Short Descriptions of Terminology*
Planning and Extending Your Legacy
ADMINISTRATOR/ADMINISTRATIX: The person appointed by a court to administer and settle the estate of a person dying without a will ("intestate"), or the estate of a person whose will appoints an executor who cannot serve; also called a personal representative. The administrator is the fiduciary for the estate.
BASIS OF PROPERTY: The value used to determine gain or loss on sale or disposition of an asset such as securities or real estate, for income tax purposes. The basis is usually the cost of the property, although it may be a different amount depending on the law governing the transaction; for example, a stepped up basis situation where a person inherits an asset upon the death of another.
BENEFICIARY: A person for whom a trust is managed and who eventually receives the trust property after the death of the trust grantor. Also, in another context, the recipient of life insurance proceeds, benefit plans or gifts in a will.
BEQUEST: Technically, this term refers to leaving personal property by will. However, in ordinary usage, this also refers to leaving all types of property by will.
BOND: A guaranty by insurance or similar company agreeing to make up for any loss, negligently or criminally caused by an executor, administrator, trustee or other fiduciary.
BUY-SELL AGREEMENT: A buy-sell agreement is a contract that provides for the future sale of a business interest or for the purchase of an owner's interest in the business. Buy-sell agreements are also known as business continuation agreements, stock purchase agreements, and buyout agreements.
Under the terms of a buy-sell agreement the buyer and owner enter into a contract for the transfer of your business interest by you or your estate at the occurrence of a specified triggering event. Typical triggering events include death, disability, and retirement. Often these agreements are "funded" through the purchase of life insurance on the seller's life.
CODICIL: An amendment to a will. The requirements for execution of a codicil are the same as those for a will. If you wish to make extensive changes, it would generally be better to execute a new will rather than amend an old will with codicils.
COMMUNITY PROPERTY: Property acquired during the course of a marriage from the earnings or efforts of either spouse while domiciled in a community property jurisdiction, except property received by inheritance or gift. It is recognized in eight states at the time of this writing: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.
CONSERVATORSHIP: A proceeding in the probate court that appoints a person to assume control over an individual's assets because that individual is unable to deal with his or her own property. It is usually based upon legal incompetence. A court appointed conservator must usually post a bond. The use of a Revocable Living Trust can avoid a conservatorship by providing for the management of assets in the event of legal incompetence or incapacity.
CONTINGENT BENEFICIARY: Usually meant to refer to the beneficiary of a trust or will who has the right to receive trust assets or income after or upon the occurrence of an event. For example, children may be the beneficiaries in a trust or contingent upon the death of the second parent to die.
CORPORATION: Probably, still the most common business entity, a "C" corporation is an entity formed under state or federal law. It is separate and distinct from its owners, and may acquire, hold, and dispose of property, conduct its business, and sue or be sued in its own name. The relative rights and duties of the corporation, its owners, and its management are largely defined by statute and by the corporation's certificate of incorporation and bylaws.
CORPUS (OR PRINCIPAL) OF A TRUST: The assets of a trust and their proceeds, as distinguished from the trust income, which is the return, earned by the assets held in trust.
CROSS PURCHASE AGREEMENT: The cross-purchase is one of the two main ways ("stock redemption" the other) a buy-sell agreement can be structured to provide your company with a succession plan. Under a cross-purchase plan, each company shareholder agrees in advance to buy the shares of the withdrawing shareholder while the withdrawing shareholder agrees to sell his or her shares to the remaining shareholders. The corporation is not involved in the transaction.
DECEDENT: A person who has died.
DELAWARE BUSINESS TRUST: An unincorporated association created by a trust instrument and the filing with the Secretary of State of Delaware of a certificate of trust. A governing instrument, which includes the trust instrument, provides for the governance of the business trust and the conduct of its business. A governing instrument may provide for various classes of trustees and beneficial owners and define their respective rights, powers, and duties. A business trust has perpetual existence. It is managed by one or more named trustees who are not liable for the obligations of the business trust. The beneficial owners have the same insulation from liability as shareholders of a corporation, have an undivided beneficial interest in the business trust's property, and have no interest in specific business trust property. However, the governing instrument may alter any of these attributes. In most cases, at least one trustee must be either a Delaware resident or have a principal place of business in Delaware.
DEVISE, LEGACY, BEQUEST: Legal terms used to mean passing property under a will. Devise is associated with a gift of real estate, legacy with a gift of cash, and bequest with a gift of other personal property. In modern usage these terms are used interchangeably.
DISTRIBUTIVE SHARE: The share of property inherited by a beneficiary when a decedent has died without a will. For example, when a person dies without a will and has no spouse and is survived by only one child, in most states the child inherits the entire estate. This would be the child's distributive share.
DURABLE POWER OF ATTORNEY FOR HEALTH CARE (DPAHC): A special type of power of attorney that gives your agent the power to make certain types of health care decisions for you if you are unable to do so yourself because of your legal incompetence. See "Power of Attorney."
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): An employee stock ownership plan (ESOP) is a qualified retirement plan in which the owner sells their stock to the plan for the benefit of the company's employees. The owner, through use of §1042, "Qualified Replacement Property", can hold the proceeds of the sale without recognizing gain while holding the "QRP" property. Like other qualified retirement plans, the company can deduct contributions to the plan, in effect allowing the principal and interest on the loan [if a loan is taken by the company or ESOP to purchase the stock (a "leveraged" ESOP)] to be paid pre-tax.
ENTITY PURCHASE AGREEMENT: The company purchases life and/or disability insurance on each of the owners. The company enters into an agreement with each owner to purchase that owner's interest in the company in the event of a triggering event. Benefits paid or if life insurance is purchased by the company, the death benefit is used to make the purchase from the owner or her heirs. Once the entity purchase the exiting owners share, the remaining owner(s) interest in the business will increase proportionally.
EQUIVALENT EXEMPTION (also known as FEDERAL EQUIVALENT EXEMPTION): The amount of property, which will pass free of estate tax upon death of an individual. For calendar year 2011 and thereafter, that amount is $1,000,000.
EXECUTOR/EXECUTRIX: An individual or institution named in a will to administer the estate of the person making the will. The executor legally steps into the shoes of the decedent and represents the estate in probate court. In some states, the executor is also called the personal representative. The executor is the fiduciary of the estate.
FAMILY LIMITED PARTNERSHIP: A type of Limited Partnership, which also has both at least one General Partner and one or more Limited Partners, designed to hold and manage family businesses. A family limited partnership (FLP) is a partnership created and governed by state law and generally comprises two or more family members. As a limited partnership, there are two classes of ownership: the general partner(s) and the limited partner(s). The general partner(s) has control over the day-to-day operations of the business and is personally responsible for the debts that the partnership incurs. The limited partner(s) is not involved in the operation of the business. Also, the liability of the limited partner(s) for partnership debts is limited to the amount of capital contributed.
An FLP can be a powerful estate planning tool that may (1) help reduce income and transfer taxes, (2) allow you to transfer an ownership interest to other family members while letting you keep control of the business, (3) help ensure continued family ownership of the business, and (4) provide liability protection for the limited partner(s).
FEDERAL ESTATE TAXES: Those taxes imposed on the transfer of assets upon death of an individual. Federal estate taxes are determined by the size of the estate. The estate tax rate ranges from 37% to 46%.
FEE SIMPLE: The entire or whole ownership of property unburdened by any future interest or any possibility of losing total ownership. This is the highest form of property ownership. Other forms of property ownership are life estate, leasehold interest, or tenancy in common, for example.
FIDUCIARY: A person having the legal duty to act primarily for the benefit of another. The fiduciary must act in the strictest confidence and trust. A trustee or agent would be a fiduciary acting on behalf of a grantor or principal. An executor and administrator have a fiduciary relationship to the estate they administer.
GIFT TAX ANNUAL EXEMPTION: Tax-free gifts may be made to any number of persons in a calendar year. Each tax-free gift made by a single individual may not exceed $13,000.00 (2009) per donee. Each tax-free gift made by a husband and wife may not exceed $26,000.00 per donee, per year (gift splitting). Gifts made in excess of the annual exemption are subject to federal gift tax in the year in which they are made, and also must be taken into consideration when administering a will or trust and determining federal estate taxes.
GRANTOR: The person who established a trust, also called a trustor or settler.
GROSS VALUE: The value of an estate before debts are paid. Probate fees are generally calculated on the gross value of the estate. For instance, if your estate consists of your residence with a market value of $150,000.00 and a mortgage of $100,000.00, probate fees would be based on the gross value of the estate, which in this case would be $150,000.00.
GUARDIAN: Someone who is legally responsible for the care and well being of another person. A guardian is generally nominated in the case of a minor child in need of care or financial support, or when a person becomes disabled or incompetent to care for himself or herself. Guardians generally act under the supervision of a probate court and are responsible for all their actions to the court. See "Ward".
HEIR: A person who would inherit property under state intestacy law, where a person dies without a will.
HOLOGRAPHIC WILL: This is a will entirely written, dated and signed by a person in his or her own handwriting. It is permitted only in a few states, often under very limited circumstances. Holographic wills should be avoided, if possible.
INCAPACITATED OR INCOMPETENT: Someone who is unable to manage his or her own affairs either due to physical or mental impairment. An incompetent person cannot enter into a contract nor can he set up a trust, or appoint an agent to act in his behalf. In the absence of any suitable planning for disability, a court will have to be petitioned for the appointment of a guardian for an incompetent. Living Trusts and Durable Powers of Attorney are tools for planning for legal incompetence to avoid probate court guardianships or conservatorships.
INCOME BENEFICIARY: A beneficiary who has a right to receive income of the trust, either presently or at some future time.
INTESTATE: Having died without a valid will. A person who dies with a will but fails to dispose of all his property is referred to as having left property by intestacy.
INTER VIVOS TRUST: A trust established by an individual during his or her lifetime, also known as a living trust. Such a trust can be either revocable or irrevocable. As opposed to testamentary trust. "Inter Vivos" means during one's lifetime.
IRREVOCABLE LIFE INSURANCE TRUST: An irrevocable life insurance trust ("ILIT") is an irrevocable trust created for the principal purpose of owning a life insurance policy. As with any other trust, the insurance trust is a contract between a grantor and a trustee to administer certain property, in this case an insurance contract, for the benefit of named beneficiaries. The insurance trust, like other irrevocable trusts, cannot be rescinded, amended, or modified in any way after it is created. Once the grantor contributes property to the trust, he cannot later reclaim ownership of the property or change the terms of the trust.
One of the primary reasons for implementing a life insurance trust is estate tax considerations. If an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. In addition, the ILIT can also be structured so that the trust will provide benefits to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.
ISSUE: All descendents of a particular person. The term includes children, grandchildren and other descendants.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP: Two or more persons holding title to property jointly with equal rights during their lifetime with the survivor to receive the entire property. In other words, death of a joint owner automatically transfers ownership of the property to the surviving joint tenants. Joint tenancy will supersede any provisions contained in a will. Joint tenancy is different from tenancy in common. Joint tenancy has drawbacks and risks, and should only be used with legal advice. The consent of all joint tenants is necessary to sell, pledge, or encumber property owned in this fashion.
LIFE ESTATE: The right to use and enjoy property during the life of a person, with the property thereafter to go to someone else.
LIMITED LIABILITY COMPANY: A limited liability company is one of the more recent and most flexible business structures available. Formed by filing a certificate of formation with the Secretary of State, a limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company may have as few as one member. Management may be by the members or by selected managers who may or may not be members themselves. As with limited partnerships, the relation among members and the management structure are typically set forth in a written limited liability company agreement. A limited liability company agreement may provide for various classes of members and managers and their respective rights, powers and duties and it may also set forth the manner of allocation of profits and losses of a limited liability company to its members. Principal attributes of a limited liability company include: (i) any member or manager may bind a limited liability company, (ii) except in certain limited situations, no member or manager is personally liable for the debts or obligations of a limited liability company, and (iii) perpetual existence. The foregoing may be changed by express provision in the limited liability company agreement.
LIMITED PARTNERSHIP: A limited partnership is a form of business ownership that consists of general partners and limited partners. There is no maximum number of either type of partner, but there must be at least one general partner. The general partners manage the partnership and are typically personally liable for all of the partnership's obligations, as well as for the acts of the other partners on behalf of the partnership. Limited partners are generally exposed to such liability only to the extent of their investment in the limited partnership. However, they are not permitted to participate in management of the partnership without the loss of this liability protection. A limited partnership offers some flexibility when allocating profits and control. This flexibility can provide certain tax and business advantages for individual partners.
LINEAL DESCENDANTS: Those persons who are blood relatives or issue.
LIVING WILL: This is a written document containing instructions to a hospital or physician to allow a person to die a natural death without using artificial life-sustaining means when it is determined that the individual is terminally ill and there is no likelihood of recovery. Not to be confused with a living trust. Each state has its own laws about Living Wills.
MINOR: A child under the legal age to be considered an adult. Varies by state, usually under 18 or 21. A minor cannot enter into a contract. Ohio's "legal age" or "age of majority" is 18 years.
MULTIPLE PROBATE: When a person dies who owned real property in more than one state, there must ordinarily be separate probate court proceedings in each state where the real estate is located. If the title to the real property is held in a Revocable Living Trust, multiple probate estates in multiple states are avoided.
NET VALUE: The value of an estate after debts are paid and deductions are made. Federal estate taxes are based on the net value of the estate.
NON-QUALIFIED DEFERRED COMPENSATION ("NQDC"): An agreement entered into between a company and one or more "select" group of employees, which is not subject to ERISA non-discrimination rules, so covering a single or select group is permissible. The agreement provides for additional compensation to be accrued, but not paid, to the employee. When actually paid to the employee, the employee includes in their income for tax purposes, and the company gets a commensurate deduction at that time. They emerged, primarily as a result of the "non-discrimination" rules of qualified plans, which prevented higher paid employees from saving adequately for retirement.
PARTNERSHIP: A type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts.
PER STIRPES AND PER CAPITA: These are two common methods of distributing property. Per stirpes is a Latin term that technically means "by the roots or by representation". When the per stirpes method of distributing property is used, a group of beneficiaries inherits the share to which their ancestor would have been entitled had such ancestor lived. Per capita is another Latin term that means "by the head", and is a different kind of distribution.
For example, assume you have three children, named Sally, Diane and Robert. Sally and Diane are dead but Sally has four children living and Diane has one child living at the time of your death. Robert has no children. Under the per stirpes method of distribution, Sally's four children share equally the one-third share that Sally would have received if she had survived you. Robert received one-third and Diane's child inherits one-third.
The term "issue" includes all your descendants, children as well as grandchildren. If you had left all your property to your "issue surviving you per capita", the result in the above example would have been different. At the time of your death there were six persons living in the group, defined as your issue. These six persons are Sally's four children, Diane's one-child and Robert. (Sally and Diane are deceased.) Your property would be divided into six equal shares, with one share to each of Sally's children, one to Diane's child and one to Robert.
To take the above example one step further, assume that Robert is alive at the time of your death and has three children. Under the per stirpes method of distribution, the result would remain unchanged, i.e., Sally's four children would inherit her one-third share equally, Diane's one child would receive the other one-third and Robert would inherit the remaining one-third. Robert's three children do not get anything. However, under the per capita method of distribution the group of issue would consist of Sally's four children, Diane's one child, and Robert and Robert's three children. In other words, there are in all nine beneficiaries who would inherit the estate, each of whom would receive a one-ninth share.
PERPETUITIES (RULE AGAINST PERPETUITIES): A complex rule, the purpose of which is to keep property from being frozen in a will or trust beyond a certain period of time. The rule against perpetuities causes the trust to terminate automatically at the required time in order to protect the legality of the trust. Ohio has abolished this rule.
PERSONAL PROPERTY: This is movable property as contrasted with real property. It would include property such as furniture, automobiles, equipment, cash and stock.
POUR-OVER WILL: A pour-over will is used to transfer property to a living trust that was not transferred to the trust during the lifetime of the grantor. People often fund their living trust with the major assets they own. However, any residual assets that could be transferred to the trust after the grantor's death will not escape probate. The assets poured over through the will have to be probated. The advantage of the pour-over will is that it provides for a uniform disposition of your property under the provisions of one single instrument, namely the living trust.
POWER OF ATTORNEY: This is a legal document giving another person, known as an agent or attorney in fact, the full legal authority to act in your behalf in your absence. A power of attorney loses its validity in the event the principal becomes disabled or dies. Most states however, permit a "durable" power of attorney, which remains valid through the disability or incompetence of the principal. A durable power of attorney can be used in conjunction with a living trust by allowing the agent to transfer any property that wasn't transferred prior to the disability or the settler to the trust.
PRINCIPAL: See "Corpus".
PROBATE: "The lawsuit you file against yourself with your own money for the benefit of people (creditors) that your don't like." This is a judicial proceeding used for transferring a decedent's assets to his legal heirs. It is a process of administering a deceased person's estate. A will generally has to be probated. In the absence of a will, the probate court appoints an Administrator to handle a decedent's estate. All questions concerning the disposition and the rights of heirs and creditors are determined through probate. Probate is lengthy, costly, and open to the public. Assets are generally frozen or restricted during probate.
PROBATE GUARDIANSHIP: A judicial proceeding during which a guardian may be appointed by a probate court to manage the financial affairs of a disabled or incompetent person or of a minor child. The guardian appointed by the court is required to make accounting of these actions to the court.
QUALIFIED TERMINABLE INTEREST PROPERTY TRUST (QTIP TRUST): This is a special type of trust used most frequently by a married couple whose estate exceeds $650,000. The QTIP Trust allows the survivor to enjoy the income of the trust, but preserves assets for the first deceased spouse's family or other heirs. Although it restricts the surviving spouse's use of the trust estate after the death of the first spouse, it is an effective method of deferring estate taxation until the death of a second spouse.
QUIT CLAIM DEED: A legal instrument used to release a person's right, title and interest in a piece of real property. It does not give warranties of title to the grantee (person to whom the property is deeded).
REAL PROPERTY: Land and property permanently affixed to land.
REAL ESTATE: Same as real property.
REMAINDERMEN: Those who receive trust assets or "remainder" after the accomplishment of another purpose. The remaindermen have a future interest in the trust assets, not necessarily associated with a present interest.
REVOCABLE TRUST: A trust that can be amended or terminated by its creator. As opposed to an irrevocable trust, a revocable trust generally has no tax consequences.
"S" Corporation: A corporation which has timely filed an "S" election with the Internal Revenue Service, whereupon, following the limitations imposed, may pass through losses and gains, thus avoiding the potential "double taxation" that can be incurred in a "C" corporation.
SETTLOR: The person setting up a trust. Same as grantor or trustor.
SOLE PROPRIETORSHIP: A business structure in which an individual is solely owner and has unlimited liability for debts whether financial or "tort" creditors. Often a Sole Proprietor does business as a "D/B/A" -doing business as, for example "Smith Plumbing".
STAY BONUS: An agreement between a key employee and the company to stay on with the company for a period of time following a triggering event, such as the owner's death, in exchange for receiving additional compensation, often in the form of ownership interest in the company.
STEPPED-UP BASIS: When a property is inherited or passed through a trust or will, the person who inherits that property receives a new basis in the property. The new basis is the value of the property at the date of the owner's death. Since property generally appreciates, this is known as stepped-up basis. It usually saves taxation on the gain or profit from a later sale of the asset.
TENANCY IN COMMON: A form of ownership of property by two or more persons. Different from joint ownership or joint tenancy. Upon the death of a tenant in common, ownership transfers to that person's heirs, not to the surviving owners. Each share can be transferred or encumbered independent of others.
TESTAMENTARY TRUST: A trust created in a will that does not come into existence until after the testator's death.
TESTATOR/TESTATRIX: The person who makes a will.
TRUST: A legal entity in which a person or institution holds or manages property for the benefit of someone else.
TRUSTOR: See "Grantor".
UNLIMITED MARITAL DEDUCTION: The amount can be left to a spouse of a deceased trust grantor or a testator of a will, free of federal estate taxes, so long as it is left outright to the spouse or in a QTIP Trust, or a QTIP property.
WARD: A person for whom a guardian is appointed.
WILL CONTEST: Litigation to overturn a decedent's will for lack of testamentary capacity, undue influence or lack of proper execution.
*The terms here are offered to provide some basic understanding of the concepts discussed here, but not a "legal" definitions or even complete descriptions. The changes in law, court rulings, regulations, or the impact various facts may have are not taken into account here. Rely on these solely at your own risk.