." The Executor has legal and business responsibilities and functions under the jurisdiction of the Probate Court.

FIDUCIARY: A person charged with the duty of trust on behalf of a BENEFICIARY. EXECUTORS, ADMINISTRATORS, and TRUSTEES are fiduciaries.

GRANTOR: The individual or entity that makes a grant of property to another person (e.g., the GRANTOR of a TRUST). A GRANTOR is also called a SETTLOR or a TRUSTOR. See also the definition of TRUST below.

GUARDIAN: The individual or entity who legally has the care and management of the person, property, or both of an unmarried child during his or her minority. In a California minority now ends at age 18. A Guardian charged with responsibility for a minor's property is called the GUARDIAN OF THE ESTATE, and one charged with responsibility for the minor's person is called the GUARDIAN OF THE PERSON. A minor under a guardianship is called a "WARD." A GUARDIAN is similar to a CONSERVATOR.

HEIR: A person who inherits property on a person's death.

INTER VIVOS TRUST: A trust created "between the living." An INTER VIVOS TRUST is also called a "LIVING TRUST." The person who sets up the trust is called the GRANTOR, SETTLOR, or TRUSTOR. The SETTLOR must be living at the time the trust is set up. If the trust is created by WILL, it does not come into existence until after the TESTATOR dies and, therefore, does not come into existence during the testator's life. For this reason, trusts created by Wills are called TESTAMENTARY TRUSTS. Inter vivos trusts may be either REVOCABLE or IRREVOCABLE.

IRREVOCABLE TRUST: A TRUST with terms and provisions that cannot be changed, modified, altered, amended or revoked. Generally these trusts are created to alter income tax and estate tax consequences. Under certain circumstances, a Court may make limited changes in such trusts.

ISSUE: A person's lineal blood descendants; e.g. children, grandchildren and great-grandchildren. The term "issue" refers to all of them regardless of their degree of kinship. Under California law, unless the document using the term "issue" provides otherwise, "issue" includes adopted persons and their issue.

JOINT TENANCY: A form of property ownership by two or more persons designated as "joint tenants with right of survivorship." When a joint tenant dies, his or her interest in the property automatically goes to the surviving joint tenant outside of and beyond the power of the decedent's WILL. Property held in joint tenancy passes outside of PROBATE. However, all such property is subject to estate tax. Holding property in joint tenancy has dangers, including certain tax disadvantages. Consult your attorney before taking title to property in joint tenancy.

LIFE ESTATE: An interest in property, the term of which is measured by the life of the person holding the interest.

LIFE INSURANCE TRUST: A type of IRREVOCABLE TRUST designed to own life insurance policies as a method of removing the proceeds of the policies from the insured's TAXABLE ESTATE.

LIFE TENANT: The person who receives the benefits from property during his or her lifetime only. The benefits stop at death.

LIVING TRUST: A trust created "between the living." A LIVING TRUST is also called an "INTER VIVOS TRUST." The person who sets up the trust is called the GRANTOR, SETTLOR, or TRUSTOR. The SETTLOR must be living at the time the trust is set up. If the trust is created by WILL, it does not come into existence until after the TESTATOR dies and, therefore, does not come into existence during the testator's life. For this reason, trusts created by Wills are called TESTAMENTARY TRUSTS. Inter vivos trusts may be either REVOCABLE or IRREVOCABLE.

MINOR: A person under the age of legal competence. In California the age of legal competence is now 18.

PERSONAL PROPERTY: Movable property as contrasted with REAL PROPERTY which is fixed. Personal property includes furniture, automobiles, equipment, intangibles such as securities and cash and bank accounts.

PERSONAL REPRESENTATIVE: The FIDUCIARY of one's ESTATE (e.g., an EXECUTOR or ADMINISTRATOR).

POUR OVER WILL: A WILL that provides for the transfer, after the PROBATE, of the assets of the decedent's estate from the EXECUTOR to a TRUSTEE of an INTER VIVOS TRUST.

POWER OF APPOINTMENT: The actual power or legal authority given by one person (the donor of the power) to another (the donee of the power), in a WILL or other document, which engages the donee to sell, transfer or dispose of property owned by the donor. A power of appointment may be general or special.

A general power of appointment enables the donee to do all those acts for himself or herself, his or her estate, creditors or any other person. A special power of appointment places limitations on who the donee can appoint the property to.

PRETERMITTED HEIR: A relative (usually a spouse or child) who, by law, may not be omitted from one's WILL, except by a clear expression of intent to do so. Absent such clear intent, such heir receives a statutory share of the estate even though not mentioned in the WILL.

PROBATE: The court proceedings in which the PROBATE COURT has jurisdiction over the EXECUTOR and the assets of the decedent. The purposes of probate include protection of:

1. The heirs from fraud and/or embezzlement;
2. The federal, state and local governments so that all taxes are paid by the estate; and
3. The creditors of the decedent so that they are paid.

Probate starts with the WILL being admitted to probate and the EXECUTOR being granted "Letters Testamentary." Probate ends after all taxes and creditors are paid, and assets are accounted for and distributed as provided in the WILL. Probate lasts approximately nine months to two years, depending on the complexity of the estate.

QUASI-COMMUNITY PROPERTY: In general, property that was acquired by a decedent while living outside California which, if acquired in California, would have been COMMUNITY PROPERTY. California law gives the non-earning spouse certain rights in this property on dissolution of marriage and at the death of the earning spouse. For federal estate tax purposes, quasi-community property is not recognized and is treated as SEPARATE PROPERTY.

REAL PROPERTY: An interest in land or property permanently affixed to land.

REMAINDER INTEREST: The residual ownership of property left in TRUST after a previous owner or the LIFE TENANT received all the property benefits to which he or she was entitled.

REMAINDERMAN: The BENEFICIARY of a TRUST who is entitled to receive the property of the TRUST after the income BENEFICIARY's interest has expired.

RESIDUE: Also RESIDUARY ESTATE. That portion of one's PROBATE ESTATE remaining after payments of debts, expenses and taxes, and after the disposition of all items of property or amounts which are neither specifically or generally named or described and given to particular individuals (known as SPECIFIC BEQUESTS).

REVOCABLE TRUST: A TRUST with terms and provisions that can be changed, modified, altered, amended, or revoked. The power to do all this is usually reserved by the person who created the TRUST, but sometimes the power may be given by the person who created the TRUST to another person. The revocable trust is becoming popular as a means of avoiding PROBATE and as a substitute for a WILL. The revocable trust is often used for elderly people to protect themselves and their assets from the expense and delays of CONSERVATORSHIPS.

RIGHT OF REPRESENTATION: A method of distributing property under a WILL or TRUST whereby the ISSUE in the nearest degree of kinship to the decedent take equal shares and each group in a more remote degree of kinship whose ancestor was in the nearest degree of kinship but predeceased the decedent takes, as a group, one equal share. For instance, "to my children who are then living in equal shares, but if a child who is not then living leaves issue who survive me, those issue by right of representation." In this example the issue of the deceased child, as a group, would "represent" their parent. Thus, if a decedent has two children and one child died leaving three children, the living child would get one-half of the estate and the children of the deceased child would divide the remaining half equally. Where multiple generations are involved, the rules governing division become more complex.

SEPARATE PROPERTY: In California, a category of property between husband and wife that is not COMMUNITY PROPERTY, but that is owned separately by the husband or wife. Property owned before marriage, gifts and inheritances are usually considered separate property. The problems of separate property arise generally in marital dissolution proceedings and in estate taxes. SETTLOR: The individual or entity that makes a grant of property to another person (e.g., the SETTLOR of a TRUST). A SETTLOR is also called a GRANTOR or a TRUSTOR. See also the definition of TRUST below.

SPENDTHRIFT TRUST: A TRUST that provides a fund for the maintenance of a BENEFICIARY, which by its terms, insulates the BENEFICIARY's interest from the BENEFICIARY's improvidence, incapacity and the claims of creditors. Under current law, a Court can order the trust to pay certain creditors, notwithstanding the spendthrift nature of the trust.

TENANCY IN COMMON: A form of holding title to REAL or PERSONAL PROPERTY by two or more persons. Because there is no right of survivorship, the legal relationship and results are very different from JOINT TENANCY. One should consult with one's attorney before taking title in any form because the effect on income tax, estate tax, death rights, etc. varies, depending on the manner in which title is held.

TESTAMENTARY TRUST: A TRUST that comes into being only as a result of the death of the person whose WILL provides for the creation of the TRUST after his or her death. Because a WILL only speaks as of the date of the TESTATOR'S death, the TRUST is created by the TESTATOR'S LAST WILL AND TESTAMENT and is, therefore, referred to as "testamentary."

TESTATOR: A person who makes a WILL.

TRUST: A legal entity established by a person (called the SETTLOR, GRANTOR or TRUSTOR) who transfers legal title to certain of his or her property (called the TRUST CORPUS, TRUST ESTATE or TRUST RES) to a person or entity (called the TRUSTEE) with explicit instructions (contained in the DECLARATION OF TRUST or TRUST AGREEMENT) for the management of such property for the benefit of another (called the BENEFICIARY). The same person may be the SETTLOR, TRUSTEE and BENEFICIARY. Trusts may be REVOCABLE or IRREVOCABLE. If the SETTLOR creates the trust during his or her lifetime, it is called an INTER VIVOS TRUST or Living trust. If it is set upon as part of his or her WILL, it is called a TESTAMENTARY TRUST.

TRUSTEE: An individual or entity that holds the TRUST ESTATE of a SETTLOR and administers and distributes the assets of the TRUST ESTATE according to the TRUST's terms for the benefit of the TRUST BENEFICIARIES.

TRUSTOR: The individual or entity that makes a grant of property to another person (e.g., the TRUSTOR of a TRUST). A TRUSTOR is also called a GRANTOR or a SETTLOR. See also the definition of TRUST above.

UNIFORM TRANSFERS TO MINORS ACT: A law which permits a person (the DONOR) to register stock, bank accounts, insurance or other assets in the name of another (the CUSTODIAN) for the benefit of one who is at the time a Minor (the BENEFICIARY) without preparing a formal trust document. In effect, the trust document has been written into the law. In so doing, the DONOR makes an IRREVOCABLE gift of the property to the MINOR but the CUSTODIAN holds, invests, reinvests, and applies the property for the benefit of the Minor until he or she reaches majority (or in some situations, even longer), at which time the property is turned over to the BENEFICIARY. This is a simple, inexpensive way to make small gifts to a MINOR.

WARD: A minor child over whom a Guardian has been appointed. See also the definition of GUARDIAN above.

WILL: The document a person signs to provide for the orderly disposition of his or her assets after his or her death, in accord with his or her wishes to provide for family security and protection and to minimize death taxes.

TAX TERMS

BASIS OF PROPERTY: The value used to determine gain or loss for income tax purposes. The bases may be cost or a different amount, depending on the law affecting the transaction.

CREDIT SHELTER AMOUNT: The amount of property effectively removed from federal tax on death and lifetime transfers because of the UNIFIED TAX CREDIT. The current (2005) credit shelter amount is $1.5million. The CREDIT SHELTER AMOUNT is also called the EXEMPTION EQUIVALENT.

EQUIVALENT EXEMPTION: The amount of property effectively removed from federal tax on death and lifetime transfers because of the UNIFIED TAX CREDIT. The current (2005) equivalent exemption amount is $1.5million. The EQUIVALENT EXEMPTION is also called CREDIT SHELTER AMOUNT.

ESTATE TAX (FEDERAL): The taxes imposed by the federal government on the transfer of assets at death. The taxes are generally paid by the EXECUTOR, ADMINISTRATOR or TRUSTEE from the assets of the ESTATE.

GENERATION SKIPPING TRANSFER TAX (GSTT): A tax imposed on certain transactions that "skip" over a generation (i.e. parent to grandchild). Each person has a one million dollar exemption from the GSTT. This tax is in addition to the federal estate tax.

GIFT TAX: A tax imposed by the federal government on the privilege of giving away, without adequate consideration, one's property during lifetime.

GIFT TAX ANNUAL EXCLUSION: The federal government allows a DONOR to exclude a certain amount of a gift from gift tax liability if the gift is of a present interest to a specific individual DONEE. Additionally, after 1981, the payment on behalf of another of school tuition or for medical care is not treated as a gift and is not subject to gift tax. There is no limit on the number of such gifts a person may make each year. The current allowable amount (2004) is $11,000.00.

INHERITANCE TAX: A tax imposed on the privilege of receiving property. This tax is usually imposed by a state in addition to the federal estate tax. California has abolished its inheritance tax, but still has an estate tax which takes advantage of the state death tax credit provided by federal law. Thus, the California tax does not increase the overall tax liability of an estate since the state death tax credit is deducted from the federal state tax.

MARITAL DEDUCTION: The amount of property one spouse can give to the other spouse outright or in a special trust without estate or gift taxes being imposed. For decedents dying after 1981, 100% of property, whether community or separate, passing to a spouse is considered a marital deduction in computing the transfer taxes. Therefore, the marital deduction is considered unlimited. However, special rules apply (and the unlimited deduction is not available) if the surviving spouse is not a U.S. citizen.

QDOT: An acronym for Qualified DOmestic Trust. A new kind of trust required whenever the surviving spouse is not a U.S. citizen and the TESTATOR wishes to obtain the benefits of MARITAL DEDUCTION. The necessary provisions can be incorporated in a QTIP TRUST.

QTIP: An acronym for Qualified Terminable Interest Property. A QTIP TRUST qualifies for the federal estate and gift tax marital deduction although the assets do not pass outright to the surviving spouse. The BENEFICIARY of the QTIP TRUST receives all income but may not dispose of the principal. A QTIP TRUST is taxed at the surviving spouse's death.

STEPPED-UP BASIS: A term describing the fact that, generally, under the federal income tax laws, for purposes of computing capital gains, a person who has received property from a decedent uses as his "cost" the value of the property at the time of the decedent's death and not the decedent's original cost.