Common Estate Planning Terms

The joint use of a marital trust (also called an “A” trust) and a bypass trust (also called a “B” trust) to take advantage of the unlimited marital deduction and help reduce potential estate tax liability. At the death of one spouse, his or her will establishes a bypass trust with an amount equal to the current federal estate tax exemption. Any amount in excess of the current federal estate tax exemption goes into a marital trust for the benefit of the surviving spouse. This approach allows couples to take advantage of both spouses’ estate tax exemption and helps to minimize the federal taxes for large estates.

A legal document that clearly explains your health care preferences to your physician and family members. It should specify the kinds of medical treatment you want—or don’t want—at the end of your life. This may include your preference on everything from testing and surgical procedures to cardiopulmonary resuscitation and organ donation. Be aware that your state of legal residence may have specific requirements to make your directives binding, so you should consult with your estate planning attorney.

Probate proceedings conducted in a different state from the deceased person’s legal state of residence. Ancillary probate proceedings generally are held if the deceased person owned real estate in another state.

You designate beneficiaries when you choose individuals or organizations to take specified assets upon your death. Assets with beneficiary designations may include IRAs, employer-sponsored retirement plans, life insurance, and annuity contracts. A beneficiary designation for an asset overrides any provisions in your will concerning the asset, as long as the beneficiary survives you. To establish beneficiary designations, you typically complete a form provided by the institution that holds the account or policy.

This trust (also called a “family” or “credit shelter” or “B” trust) is generally used in combination with a marital trust to help save on estate taxes. Upon death, the bypass trust is funded with up to the then-current estate tax exemption amount. The trust can provide income to a surviving spouse and/or other family members during the spouse’s lifetime. Subject to certain restrictions, you may also grant the trustee the power to distribute trust principal for particular needs of your spouse and/or other beneficiaries. If properly structured, the assets in the trust would not be included in the surviving spouse’s estate at his or her death. (Also see Marital Trust, A/B Trust Combination, and Qualified Terminable Interest Property (QTIP) Trust.)

This trust is designed to provide an income stream to one or more beneficiaries for a specific period of time or for a lifetime, with the remainder passing to a charity or charities of your choice. While there are tax benefits to creating this type of a trust, the trust must be irrevocable and follow strict rules set forth by the IRS. The two types of charitable remainder trusts are charitable remainder annuity trusts and charitable remainder unitrusts. The annuity trust returns a fixed dollar amount to the donor or other beneficiary designated by the donor, while the unitrust pays out a percentage of the trust’s value (as redetermined). This can be a hedge against inflation assuming the trust assets increase in value, but unlike the fixed payments from a charitable remainder annuity trust, if the investments in a unitrust decline in value, your annual payment also would decrease.

Community property states are states in which some or all of the assets earned and accumulated during your marriage may be deemed to be “community property,” regardless of title. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

With this written document, you grant another person (a member of your family, a trusted acquaintance, an institution, or an attorney) power to manage your affairs, particularly in the event of your incapacity or incompetency. This person is sometimes referred to as your “agent” or your “attorney-in-fact.” The powers that the attorney-in-fact has are specified in the document and may be broad in scope (e.g., management of all financial and legal affairs) or narrow (e.g., take actions necessary to sell a specific piece of property) according your wishes as the principal.

Under some circumstances, the state can assert an estate recovery claim to be reimbursed from assets of the deceased Medicaid recipient. The state’s claim arises from Medicaid benefits provided by the state at and after age 55. Federal law requires states to pursue estate recovery against assets in the decedent’s probate estate – assets of the decedent that pass by will or intestacy (lack of an effective will). Federal law allows, but does not require, states to pursue estate recovery from nonprobate assets – those that pass by joint tenancy with right of survivorship, certain trusts, beneficiary designations, etc.

An executor (sometimes called an administrator or personal representative) is a person or an institution (like a bank) that you appoint in your will to carry out its provisions. If you die without a will or no executor named in your will survives you, a court appoints one for you to handle the assets that are subject to probate. An executor named in a will may choose not to act or may not be allowed to assume the role in some states if they are not a legal resident of that state. Make sure to account for these contingencies when selecting an executor.

Some typical duties of an executor include:

  • Locating all of your assets that are subject to probate;
  •  Paying any outstanding debts you may have from your assets;
  • Preparing any reports required by the probate court;
  •  Filing a final income tax return for you (or your surviving spouse can file jointly);
  •  Filing a fiduciary income tax return for the estate, if applicable;
  •  Paying all taxes and final expenses from your assets; and
  •  Distributing the assets remaining in your estate according to the instructions in your will.

The federal gift and estate tax exemptions for 2017 is $5,490,000 million (increased from $5,450,000 in 2016). This means that the opportunity to transfer large amounts during lifetime or at death remains.

The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for all Americans; for more than ten years, we have been planning with uncertainty under legislation that contained built-in expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have more certainty with which to plan.

The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5,490,000 million). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at death) to grandchildren and others who are more than 37.5 years younger than the transferor; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows your clients to take advantage of planning that will greatly benefit future generations.

Separate from the new tax law, the amount for annual tax-free gifts is $14,000, (no increase from 2016) meaning any one can give up to $14,000 per beneficiary, per year free of federal gift, estate and GST tax – in addition to the $5,490,000 million gift and estate tax exemption. By making annual tax-free transfers while alive, your clients can transfer significant wealth to their children, grandchildren and other beneficiaries, thereby reducing their taxable estate and removing future appreciation on transferred assets. And, they can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing your clients to transfer more free of tax.

A guardian is an individual who manages and cares for the property and/or physical well-being of a minor. If you have children, you typically would name a guardian for them in your will. Some parents prefer to name one individual to be guardian of their child’s physical care (a “guardian of the person”) and another individual (or institution) to be guardian or custodian of their child’s property/financial assets (a “guardian of the estate”). For an adult who becomes incompetent to care for his or her financial and/or physical well-being, a court may be petitioned to appoint a guardian (or conservator) if there is no person to step in under a durable power of attorney.

Such a trust is created and funded to help avoid estate taxes on the benefits paid by your life insurance policy(ies) on your own life. Death benefits from life insurance can inflate the size of your taxable estate. By placing existing policies in an irrevocable trust or having the trustee purchase the policies in the first place, the insurance death benefits would not be taxable in your estate (providing certain conditions are met) since the IRS deems that you do not have control over these assets. Because the trust is irrevocable and the IRS imposes strict rules for this type of trust, it is important to talk to your estate planning attorney before proceeding.

This is ownership of assets with your spouse or other person(s) with rights of survivorship. If you die first, your share of the assets passes automatically to the person(s) with whom you own the assets and vice versa.

A contract between an insurance company and a policyholder in which the company agrees to pay a predetermined amount to the policy’s designated beneficiary upon the death of the insured person in exchange for paying the insurance premiums. Life insurance is mainly purchased to provide for a person, family, or business dependent on your income. The insured may or may not be the policyholder who pays the premiums on the life insurance policy.

This trust is usually funded with any amount in excess of a person’s available federal estate tax exemption amount. Usually the money is left in the trust for the spouse for investment and financial management purposes, and the spouse must have the right to receive income from the trust during his or her lifetime. The surviving spouse is also granted a general power of appointment to provide him or her with the flexibility to modify the way assets will be distributed at his or her death, including naming new beneficiaries. Unlike assets in a bypass trust, the assets in a marital trust are included in the surviving spouse’s taxable estate. (Also see Bypass Trust.)

This is a type of beneficiary designation where you specify one or more beneficiaries to inherit certain assets, like bank accounts, automatically upon your death. This must be arranged with the institution that holds the account.

This term describes how certain assets are to be distributed at your death. A per capita designation generally divides an asset equally among only the beneficiaries specified who survive you. If one of the beneficiaries passes away before you, his or her share goes to the other beneficiaries listed.

This term describes how certain assets are to be distributed at your death. When you name your beneficiaries per stirpes, in the event that one of the beneficiaries predeceases you, his or her share of the assets generally passes to his or her heirs, not to other beneficiaries listed.

A pour-over will works in combination with a revocable living trust. It instructs your executor to “pour over” assets not already in the trust at the time of your death into the trust. Your trustee will then distribute them as directed in your trust agreement. Assets added to a trust after your death by virtue of a pour-over will do not avoid probate. However, the pour-over will/trust combination typically affords increased privacy, since details on the disposition of your estate reside in the trust agreement, which in most states does not have to be filed with the probate court.

A court-supervised process beginning after your death to determine the validity of your will and monitor the execution of its provisions. Assets that would go through probate typically are those that you own individually (or as a tenant in common) and for which there are no beneficiary designations. Assets owned as joint tenants with rights of survivorship, with beneficiary designations, or titled in the name of an existing trust are designed to pass to others directly outside of your will and the probate process.

A QTIP trust is a variation of the marital trust. The surviving spouse has the right to receive income from the trust while he or she is alive, then, at the spouse’s death, leaves any remaining trust assets, after payment of estate taxes, to the beneficiaries the spouse designated in the trust. A QTIP trust may be especially effective when you have remarried and the intended beneficiaries after the death of your spouse’s death are your children from the prior marriage.

A revocable living trust holds property and other assets that you transfer to it and can be changed or rescinded during your lifetime, whereas the terms and conditions of an irrevocable trust generally cannot be altered once you create the trust. While assets in a revocable living trust avoid probate, the assets are considered part of your taxable estate.

An asset you own by yourself. The assets passes according to your will or the laws of your legal state of residence if you do not have a will.

While jointly owned assets more typically are held with rights of survivorship, sometimes they are jointly held instead as tenants in common. In this situation, your share of the assets passes to your heirs according to your will or the laws of your legal state of residence and not automatically to the surviving joint owner(s) of the assets.

A trust that comes into existence after your death (as opposed to a revocable living trust) and is commonly created under your will or under your revocable living trust. Its term is generally for as long as that document stipulates, within certain limits (e.g., for a spouse’s lifetime or for a certain number of years). For example, a couple with minor or young adult children may list each other as the primary beneficiary under each of their wills and their children as the contingent beneficiaries, but then also specify that a trust should be created for the children’s benefit in the event both parents are deceased. The terms could then specify how money is to be used for them and at what ages and/or upon what events a child is to inherit any assets directly.

This is a type of beneficiary designation where you specify one or more beneficiaries to inherit certain assets, like mutual fund accounts, automatically upon your death. This must be arranged with the institution that holds the account.

A period (months) of ineligibility for MaineCare caused by “uncompensated transfers” during the look-back period that are not exempt.

The transfer penalty is the sum of all non-exempt transfers by either spouse within 5 years (60 months) before the application for MaineCare DIVIDED BY a divisor (currently $8,476/month) established in the MaineCare eligibility rules.

The trustee is an individual or an institution, such as a bank, that manages assets held in a trust for the beneficiary(ies) of the trust. The responsibilities of a trustee managing a trust upon your death generally are to:

  • Identify assets in the trust;
  •  Manage the addition of any assets to the trust by your executor according to the terms of your will;
  • Invest the assets in the trust created; and
  • Distribute the assets outright to your beneficiaries and/or continue the trust or establish any new trust as specified in the trust documents.

Gifts to qualified charities are deductible for estate tax purposes if you leave assets to a charity outright by your will or trustor through a charitable remainder trust. These bequests can result in an estate tax deduction for either the amount of the bequest or the projected remainder amount in the trust that will ultimately go to charity.

If you are married to a U.S. citizen, you may leave an unlimited amount to your spouse estate tax-free. Special rules apply for non-U.S. citizens. Gifts made to your spouse during your lifetime are also gift tax-free.

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