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Advance
Directive – combines the Living Will and Designation of
Health Care Surrogate into one document.
Annual Exclusion Gifts – refers to the $12, 000 you
can give gift tax-free to as many people as you want, every
year. The gift does not reduce your $1 million lifetime gift
tax exclusion, and can total $24,000 per year, per person,
if your spouse agrees (a “split gift”).
Annuity – a fixed amount that is typically payable to
you for a period of years, your lifetime, or a combination
of the two. While an annuity offers you the certainty of a
steady payment, it is not considered a hedge against
inflation.
Applicable Credit Amount – formerly referred to as
the “unified credit.” This credit applies against Federal
estate tax, and in 2007 and 2008, it shelters property worth
$2 million. In 2009, it will shelter property worth $3.5
million. In 2010, the estate tax disappears for the year,
and by 2011, it reappears. At that time, the applicable
credit amount will drop to its pre-2001 Tax Act level of
$345,800, and will only shelter property worth $1 million
Applicable Exclusion Amount – the amount of property
you can shelter from estate tax because of the Applicable
Credit Amount (see above).
Ascertainable Standard – this refers to a clearly
discernable standard by which a trustee is allowed to pay
out income or principal to a trust beneficiary. A typical
ascertainable standard permits distributions for a
beneficiary’s “ health, education, maintenance and support.”
Such standards are particularly important when a trustee has
a “beneficial interest” in the trust – i.e. is eligible for
principal or income distributions – and will help ensure
that the trust property won’t be taxable in the trustee/
beneficiary’s estate.
Charitable Deduction – the deduction against income,
estate and gift taxes for gifts to charity. There are
limitations on the charitable income tax deduction, but no
limitations on the charitable estate or gift tax deduction.
Charitable Gift Annuity – an annuity that you receive
from a charity in exchange for a gift to that charity (the
annuity can also be payable to someone of your choosing). If
you contribute cash for the annuity, your annuity payments
are treated as part ordinary income and part return of your
investment; if you contribute appreciated property, your
gift is treated as a “bargain sale,” so that your annuity
payments are treated as part ordinary income, part long-term
capital gain (assuming you owned the asset for more than a
year) and part return of your investment. If you outlive
your life expectancy and are still receiving payments, they
will be treated as ordinary income. When you make your
charitable contribution, the present value of the charity’s
remainder interest is eligible for a charitable income tax
deduction. Typically, the rates a charity will pay are lower
than commercial rates, and are generally based on
recommendations from the American Council on Charitable Gift
Annuities. A charitable gift annuity can be a good way to
benefit charity and retain an income stream.
Charitable Lead Trust (CLT) – a “split-interest”
trust that is the inverse of a charitable remainder trust
(see below). With a CLT, charity gets the “up-front” income
interest, generally for a period of years, and your heirs
get the remainder interest, or what’s left over after the
income interest ends. You generally don’t get an income tax
deduction for the charitable interest, although you do get a
gift or estate tax deduction for it (that deduction offsets
the gift of the remainder interest). As with the CRT, the
income interest must be either an annuity (a fixed amount
that remains the same regardless of the trust’s value) or a
unitrust interest (a variable amount that goes up or down
depending on the trust’s value). Unlike the CRT, there is no
minimum required percentage for the annuity or unitrust
payout. A CLAT is a charitable lead annuity trust and a CLUT
is a charitable lead unitrust.
Charitable Remainder Trust (CRT) – a “split-interest”
trust that is the inverse of a charitable lead trust (see
above). With a CRT, the “up-front” income interest goes to
an individual for a period of years (no more than 20) or
life, and the “remainder interest” (what’s left over after
the income interest ends) goes to charity. The income
interest is a taxable gift if it is payable to someone other
than you or your spouse. The charitable remainder interest
is not subject to estate or gift tax, and is eligible for a
charitable income tax deduction (subject to limitations) if
you set up the trust during your life. Lifetime CRTs can be
an effective way to diversify low-basis assets while
deferring capital gains tax. Because the trust is
tax-exempt, it sells the assets tax-free and has 100% of the
proceeds available to generate income for you. Although you
are taxable on the trust’s payout, it will likely be subject
to favorable capital gains tax rates if the trust is
invested for growth. The payout must be either an annuity (a
fixed amount that remains the same regardless of the trust’s
value) or a unitrust interest ( a variable amount that goes
up or down depending on the trust’s value.) With a CRAT (an
annuity trust), the payout must equal at least 5% of the
trust’s initial value, but no more than 50% of that value;
with a CRUT (a unitrust), the payout must equal at least 5%
of the trust’s annual value, but no more than 50% of that
value. The present value of the charitable remainder must
equal at least 10% of the trust’s initial value. There are
several variations on a CRUT, including a “FLIP-CRUT.” With
this, the trust initially pays the lesser of its income or
at least 5% of its annual value, and on a specified date or
an occurrence that’s outside of your control (such as
marriage, divorce or the birth of a child), the trust
becomes a regular CRUT. The FLIP-CRUT can therefore offer
tax-deferred savings and potentially serve as an additional
retirement account.
Community Property – the property ownership system
that applies in nine states: Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington, and
Wisconsin. (Alaska has an elective community property
system.) With community property, you and your spouse are
each deemed to own one-half of the property. When the first
one of you dies, the cost basis of all of your community
property is adjusted to its fair market value. Assuming the
property as appreciated, this basis “step-up” wipes out all
of the property’s built-in capital gains. This is more
favorable than how jointly held spousal property is
generally treated in the rest of the United States. In those
jurisdictions, when the first spouse dies, only one-half of
the jointly held property gets a basis adjustment, so that
only one-half of the built-in capital gains disappear.
Credit Shelter Amount – refers to the amount you can
shelter from estate tax. Through 2008, this amount is $2
million. With proper planning, a husband and wife
collectively can shelter $4 million from estate tax through
2008 ($7 million in 2009, or $3.5 million each). See
Applicable Exclusion Amount, above, and Credit Shelter
Trust, below.
Credit Shelter Trust – a trust that is typically
created under your will and is funded with the amount you
can protect from estate tax (see Applicable Exclusion
Amount, above). A credit shelter trust is usually for your
surviving spouse and children, and can pass tax-free to your
children at your spouse’s death. It thus shelters the trust
property from estate tax in both your and your spouse’s
estates.
Crummey Power – refers to a trust beneficiary’s
limited right (usually for 30 days) to withdraw property
that is added to a trust. The power is designed to ensure
that your gift to the trust qualifies for the annual
exclusion by giving the beneficiary a “present interest” in
the gift (i.e. the right to withdraw it). If the trust does
not have Crummey powers, your gift to it will erode part of
your $1 million lifetime gift tax exclusion. Crummey powers
are typically used in irrevocable life insurance trusts. (“Crummey”
was the name of the taxpayer whose court case gave rise to
this technique; see Annual Exclusion Gifts, above)
Decoupling – refers to what a number of states (over
20) have done to preserve their state death tax credit
revenues. In other words, decoupled states have untied
themselves from the federal system so that they can continue
to receive state death tax dollars that otherwise
disappeared completely in 2005. The effect of living in a
decoupled state such as New York, New Jersey, Illinois, or
Massachusetts, is that your estate taxes are higher.
Donor-Advised Fund – refers to a charitable fund that
is typically run by a community trust or a financial
institution. Your contribution to the fund goes in a
separate account, and is eligible for an upfront income tax
deduction even though the dollars may not be paid to charity
until a later date. The funds grow tax-free, and you may
recommend how your charitable donations are used. Because
the fund is treated as a public charity, your gifts are not
subject to the restrictive charitable income tax limits
imposed on gifts to a private foundation. A donor-advised
fund can be an attractive way to make directed charitable
gifts without the complications of a private foundation (see
below).]
Dynasty Trust – a trust that is created in one of
several jurisdictions that has abolished the “rule against
perpetuities” (see below). A dynasty trust could
theoretically last “forever” and need not terminate when the
law usually requires trusts to terminate – generally about
100 years after they are created. Dynasty Trusts last 360
years in Florida.
Estate Tax – a tax on the transfer of property at death. If
your taxable estate plus your adjusted taxable gifts (post-
1976 lifetime gifts that erode your $1 million gift tax
exclusion and are not includible in your estate) exceed the
applicable exclusion amount (see above), then your estate
will be subject to estate tax. The 2001 Tax Act repealed the
estate tax in 2010, but just for that one year. Prior to
that one year of repeal, the amount you can protect from
estate tax has been increasing, and the top estate tax rate
has been decreasing: from 2007 through 2009, it is 45%.
Assuming the estate tax returns in 2011, the top rate again
will be 55%.
Estate Tax Exclusion – the amount of property you can
protect from estate tax (see Applicable Exclusion Amount,
above).
Executor – the individual, bank or trust company
named in your will to administer your assets at your death
and to see that the terms of your will are carried out (the
bank or trust company is called a “corporate” executor). The
executor’s duties include figuring out what you owned,
gathering your assets, determining you debts and
liabilities, and filing your estate tax return and final
income tax return. The executor also must make a number of
post-mortem tax planning decisions and preserve your
estate’s assets before they are distributed. This can mean
managing those assets, making sure they are appropriately
insured and securing insurance if they are not.
Family Limited Partnership (FLP) – a pass-through
entity that is used to hold assets and create valuation
discounts for gifts of limited partnership interests
(“pass-through” means that the partnership’s income passes
through to the partners, and is not separately taxed to the
partnership). Valuation discounts are generally available
for gifts of limited partnership interests because the
rights and powers of limited partners are restricted: e.g.,
the limited partners cannot transfer their interest,
participate in the management of the underlying partnership
assets, access the underlying property, control partnership
distributions or easily withdraw from the partnership. FLPs
(along with limited liability companies, which have been
similarly used) are under much scrutiny from the IRS.
Judging by recent cases, an FLP is more likely to survive
that scrutiny if there is a “legitimate non-tax purpose”
behind it, and it is funded with some kind of working
business, rather than just marketable securities.
Fiduciary – one who stands in a relationship of trust
to others, and often, holds people’s assets. Executors and
trustees, for example, are fiduciaries. A bank or trust
company is a “corporate” fiduciary. As then-Judge Benjamin
Cardozo described the fiduciary’s standard of behavior in a
1928 New York Court of Appeals case (Meinhard v. Salmon), it
requires “[n]ot honesty alone, but the punctilio of an honor
the most sensitive.”
529 Plan – a tax-preferred account that allows you to
save for your child’s higher education. All 50 states offer
them, and there are many variations within the plans. The
following website is a springboard for accessing all the
different plans: http://www.collegesavings.org/.
Generation-Skipping Transfer Tax – a transfer tax that
is in addition to the estate tax or gift tax. Its rate is
generally equal to the highest estate tax rate (45% through
2009); the tax applies (in 2007 and 2008) to transfers over
$2 million to people such as grandchildren, regardless of
whether the transfer is outright or in trust. In 2009, the
GST applies to transfers over $3.5 million. In 2010, the tax
is repealed, but is scheduled to come back the following
year, when it will apply to generation-skipping transfers
over $1 million, indexed for inflation. The purpose of the
GST is to make sure that tax is collected when property
passes from generation to generation.
Gift Tax – a tax on lifetime transfers of property
that exceed $1 million in the aggregate. Its top tax rate is
the same as the top estate tax rate (45% through 2009). In
2010, when the estate tax is repealed, the gift tax remains,
and will have a top rate of 35%. In 2011, that top rate tax
is scheduled to go back to 55%.
Grantor – you are a grantor if you establish a trust
while you’re alive. Another term for this is “settlor” or “trustor.”
Grantor Retained Annuity Trust (GRAT) – a trust that
transfers future appreciation to your heirs. Typically, you
fund a GRAT with property that is likely to appreciate
significantly or is a “cash cow.” With the GRAT, you receive
an annuity for a period of time, generally two or three
years. At the end of that period, whatever is left in the
GRAT (the “remainder interest”) passes either outright or in
further trust to the heirs you’ve named in the trust. You
are deemed to make a gift when you fund the GRAT, but
because the present value of your right to receive the
annuity is worth something, the value of that gift is
reduced. It is possible to structure a GRAT to make your
annuity equal 100% of what you put into the trust so that
there is no gift (a “zeroed-out GRAT”). Assuming the GRAT
outperforms the interest rate used to value your annuity
(see the 7520 Rate, below), that “excess” will pass tax-free
to your heirs.
Grantor Trust – a trust you create while you’re
alive, and of which you are the owner for income tax
purposes. In other words, you report the trust’s income,
deductions and credits as part of your income tax, and don’t
treat the trust as a separate taxpayer. A “defective”
grantor trust is deliberately structured to be taxable to
you for income tax purposes, but is not includible in your
estate for estate tax purposes. The advantage of such a
trust is that your payment of the trust’s income taxes is a
tax-free gift to the trust and its beneficiaries, since
neither will have to pay any tax on the trust’s realized
income.
Gross Estate – refers to everything you own at death,
including your individually owned property, your share of
jointly held property, pensions plans, insurance benefits,
etc. Determining the size of your gross estate is the first
step in determining your potential estate tax liability.
Health Care Proxy – the document in which you name an
individual to be your “ health care agent” or “health care
surrogate.” This individual will make health care decisions
for you when you no longer can. The rules regarding health
care proxies vary from state to state. See Living Will,
below.
Incentive Trust – refers to a trust that is typically
created under your Will, and that is designed to encourage
your beneficiaries in certain types of behaviors, such as
achieving high grades, gainful employment, etc. Such a trust
might permit principal distributions to the beneficiary, for
example, that are equal to beneficiary’s wage income.
Although well-meaning, incentive trusts can inadvertently
penalize beneficiaries: e.g., children who choose low-paying
professions or stay home to raise a family won’t get as much
as the child who becomes an investment banker – probably not
what you had in mind.
Income Beneficiary – the individual or entity
currently eligible to receive income from
a trust. Depending on the type of trust, the trustee may be
required to pay out the income, or may have discretion to do
so. An individual’s income interest, for example, typically
ends in death.
Inheritance Tax – a tax that some states impose at
your death. Contrary to an estate tax, which is imposed on
property passing at your death, an inheritance tax is
imposed based on the recipient of the property: in general,
the closer the degree of kinship, the lower the tax.
In Terrorem Clause – refers to a clause in a will (or
trust) that threatens to deprive you of your inheritance if
you challenge the document giving you the inheritance.
Courts are generally reluctant to enforce
“no-contest”clasues and construe statutes authorizing them
very narrowly. In some jurisdictions, such as Florida, these
clauses are unenforceable.
Irrevocable Life Insurance Trust (ILIT) – an
irrevocable trust that you set up during your lifetime to
hold insurance on your life. The purpose of the trust is to
remove the insurance from your taxable estate and that of
your spouse, if you’re married. Typically, your surviving
spouse and children are the beneficiaries, and at your
spouse’s death, the trust passes estate tax-free to your
children. Insurance trusts generally use “Crummey powers”
(see above) to secure the annual exclusion for gifts to the
trust that are intended to pay the insurance premiums. If
you fund the trust with an existing policy, you must live
for three years after setting up the trust to keep the
insurance out of your estate; if your trustee buys the
policy on your life, the three-year survivorship rule does
not apply.
“Kiddie Tax” – an income tax rule that applies to
children under the age of 18. It requires that their
“unearned income” in excess of $1,700 (the 2007 threshold)
be taxed at their parents’ highest rate. (Unearned income
refers to items such as interest, dividends, and capital
gains.) Custodial accounts under the Uniform Transfers to
Minors Act, for example, are subject to the kiddie tax (see
UTMA/UGMA accounts, below).
Living Will – a document that sets forth your health
care wishes when you no longer can. The document can
request, for example, that you not be kept in a “persistent
vegetative state,” or it can also request that every measure
be taken you keep you alive (in general, the law presumes
that you would want to be kept alive; the living will
usually rebuts that presumption). Most states recognize
living wills, which are often coupled with a “health care
proxy” (see above).
Marital Deduction – the deduction against estate or
gift taxes that applies when you make gifts to your spouse.
The gifts can be outright or in trust. The marital deduction
postpones estate tax until your surviving spouse dies. It is
unlimited if your spouse is a U.S. citizen (see QDOT,
below).
Minor’s Trust – a trust that holds property for a
minor (let’s say it’s your child), and is sometimes referred
to as a “2503(c) trust.” It is a receptacle for annual
exclusion gifts, and does not require Crummey notices (see
Crummey Powers, above). The trust must be solely for your
child, and can be used for your child’s benefit before he
reaches age 21, when it must be turned over to him. Some
trusts, however, are structured to give the child a “window
of opportunity” to terminate the trust at age 21, and
continue on if the child doesn’t seize the opportunity.
Per Capita – “by the head.” Trust documents
occasionally provide that when the income beneficiary dies
(i.e., the individual who’s currently eligible to receive
trust income), the remaining trust property will pass to the
individual’s “surviving issue, per capita and not per
stirpes.” This means that all of the income beneficiary’s
surviving descendants take an equal share of what’s left in
the trust. To illustrate, assume that Mom is an income
beneficiary, and has three children, each of whom has two
children. At her death, the property passes to her surviving
issue, per capita and not per stirpes. Because Mom has nine
surviving descendants (three children and six
grandchildren), each one receives 1/9 of the trust
remainder. The more usual distribution, however, is per
stirpes (see below).
Per Stirpes – by the “stocks” or “by the roots.”
Trust documents often provide that when the income
beneficiary dies (i.e., the individual who is currently
eligible to receive trust income), the remaining trust
property will pass to the individual’s “surviving issue, per
stirpes.” This means, for example, that grandchildren split
whatever share their deceased parent would have of whom has
two children. Mom’s son predeceases her. At Mom’s death, the
property passes to her surviving issue, per stirpes.
Power of Appointment – your right to direct who takes
trust property, either when you’re alive or at your death. A
“general power of appointment” (GPA) means that in addition
to directing the property to other people, you can also
direct it to yourself, your estate, your creditors or the
creditors of your estate. The property over which you have a
GPA is includible in your estate for estate tax purposes. A
“limited power of appointment (LPA) means that you cannot
give the property to yourself, your estate, your creditors,
or the creditors of your estate – even though, depending on
how broadly the power is written, you could conceivably give
it to anyone else. The property over which you have an LPA
is not includible in your estate for estate tax purposes.
Power of Attorney – a document wherein you name an
individual to act as your “attorney-in-fact” and transact
business on your behalf. Note that the attorney-in-fact is
not authorized, for example, to make annual exclusion gifts
(see above) unless the document so states. A “durable” power
of attorney is effective when executed and remains so even
when you become incompetent. A “springing” power of attorney
does not become effective until a stated event occurs, such
as your incompetence. Any power of attorney ends at your
death, when you attorney-in-fact can no longer act on your
or your estate’s behalf.
Present Value – this refers to what a future dollar
(or revenue stream) is worth in today’s dollars. For
example, in a GRAT (see above), the present value of your
annuity stream is subtracted from the value of the property
you transfer to the GRAT to determine the value of your gift
to your heirs (they get what’s left over). In other words,
if the present value of your annuity is 100%, the present
value of the remainder gift is zero. The 7520 rate (see
below) is the interest rate used to make this computation.
Private Foundation – a charitable entity that you can
create either as a trust or a corporation, and that can last
in perpetuity. It gives you maximum control over your
charitable giving, and lets you direct how the foundation
uses its contributions. Private foundations have a number of
rules that must be scrupulously followed, such as minimum
amounts that must be paid out annually and prohibitions on
self-dealing. The income tax deduction for lifetime
contributions to private foundations is subject to a number
of limitations, whereas the gift and estate tax deduction
for such contributions is unlimited (e.g., if your
contribute to a private foundation under your will, that
gift is fully deductible).
Probate Estate – assets that you own in your own name
that are governed by your will, and not by contract or state
law. In other words, the probate estate includes things like
real estate held in your own name, bank and brokerage
accounts and tangible personal property. It does not
include, for example, life insurance, jointly held property
and qualified plan benefits and IRAs.
QDOT – a “qualified domestic trust.” This trust
qualifies for the marital deduction and is used to postpone
estate tax when the decedent’s surviving spouse is not a
U.S. citizen. It can be structured as 1) a QTIP trust (see
below), where the surviving spouse receives all of the
trust’s income and can direct what happens to the property
at his or her death; 3) a charitable remainder trust, where
the surviving spouse is the only income beneficiary; or 4)
an “estate trust,” where trust income accumulates and the
trust pours into the surviving spouse’s estate at his or her
death. A QDOT is onerous in that principal distributions to
the surviving spouse (unless they are “hardship” related),
will trigger estate tax – or what would have been taxable at
the first spouse’s death on the principal distributions had
the trust not been in existence. The QDOT is thus a “pay as
you go” tax regime, contrasted with the QTIP trust, which is
a “pay once you’re gone” tax regime.
QTIP Trust – a “qualified terminable interest
property” trust. This trust qualifies for the marital
deduction and therefore postpones estate tax. Your surviving
spouse must receive all of the trust’s income at least
annually, and may receive, if you wish, principal
distributions at the trustee’s discretion. When your spouse
dies, the trust is taxable in your spouse’s estate. After
taxes, the property passes as you provided under the terms
of the trust. QTIP trusts are especially useful in second
marriages, where you want to provide for your surviving
spouse but ensure that the children from your first marriage
receive any remaining trust property when your spouse dies.
Qualified Personal Residence Trust (QPRT) – a trust
to which you transfer a “personal residence” (i.e., a
principal residence or a vacation home) and retain the right
to use the residence for a term of years. At the end of the
trust term, the residence goes to your heirs. Although you
are deemed to make a gift when you transfer the residence to
the trust, that gift is reduced by the present value of your
right to use the residence and direct what happens to it if
you die during the trust term. No matter how much the
residence appreciates by the time your heirs receive it, it
won’t be subject to gift tax. For the QPRT to be successful,
you must outlive the trust term.
Qualified Plan – refers to various retirement
vehicles, including pension, profit sharing plans and 401
(k) plans; it also loosely refers to IRAs (individual
retirement accounts).
Remainderman – the individual or entity (such as a
trust) that takes whatever is left in a trust when the
income beneficiary’s interest is over (see income
beneficiary above).
Required minimum distribution – refers to the minimum
amount you must start taking from a qualified plan, such as
401 (k) or a pension or profit sharing plan, when you retire
or reach age 70 1/2 , whichever happens later. With IRAs,
however, you must start taking these distributions when you
reach 70 ˝, regardless of whether you are still working.
Revocable Trust – a trust that you can revoke or
amend at any time. A revocable trust - also known as a
“living trust” – offers no transfer tax savings, but serves
as an asset management vehicle during your life, and can
help provide for you if you become disabled or incompetent.
At your death, it serves as a will substitute and governs
the disposition of assets you transferred to it during your
life and at your death (usually through a “pour-over” will).
Right of election – refers to your surviving spouse’s
right to “elect against” your will. If your spouse makes the
election, he or she will receive the portion of your estate
to which state law entitles surviving spouses. This
“elective share” is in lieu of the provisions you made for
your spouse in your will.
Sale to a Defective Grantor Trust – like the GRAT
(see above), this technique is a play on potential
appreciation. It involves selling an asset to a trust in
exchange for a note that is usually interest-only (i.e., a
balloon note). Because of the trust’s structure, neither
gain from the sale nor interest on the note is taxable to
you. Any appreciation in excess of the note’s interest rate
goes to the trust, and ultimately your heirs, gift-tax free.
If you die while the note is outstanding, there is
uncertainty as to the income tax consequences of the
transaction.
Second-to-die/ Survivorship Life Insurance – a
cost-effective insurance policy on two people’s lives that
does not pay out until the death of both insureds. It is
frequently used to insure husbands and wives, and can help
replenish the wealth lost to estate taxes at the surviving
spouse’s death. It is also used as a source of cash for
paying the estate tax of an illiquid estate. Typically,
second-to-die insurance policies on husbands and wives are
placed in irrevocable life insurance trusts (see above) to
ensure that the policies will not be subject to estate tax
in either spouse’s estate.
7520 Rate – an interest rate that the IRS publishes
monthly. It is an assumed rate of return, and is used to
determine the present value of things like annuities, life
estates, and income and remainder interests (“7520” refers
to the section of the Internal Revenue Code that defines
this rate). For example, you use the 7520 rate to determine
the present value of your annuity in a GRAT, and the present
value of your retained interests in a QPRT. The 7520 rate is
sometimes referred to as the “ hurdle rate”; the more your
property outperforms it, the better the result (i.e., more
property is removed from your estate).
Stepped-up Basis – the upward adjustment in basis
that occurs when you die owning appreciated assets (if the
assets have depreciated, you get a “step-down” in basis). In
other words, when you die, because your assets are generally
valued as of your death, this value serves as the new cost
basis. The effect of this is to wipe out any built-in
capital gains, so that if your heirs cash in their
inheritance, they won’t pay capital gains tax (assuming the
asset hasn’t appreciated between your death and when it’s
sold). Note that when the estate tax disappears in 2010, so
does the basis step-up: instead, there will be “carryover
basis” (subject to a few exceptions) – meaning that your
heirs inherit your cost basis and pay capital gains tax when
they cash in their (appreciated) inheritance. Carryover
basis means that you need to keep careful records of all
capital improvements and dividends reinvestments: if your
heirs can’t prove your basis, the likely presumption is that
it’s zero.
Transfer Tax – the tax on the transfer of property.
Estate, gift, and generation-skipping transfer taxes are all
transfer taxes.
Trust – an entity where the trustee holds legal title to the
assets, and the beneficiaries (the people who benefit from
the trust) hold beneficial title to the assets. A trust can
help save people from themselves, potentially insulate
assets from creditors and offer tax savings.
Trustee – the individual or bank or trust company
named to administer a trust’s assets. The trustee’s duties
include managing the trust’s assets, making appropriate
distributions to beneficiaries and filing the necessary tax
returns for the trust. When a bank or trust company fills
that role, it is called a “corporate” trustee.
UTMA/UGMA accounts – refers to “custodial” accounts
under the Uniform Transfers to Minors Act and the Uniform
Gifts to Minors Act (UTMA is an updated version of UGMA).
Both Acts provide a simple framework for transferring
property to minors: in general, UTMA lets you give a broader
class of assets than UGMA and holds those assets until the
minor reaches age 21 (unless you select age 18 when you set
up the account); UGMA usually requires the minor to receive
the property at age 18, unless you select age 21. More
states are adopting UTMA.
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