Estate Planning Glossary

Annual Gift Tax Exclusion: The amount under the IRC (internal revenue code) that anyone can give to anyone else each year without using up any of the lifetime exclusion from gift or estate tax or having to file a gift tax return. IRC Sec. 2503-2. Adjusted for inflation in $1,000 increments.

Asset Protection: This general term refers, logically, to protecting assets from claims against trust beneficiaries. The beneficiaries can be the trust Grantors themselves, or the next beneficiaires in line. These are irrevocable trusts designed to keep assets out of the hands of debt collectors and divorcing spouses, to shelter during times of disagreements, disability and destructive habits, and to anticipate the death of the beneficiary (The Killer Ds). Some states, like NH and RI in the Northeast, allow the principal within such trusts to benefit the Grantors themselves, with certain conditions.

Income-only trusts protect the principal for subsequent beneficiaries, while the Grantors only enjoy the income (interest, dividends, use, and rents).

BDOT Trust and BDIT Trusts: The Beneficiary Deemed Owner Trust (BDOT) is a trust that takes advantage of the tax code to shift income taxation of the trust assets away from the trust Grantor and away from the trust itself, to the trust beneficiary.

(BDOT was originated by Edward Morrow, Esq. Another term is a BDIT, or Beneficiary Defective Irrevocable Trust, which may have been used first by Steven Oshins, Esq.)

Bypass Trust: The Bypass Trust is a trust created generally at the death of the first spouse in order to contain and shelter the estate tax exemption amount from being taxed when the second spouse dies.

Hence, this trust bypasses the estate of the second spouse to die. the Bypass Trust is also known as a credit shelter trust, and less descriptive: a B Trust or a Family Trust. (The balance of the first spouse’s estate generally goes to a Marital Trust.)

When created during the lifetime of the spouses, it is similar to a Spousal Lifetime Access Trust. the Bypass is arguably less important in the era of Portability of exemptions between spouses, but still useful: The appreciation on the Bypass also is exempt from estate tax. This trust can be a shelter against the second spouse leaving the assets to a new spouse and losing the assets to creditors.

Charitable Deduction: In estate and gift tax, 100% of what is given to qualified charities is exempt from tax. “Qualified’ means recognized by the IRS.

Charitable Remainder Trust: Charitable Remainder Trust – or CRT. This Trust is a creature of statute and comes in two basic varieties: a Charitable Remainder Trust and a Charitable Lead Trust.

The Remainder Trust give distributions to the Grantors (or other beneficiaries) now, and leaves what is left of the trust at the death of the grantor (or the end of a terms of years) to charity(ies).

The Lead Trust provides distributions to charity(ies) for a term of years, following which what is left of the trust passes to family, or a trust for family. Either way a gift is made to charity – one, off in the future, and the other, up front. This gift earns the grantor(s) a deduction against income tax.

The trusts also eliminate or minimize estate tax when done right. One further nuance is that these trusts can either be “unitrusts” or annuity trusts. The latter pays a fixed amount, or annuity, each year as a distribution to the grantor or to the charity.

The unitrust pays a percent of the value of the trust at the start of the year. There are a few other variations as well limited only by the law and the creativity of the drafter.

Crummey: As in Crummey powers and Crummey letters. The power is a right given to an irrevocable trust beneficiary to withdraw the contribution or gift to the trust usually for a period of 30 days. This right is an example of a general (unrestricted) power of appointment. The Crummey letter is to inform the beneficiary of this right, given once a year or at the time of the contribution.  Named for the 1968 9th Circuit Appeals case that established this tool which qualifies the contribution for the annual gift tax exclusion.

DING: Delaware Incomplete Non-Grantor Trust. Also NING and WING (same thing in Nevada and Wyoming. DE, NV and WY are popular but are not the only states where this can work). A trust designed for the Grantor to avoid state income tax in their home state by being situated in another state, a state that does not tax trusts of out of state Grantors.

Disclaimer: The act of refusing an inheritance or survivorship benefit (like a joint account) and letting the asset(s) pass to the net beneficiary(ies) or trust in line.

Domestic Asset Protection Trust: Or DAPT. This type of irrevocable trust allows the Grantor to protect their own assets against their own creditors, while still being able to access the principal for their own use, with important exceptions for child support and other domestic relations and fraudulent transfer and bankruptcy rules. This trust is not part of the common law of any state and is sanctioned under the laws of 18 states (including in the Northeast: DE, NH and RI).

Family Health Trust™ Or FHT: This is a variety of irrevocable trust established by family members to hold assets to reimburse themselves when they assist family members in need. It is often funded with assets that once belonged to members of the senior generation, i.e. parents of the trust Grantors . This trust is not countable as an asset of the members in need. Other variations on this trust expressly name the beneficiaries in need and allow payment directly for their benefit. (Trademark of Timothy B. Borchers, Esq.)

Federal Estate Tax: The federal estate is part of a unified federal gift and estate tax that is an excise on the transfer of wealth. The exemption has ranged, in recent memory, from a few hundred thousand dollars and a rate as high as 60%, to $11.58M and a flat 40% rate in 2020.

The Internal Revenue Code used to allow for a credit of state estate taxes as a set off against the federal tax. When this was abandoned in 2001 in favor of a deduction, most states one by one dropped their own estate taxes in order to attract residents to retire within their borders.

Generation Skipping Transfer Tax and Trusts:
Generation Skipping Transfer Tax and Trusts: The federal generation skipping transfer tax (GSTT) exemption is the same as the estate and gift tax exemption [view those here]. The tax captures tax revenue from transfers and trusts to persons more than one generation down (thereby skipping a generation where it could be taxed). Direct gifts to beneficiaries two generations below the Grantor, or that may provide discretionary benefit to the third generation are generation skipping transfers. Trusts that receive such transfers are Generation Skipping Trusts (GST). Transfers up to the exemption amount are “exempt” trusts. Those that exceed the exemption go into “non-exempt” trusts and should be spent first so as to minimize or escape tax at the termination (e.g. when the lifetime beneficiary dies).

Gift Trust: An irrevocable trust that is a completed gift by the Grantor usually of amounts not to exceed the Annual Gift Tax Exclusion. The trust is generally a Grantor Trust and contains Crummey powers of withdrawal by the beneficiaries so as to qualify for Annual Gift Tax Exclusion.

Grantor Retained Annuity Trust: Or GRAT. A complex irrevocable trust arrangement designed to receive a transfer of an appreciating asset, like privately held business stock, that will in return give the Grantor a payment (annuity). The result is that the appreciation will be removed from the estate at very little or no gift or estate tax cost.

Grantor Trust: Revocable or irrevocable trust the income of which is taxed to the Grantor under IRC Sections 671-678. These sections identify powers (like the power to revoke or to exchange asses with those in the trust) that cause taxation to the trust Grantor. Under Sec. 678(a)(1) the income of trust can be required to be taxed to the beneficiary whether or not the income is received by the beneficiary. Taxation to a Grantor or beneficiary is often a strong benefit of the trust because of the differential between trust and personal income tax rates.

Heirloom Ownership Trust™: Or HOT Trust. A revocable or irrevocable trust established by vacation or heirloom property owners for their benefit and for future generations, setting out terms such as Allocation of ownership, Understanding of long-term purpose, Governance, Use regulations, Stewardship, and Transferability of interests (AUGUST terms). (Trademark of Timothy B. Borchers, Esq.)

HEMS Standard: Health, Education, Maintenance and Support. These standards for distribution to beneficiaries are known as “ascertainable” or objectively determinable standards. They are most often synonymous with maintaining reasonable comfort in the standard of living to which the beneficiary is accustomed. A beneficiary who serves as a trustee and is limited to HEMS in distributing to themselves does not have so much control that they are deemed to be an owner of the trust or that the assets in the trust are part of their Taxable Estate. IRC Section 2041(b)(1)(A).

The HEMS standard is an exception to the rule that a person who can distribute to themselves out of a trust without consulting with anyone else has general power of appointment under IRC Section 2041(a). The HEMS standard prevents the power from being a blank check – legally tantamount to ownership.

IDGT: Intentionally Defective Grantor Trust. An irrevocable trust that is a completed gift by the Grantor but still taxable to the Grantor. Most ILITs and Lifetime Gift Trusts are designed to be IDGTs. A good tool for a Grantor to make a gift and continually make non-gift transfers by paying the income tax on the trust income.

ILIT: Irrevocable Life Insurance Trust. An irrevocable trust that is a completed gift by the Grantor, usually of amounts equal to the annual premiums for life insurance policies on the life of the Grantor. The trust is generally a Grantor Trust and contains Crummey powers of withdrawal by the beneficiaries so as to qualify for Annual Gift Tax Exclusion, at least in part.

Income-Only Irrevocable Trust and LAST Trust™: An irrevocable trust designed to protect assets from having to be spent on nursing home care can provide income to the Grantor or no income. One example is a Legacy Asset Savings Trust™ (LAST Trust™).

The LAST Trust is designed either with income payable to the Grantor, but no principal, or with no income or principal payable to the Grantor combined with a Life Estate, and contains estate tax planning and Trust Protector provisions. (Trademark of Timothy B. Borchers, Esq.)

Independent Trustee: Specifically in relation to the trust Grantor, the IRS effectively defines the term for what it is not: a person who is not a related or subordinate party, i.e., not a spouse, father, mother, descendant, brother, sister, subordinate employee, or corporation in the control of the Grantor. (IRC Sec. 672).

With regard to beneficiaries, an Independent Trustee is often defined the same way as to Grantors, by the trust instrument. For some trust purposes, however, anyone who is not the Grantor is considered independent. The opposite of an Independent Trustee is an Interested Trustee.

Inheritance Trust™: A trust created after the death of the Grantor for the benefit and protection of the inheritor (or created to receive lifetime gifts and inheritance from the Grantor). The trust is intended to be used for the health, education, maintenance or support of the beneficiary when the beneficiary or other related party is the Interested Trustee.

The beneficiary-trustee may be removed by a Trust Protector. When an Independent Trustee is in charge, the trust provides for total discretion on the part of the trustee. This trust also serves a a GST Trust (Generation Skipping Transfer Trust). (Trademark of Timothy B. Borchers, Esq.)

Interested Trustee: A Grantor or beneficiary of the trust, or a related or subordinate party in relation to the Grantor. A Grantor who is an Interested Trustee cannot escape income or estate taxation of the assets of the trust. A beneficiary who is an Interested Trustee may find the assets included in their Taxable Estate because of their degree of control, or income-taxable to them. The opposite of an Interested Trustee is an Independent Trustee.

Irrevocable Trust: A trust that cannot be revoked by the Grantor. Irrevocable trusts are created to either save taxes or protect assets, or both.

• Sometimes state income taxes are saved by the Grantor by placing the assets in a Non-Grantor irrevocable trust which is then deliberately situated in a non-tax jurisdiction (ex. A Delaware DING Trust).
• Estate taxes may be saved by making a gift of the assets to the trust (ex.: an ILIT or a SLAT), thus removing the assets from the Grantor’s estate or freezing the value for transfer tax purposes.
• Assets can be protected against claims by putting them beyond the reach of the Grantor and the beneficiaries (ex.: an Income-Only Trust or LAST Trust™ used for Medicaid planning purposes or a Lifetime QTIP Trust).

All trusts are not revocable by the beneficiaries and hence are irrevocable as to them. Revocable trusts become irrevocable at the death of the Grantor.

Killer Ds: These are the risks to beneficiaries’ inheritance: Debt, Divorce, Disability, Destructive Habits, Death, Disputes. (Timothy Borchers, Esq. coined the term in 2010.)

Life Estate: Use for life. A life estate is the right of the life tenant to live in a home for life, to receive the rent from a home, or to receive  the interest and dividends of money or investments. What follows a life estate is the “remainder,” i.e., the owner(s) next in line after the death of the life tenant.

This is a very useful tool in many contexts. Deeding a property but reserving a life estate can mean that the property avoids probate in passing to the next owners, and that the property earns a new tax basis – a step up to the value at the death of the life tenant.

Lifetime QTIP Trust: An irrevocable trust established for the lifetime of the Grantor’s spouse, removing the assets from the Grantor’s name and estate, providing the spouse income for life and limited access to principal, allowing the income to be shifted to the spouse, protection against both the Grantor’s and the spouse’s claims, and inclusion in the taxable estate of the spouse.

Long Term Care Planning: Advance Planning includes purchasing traditional or hybrid long term care insurance policies, making arrangements to age-in-place or opt for assisted living, and deciding whether to protect some portion of one’s assets from having to be spent on long term care, which is not covered by Medicare, by means of an irrevocable trust.

Crisis Planning includes last minute planning to preserve and protect assets at the time of entering a nursing home or obtaining long term care. It may involve financial techniques such as purchasing immediate, “Medicaid qualified” annuities, transferring assets to the spouse, and prepaying for end of life expenses, like a funeral.

Marital Deduction: The provision of the US Tax Law that allows the estate of a decedent to take a deduction equal to 100% of the value of assets passing to the surviving spouse or that qualify for the QTIP election – a choice to treat assets that do not flow directly to the spouse but are held in trust but qualify for the deduction.

In 1986 the federal tax code changed from only a 50% deduction to 100%. States like Massachusetts were slow adopters of the 100% deduction (1996).

Nominee Trust: This looks and acts a lot like a true trust, but it is not. It is a title holder on behalf of the “beneficiaries” who act more like owners and partners than beneficiaries. The nominee trust instrument says that the beneficiaries (or holders of beneficial interests) direct the trustee who is cloaked with apparent authority to perform any action.

In some cases the owner or co-owners “declare” the trust, and declare themselves to now be trustees of the nominee trust. Spouses, siblings or business partners might do this. In other cases, the trustees are put up to it by the owners, such as children being appointed as the agents of the parents. Caution should be exercised from state to state.

Massachusetts is well known for recognizing this form of “trust” for real estate and for personal property ownership. Other states have adopted it awkwardly. (Florida calls it an Illinois land trust – go figure.) In any case, it is an excellent tool for holding title under a single legal instrument on behalf of multiple trusts, individuals or entities.

Nursing Home Spend Down: To qualify for state Medicaid benefits for long-term care, an applicant must spend down her/his income and assets until they are under a specified amount. The countable assets and asset limits vary from state to state and depend on one’s marital status.

Portability: The portability of the estate tax exemption allows a survivng spouse to use the unused portion of the federal estate tax exemption of their deceased spouse and add it to her/his own exemption when she/he later dies.

Probate: Probate can refer to the process of settling the estate of a deceased person. But the term is used more precisely to refer to the legal process of the Probate Court in each state by which title to assets left in the decedent’s name alone are governed by their will or by intestate succession, sanctioned by the court. Hence, we “probate” the will to probe and to prove who heirs are and/or legally pass down title to the assets. We do not have to probate a trust because it already has title to the assets and the beneficiaries are defined in the instrument.

“Probate assets” are those which must pass through the probate court process to legally be devised to the beneficiaries. Jointly owned assets or assets with a named beneficiary are not probate assets. Assets where the joint owner died first or where the named beneficiaries have predeceased the decedent (such as life insurance payable to a spouse who has already died, with no contingent beneficiaries living) also become probate assets.

QTIP Trust: A trust funded at the death of the Grantor spouse (unless it’s a Lifetime QTIP Trust) that qualifies for the Marital Deduction even though it is not a direct bequest to the spouse (where it would terminate in the estate of the spouse and be taxed in her/his estate).

A QTIP Trust qualifies for the marital deduction because the trust will terminate at the spouse’s death and be part of her/his Taxable Estate and because it benefits only the spouse and it must pay at least the income from the trust annually to the spouse. The trust is not subject to estate or gift tax under the 100% Marital Deduction rules. This trust will protect the assets from creditors of the spouse, especially with an Independent Trustee serving.

Qualified Personal Residence Trust: An irrevocable trust under which the Grantor transfers up to two homes to the trust but retains an interest for a term of years, at little “gift cost” (small use of the gift /estate exclusion). The “remainder” at the end of the term passes to heirs (or, better, a trust for heirs). If the Grantor survives the term, the property is no longer part of their estate. They become renters of the property, allowing further transfers of wealth to heirs at no gift cost.

Retirement Plan Trust: A trust, usually revocable during the life of the Grantor, that acts as a beneficiary of a retirement account such as a traditional IRA, a Roth IRA, 401(k), 403(b), 457 plan and so forth. The RPT allows for the accumulation of the required distributions from the retirement account within the trust and discretion in distributing the payments to the beneficiaries.

Required distributions include required minimum distributions (RMDs) to beneficiaries who inherit pre-2020, and the 10-year maximum payout post 1/1/2020, (except for qualified beneficiaries who may still use longer /lifetime payouts). The RPT allows for the protection of valuable IRAs, sensitivity to income taxes, benefits of deferral, and management of the proceeds for protection of the beneficiaires. An RPT can be used for a spouse beneficiary as well, qualifying for the Marital Deduction from estate taxes.

Revocable Trust: A trust the terms of which can be changed by the Grantor and from which the Grantor can withdraw the assets and return them to him/herself. A revocable trust is always a Grantor Trust for income tax purposes under IRC Section 674. It is includable in the taxable estate of the Grantor under IRC Section 2038.

SECURE Act: The Setting Every Community Up for Retirement Enhancement Act of 2019, known as the SECURE Act, became law on December 20, 2019. The Act impacts retirement savings rules and taxes for workers and retirees. The Act includes changes to age of required minimum distributions (from 70 ½ to 72), allows traditional IRA owners to make contributions indefinitely and also mandates most non-spouses who acquire an inherited IRA to take all distributions within 10 years of the retirement account owner’s death.

Situs: The place to which, for purposes of legal jurisdiction or taxation, a property belongs.

SLAT: Spousal Lifetime Access Trust. This irrevocable trust represents a gift usually to the spouse and heirs of the Grantor. It provides that the spouse is the primary beneficiary and she/he is often the trustee with access to the principal or income of the trust. The trust assets are removed from the Grantor’s estate and the Grantor may apply her/his gift tax exemption to the gift to the SLAT.

Supplemental Needs Trust: A trust designed to receive transfers/gifts from the Grantor during life and/or at death to benefit a person with a disability without disqualifying the beneficiary from receiving public benefits, such as Medicaid. The trust may be used for necessities and little luxuries, to supplement the public benefits. Whatever is not used in the trust will pass to persons or charities selected by the Grantor or perhaps by the beneficiary. (This trust does not need to be paid to the State as reimbursement for benefits.)

Taxable (vs. Nontaxable) Estate: In general, the assets of the Probate and Non-probate estate of a decedent that could be subject to estate or inheritance tax.

Testamentary Trust: A trust created by a will. The trust required to be created under the terms of a will for the benefit of minor children or for a disabled spouse would be a testamentary trust, for example.

Trust Protector: A person or entity appointed to protect the intent of the Grantor of an irrevocable trust (or a revocable trust that will one day be irrevocable or over which the Grantor may lose the ability to revoke and amend).

The Protector can be given one or more of a wide range of possible powers, including the ability to amend the trust to align with the Grantor’s intentions, respond to changes in law and taxation, grant additional powers to trustees or beneficiaries, approve gifts from the trust, sign Inheritance Trusts or other spinoff trusts, remove and appoint trustees, and advise or direct the trustees, creating a safe harbor of advice the trustees may legally rely on.

The Trust Protector should be independent and disinterested, and is usually a trust professional such as an estate planning attorney, CPA or trust company. State law may be ambiguous whether the Protector is a fiduciary or not. Some states have statutes concerning the Trust Protector while others simply do not have law prohibiting or regulating the role.