Alexandrov, Metzger, & Flannagan

Estate Planning Glossary 

Accounting:  a compilation or list of an estate or trust's assets, income, expenses and liabilities over a specified period of time.  A duly appointed executor or administrator must file one or more probate accounts with the probate court.

 
Administration:  a court-supervised process in which the probate assets of a deceased person are distributed to the decedent's beneficiaries as determined by the intestacy laws after the payment of debts, claims, and administration expenses.  The term "Probate" is used when the decedent died with a valid will.  

 
Administrator (male) or Administratrix (female):  the person who is appointed by the probate court to oversee the administration of the assets of a deceased person who died without a valid will.  See "Executor" for a more detailed description of the administrator's duties.

 
Alternate valuation date:  an estate for estate tax purposes may elect to value the estate's assets at the lower of (1) the value of the decedent's assets six months after the date of the decedent's death (the "alternate valuation date") or (2) the value of the decedent's assets as of the date of the decedent's death.  The alternate valuation date can only be used if it results in an overall lower valuation of the estate's assets as a whole.

 
Ancillary probate: a court proceeding in a court located outside of the state in which the decedent maintained legal residency to probate out-of-state real estate which the decedent owned in his or her name only.  An owner of out-of-state real estate should use a trust or other probate-avoidance technique in order to avoid the need for ancillary probate after the owner's death.

 
Annual gift tax exclusion amount: each person may gift up to $12,000.00 to a single individual during a calendar year without having to file a Federal gift tax return.  There is no limit on the number of individuals whom you can give up to $12,000.00 in a single calendar year.  Gifts to trusts have to be properly structured in order to qualify for the annual exclusion.  The annual exclusion amount is $12,000.00 for 2007, and is indexed to inflation.  Gifts in excess of the annual exclusion amount are taxable gifts, and reduce your Federal lifetime gift tax exemption of $1,000,000.00, and must be reported on a Federal gift tax return.    

 
Applicable exclusion amounts:  See "Federal estate tax exclusion amounts".

 
Attorney-in-fact:  the person named in your durable power of attorney to handle your financial affairs in the event of your incapacity.

 
Basis:  your basis in an asset determines whether you will have a gain or loss upon the sale of the asset.  For an asset that you purchase, your basis is generally the purchase price that you paid for the asset plus improvements.  For an asset that was gifted to you, the donor's basis in the asset generally becomes your basis in which case you are said to have a "carry-over basis".  For an asset that you inherited from a deceased person, your basis is generally determined by the value of the asset at the date of the decedent's death (unless the estate elected to use the alternate valuation date) in which case you are said to have a "stepped-up basis".

 
Beneficiary:  a person who is entitled to property from an estate or trust or is entitled to the benefits of a life insurance policy, annuity, retirement account, or other asset which is payable to the beneficiary by virtue of a beneficiary clause or pay-on-death or transfer-on-death form.

 
Beneficiary designations:  typically some type of form or application which you complete to specify whom you want to receive a certain asset after your death.  Beneficiary designations are commonly used with life insurance, retirement accounts, annuities, and certain bank accounts.  An asset with a valid beneficiary designation, except in those limited cases where a person names his or her estate as the beneficiary, is not subject to probate.  They are similar to "pay-on-death" and "transfer-on-death" provisions.  It is very important for you to maintain up-to-date beneficiary designations because the insurance company or other financial custodian will pay the benefits according to the most recent designation on file at your death.

 
Capacity: a requirement for a legal document to be valid and enforceable.  A person must have the ability to understand his or her actions, be of legal age, of sound mind, and not subject to the influence or coercion of a third party.

 
Charitable deduction:  you may be entitled to claim a deduction on your income, estate or gift tax return for certain gifts that you make to a qualified charity.  This is a very complicated area of the tax law, and you should consult with a qualified tax advisor before making any significant gift to a qualified charity to confirm the deductibility of the gift.

 
Codicil:  a legal document, prepared and executed according to state law, in which you change or amend the terms of a previously executed will.  It is subject to the same formalities as a will.

 
Conservator:  an individual who is appointed by the probate court to oversee your financial affairs if you become physically or mentally incapable of caring for yourself.  

 
Credit shelter trust (or by-pass trust):  if you married, and the value of your combined assets exceeds the Federal estate tax exclusion amount, each spouse can create a credit shelter trust so that each spouse utilizes his or her Federal estate tax exclusion amount.  A credit shelter trust shelters an amount of trust assets equal to the deceased spouse's Federal estate tax exclusion amount and places this amount in a separate trust share which the trustee will administer for the surviving spouse's benefit during his or her lifetime but will be excluded from being taxed in the surviving spouse's estate for Federal estate tax purposes.  A credit shelter trust allocates the balance of the trust assets over the deceased spouse's Federal estate tax exclusion amount to a separate trust share which qualifies for the unlimited marital deduction so that no Federal estate taxes will be due upon the first spouse's death.  A properly designed credit shelter trust also includes provisions that will enable each spouse to utilize his or her Massachusetts estate tax exclusion amount.

 
Crummey powers:  provisions in an irrevocable trust, named after a famous tax case, which give trust beneficiaries the right to withdraw, for a limited period of time, their share of a gift of property to the trust so that the gifted property will be treated as a gift of a present interest and qualify for the annual gift tax exclusion.  

 
Decedent:  a person who has died with or without a valid will.

 
Deed:  a legal document, prepared and executed according to state law, in which you transfer an ownership interest in real estate to another person or entity.

 
Disqualification period:  the period in which a person will be ineligible for Medicaid by virtue of having made a gift or transfer of assets to an irrevocable trust or to another individual who is not that person's spouse.   The calculation of the disqualification period is based upon the value of the gifted or transferred property and the average monthly cost of nursing home care in the state as annually determined by the state's Medicaid program.  Different rules apply depending upon whether or not the gift or transfer was made before February 8, 2006 or on or after February 8, 2006. 

 
Durable power of attorney:  a legal document, prepared and executed according to state law, in which you name an agent to make financial decisions for you and manage your property if you are disabled or unavailable.  A durable power of attorney, unlike a regular power of attorney, is not automatically revoked upon your incapacity.

 
Estate tax (or death tax):  a tax that is based upon the value of a decedent's taxable estate for Federal and state estate tax purposes.  The actual amount of Federal and state estate tax for which your estate will be liable will be based upon the specific tax laws in effect at the time of your death, and the net value of your estate at your death.  See "Taxable estate".    

 
Executor (male) or Executrix (female):  the person named in a will to administer your probate estate after your death.  The role is to collect the probate assets, protect or insure the probate assets, pay any debts or final expenses, and distribute the net probate estate to the beneficiaries.  The executor is also responsible for filing any final personal income tax returns, and any estate tax returns, and to remit payment of any taxes that are due to the tax authorities. 

 
Federal estate tax exclusion amounts:  the amount that you can leave to your family estate tax-free for Federal estate tax purposes if you die in a given year.  The Federal estate tax exclusion amounts, which are also known as "applicable exclusion amounts", depend upon the year of your death.  For 2007 and 2008, the Federal estate tax exclusion amount is $2,000,000.00.  For 2009, the Federal estate tax exclusion amount is $3,500,000.00.  For 2010, the Federal estate tax exclusion amount is unlimited because of the repeal of the Federal estate tax for the year of 2010.  For 2011, and subsequent years, the Federal estate tax exclusion amount is $1,000,000.00.  To obtain your Federal estate tax exemption amount, you must subtract any taxable gifts that you made during your lifetime.

 
Fiduciary:  a person in a position of trust who must act for the benefit of another person or persons and who has special responsibilities to act only in the best interests of the other person or persons as imposed by law, the probate court, or a legal document.  This term includes people who serve as an attorney-in-fact, conservator, executor, guardian, and trustee.

 
Funding: to change the title of your assets to your living trust, or to make your living trust the beneficiary of your life insurance policies or other assets which are payable to a designated beneficiary upon your death.  See also "Retitling".

 
Generation-skipping transfer tax (GST):  a separate Federal tax that applies once a person makes cumulative lifetime or death generation-skipping transfers in excess of the Federal generation-skipping transfer tax exemption amount of $2,000,000.00 for 2007 and 2008, $3,500,000.00 for 2009, and $1,000,000.00 for 2011 and beyond.  The GST tax rate is a flat rate of 45% for 2007 through 2009, and 55% for 2011 and beyond.  As with the Federal estate tax, the GST tax is repealed in 2010.  A "generation-skip" occurs whenever a donor gives property to member of a generation which is at least two generations below the donor's generation such as a grandparent giving property to a grandchild or an uncle giving property to a great niece.  

 
Gift tax:  a Federal tax that applies if a person makes cumulative lifetime taxable gifts in excess of the Federal lifetime gift tax exemption amount of $1,000,000.00.  Massachusetts does not have a gift tax.  A taxable gift is a gift in a calendar year to a single individual that exceeds the annual gift tax exclusion amount.

 
Grantor:  (1) The person who establishes or creates a trust.  The grantor is normally the person who transfers money or other property to the trust.  There can be more than one grantor of a trust such as a joint trust established by a married couple.  The term "Settlor" is sometimes used instead of this term. (2) The person who signs a deed transferring the ownership of real estate.

 
Grantor trust:  a trust whose income and gains are reported and taxed on the Grantor's personal income tax returns for income tax purposes.  A grantor trust does not pay income taxes at the trust level.

 
Gross estate:  all property that is included in your estate for Federal and state estate tax purposes, including both your probate assets and your non-probate assets such as life insurance, retirement accounts and jointly-held assets.   It includes virtually every asset in which you had an interest at your death.  

 
Guardian: (1) The person or persons whom you nominate in your will to care for your children until they attain legal age (which is 18 years in Massachusetts) upon your death.  (2) The person who is appointed by the probate court to make personal and financial decisions for you if you become physically or mentally incapable of caring for yourself.  

 
Guardian at litem:  a disinterested attorney-at-law who is appointed by the probate court to review an accounting or a proposed action on the part of a fiduciary in an estate, guardianship, or conservatorship proceeding on behalf of a minor or disabled beneficiary, and to report to the probate court whether or not the approval of the accounting or proposed action would be in the minor or disabled beneficiary's best interests.

 
Health care agent:  the person named in your health care proxy to make medical decisions for you in the event of your incapacity.

 
Health care proxy:  a legal document, prepared and executed according to state law, in which you name an agent to make medical decisions for you if you are unable to make them for yourself.  A health care proxy is known as a durable power of attorney for health care in certain states.

 
Heirs-at-law:  the individuals who are entitled to inherit your probate assets if you die without a valid will.  

 
HIPAA authorization:  HIPAA is an acronym for a Federal law called the Health Insurance Portability and Accountability Act which, among other things, imposes requirements on health care providers to create standards and controls to protect the confidentiality of an individual's health care information.  A HIPAA authorization is an important document which authorizes your spouse, adult children, or other close family members or friends to obtain your confidential medical information from your health care providers in order to help you make a medical decision or pay your medical bills.

 
Homestead exemption: an exemption which is available to protect the equity in your primary residence from the claims of certain creditors.  In Massachusetts, the homestead exemption is generally limited to the first $500,000 of equity and you must sign a written declaration of homestead and record the declaration of homestead in the county registry of deeds in order to obtain the benefits of the homestead exemption. 

 
Incapacity: a condition which describes a person who is physically or mentally unable to make financial, health care or personal decisions.  The probate court must make a finding of incapacity in order to appoint a conservator or guardian for a person. 

 
Intangible personal property:  generally property that is or can be reduced to money such as cash, stocks, bonds, life insurance, retirement accounts, or debts that are due to you.  

 
Intestacy laws:  the state statutes which determine who will inherit your probate assets if you die without a valid will. 

 
Intestate:  to die without a valid will in place, which means that your probate assets will be distributed according to the intestacy laws rather than as directed by you in a valid will. 

 
Inventory:  a compilation or list of the assets which are part of a decedent's probate estate or a trust, including real estate, tangible personal property, and intangible personal probate.  A duly appointed executor or administrator must file a probate inventory with the probate court.

 
Irrevocable trust: a trust in which the grantor waives the right to change or amend the trust.  There are many different types of irrevocable trusts such as Irrevocable Life Insurance Trusts, which are designed to tax proof a life insurance policy insuring the grantor's life for estate and income tax purposes, and Irrevocable Medicaid Trusts, which are designed to protect the grantor's residence or other important assets from a catastrophic nursing home stay.  See "Trust".

 
Issue:  means the direct descendants in the first, second or any other degree of kindred to the ancestor designated.  For example, your issue are your children, grandchildren, great-grandchildren, and so on and so forth.

 
Joint tenancy with right of survivorship:  this is a form of ownership between two or more individuals who are called "joint tenants" in which the interest of a deceased joint tenant in a jointly-held asset passes to the surviving joint tenant automatically upon the death of the deceased joint tenant and without the need to probate the asset.

                                                 
Living trusts:  a trust that is established independently of a person's will, and is effective immediately upon its execution.  A living trust can be revocable or irrevocable.  A living trust differs from a testamentary trust in that the latter trust is incorporated into the terms of a person's will and is not effective until the person's death.  Living trusts help avoid the expenses, delays, publicity, and other disadvantages of probate.

 
Living will:  a document in which you express your feelings that you would not want the process of dying to be artificially prolonged by artificial means or measures if you suffer from an irreversible or incurable illness or disease.

 
Look-back period:  the period of time in which a gift or other uncompensated transfer must be disclosed on a Medicaid application.  For gifts made on or after February 8, 2006, the "look-back" period is five years under both Federal and Massachusetts law.

 
Marital deduction:  you generally do not have to pay any gift or estate taxes on any gifts that you make to your spouse, outright or in properly structured trusts, provided that he or she is a citizen of the United States.  Special rules apply if your spouse is not a citizen of the United States.  The strategic use of the marital deduction is an important consideration for estate tax planning purposes.

 
Massachusetts estate tax exclusion amount:  the amount that you can leave to your family estate tax-free for Massachusetts estate tax purposes.  The Massachusetts estate tax exemption amount is fixed at $1,000,000.00 until or unless the Massachusetts state legislature changes it.

 
Medicaid (MassHealth):  A program that is funded partially by the Federal government and partially by each state which provides health insurance for financially eligible individuals and families and pays for nursing home care for individuals who meet certain financial and health criteria.  Medicaid is known as MassHealth in the Commonwealth of Massachusetts.

 
Non-probate assets:  property at your death which is not disposed of according to your will. 

 
Pay-on-death account:  a bank account which is payable to a specified beneficiary or beneficiaries upon the account owner's death without the need for probate.

 
Pour-over will:  a will which leaves the residue of the probate estate to a living trust.  A pour-over will is one in which the residuary assets "pour-over" from the probate estate to a living trusts.  Pour-over wills are generally used if a living trust is part of the estate plan.  A pour-over will "backs-up" a trust by transferring any property to the trust which the decedent had not transferred to the trust during the decedent's lifetime. 

 
Probate:  a court-supervised process in which the probate assets of a deceased person are distributed to the beneficiaries specified in the decedent's will after the payment of debts, claims, and administration expenses.  The probate filings including the decedent's will as well as the probate accounting and inventory are public records.  The term "Administration" is used when the decedent died without a valid will.

 
Probate assets:  property at your death which is disposed of according to your will.  It consists of property which was titled in your name only at your death or payable to your estate after your death. 

 
Probate court:  the state court which has jurisdiction over probate matters.  A deceased person's estate is probated in the probate court located in the county in which the deceased resided.  The probate court also has jurisdiction over guardianships and conservatorships.

 
Real estate:  land and any structures or other objects permanently attached to land such as a house or building. 

 
Residue or residuary estate:  the remaining property in your probate estate after taking into account specific gifts of money or other property to specific individuals or charities. 

 
Retitling:  the process of changing the title of your assets to a trust, to shift the ownership of assets between a married couple so that each of their estate tax exemptions will be fully or partially used, or to accomplish some other objective such as avoiding the need to probate your assets at death.

 
Revocable trust: a trust in which the grantor reserves the right to change or amend the trust during the grantor's lifetime.  Normally, the grantor serves as the initial trustee of a revocable trust and specifies one or more individuals to serve as successor trustee upon the grantor's death or incapacity.  Oftentimes, a revocable trust is the centerpiece of a person's estate plan and can accomplish many important estate planning objectives such as probate avoidance, estate tax reduction, and providing for the grantor's minor or young adult children.  See "Trust".

 
Right of representation (or by representation):  means language in a will, trust, or beneficiary designation which determines whether the children or other descendants of a deceased beneficiary will take the deceased beneficiary's share of an estate, trust fund, or other asset.  For example, a will may contain a clause that leaves the decedent's estate to his or her children by right of representation.  If the decedent had three surviving children and one deceased child who has surviving children of his or her own, each surviving child would receive a one-fourth share and the deceased child's one-fourth share would be further divided among his or her surviving children. 

 
Settlor:  See "Grantor".

 
Special needs trusts:  trusts which contain special wording to provide for a disabled beneficiary or person with special needs.  The income and principal of these trusts are generally available to supplement but not replace any benefits which the beneficiary receives or may receive from a governmental or charitable source and are carefully drafted to preserve the beneficiary's eligibility for such benefits.

 
Spendthrift clause:  means a provision in a trust that is designed to prevent a beneficiary's creditors from reaching or attaching the beneficiary's interest in a trust and to prevent a beneficiary who has financial problems, or has reckless spending habits, from selling, transferring, or pledging his interest in a trust.  A trustee can refrain from making distributions of trust property directly to a spendthrift beneficiary if doing so would expose the property to the claims of the spendthrift beneficiary's creditors.

 
Tangible personal property: property that you can move such as jewelry, household furnishings and furniture, artwork, automobiles, collections, or heirlooms. 

 
Taxable estate: your gross estate for Federal and state estate tax purposes less deductions, debts, liabilities, and administration expenses.  The Federal and state estate tax rates are applied to your taxable estate to determine the estate taxes that are due from your estate. 

 
Taxable gift:  the portion of any gift that you make to another person, or to certain entities such as a trust, in a single calendar year that exceeds the annual exclusion amount.  You must file a Federal gift tax return to report any taxable gifts that you make in a calendar year and must pay Federal gift taxes once your cumulative lifetime taxable gifts exceed your Federal lifetime gift tax exemption of $1,000,000.00.   

 
Testamentary trust:  a trust that is established under the terms of a valid will as opposed to a living trust that is established independently of your will during your lifetime.  Testamentary trusts should only be used in very specific planning situations because they are only effective at death, must be authenticated through the probate process, and can be more expensive to administer than living trusts.

 
Testate:    to die with a valid will in place, which means that your probate assets will be distributed according to your valid will as opposed to the intestacy laws.

 
Testator (male) or Testatrix (female):  the person who signs a valid will.  

 
Title:  a document which identifies the owner of an asset.  For example, a deed identifies the owner of the real estate described in the deed.

 
Transfer-on-death account:  a brokerage account which is payable to a specified beneficiary or beneficiaries upon the account owner's death without the need for probate.

 
Trust: an agreement, usually in writing, between the grantor and the trustee in which the trustee agrees to hold, invest, and administer the trust property for the benefit of another person or persons called beneficiaries.  There are many different types of trusts depending upon the grantor's objectives when the trust was established.  See "Irrevocable trusts", "Living trusts", "Revocable trusts", and "Testamentary Trusts".

 
Trustee:  the person who administers a trust, invests its assets, and distributes the trust's assets to the trust's beneficiaries in the manner and at the time specified in the trust document.

 
Will:  A will is a legal document, prepared and executed according to state law,  which identifies who will receive the property titled in your name only at death or payable to the your estate upon your death.  A will also expresses your nominations for the executor of your probate estate and guardian of your minor children, if any.