Basis of property. The value used to determine gain or loss for income tax purposes. The basis may be cost or a different amount, depending on the law affecting the transaction.
Beneficiary. The individual or corporation who receives the benefit of a transaction, e.g., beneficiary of a life insurance policy, beneficiary of a trust, beneficiary under a will.
Codicil. An addition to a will that may modify, add to, or subtract from, qualify, alter, or revoke provisions in the will. The codicil is a separate document. It is signed with the same formalities as a will. The codicil can be changed, revoked, canceled, or destroyed at any time.
Community Property. Real or personal property owned in common by husband and wife as a kind of marital partnership. Either spouse has management and control of the community real and personal property; however, both spouses must join in a transfer of ownership or lease for more than one year of community real property. All property acquired during marriage from earnings, and the earnings themselves, are community property. Property acquired prior to the marriage, or during the marriage by gift or inheritance is not community property. Spouses can by oral or written agreement change the character of the property from separate to community property and vice versa.
Corpus. Term referring all property belonging to a trust.
Donor. One who makes a gift. The recipient of that gift is referred to as the donee.
Equivalent exemption. A unified tax credit is deducted from any estate tax owed. This credit is the tax equivalent to the deduction from the gross estate of an amount called the equivalent exemption. For 2005, 2007, and 2008, the equivalent exemption is equal to $2,000,000. The equivalent exemption amount slowly increases in steps to $3.5 in the year 2009 but then drops back to $1 million when the estate tax is reinstated in 2011.
Estate taxes (federal). The death taxes imposed by the federal government on the transfer of assets on death. The executor of the estate generally pays the taxes.
Executor. The individual or corporation appointed in a will by a testator (one who makes a will) to take care of the testator’s property after death. Also called a personal representative. The executor is confirmed by the probate court. He has the legal and business responsibilities and functions under the jurisdiction of the probate court. The executor chooses the attorney to do the legal work for the estate. Executrix is the term for the female executor, although executor is now used for both male and female personal representatives in probate.
Fiduciary. A person charged with the duty of carrying out the terms of a trust on behalf of a beneficiary. Executors and trustees are fiduciaries.
Future interest--gift tax. A gift by a donor to a recipient, (the donee), whereby the donee receives the benefit, use, or enjoyment sometime in the future. Such a gift cannot take advantage of the $12,000 annual exclusion, which is reserved for the gift of a present interest. If a parent give a child $10,000, and the child cannot use it now but must use it in the future, that is a gift of a future interest.
Generation-skipping tax. The death or lifetime transfer tax imposed on a taxable distribution from, or a taxable termination of, a generation-skipping trust which is defined as a trust with two or more generations of beneficiaries belonging to a younger generation than the grantor.
Gift tax annual exclusion. The federal government allows the donor to exclude $12,000 of a gift from gift tax liability of a gift that is a present interest to a specific individual donee. A present interest gift is one of which the donee has an immediate unrestricted right of use, benefit, and enjoyment. If a parent gives a child $10,000, and the child can use it now, that is a gift of a present interest.
Grantor. The individual or corporation who makes a grant of property to another person, e.g. grantor of a trust, grantor of a deed of property.
Gross up rule for gift tax. The amount of gift tax paid on gifts made within three years of death is included in a decedent’s gross estate. This “gross up” rule eliminates any incentive to make deathbed transfers to remove an amount equal to the gift taxes from the assets of the decedent.
Guardian. The individual (or corporation), who legally has care and management of the person, property, or both of an unmarried child during his or her minority. In California, minority now ends at age 18. A guardian also may have authority over the property of a married minor. A conservator is a person who may be appointed to care for the person or property or both of an incompetent adult, or for the person of a married minor.
Heir. The person who inherits property under state law.
Inheritance taxes. The California taxes imposed on the transfer of property of decedents who died before 8:00 p.m., June 8, 1982. California inheritance taxes were repealed by the passage of Proposition 5 and 6 in the June 8, 1982, election. However, federal inheritance taxes (estate taxes) are not repealed and remain in effect today.
Inter vivos trust (Living trust). A trust created between living people. The grantor, referred to as trustor or settlor, is a living person or existing corporation. Compare this to a testamentary trust.
Irrevocable trust. A trust the terms and provisions of which ordinarily cannot be changed, modified, altered, amended, or revoked. Under certain circumstances, a court may make limited changes.
Issue. Generally, progeny, offspring, lineal descendants (children, grandchildren, etc.), and adopted children. However, a testator can, in his will, define issue to exclude adopted children.
Joint tenancy. A form of property ownership by two or more person designated as “joint tenants with right of survivorship.” When a joint tenant dies, his interest in the property automatically goes to the surviving joint tenant outside of a, beyond the power of the will of the deceased joint tenant; the property passes outside probate. But holding property in joint tenancy has dangers, including certain tax disadvantages. Consult your attorney before taking title to property in joint tenancy.
Life estate. An interest in property, the term of which is measured by the life of the person holding the interest.
Life tenant. The person who receives the benefits from real or personal property during his lifetime only. The benefits stop when he dies. The benefits are rents, income, and possibly the use of the property. The life tenant is not necessarily the “tenant” occupying the property, such as a lessee or renter.
Marital deduction. In estate and gift taxation, the amount of property one spouse can give to the other spouse outright or in a special trust without estate or gift taxation. For decedents dying after 1981, 100 percent of property, whether community or separate, passed to a spouse is considered a marital deduction in computing the transfer taxes. Therefore, the marital deduction is considered unlimited.
Minor. A person under the age of legal competence. In California, the age is 18.
Perpetuities, rule against. An extremely complicated rule the purpose of which is to keep property from being frozen in a trust beyond a certain period of years. If the trust violates the rule against perpetuities, it is void from its beginning. The perpetuities clause in wills and trusts provides that the trusts contained in them terminate automatically at the required time. This protects the legality of the trust.
Personal property. Movable property as contrast with real property, which is fixed in place. Personal property includes money, furniture, automobiles, and equipment.
Power of appointment. The actual power or legal authority given by the deed or will of one person, the donor of the power, to a second person, the donee of the power, which enables the second person to sell, transfer, contribute, mortgage, or dispose of property owned by the first person. A power of appointment may be general or special, as defined below.
General power. Enables the second person to do all those acts for himself, his creditors, his estate, the creditors of his estate, or any other person.
Special power. Limits the second person concerning the persons to whom he can transfer the property over which he has a power of appointment. The limitation of appointment can be very specific, e.g., to a group consisting only of the children of the first person, or the children of the second person. But never can the second person appoint, i.e., “give,” the property to himself, his estate, his creditors, or the creditors of his estate, because this would defeat the purpose of the special power, namely, to keep the appointive property from being taxed in the estate of the second person on his death.
Pour-over will. A will that provides for the transfer, after or during the probate court proceeding, of the net assets of the deceased person from the executor’s control to the control of a trustee who is in charge of a trust that was in existence immediately before the death of the deceased person. The executor pours over the assets into the open vessel of the existing trust.
Present interest. See Gift tax annual exclusion.
Probate. The court proceedings in which the probate court has jurisdiction over the executor, and the assets of the deceased person. The purposes of probate include protection of:
(1) The heirs from fraud and embezzlement;
(2) The federal, state, and local governments so that all taxes are paid by the estate; and
(3) The creditors of the deceased person so that they are paid.
Probate starts with the will being admitted to probate and the executor being granted “letters testamentary.” Probate ends after all taxes are paid, creditors are paid, and assets are counted for and distributed as provided in the will. Probate lasts approximate nine months to two years or more, depending on the complications in the estate.
Quasi-community property. In California only, property that, had the couple been living in California while married, would be considered community property. For example, husband and wife are married and living in a non-community property state for 3 years, later they move to California, a community property state. The property acquired during the couple’s marriage in the non-community property state, other than by gift or inheritance, is considered quasi-community property, and therefore considered community property for all intents and purposes.
Real property. An interest in land, or property permanently affixed to land such as a building.
Remainder interest. The residual ownership of property left in trust after a previous owner or after the life tenant received all the property benefits to which they were entitled.
Reversionary interest. The future return to ownership of property by a person who for a period of time surrenders his ownership in trust or outright to another person. After that period, the property “reverts” or comes back to the original owner.
Revocable trust. A trust whose terms and provisions can be changed, modified, altered, amended, or revoked. The power to do all this is usually reserved by the person who created the trust, but sometimes the creator to the second person may give the power. The revocable trust is becoming popular as a means of avoiding probate and as a substitute for a will. The revocable trust is often used for aged people to protect themselves and their assets from the expense and delays of conservatorship. Before using a revocable trust, a person should consult with an attorney who is experienced with revocable trusts.
Right of representation or per stirpes. Refers to a method for dividing property on the death of a beneficiary. The descendants of that beneficiary take the same share or right that the beneficiary would have received had the beneficiary lived. Contrast this with per capita division in which each beneficiary (e.g., grandchild) receives the same amount as the other beneficiaries of the same relationship (i.e., the other grandchildren).
Separate property. In California, a category of property held by husband and wife that is not community property, but that is owned separately by the husband or wife. The problems of separate property arise generally in marital dissolution and in the determination of death taxes. Gifts, inheritances, and property owned before marriage are usually considered separate property.
Spendthrift trust. A trust that provides a fund for the maintenance of a beneficiary, which by its terms insulates the beneficiary’s interest from the beneficiary’s improvidence, incapacity, and the claims of creditors.
Tenancy in Common. A form of holding title to real or personal property by two or more persons. Because there is no right of survivor ship, the legal relationships and results are very different from joint tenancy. A person should take title to property only after consulting with his attorney because the effect on income tax, estate tax, death rights, etc., varies depending on how title is held.
Testamentary trust. The trust that comes into being only as a result of the death of a person whose will provides for the creation of the trust after his death; hence, the term “testamentary.”
Testator. The person who makes a will. Testatrix is the female equivalent, but it is common as a convenience to use the term testator for either man or a woman.
Trust. A legal entity established either by a trust agreement signed by a person during his life or arising after death from a will or testamentary trust. The trust is governed by the terms in the documents. They can last, as long as 50 years, if not longer, so it must be written with great care.
Trustee. The individual or corporation who in a trust has legal title to the assets and has the power given in the trust to carry out the wishes of the persons or persons (trustor) who created the trust. The trustee has a fiduciary obligation to the trust’s beneficiaries. The trustee is subject to strict regulation. Although he has legal title for convenience, the beneficiaries in fact own the beneficial or equitable title. When there is more than one trustee, the trustees are called co-trustees.
Trustor. The person who establishes the trust (sometimes referred to as “settlor”). There can be more than one trustor.
Unified estate and gift tax. A federal tax imposed upon the net value of an estate and on gifts of certain amounts. The transferor is liable for the gift taxes but if the transferor fails to pay the gift tax, the transferee may be held liable for its payment. I.R.C. §§2001 et seq. And 2501 et seq.
Unified tax credit. A federal tax credit that may be applied against the gift tax, the estate tax, and sometimes the Generation-Skipping Transfer tax. For Gift Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $780,800 and the Applicable Exclusion Amount is $2,000,000.
Will. The document a person signs to provide for the orderly disposition of his other assets after his death, in accord with his wishes to provide for family security and protection and to minimize death taxes.