Norton, Hubbard, Ruzicka, Kreamer & Kincaid, L.C.

ESTATE PLANNING VOCABULARY

Basis of property. The value used to determine gain or loss for income tax purposes. The basis may be cost or a different amount, depending on the law affecting the transaction.

Beneficiary. The individual or corporation who receives the benefit of a transaction, e.g., beneficiary of a life insurance policy, beneficiary of a trust, beneficiary under a will.

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 be changed, revoked, canceled, or destroyed at any time.

Exempetion equivalent. This is the amount of property removed from tax on death and lifetime transfers equivalent to the unified tax credit. For 2005, the exemption equivalent is $1,500,000. For 2006, it will be $2,000,000. For 2009, it will be $3,500,000, but, until Congress amends the Internal Revenue Code, will revert to the 2001 level of $675,000 in 2010.

Estate taxes (federal). The death taxes imposed by the federal government on the transfer of assets on death. The taxes are generally paid by the executor of the estate.

Executor. The individual or corporation appointed in a will by a testator to take care of the testator's property after his death. Also called a personal representative. The executor is confirmed by the probate court. He has legal and business responsibilities and functions under the jurisdiction of the probate court. The executor chooses the attorney to do the legal work for the estate. Executrix is the term for the female executor, although executor is now used for both male and female personal representatives in probate.

Fiduciary. A person charged with the duty of trust on behalf of a beneficiary. Executors and trustees are fiduciaries.

Future interest--gift tax. A gift by a donor to a recipient, the donee, which the donee does not get the benefit, use, or enjoyment of until sometime in the future. Such a gift cannot take advantage of the $11,000 annual exclusion, which is reserved only for a gift of a present interest. If Father gives $5 in trust to be paid by the trustee to Son in three years, the gift is a future interest.

Generation-skipping trust. The death or lifetime transfer tax imposed on a taxable distribution from or a taxable termination of a generation-skipping trust which is defined as a trust with two or more generations of beneficiaries belonging to a younger generation than the grantor.

Gift tax annual exclusion. The federal government allows the donor to exclude $11,000 of a gift from gift tax liability if the gift is of a present interest to a specific individual donee. A present interest gift is one of which the donee has an immediate unrestricted right of use, benefit, and enjoyment. If Father gives Son $5, and Son can use it now, that is a gift of a present interest.

Grantor. The individual or corporation who makes a grant of property to another person, e.g., grantor of a trust, grantor of a deed of property.

Gross up rule for gift tax. The amount of gift tax paid on gifts made within three years of death is included in a decedent's gross estate. This "gross up" rule eliminates any incentive to make deathbed transfers to remove an amount equal to the gift taxes from the assets of the decedent. Gifts made after December 31, 1976 and within three years of donor's death are included in the donor's gross estate for federal tax purposes except for gift amounts that qualify for the donor's $11,000 per donee annual exclusion.

Guardian. The individual or corporation who legally has the care and management of the person, property, or both of a child during his minority. In Kansas, minority now ends at age 18. A guardian is also the legal person who is in charge of an individual who has been legally declared incompetent to manage his own affairs.

Heir. The person who inherits property under state law.

Inheritance taxes. The state taxes imposed according to the relationship to the decedent of the person who receives the property. In Kansas, for decedents dying prior to July 1, 1998, a surviving spouse will pay nothing; a lineal descendant very little; a sibling more than a dependent; other beneficiaries more than a sibling. The Kansas inheritance tax was repealed for decedents dying after June 30, 1998, but an estate tax intended to divert a portion of federal taxes to the state was retained. Currently, that tax is sometimes imposed even when there is no federal estate tax. In Missouri, there is no longer a separate inheritance tax.

Inter vivos trust. A trust created "between the living." The grantor (trustor) is a living person. Compare this to a testamentary trust.

Irrevocable trust. A trust whose terms and provisions cannot be changed, modified, altered, amended, or revoked. Under certain limited circumstances, a court may make limited changes.

Issue. Generally, progeny, offspring, lineal descendants; but a testator can, in his will, define issue to include adopted children.

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 interest in the property automatically goes to the surviving joint tenant outside of and beyond the power of the will of the deceased joint tenant; the property passes outside probate. But holding property in joint tenancy has dangers. 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 life interest.

Life tenant. The person who receives the benefits from real or personal property during his lifetime only. The benefits stop when he dies. The benefits are rents, income, and maybe the use of the property. The life tenant is not the "tenant" occupying the property, such as a lessee or renter.

Marital deduction. In estate taxation, the amount of separate property a deceased person can give outright or in a special trust only to the surviving spouse without estate taxation. The marital deduction was originally designed by Congress to give deceased residents of the noncommunity property states the same property-splitting benefits in taxation as exist in the community property states like California, Arizona, Nevada, etc. The Economic Recovery Tax Act of 1981 increased the marital deduction to 100% of property passing to a surviving spouse in a qualified manner. Under many circumstances, however, the use of the unlimited marital deduction on the death of the first spouse may generate significant taxes on the death of the second spouse that could have otherwise been avoided.

Minor. A person who is under the age of legal competence. In Kansas and Missouri, the age of majority is 18.

Perpetuities, rule against. A complicated rule whose purpose is to keep property from being frozen in a trust beyond a certain period of years. If the trust violates the rule against perpetuities, it is void from its beginning. The perpetuities clause in wills and trusts provides that the trusts contained in them terminate automatically at the required time. This protects the legality of the trust.

Personal property. Movable property as contrasted with real property, which is fixed. Personal property includes furniture, automobiles and equipment.

Power of appointment. The actual power or legal authority given by the deed or will of one person, the donor of the power, to a second person, the donee of the power, which enables the second person to sell, transfer, contribute, mortgage, or dispose of property owned by the first person. A power of appointment may be general or special, as defined below.

General power. Enables the second person to do all those acts for himself, his creditors, his estate, the creditors of his estate, or any other person.

Special power. Limits the second person as to the persons to whom he can transfer the property over which he has a power of appointment. The limitation of appointment can be very specific, e.g., to a group consisting only of the children of the first person, or the children of the second person. But never can the second person appoint, i.e., "give", the property to himself, his estate, his creditors, or the creditors of his estate because this would defeat the purpose of the special power, namely, to keep the appointive property from being taxed in the estate of the second person on his death.

Pour-over will. A will that provides for the transfer, after or during the probate court proceeding, of the net assets of the deceased person from the executor's control to the control of a trustee who is in charge of a trust that was in existence immediately before the death of the deceased person. The executor pours over the assets into the open vessel of the existing trust.

Present interest. See Gift tax annual exclusion.

Probate. The court proceedings in which the probate court has jurisdiction over (a) the executor, and (b) the assets of the deceased person. The purposes of probate are:

1. to protect the heirs from fraud and embezzlement;
2. to protect the federal, state and local governments so that all taxes are paid by the estate; and
3. to protect the creditors of the deceased person 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 are paid, creditors are paid, and assets are accounted for and distributed as provided in the will. Probate lasts approximately nine months to two years or more depending on the complications in the estate.

Real property. An interest in land, or property permanently affixed to land.

Remainder interest. The future return to ownership of property by a person who for a period of time surrenders his ownership in trust or outright to another person. After that period, the property "reverts" or comes back to the original owner.

Revocable trust. A trust whose terms and provisions 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 creator to a second person. The revocable trust is becoming popular as a means of avoiding probate and as substitute for a will. The revocable trust is often used for aged people to protect themselves and their assets from the expense and delays of conservatorship. Before using a revocable trust, a person should consult with an attorney who is experienced with revocable trusts.

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.

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 relationships and results are very different from joint tenancy. Title to property should be taken by a person only after consulting with his attorney because the effect on income tax, estate tax, death rights, etc., varies depending on how title is held.

Testamentary trust. The trust that comes into being only as a result of the death of a person whose will provides for the creation of the trust after his death; hence, the term "testamentary."

Testator. The person who signs the will, and in it disposes of his property. Testatrix is the female term, but it is common as a convenience to use the term testator for either a man or a woman.

Transfer on Death Deed. A deed to real estate which provides a non-probate transfer to a designated beneficiary upon the death of the owner of property. In Kansas, a Transfer-On-Death Deed does not affect the owner’s ability to deal with property during his or her lifetime.

Trust. A legal entity established either by a trust agreement signed by a person during his life or arising after death from a will or testamentary trust. The trust is governed by the terms in the documents. They can last as long as 50 years, if not longer. That is why they must be written with great care.

Trustee. The individual or corporation who in a trust has bare legal title to the assets and has the power given in the trust to carry out the wishes of the person or persons (trustor or grantor) who created the trust. The trustee has a fiduciary obligation to the trust's beneficiaries. The trustee is subject to strict regulation. Although he has legal title for convenience, the beneficial or equitable title is in fact owned by the beneficiaries. When there is more than one trustee, the trustees are called co-trustees.

Trustor (or Grantor). The person who establishes the trust. There can be more than one trustor.

Unified estate and gift taxes. Effective January 1, 1977, the separate estate and gift tax schedules have been combined into a single tax schedule, so that the cumulative value of taxable gifts made during life is added to the value of the decedent's estate in determining the applicable estate tax rates. The same tax rates will apply to both life-time gifts and to the estate left at death.

Unified tax credit. The previous estate tax exemption of $60,000 and the gift tax exemption of $30,000 (per donor) are replaced by a tax "credit" that is a dollar amount deducted from a "tentative tax." For 1987 and thereafter, the credit will apply to shelter property from taxation in the amount of the exemption equivalent, defined above.

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