Estate Planning Terms
ADMINISTRATOR—person appointed by the court to handle the estate of someone who died without a will.
ANNUAL EXEMPTION—The annual tax-free allowance (known as the Annual Exempt Amount) allows you to make a certain amount of gains each year before you have to pay tax. Nearly everyone who is liable to Capital Gains Tax gets this tax-free allowance.
There’s one Annual Exempt Amount for:
• most individuals who live in the UK
• executors or personal representatives of a deceased person’s estate
• trustees for disabled people
Most other trustees receive a lower Annual Exempt Amount.
BENEFICIARY—person or entity (like a charity) who is to receive assets or profits from an estate, a trust, an insurance policy or any instrument in which there is distribution. The beneficiary benefits from the trust assets, but does not manage or control them (unless the beneficiary is also the trustee).
CONSERVATOR—a guardian and protector appointed by a judge to protect and manage the financial affairs and/or
the person’s daily life due to physical or mental limitations or old age. The conservator may be only of the “estate”
(meaning financial affairs), but also may be of the “person,” when he/she takes charge of overseeing the daily activities, such as health care or living arrangements of the incompetent adult. A conservator may be required if someone becomes incapacitated and has not designated someone to take over their affairs in a living trust or power of attorney.
ESTATE TAX—in the United States, a tax imposed on the transfer of the “taxable estate” of a deceased person, whether such property is transferred via a will, according to the state laws of intestacy or otherwise made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries.
EXECUTOR—the person appointed by the court in a probate proceeding to administer the estate of a person who has died leaving a will which nominates that person.
FIDUCIARY—a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty. Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled.
GUARDIAN—a person who has been appointed by a judge to take care of a minor child personally and/or manage that person’s affairs. To become a guardian of a child, either the party intending to be the guardian or another family member, a close friend or a local official responsible for a minor’s welfare will petition the court to appoint the guardian. In the case of a minor, the guardianship remains under court supervision until the child reaches majority at 18. Naming someone in a will as guardian of one’s child in case of the death of the parent is merely a nomination. The judge does not have to honor that request, although he/she usually does.
INTESTACY—the condition of having died without a valid will. In such a case if the deceased party has certain property held in his/her name alone, it will generally be distributed according to statutes. In probate, the administration of the estate of a person without a will is handled by an “administrator,” who is usually a friend or family member of the decedent appointed by the court.
LIFE TIME EXEMPTION—A gift tax is a tax imposed on the transfer of ownership of property. The United States
Internal Revenue Service says a gift is “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
PERSONAL REPRESENTATIVE—a generic term for an executor or administrator of the estate of a person who has died.
PROBATE—a court proceeding to prove a will is valid, ensure creditors of decedent have the opportunity to make a claim against the estate and carry out the decedent’s estate according to the terms of the will, if any, or as required by law.
STEPPED UP BASIS OR STEP DOWN BASIS—an increased or decreased basis (value that is used to determine taxable profit or loss when property is sold) given to inherited property that went up or down in value after the deceased person acquired it but before the new owner inherited it. The basis of the new owner is “stepped up” or “stepped down” to the market value of the property at the time of death. The stepped-up basis means that when the property is eventually sold, there will be less taxable capital gain.
TRUST—a Living Trust is a private agreement created by a writing while the creator (called a trustor) is alive. The trustor’s property is placed in trust with a trustee (often the trustor during his/her lifetime) and distribution will take place for the benefit of one or more beneficiaries according to the terms of the trust. During the trustor’s lifetime the trustor is typically the primary beneficiary of the trust and after the death of the trustor, others begin to benefit from the trust assets, in accordance with the terms of the trust.
TRUSTEE—a person or entity who manages the trust and its assets under the terms of the trust stated in the declaration of trust which created it.
TRUSTOR/SETTLOR—the creator of a trust (who normally places the original assets into the trust).
WILL—a written document which leaves the estate of the person who signed the will to named persons or entities including portions or percentages of the estate, specific gifts, creation of trusts for management and future distribution of all or a portion of the estate (a testamentary trust). A will usually is administered by the court and typically names an executor (and possibly substitute executors) to manage the estate, states the authority and obligations of the executor in the management and distribution of the estate, nominates guardians of minor children, and spells out other terms.
TYPES OF TRUSTS
CLT (CHARITABLE LEAD TRUST)—an arrangement in which property income or investment income is given to a charity while the grantor is living, but the principal passes to other designated parties upon the grantor’s death. The person (grantor) who sets up the trust transfers assets to it, and income from the trust property then goes to the charity for a set period of time. Then the trust property goes back to the person who set up the trust (or another beneficiary that person named, usually the grantor’s children or grandchildren). Typically, the charity serves as trustee of the charitable trust.
CRT (CHARITABLE REMAINDER TRUST)—an arrangement in which property or money is donated to a charity, but the asset (grantor) continues to use the property and/or receive income from it while living. The beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned.
In addition, the asset is removed from the estate, reducing subsequent estate taxes. While the contribution is irrevocable, the grantor may have some control over the way the assets are invested, and may even switch from one charity to another (as long as it’s still a qualified charitable organization).
GRANTOR RETAINED INTEREST TRUST (GRIT)—a House GRIT is an irrevocable trust into which the grantor places a personally owned home while retaining an income right or the use of the property for a fixed period of years. The home, at the end of the specified period of years, will pass to non-charitable beneficiaries, such as a child or grandchild of the grantor. Generally, the grantor is making a gift of the future right to trust assets to the remainderman (family members). If the grantor survives the term of years selected, so that the home is not included in his gross estate, significant estate tax as well as other transfer cost reductions may be realized.
GRANTOR RETAINED ANNUITY TRUST (GRAT)—the cost of the transfer would be the gift tax on the value of the remainder interest. The gift is of a “future interest” and does not qualify for the annual gift tax exclusion. Therefore, part of the applicable credit amount (formerly, unified credit) must be consumed.
GRANTOR RETAINED UNIT TRUST (GRUT)—the GRUT may be used by an estate owner to transfer assets to his or her children. The value of the transferred asset minus the value of the retained unitrust interest will equal the value of the remainder interest which is potentially subject to gift taxation. For example, if the payout rate is 6%, the trustee will pay the grantor 6% of the value of the trust assets as revalued each year. Thus, if the trust assets earn more than 6%, the excess earnings will be added to principal and there will be a higher dollar payment the following year.
ILIT (IRREVOCABLE LIFE INSURANCE TRUST)—a type of irrevocable trust that is specifically designed to hold and own life insurance policies. Once the ILIT has been set up, ownership of the life insurance policies are transferred to the Trustee of the ILIT. While the grantor can’t be a Trustee of the ILIT—otherwise they’ll be deemed to have incidents of ownership in the life insurance—a spouse and/or children can be Trustees.
Once ownership of the life insurance has been transferred to the Trustee of the ILIT, the grantor will have given up all incidents of ownership over the policies. Since the grantor no longer owns the policies, the proceeds can’t be taxed in the estate when the grantor dies.
QPRT (QUALIFIED PERSONAL RESIDENCE TRUST)— are irrevocable split interest trusts. The transfer of the residence to the trust constitutes a completed gift. The split interest character of the trust is as follows: the grantor retains the right to live in the house for a number of years, rent free, and then the remainder beneficiaries of the trust become fully vested in their interest. PRTs are similar by nature to other types of retained interest trusts, like GRITs, GRATs and GRUTs.
TITLE OF ASSETS
COMMUNITY PROPERTY—property and profits received by a husband and wife during the marriage, with the exception of inheritances, specific gifts to one of the spouses, and property and profits clearly traceable to property owned before marriage, all of which is separate property.
JOINT TENANCY—a crucial relationship in the ownership of real property, which provides that each party owns an undivided interest in the entire parcel, with both having the right to use all of it and the right of survivorship, which means that upon the death of one joint tenant, the other has title to it all.
SEPARATE PROPERTY—property owned by one spouse, which he/she acquired: a) before marriage, b) by inheritance, c) as a gift, d) assets traceable to other separate property such as money received from sale of a house owned before marriage, and e) property the spouses agree is separate property.
TENANCY IN COMMON—title to property held by two or more persons, in which each has an “undivided interest” in the property and all have an equal right to use the property, even if the percentage of interests are not equal or the living spaces are different sizes. Unlike “joint tenancy,” there is no “right of survivorship” if one of the tenants in common dies, and each interest may be separately sold, mortgaged or willed to another.
OTHER ESTATE PLANNING DOCUMENTS
ADVANCE HEALTH CARE DIRECTIVE—lets your physician, family and friends know your health care preferences, including the types of special treatment you want or don’t want at the end of life, your desire for diagnostic testing, surgical procedures, cardiopulmonary resuscitation and organ donation. It is important to carefully read the instructions set forth in the directive because many forms for advanced health care directives include language that is contrary to Catholic teaching. The directive allows for you to select who should handle your health care choices and discuss the matter with them. You could name a spouse, relative or other agent.
DURABLE POWER OF ATTORNEY—all powers of attorney are simply written documents whereby you authorize someone to act on your behalf. A “durable” power of attorney continues to be effective despite your subsequent disability.
PROBATE FEE SCHEDULE
Probate = Fees (CA Pro Code §10801)
4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000
.5% of the next $15,000,000
Attorney Fees are the same as Executor. So, the typical cost for a $l Million estate, excluding filing and appraisal fees are calculated at $4k + $3k + $16k = $23k for the attorney plus same
amount for the executor. Total fees of $46k.
Source: CA Probate Code §10810