Experience

Estate Planning Glossary

Annual exclusion - Each individual can give away up to $11,000 per recipient per year without gift taxes. Not all gifts qualify for the annual exclusion; only outright gifts or gifts to certain types of trusts qualify.

Beneficiary - An individual(s) or institution(s) who is to receive real or personal property from a trust upon the terms set forth in the instrument or declaration of trust.

Charitable lead annuity trust ("CLAT") - A trust under which the charitable beneficiary has the right to receive an annuity amount each year during a stated term. The annuity amount is calculated based upon the initial value of the trust assets at the creation of the trust. After the stated term, the remainder of the trust is distributed to the non-charitable beneficiary.

Charitable lead trust - A trust under which a non-charitable beneficiary receives the remainder of the trust after payment of amounts over time to a charitable beneficiary. Often used to facilitate diversification of single low-basis stock holdings, and to maximize charitable gifts and deductions while providing income payments to the grantor.

Charitable lead unitrust trusts ("CLUT") - A trust under which the charitable beneficiary has the right to receive an annuity amount each year during a stated term. The annuity amount is calculated based upon the value of the trust assets at the beginning of each year of the trust. After the stated term, the remainder of the trust is distributed to the non-charitable beneficiary.

Charitable remainder annuity trust ("CRAT") - A trust under which the non-charitable beneficiary has the right to receive an annuity amount each year during a stated term or the beneficiary's lifetime. The annuity amount is calculated based upon the initial value of the trust assets at the creation of the trust. After the stated term or the beneficiary's lifetime, the remainder of the trust is distributed to the charitable beneficiary.

Charitable remainder trust - A trust under which a charitable beneficiary receives the remainder of the trust after payment of amounts over time to a non-charitable beneficiary. Often used to facilitate diversification of single low-basis stock holdings, and to maximize charitable gifts and deductions, while providing income payments to the grantor.

Charitable remainder unitrust trust ("CRUT") - A trust under which the non-charitable beneficiary has the right to receive an annuity amount each year during a stated term or the beneficiary's lifetime. The annuity amount is calculated based upon the value of the trust assets at the beginning of each year of the trust. After the stated term or the beneficiary's lifetime, the remainder of the trust is distributed to the charitable beneficiary.

Disclaimer - A refusal by an individual, usually in the form of a written document, to accept some or all of his or her legal rights to property. A disclaimer qualified under the Internal Revenue Code as a non-taxable transfer must be accomplished within 9 months after the date of the transfer.

Estate tax - A transfer tax imposed at a rate equal to 18% to 50% on transfers occurring at the decedent's death. Each decedent has a unified credit exemption of $1,000,000 (in 2003, $1,500,000 in 2004) from the tax, unless such exemption is used to exempt gifts made during lifetime.

Generation skipping transfer tax - A transfer tax imposed at a rate equal to the highest estate tax rate (currently 50%) on gifts or estate transfers where the transferred assets pass, or will pass, to recipients two or more generations below the donor, without being subject to the imposition of estate tax at the intervening generations. Each donor has an exemption of $1,120,000 (in 2003, $1,500,000 in 2004) from the tax.

Generation skipping trust - An inter vivos or testamentary trust designed to exist for more than one generation into the future and qualify for the generation skipping transfer tax exemption (equal to $1,120,000 in 2003 and $1,500,000 in 2004), while avoiding inclusion in the estates of the beneficiaries for estate tax purposes.

Gift tax - A transfer tax imposed at a rate equal to 18% to 50% on transfers made by a donor during their lifetime. Each decedent has a federal unified credit exemption ($1,000,000 in 2003, and $1,500,000 in 2004) from the federal gift tax, and, if not used during lifetime, the exemption will exempt transfers at death from the federal estate tax. Also, each donor can make an unlimited number of annual exclusion gifts each year without incurring gift tax.

Gift trust - Any trust that is intended to hold gifted or inherited assets for the benefit of individuals or institutional beneficiaries. Often created for beneficiaries who are unable to manage gifted assets, or to minimize gift, estate and generation skipping transfer taxes to the grantor and the beneficiaries.

Grantor - An individual(s) or institution(s) who transfers real or personal property in trust to a trustee or trustees under directions to the trustee, usually contained in a written trust instrument or agreement, to hold, manage, invest, account for and distribute the property to the beneficiary or beneficiaries on the terms set forth in the trust instrument.

Grantor retained annuity trust ("GRAT") - An irrevocable inter vivos trust under which a grantor transfers his or her interest in real or personal property to the trustee to hold during a specified term. During each year of the term, the grantor receives an annuity amount based upon the value of the assets at the creation of the trust. Upon expiration of the term, the trust property passes to the remainder beneficiary or beneficiaries. Primarily used to gift property to the remainder beneficiary that is susceptible to application of valuation discounts and actuarial discounts based on the grantor's age and the term of the trust, and is most beneficial if the property is expected to appreciate in value.

Grantor retained unitrust trust ("GRUT") - An irrevocable inter vivos trust under which a grantor transfers his or her interest in real or personal property to the trustee to hold during a specified term. During each year of the term, the grantor receives an annuity amount based upon the value of the assets at the beginning of the year. Upon expiration of the term, the trust property passes to the remainder beneficiary or beneficiaries. Primarily used to gift property to a remainder beneficiary that is susceptible to application of valuation discounts and actuarial discounts based on the grantor's age and the term of the trust, and is most beneficial if the property is expected to appreciate in value.

Intentionally defective grantor trust - An irrevocable inter vivos trust created by a grantor for the benefit of beneficiaries other than the grantor that attributes all income tax incidents to the grantor. Typically used where the grantor desires to irrevocably gift the property to the beneficiaries and exclude the property from the grantor's taxable estate for estate tax purposes, but intends that the transfer be ignored for income tax purposes. Often used in conjunction with a sale of discounted assets by the grantor to the trust, to avoid capital gain on the sale of the assets.

Inter vivos trust - A trust created during the grantor's lifetime, usually by means of a trust instrument or agreement.

Irrevocable Trust - A trust that is not amendable or revocable by the grantor. Can be created during a grantor's lifetime, often called an "inter vivos" trust, or upon a grantor's death, often called a "testamentary" trust. Some common types of irrevocable inter vivos trusts include life insurance trusts, gift trusts, generation skipping trusts, qualified personal residence trusts ("QPRT"), grantor retained annuity trusts ("GRAT"), intentionally defective grantor trusts, charitable remainder annuity trusts and charitable remainder unitrust trusts ("CRAT") and "CRUT"), charitable lead annuity trusts and charitable lead unitrust trusts ("CLAT" and "CLUT"). Some common types of testamentary trusts include, unified credit exemption trusts, marital trusts, generation skipping trusts, testamentary charitable remainder trusts and charitable lead trusts.

Life insurance trust - An irrevocable trust designed to hold life insurance policies on the life of the grantor to exclude those policies from the grantor's taxable estate for estate tax purposes. Typically includes provisions for rights of withdrawal by beneficiaries to qualify premium payments as annual exclusion gifts, as well as provisions for continuing testamentary trusts after the grantor's death for the grantor's spouse, children and other beneficiaries.

Limited partnership - A limited partnership is a partnership created under the limited partnership laws of each state. A limited partnership has both general partners and limited partners. The limited partners do not participate in the management of the partnership and, thus, are not subject to the claims of the creditors of the limited partnership. On the other hand, the general partners of a limited partnership are subject to the claims of the creditors of the limited partnership. The general partners generally have the ability to control the operations of the partnership, as well as the amount, if any, of any distributions to the limited partners. In addition, partnership agreements often restrict the ability of a limited partner to sell or otherwise transfer his or her interest in the limited partnership.

Marital deduction - An unlimited deduction against the estate tax and gift tax for transfers made outright or in qualifying trusts to the spouse of the transferor.

Marital deduction trust - A trust that qualifies for the marital deduction for estate tax and gift tax purposes. Several types of trusts so qualify, including: general power of appointment marital trusts, qualified terminable interest property trusts, and qualified domestic trusts.

Non-profit corporation - A corporation created under applicable state law, which is exempt from income taxes and is required to operate in accordance with applicable state law and tax laws. Typically, the board of directors or trustees consist of family members, making it appealing to donors who desire to control the gifted assets until they are distributed to charity.

Personal Representative - The individuals (or institutions) named in a will or appointed by the Probate Court who are responsible for gathering a decedent's assets, paying debts, taxes, and expenses, selling assets of the estate, if necessary, and distributing the remaining property and money according to the terms of the will (or the intestate laws of the state of residence). The personal representative must preserve and protect the estate assets and account to the estate beneficiaries for estate income and expenses. The personal representative must file a federal and state estate tax return, if required, and must also file final state and federal income tax returns for the decedent, and, if necessary, federal and state income tax returns for the estate.

Postnuptial agreements - Contracts entered into by a husband and wife after marriage, defining the rights of each spouse in their marital, non-marital and jointly-owned property in the event of divorce, legal separation or the death of one of the parties. A postnuptial contract is considered to be valid and enforceable if it complies with the statutory requirements for prenuptial agreements. Though historically not utilized as widely as prenuptial agreements, a recent modification of the Minnesota statues makes it likely that postnuptial agreements will become a more commonly used contract.

Prenuptial (Antenuptial) agreements - Contracts couples can enter into prior to marriage in order to govern their respective rights in marital, non-marital, and jointly-owned property in the event of divorce, legal separation, or the death of one of the parties. Minnesota law provides that a man and woman of legal age may enter into an agreement prior to solemnization of marriage that will be valid and enforceable if: (1) there is a full and fair disclosure of the earnings and property of each party; and (2) the parties have had an opportunity to consult with legal counsel of their own choice. Antenuptial agreements must be in writing, executed and acknowledged by the parties in the presence of two witnesses and a notary public, and must be entered into and executed prior to the day of solemnization of marriage.

Private foundation - A trust or non-profit corporation that provides for distributions only to charitable recipients during its term. May be a perpetual trust or corporation.

Probate - A legal process whereby (1) a judge determines whether or not the decedent's will is valid; (2) a personal representative is appointed to (a) collect the decedent's assets in his or her probate estate, (b) pay the decedent's legal debts, and (c) distribute the remaining assets in the decedent's probate estate to the individuals or entities entitled to the assets in accordance with the will or laws of intestacy; and (3) the court approves the transfer of the decedent's assets to the individuals and entities designated in the will or the laws of intestacy. The probate court will also determine the rights, if any, of a spouse and children to the decedent's property.

Probate estate - The assets of the decedent as of the date of death which are titled only in the decedent's name, or which are payable to the decedent's "estate" or personal representative. Property held in joint tenancy with rights of survivorship are not included in the decedent's probate estate. In addition, the proceeds of life insurance, annuities, IRAs or qualified retirement benefits will not be included in the decedent's estate unless the beneficiary designation specifically designates the decedent's estate.

Qualified personal residence trust ("QPRT") - An inter vivos trust under which a grantor transfers his/her interest in a personal residence to the trustee to hold for the grantor's use and occupation during a specified term, and, upon expiration of the term, the residence passes to the remainder beneficiary or beneficiaries. Primarily used to gift the residence to the remainder beneficiary that is susceptible to application of valuation discounts and actuarial discounts based on the grantor's age and the term of the trust, and is most beneficial if the residence is expected to appreciate in value.

Revocable Trust - An inter vivos trust that is subject to amendment or revocation by the grantor or settlor. Primarily used to avoid probate upon the grantor's death, guardianship and conservatorship actions during the grantor's lifetime, and to maintain the grantor's privacy both during the grantor's lifetime and upon the grantor's death. Usually contains the same provisions as a will for the disposition of the grantor's estate upon the grantor's death.

Settlor - See grantor.

Testamentary trust - A trust created upon or after the grantor's death, often by means of a will or revocable trust, or in the context of another trust instrument or agreement.

Trust - A legal arrangement under which a grantor or settlor transfers real or personal property to a trustee or trustees under directions to the trustee, usually contained in a written trust instrument or agreement, to hold, manage, invest, account for and distribute the property to the beneficiary or beneficiaries on the terms set forth in the trust instrument.

Trustee - An individual or institution who is charged by the grantor or settlor with holding, managing, investing, accounting for and distributing property from a trust to the beneficiary or beneficiaries

Unified credit exemption - An amount of assets that can pass without imposition of an estate tax or gift tax on the transfer. The amount of assets equates to a credit against the estate tax or gift tax. In 2003, the federal estate and gift tax exemption is $1,000,000. In 2004 through 2006, the federal estate tax exemption increases to $1,500,000, and is scheduled to increase until 2010; the federal gift tax exemption is scheduled to remain at $1,000,000. Minnesota's exemption is $700,000.

Will - A written document by which a person who is over the age of eighteen (18) may direct, subject to certain exceptions, the disposition of their personal and real property after death. With a will, the decedent can name a personal representative and control the disposition of his or her probate estate subject to certain exceptions. If a person does not execute a will, each state has "default" rules, called "intestacy laws," which specify who receives the decedent's property upon his or her death.

In addition, a will is the only method for legally naming a guardian for the decedent's children.

Wills can provide for outright dispositions or use testamentary trusts. A will cannot dispose of property that is owned jointly with right of survivorship, or property that has a beneficiary designation, such as life insurance, annuities, IRAs.