Terms and Definitions - click here or scroll down
Will - a written document that leaves the estate of the person who signed the will to named persons or entities (beneficiaries, legatees,devisees) including portions or percentages of the estate, specific gifts, income interests, cash gifts, and the creation of trusts for management and future distribution of all or a portion of the estate (a testamentary trust). A will usually names an executor (and often substitute executors) to manage the estate, states the authority and obligations of the executor in the management and distribution of the estate, and specifies what beneficiaries will receive what assets or interests. Top
Minor’s trust -Under the Uniform Transfers to Minors Act (UTMA), any will can provide that property received by minors will be maintained in trust until the minor reaches age 21. However, for clients wishing to reduce their estate tax by paying out annual gifts from the estate during their lifetime, the Internal Revenue Code section 2503(c) treats gifts to minors (up to age 21) in trust for their benefit and/or that will be distributed upon them attaining age 21 as present interests. This results in an ability to transfer $12,000 per year (the 2007 annual gift exclusion for one spouse-if two spouses are contributing, $24,000 can be put in trust each year) to each minor without incurring gift tax. Trusts for beneficiaries beyond the age of 21 can also be established to make use of the annual gift exclusion by giving the beneficiaries satisfactory powers (called Crummy Powers after the case establishing the law on this point) to characterize the payments into the trust as gifts of present interests. Trusts for minors can also be established as an intervivos (during the settlor’s life time) revocable or irrevocable trusts. Unlike a trust under the Uniform Transfers to Minors Act, with an intervivos trust or a modified testamentary trust, there is no cut off for how long money for a minor can remain in trust after the beneficiary attains the age of 21. Top
Charitable trust - a form of trust in which the donor (trustor or settlor) places substantial funds or assets into an irrevocable trust (a trust in which the basic terms cannot be changed or the gift withdrawn) with an independent trustee, in which the assets are to go to charity. Somtimes, the donor (or specific beneficiaries) can receive regular profits from the trust during the donor's lifetime. The IRS will allow a large deduction in the year the funds or assets are donated to the trust, and the tax savings can be used to buy an insurance policy on the life of the donor which will pay his/her children the proceeds upon the donor's death. Thus, the donor (trustor) can make the gift to charity, receive a return on his/her money and still arrange to make a large gift at death to his/her heirs. The disadvantage is that the assets are permanently tied up or committed. Scholarship Trust can also be established to benefit students at certain schools with certain specified qualifications, life experience, and/or academic programs. Top
Inheritance - Property or a property interest that is passed to another upon one’s death. Top
Beneficiaries -The people or charities who will benefit from a transfer of property or a property interest. In estate planning, beneficiaries are the people and organizations you designate in your estate planning instruments as entitled to receive income, use, or title to assets in your estate. Top
Trust - A trust can be created in a variety of ways and for a variety of purposes. Testamentary trusts are created in a will and are subject to continuing probate court supervision. Intervivos, or living trusts, are those created during one’s lifetime. The major advantage of these trusts is that they operate as will substitutes, allowing you to direct the disposition of your property in a manner that avoids probate. Probate is an expensive and time-consuming process where the court appoints an administrator whose job it is to determine all the assets and distribute them to the beneficiaries under the supervision of the court. Trusts are far more efficient because they bypass probate altogether, avoiding a lot of delay and expense. Top
Trusts that can be amended or revoked are revocable trusts (see definitions below). Since the adoption of the uniform trust code in New Hampshire, all intervivos trusts are presumed revocable unless the trust instrument indicates otherwise. Irrevocable trusts cannot be amended or revoked once they are created. However, some flexibility can be gained through proper use of powers of appointment.
Trusts also allow you to keep certain property for the use of beneficiaries without actually passing that property to anyone until later. Similarly, some of the beneficiaries could be entitled to income from the trust property during their life time with the property being distributed to other beneficiaries upon the death of the income beneficiaries. These variations permit you to maximize the investment of your estate. It can also allow you to benefit people you care about but are too young or not adequately skilled to manage the entire distribution at the time of your death. There are many ways to control the distribution of your estate by way of trusts.
Irrevocable trust - a trust that cannot be revoked or altered by the settlor, the person who created and funded the trust, after its creation except upon the consent of all the beneficiaries or a court order. Powers of appointment are sometimes gifted under irrevocable trusts. A power of appointment is a property interest that allows the beneficiary to decide who will receive the property. Because the power of appointment may be continuing through the beneficiary’s life time, the ultimate beneficiaries and the amounts of each distribution do not have to be fixed by the terms of the trust even though it is irrevocable once created. Powers of appointment should be given and created with special care to avoid increased tax liability to the holder of the power. A general power of appointment allows the holder to appoint property to his or herself. A limited power of appointment can set forth a group of possible beneficiaries or simply prohibit the holder from making gifts to him or herself or for his or her creditors or otherwise to the benefit of the holder. Top
ILIT -The Irrevocable Life Insurance Trust is a mechanism by which a trust can be established to own a policy on your life. The trust can purchase the policy and pay the premiums itself to avoid the policy being included in your taxable estate upon your death. Existing policies can be transferred into an ILIT but may be included in your estate if you pass away within the prescribed time period. Top
QDOT - Qualified Domestic Trust - A trust that can be used in compliance with the IRS regulations to postpone taxation of gifts to non-citizen spouses. The marital deduction to spouses who are citizens is unlimited allowing one spouse to transfer all of his or her assets to the other upon the death of the first without taxation at that time. Because this deduction is not available for transfers to non-citizen spouses, a QDOT can be used to defer taxation on amounts greater than the federal estate tax exemption. Top
Q-TIP - Qualified terminable interest property -Trusts that meet the IRS criteria to permit them to qualify as transfers within the scope of the unlimited marital deduction, unified federal estate tax credit, and generation skipping tax (tax on transfers bypassing initial taxation because the gift is to grandchildren or others in subsequent generations) exemption, yet simultaneously permitting the donor spouse control over the ultimate distribution of his or her assets. Commonly, these trusts are established to permit the surviving spouse to enjoy income from the trust and limited ability to invade the trust’s principal. Consumption of income and assets for the surviving spouse’s support is ordinarily a tax free event. Top
Distribution - An asset, or share of assets or income interest from a estate or trust, or the payment of all or some of the profits or assets of a business. Top
Revocable trust - A trust that keeps the same tax status as the individual(s) who created it (settlor) and which can be amended or terminated (revoked) at any time during the settlor’s lifetime. Top
Probate - the process by which a court of competent jurisdiction (a probate court in the county in which the person died and/or in which real estate is located) decides how the assets of an estate will be distributed. When someone dies with a will, this process includes proving to the court that the document presented is the valid last will and testament of a deceased person. This can be very time consuming and expensive. When someone dies without a will, his or her assets are distributed in accordance with state law. Top
Distribute - the dividing up of those assets of an estate or trust when someone has died according to the terms of the deceased's will or trust, or in absence of a will, according to the laws of descent and distribution, or the paying out of business assets, profits, or interest. Top
Gift - the voluntary transfer of property (including money) to another person completely free of payment or conditions while both the giver and the recipient are still alive. Top
Annual gift exclusion - An exclusion that applies to gift (present transfer) to any person within a reporting year. The annual gift exclusion can be utilized to minimize estate tax by permitting tax free disbursements up to the applicable exclusion amount (currently $25,000 per donee) and permitting tax free funding of irrevocable trusts, such as the ILIT. Top
Testamentary trust - A trust created by the terms of a will. Example: "The residue of my estate shall form the corpus (body) of a trust, with the executor as trustee, for my children's health and education, which shall terminate when the last child attains the age of 25, when the remaining corpus and any accumulated profits shall be divided among my then living children." A testamentary trust differs from an "inter vivos" or "living" trust, which comes into being during the lifetime of the creator of the trust (called trustor, settlor or donor), usually from the time the declaration of trust is signed. Top
Intervivos trust - a trust created by a writing (declaration of trust) which commences while the creator (called a trustor or settlor) is alive. This type of trust is sometimes called a "living trust." The property is then placed in trust with a trustee (often the trustor during his/her lifetime) and distribution will take place according to the terms of the trust-possibly both during the trustor's lifetime and then upon the trustor's death. Top
Buy-Sell Agreement - an agreement under which surviving owners of a partnership or corporation are to purchase the ownership interest of the deceased, disabled or withdrawing partner/co-owner. Such an arrangement allows the surviving owners to carry on business. The proceeds of the purchase and sale of the ownership interest are then available for distribution to the deceased partner’s beneficiaries. Top
FLLC or FLLP - The Family Limited Liability Partnership or Family Limited Liability Company (FLLC) are sometimes used by family business owners to also direct the distribution of ownership interests to family members. Therefore, the creation of a FLLP or FLLC can be part and parcel with your estate plan in a manner that may reduce your estate tax. Top
Heath Care Power of Attorney - A legal document that permits another person(s) to make health care decisions for you when you are unable to make the decisions for yourself. The Health Care Power of Attorney can include funeral and/or burial instructions, can nominate guardians of minor children and other information that needs to be learned of immediately upon death. Top
Financial Power of Attorney - A legal document that enables an individual to designate another person, called the attorney in fact, to act on his/her behalf for financial and legal matters. These powers can be used in an isolated transaction, can be restricted so they are only effective when you are unable to make financial decisions on your own, or can be effective today for a range of purposes that might be expected to come up in the management of anyone’s financial affairs. Top
Living Will - In some states, the living will is also called an a health care directive or medical directive. A living will is a written document that states a person's wishes regarding life-support or other medical treatment in certain circumstances, usually when death is imminent and the person is incapacitated due to illness, injury or age. The Living Will can be drafted as part of a more comprehensive document to include and duplicate the information contained in the Health Care Power of Attorney that gives funeral and/or burial instructions, nominates guardians of minor children and other information that needs to be learned of immediately upon death.
Deed - the written document which transfers title (ownership) or an interest in real property to another person and that is recorded with the registry of deeds. Top
