Ademption – A doctrine which provides that a bequest may only be satisfied with the specific property that is named.
Agent – The individual named to act under a Power of Attorney for Property or Health Care. Such documents should generally be effective only during the creator’s incapacity.
Beneficiary – The person or an entity that will receive the income or principal from the trust.
Bypass Trust – see Family Trust below.
Codicil – A document that amends one or provisions of a Will. A Codicil can be used to make minor changes, such as changing the names or order of Executors or Guardians. For larger revisions, the existing Will is usually revoked by a new Will.
Complex Will – A testamentary document that provides for the distribution of the individual’s assets but creates testamentary trusts (created at death) to hold the assets and distribute them as the document provides.
Credit-Shelter Trust – see Family Trust below.
Crummey Notice – The Crummey Notice takes its name from the 1968 decision in Crummey v. Commissioner, 397 F.2d 82, 88 (9th Cir. 1968) in which it was established that a gift in trust qualifies for the annual Gift Tax exclusion as long as the trust’s beneficiaries have the power to withdraw the gifted assets. The beneficiaries must have actual notice of such power, but not necessarily written notice unless required by the trust document. Crummey Notices come into play with irrevocable trusts, such as ILITs and Gift Trusts, where the Grantor intends to make a present gift. Generally, it is recommended that the beneficiary be given a window of at least 30 days to withdraw the assets prior to the trust investing them elsewhere.
Dead Man’s Act – A state law that excludes the testimony of an interested witness concerning a personal communication between the interested witness and the deceased party.
Dynasty Trust – A long-term, perpetual trust created specifically to provide for the grantor’s descendants for several generations to come, if not indefinitely.
Elective Share – A fraction, percentage or amount of the deceased spouse’s estate, as legislated by state law, to which the surviving spouse is entitled in order to prevent an individual from completely disinheriting the surviving spouse. In Illinois, the fraction to which the surviving spouse is entitled is one-half of the probate estate if the decedent left no surviving descendants and one-third of the probate estate if the decedent did leave surviving descendants.
Executor – The individual appointed to oversee payment of expenses and the disposition of assets under a Will.
Estate Tax – A tax imposed at death on the assets owned by the decedent. Ownership is determined based on the rules and principles established by the IRS. An exemption from Estate Tax ($5 million in 2011 and 2012) is provided under the Code to each individual.
Family Trust -The portion of a Revocable Living Trust, usually equal to the Estate Tax exemption amount, which is held for the benefit of the decedent’s spouse and/or descendants. The balance of the trust assets are generally allocated to the Marital Trust or transferred to the surviving spouse outright. The Family Trust is also commonly referred to as the Bypass Trust or the Credit-Shelter Trust.
Generation Skipping Transfer (GST) Tax – A Federal tax imposed on transfers of assets where the individual making the transfer is two or more generations above the transferee. Assume that Albert has a child, Brian, and Brian has a child, Chris. A transfer from Albert to Chris would generally be considered a Generation Skipping Transfer and would thus be subject to the tax. The GST Tax is separate from the Gift and Estate Tax and is imposed in addition to those taxes. Please also see Skip-Person on the next page.
Gift Tax – A Federal tax imposed on transfers made from one individual to another. There are two exclusions available for such transfers: (1) an annual exclusion of $13,000 in 2011 and (2) a lifetime exclusion of $5 million in 2011 and 2012.
Gift Trust – An irrevocable instrument that allows you to maximize the annual and lifetime Gift Tax exclusions while maintaining control over the purposes for which such gifts may be used. The Gift Trust also serves to reduce the size of the creator’s taxable estate.
Grantor – Also called the settlor or trustor, this is the person who creates and funds the trust.
Grantor Retained Annuity Trust (GRAT) – An irrevocable trust with a specific term in which the grantor transfers assets to the GRAT and retains an income interest in the trust. This income interest will be stated as an annuity or percentage of the original assets transferred to the GRAT. Each year the GRAT is expected to pay the grantor the annuity amount. At the end of the term, any remaining assets are distributed to the named beneficiary or beneficiaries. The value of the gift at the time that the GRAT is created and funded is calculated using IRS tables.
Guardian – An individual appointed by a court or valid document, such as a Will, to oversee an individual who is a minor or has special needs or the assets of such an individual. Parents with minor children should have a Will prepared to name Guardians and successors to care for their minor children if they are unable to do so.
Health Insurance Portability and Accountability Act (HIPAA) – Federal legislation enacted in 1996 that limits the ability of medical providers to share personal medical information and history with anyone other than the individual, including family, without his or her permission. A HIPAA Release should be prepared to allow your family, agents and trustees to access your information if necessary.
Intestate – An individual who dies without a Will is referred to as dying intestate. Each state provides its own intestate succession law, which determines how the assets of a decedent who dies intestate will be distributed. For a detailed explanation of Illinois’ intestacy laws, please see Newsletter #4.
Irrevocable Life Insurance Trust (ILIT) – An irrevocable instrument that allows the creator to reduce the size of his or her estate, create liquidity to pay any taxes and expenses that will be due at the time of death and provide for remainder of the payout of such policy to be distributed as the creator chooses.
Irrevocable Trust – An irrevocable instrument often used to reduce the size of the grantor’s taxable estate by making gifts to the beneficiaries of the trust. The trust agreement provides how the trustee may manage and distribute the assets for the benefit of the beneficiaries. By establishing a trust rather than making the gift outright, the grantor can control how and when such assets are used. However, there are many complex guidelines that must be followed in order to ensure that the grantor is not treated as the owner of the trust assets, which would cause inclusion of those assets in his or her taxable estate.
Marital Deduction – An unlimited deduction from transfer taxes available for transfers of property between spouses. The deduction is only available if the recipient spouse is a U.S. citizen.
Marital Trust – The portion of a Revocable Living Trust that exceeds the Estate Tax exemption amount and is held for the benefit of the surviving spouse for his or her life.