A Guide to the Language of Estate Planning – Structures and Key Terms
Estate planners have an extensive language of their own consisting of a wide variety of abbreviations and technical terms. The vast majority of these terms tie into the numerous types of trusts and other entities that are used in planning whether it relates to tax planning, asset protection or accommodating someone with special needs. This glossary is a quick way of refreshing your memory on what some of these are and what specifically they are designed to do.
Beneficiary – This is the person, entity, or group for whom a trust is established. Not all beneficiaries are created equal however as their interests can be vested and certain, contingent and future or something in between. For example, a beneficiary may be a present interest beneficiary, entitled to receive distributions from a trust right now, or a future interest beneficiary, entitled to receive distributions at some point in the future. They may also be vested, where their rights under the trust cannot be taken away, or contingent, where their rights are still subject to conditions that may or may not occur in the future.
BDIT: Beneficiary Defective Inheritor’s Trust – This is a type of third-party settled trust (a trust funded with assets never held by the trust beneficiary) designed: (1) to give the Inheritor’s Trust primary beneficiary control and beneficial enjoyment of trust property such that the primary beneficiary can use and manage the trust assets without compromising the trust’s ability to avoid transfer taxes at the primary beneficiary’s death, (2) to protect the trust assets from the primary beneficiary’s creditors; (3) and yet be structured in a way that it is still taxable to the grantor for income tax purposes.
Bypass/Credit Shelter Trust – This is the portion of the deceased spouse’s property that gets charged against the decedent’s AEA (Applicable Exclusion Amount). The bypass trust can provide benefits for the surviving spouse or other beneficiaries (or a combination thereof). Generally, bypass trusts are designed so that they are not included in the surviving spouse’s estate when he or she later dies.
CLT: Charitable Lead Trust – Under the term’s of a CLT, a donor donates an asset’s income stream for a period of years to a charity instead of the remainder interest. Upon the end of the lead period, the remainder interest can then pass to another beneficiary determined by the grantor such as a child, grandchild, etc.
CLAT: Charitable Lead Annuity Trust – A CLAT is the opposite of a CRAT. With a CLAT, the grantor establishes a trust and names a charity to receive an annuity amount from the trust for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the grantor or to other non-charitable beneficiaries named in the trust.
Clayton Election – This election is derived from the tax court case, Estate of Clayton v. Commissioner, 97 T.C. 327 (1991). It is a very popular method of determining the amount of a deceased spouse’s estate that will be set aside for the surviving spouse. It requires a trustee or personal representative to decide during the trust administration process how big the marital deduction should be. The property set aside for the marital deduction gets transferred to the marital trust, which is set up as a QTIP trust. A 706 (Federal Estate Tax Return) is required to notify the IRS of the QTIP election and disclose the amounts going into the marital QTIP and bypass trusts. The Clayton election is a very flexible marital deduction planning tool and is frequently used for clients who have moderate to nearly-taxable estates, or in times of significant uncertainty in the estate tax.
CLUT: Charitable Lead UniTrust – This is basically the opposite of the CRUT. With a CLUT the grantor establishes a trust and names a charity to receive a percentage of the trust’s value for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the grantor or to other non-charitable beneficiaries named in the trust.
Community Property Trust – This is a special type of joint revocable trust that takes advantage of special laws in certain community property states (most commonly, Tennessee and Alaska) that allow people to opt in to the state’s favorable community property laws. The value behind the strategy is to allow a married couple to get a “double step-up” in basis – a step up in the deceased spouse’s property AND in the surviving spouse’s property – both at the time of the first spouse dies as well as when the second spouse dies.
CRAT: Charitable Remainder Annuity Trust – Under a CRAT, a grantor establishes a trust and puts property in, keeping the right to receive an annuity payment from the trust for an initial term – either for a term or years or for the grantor’s life. After the initial term the amount remaining in the trust (the “remainder”) is distributed to a charity named in the trust.
CRT: Charitable Remainder Trust – A CRT is an irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. The whole idea of a charitable remainder trust is to reduce taxes. This is done by first donating assets into the trust and then having it pay the beneficiary for a stated period of time. Once this time-frame expires, the remainder of the estate is transferred to the charities deemed as subsequent beneficiaries.
CRUT: Charitable Remainder UniTrust – With a CRUT, a grantor establishes a trust and puts property in, keeping the right to receive a percentage, or unitrust amount, of the trust assets for an initial term – either for a term or years or for the grantor’s life. After the initial term the amount remaining in the trust (the “remainder”) is distributed to a charity named in the trust.
DAPT:Domestic Asset Protection Trust – This is a type of irrevocable trust that allows a client to set aside assets in trust and protect those assets from creditor claims. The DAPT is established under the laws of a state that has favorable asset protection laws. There are 17 states that currently allow individuals to set up DAPTs. Typically DAPTs are usually set up under the laws of Delaware, South Dakota, Alaska, or Nevada, the initial states having laws supporting DAPT’s creation.
Decanting – This is the process by which a trustee exercises the power to distribute property from one trust (the “originating” trust or the “inception” trust) into a new trust for the benefit of a beneficiary. Decanting is an increasingly popular strategy to allow a trustee to create new, more favorable trust terms for a beneficiary – albeit consistent with the trustee’s fiduciary obligation to the beneficiary established in the inception trust.
Delaware Tax Trap (DTT) – Refers to a technique, when intentionally implemented, allows a trust to extend the timeframe of a trust beyond what would be the limit of the original Rule of Perpetuities (RAP) of a trust by allowing a beneficiary to exercise a limited power of appointment in a way that extends the RAP of the trust even further. The upshot is that the person who exercises the power causes the property subject to the power to be included in their estate (getting a basis adjustment) when they die. The DTT “loophole” is found in IRC sec. 2041(a)(3) when someone who holds a limited power of appointment exercises it in a way that “…postpone[s] the vesting of any estate or interest… or suspend[s] the absolute ownership or power of alienation of [the interest]… for a period ascertainable without regard to the date of the creation of the power.” In other words, if someone who holds a limited power of appointment exercises that power to give someone else a presently-exercisable general power of appointment (referred to as a “PEG” power), the person who exercised the limited power of appointment will have estate inclusion over the property for which the PEG power was granted to the other person. Effectively drafting to take advantage of the DTT often requires modifying a trust’s RAP clause and eliminating any limitation that would otherwise prevent the exercise of a limited power of appointment this way.
DING/ NING/ WING: Delaware / Nevada / Wyoming Incomplete Non-Grantor Trust – These are all state specific flavors of an irrevocable trust that works primarily as an income tax / capital gains tax minimization strategy. The trust is set up in a state that does not impose state income tax so any highly-appreciated assets sold by the trust will avoid state capital gains tax. Any assets remaining in the trust when the client dies will be included in the client’s gross estate, causing a step-up in basis for those assets.
Disclaimer – Disclaiming is a formal technique whereby someone can chose to not receive property and it will be treated as if they have never received it. It’s a technique under IRC Sec. 2518 that allows someone who is entitled to receive property to disclaim that property, allowing it to be distributed somewhere else. In the context of marital deduction planning, the disclaimer method allows the surviving spouse to disclaim property into a bypass trust, providing some flexibility in marital deduction planning.
DSUEA: Deceased Spouse Unused Exemption Amount – This refers to the amount of AEA that is leftover after the estate has allocated part of a deceased spouse’s estate exemption to a bypass trust.
Executor / Personal Representative – This is the person who is named in a will or otherwise appointed by the court to administer the estate of a deceased person. The trustee administers the trust; the executor or personal representative administers the probate estate.
FAPT: Foreign Asset Protection Trust – This is a more advanced form of asset protection trust that is established under the laws of a foreign country having even more favorable asset protection for clients than within the United States. The Isle of Man, the Cook Islands, and/or the Cayman Islands are all frequently used as situses for overseas trusts.
Fiduciary – This describes the nature of a relationship where one party owes a series of duties to another party and is held legally responsible for the outcomes of their actions. As it relates to estate planning there are a number or roles used in the estate planning process that have or may have fiduciary duties. More specifically –
Trustees are fiduciaries of trusts, owing duties to the beneficiaries
Executors or Personal Representatives are fiduciaries of the estate, owing duties to the beneficiaries
Guardians and conservators are fiduciaries, owing duties to the ward under their charge
Agents and attorneys-in-fact are fiduciaries, owing duties to the principal under a Power of Attorney
Health Care Proxies or surrogates are fiduciaries, owing duties to the maker of a Living Will / Advance Directive
Note however that trust protectors may or may not be fiduciaries, depending on the nature of the power that they’re given.
FLP: Family Limited Partnership – A type of partnership where assets are pooled into a family owned business of which family members own shares. FLPs allow for shares to be gifted to family members and rely on minority discount valuations to help minimize estate taxes and take advantage of gift tax exemptions.
GPOA: General Power of Appointment – This is a power that can either be reserved by the grantor or given to someone else to direct how property in a trust gets distributed. General powers of appointment are included in the power holder’s estate under IRC sec. 2041(b)(1). To be a “general” power of appointment, the person holding the power must be able to appoint the property to either themselves, their estate, their creditors, and/or the creditors of their estate.
Grantor / Settlor – These nearly synonymous terms refer to the individual who establishes a trust.
GRAT: Grantor Retained Annuity Trust – A GRAT is a type of irrevocable trust that is designed around a sophisticated gifting & wealth transfer strategy. In a GRAT, the grantor establishes a trust putting property in and taking back an annuity (calculated as a dollar amount) for a specific amount of time based on the value of the property in the trust. After the annuity period ends the GRAT pays out to other beneficiaries.
GRIT: Grantor Retained Income Trust – A GRIT is similar to a GRAT except that the grantor receives the income stream from the trust assets, rather than a fixed annuity amount from the trust for a specified period of time. After the initial term ends the GRIT pays to other beneficiaries.
GRUT: Grantor Retained UniTrust – A GRUT is similar to a GRAT but instead of taking out an annuity interest the Settlor receives a percentage of the trust (called a unitrust amount) for a specific amount of time based on the value of the property in the trust. After the initial term ends the GRUT pays to other beneficiaries.
Guardianship /conservatorship – This refers to the court proceedings that are undertaken when an individual lacks the legal capacity to make decisions for themselves or otherwise protect their own interests. That lack of legal capacity can be due to mental or physical illness or because the person is a minor child. A guardian or conservator is a fiduciary appointed by the court to make decisions on behalf of the legally disabled person (who is called the “ward”). That fiduciary must provide periodic reports to the court and the guardianship/conservatorship continues until the ward (disabled person) dies or is no longer under the legal disability. Durable powers of attorney and trust-oriented planning helps avoid guardianship/conservatorship proceedings.
IDGT: Intentionally Defective Grantor Trust – This is a form of irrevocable trust that gets the value of the trust assets out of the client’s estate but allows the client to continue to be treated as the owner for income tax purposes only. One of the main advantages is that the (often wealthy) client can add value to the trust by paying the income tax that is due on the income in the trust without those tax payments being treated as additional taxable gifts to the trust. Also, it means that the trust income will generally be taxed at lower rates since the fiduciary income tax brackets are typically higher.
ILIT: Irrevocable Life Insurance Trust – This is a very popular form of irrevocable trust that is designed to own high-value life insurance. A client establishes an ILIT and pays enough money into the trust to allow the trustee to buy life insurance on the life of the client (and often, the client’s spouse). When properly structured and funded, when the insured person dies, the death benefit of the life insurance is paid into the trust but is not included in the gross estate of the client – avoiding any estate tax liability.
Intestate / Intestacy – This describes the condition of someone who dies without having a will in place. If you have assets/property that is not otherwise planned for and no will, the outstanding property will pass through the laws of intestacy in the state where you resided. The laws of intestacy vary from state to state and are set forth in state statutes.
IRT: Irrevocable Living Trust – A trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.
LEPA: Life Estate Power of Appointment Trust – A LEPA trust is a form of marital deduction-qualifying trust that serves as an alternative to a QTIP trust. This form of trust is authorized under IRC sec. 2056(b)(5) and unlike the QTIP, does not require a form 706 (Federal Estate Tax Return) to establish. The LEPA trust must entitle the surviving spouse to receive all income during life, and the life income interest must be over all property for which the marital deduction is sought. The spouse must have the lifetime power to appoint property in the trust to themselves or a power (lifetime or testamentary) to appoint the property to his or her estate. Like a QTIP trust, the spouse is the grantor for income tax purposes (IRC sec. 678) and the value of the trust property is included in the spouse’s estate (getting a basis adjustment) when the spouse dies (IRC secs. 2041, 1014(a))
LPOA: Limited Power of Appointment – This is a power to appoint property to someone else, but in a way that does not cause the property “subject to that power” to be included in the power holder’s estate. Any powers of appointment that are not “general” powers of appointment are limited powers.
Marital Deduction – The marital deduction allows a married individual to leave property to his or her surviving spouse free of estate tax. U.S. citizens can leave an unlimited amount for their surviving spouse, assuming the survivor is also a U.S. citizen, and assuming the gift qualifies under IRC Sec. 2056. There are lots of different ways a trust or will can determine the amount set aside for the marital deduction, including:
Fractional formulas, which compute a fraction that gets applied to the dead spouse’s estate;
Pecuniary formulas, which compute a dollar amount to be applied to the dead spouse’s estate;
Specified dollar amounts or percentages, which are typically based on requirements of a premarital agreement or state law;
The Clayton election, which provides that a trustee can later decide how much to use for the marital deduction; and
The Disclaimer method, which allows the surviving spouse to decide what property to keep and what property to put into the bypass / credit shelter trust
Marital Trust – The marital trust refers to the deceased spouse’s property that is transferred into a trust qualifying for the marital deduction. When the surviving spouse later dies the value remaining in the marital trust is included in that spouse’s estate.
MAPT: Medicaid Asset Protection Trust – It’s an irrevocable trust that is structured and funded in a way that means the assets transferred to the trust are protected from counting as resources for Medicaid qualification purposes; it can be drafted a number of ways to take advantage of tax benefits.
NICRUT: Net Income Charitable Remainder UniTrust – A NICRUT annually pays to the Recipient(s) the lesser of the trust’s net income or an annual “Uni Amount”. The Uni Amount is a fixed percentage of the value of the trust assets at the beginning of the trust’s tax year. Because the Recipient(s) receive the lesser of the trust’s net income and the Uni Amount and because the Uni Amount is a percentage of the value of the trust assets at the beginning of the trust’s tax year the annual amount distributed to the Recipient(s) will vary with variations in the trust’s income and the value of the trust. Additional contributions may be made to a net income charitable remainder unitrust if that option is selected.
NIMCRUT: Net Income with Makeup Charitable Remainder UniTrust – Used as a type of CRT. This trust annually pays to the Recipient(s) the lesser of the trust’s net income or an annual “Unitrust Amount” in a manner similar to the NICRUT. However, if the net income of the trust is less than the Unitrust Amount in a given year the amount by which the Unitrust Amount exceeds the value of the net income is added to a “deficit account.” If the net income of the trust is greater than the Unitrust Amount in a given year that excess amount can be distributed to the Recipient(s) up to the amount of the deficit account. To the extent excess income is distributed to the Recipient(s) the deficit account is reduced. The amount of excess income that can be distributed to the Recipient(s) is limited by the size of the deficit account. Additional contributions may be made to a net income charitable remainder unitrust if that option is selected.
PEG Power: Presently-Exercisable General Power of Appointment – A power that can be immediately exercised by the power holder to appoint property to that person’s self, their estate, their creditors, or the creditors of their estate. Possession of a PEG power causes the value of the property over which the power may be exercised to be included in the power holder’s estate. PEG powers are used in many contexts, including the application of the Delaware Tax Trap (DTT), discussed above.
Portability – The concept of portability allows married couples to effectively combine their individual AEAs, allowing them to pass up to $10,000,000 (adjusted for inflation) to their heirs. If a spouse dies and doesn’t use all of his or her AEA in their estate plan, the amount they don’t use is called the DSUEA, and the surviving spouse is allowed to use that amount in their own estate tax planning. In order to take advantage of portability the trustee of the deceased spouse’s estate must file a federal estate tax return to claim
Pour-Over RLT – This is a special strategy designed generally for couples in blended families who live in a community property state and where the couple’s planning objectives are really different from each other. The couple will establish a joint RLT to hold their community property or other jointly-owned property, and they will each establish a separate RLT to hold their separate property. When the first of that couple dies, the joint RLT terminates and “pours over” the joint RLT assets into the separate trusts. Those separate trusts then manage the distribution of the property.
Probate – The court proceeding that must be undertaken to transfer the property of a dead person to surviving beneficiaries. Probate procedures vary widely from state to state but generally they’re public proceedings and can be time consuming and rather expensive. One of the objectives of trust-based planning is to avoid probate. This is done primarily to save time, minimize the likelihood of disputes among heirs, and preserve privacy.
QDOT: Qualified Domestic Trust – This is a form of marital trust used to take a deduction that can be used for estates where surviving spouses are not citizens of the U.S. The QDOT rules are found under IRC sec. 2056A and generally function to defer estate tax on the property transferred to the QDOT until it’s distributed from the trust.
QPRT: Qualified Personal Residence Trust –A QPRT works like a GRAT except that the property transferred to the trust is the grantor’s personal residence. The grantor keeps the right to live in the home for a specified number of years and after that term ends, the grantor must move out or begin paying rent to the trust, since other beneficiaries are entitled to the trust property after the initial term.
QTIP election – The QTIP election (qualified terminable interest property) refers to an election made allowing a grantor to set aside property for the surviving spouse in a trust in a way that qualifies for the unlimited marital deduction. ( IRC Sec. 2056(b)(7).)
RAP: Rule Against Perpetuities – This is a creation of the common law that is used to determine how long a trust can legally remain in effect. The original rule is based on the notion of “lives in being” (that is, people who are alive or who can be easily identified) at the time the trust becomes irrevocable plus an additional 21 years. An increasing number of states have greatly expanded the timeframe of the rule against perpetuities, and several have eliminated it completely. Simply put, if the rule against perpetuities applies the trust can’t last forever. It can last for hundreds of years sometimes, but it must end and distribute at some point for the trust to be valid and enforceable.
RLT: Revocable Living Trust – This is the main document & planning solution most trusts & estates attorneys implement for their clients. The client transfers their property to the RLT during their life so that their trustee can manage that property for the client if the client becomes disabled and when the client dies. Because the trust owns the property, probate is not necessary to transfer property after the client dies.
Individual / Separate RLT: This is a trust established for an individual. The client may be a single person, or they may be a married person.
Joint RLT: This is a trust established for a married couple. For married clients in community property states, a joint RLT is mandatory to maintain community property status and the favorable tax treatment that follows. Married clients in separate property states may use either a joint RLT or may use separate RLTs.
SCRUT: Standard Charitable Remainder Trust – A type of CRT, a standard charitable remainder unitrust Trust (SCRUT) pays an annual “Uni Amount” to the Recipient(s). The Uni Amount is a fixed percentage of the value of the trust assets at the beginning of the trust’s tax year. Because the Uni Amount is a percentage of the value of the trust assets at the beginning of the trust’s tax year the annual amount distributed to the Recipient(s) will vary with variations in the value of the value of the trust.
Separate Property/Common Law State – Unlike community property, separate property receives a basis adjustment only when the owner of that separate property dies. For married couples in separate property or common law states, they may own their property jointly, but it is not treated the same as community property. All states that are not community property states are separate property states.
SCINs: Self Cancelling Installment Notes – The “self-cancelling” feature means that if you die during the note’s term — which must be no longer than your actuarial life expectancy at the time of the transaction — the buyer (that is, your children or other family members) is relieved of any future payment obligations.
SNT: Special / Supplemental Needs Trust – This is a special type of trust designed to set aside assets for the benefit of a beneficiary whose disabilities may allow the beneficiary to receive public assistance for medical and other care expenses. There are generally two types: first-party trusts that someone establishes for their own benefit, and third-party trusts that someone establishes for the benefit of someone else, like a spouse, child, parent, etc.
SRT: Standalone Retirement Trust – This is a special type of trust designed to receive “qualified retirement accounts” like IRAs, 401(k)s, etc. It can be set up as either revocable or irrevocable, and it’s designed to allow trust beneficiaries to continue to defer or “stretch out” income tax on the account balance for as long as possible. SRTs also provide a lot of protection for retirement account balances after they’re inherited by beneficiaries which is particularly important since Clark v. Rameker, a case which made clear that inherited 401(k)s do not enjoy bankruptcy protection.
Survivor’s Trust – This term only applies in the context of a joint RLT plan. The survivor’s trust is the surviving spouse’s share of the joint trust property, plus any separate property the surviving spouse had. The deceased spouse’s property will typically flow into the marital and/or bypass trusts. The survivor’s trust is fully revocable by the surviving spouse for the remainder of the survivor’s life. It’s treated just as if the surviving spouse had established his or her own individual RLT.
Testate – This describes the condition of someone who dies WITH a will.
Trust – A “trust” is really just a formal relationship where someone (the grantor) appoints someone else (the trustee) to hold title to and manage trust property for the benefit of one or more people (the beneficiaries).
Trust Protector – This is a special type of power holder who can control certain aspects of irrevocable trusts. Comparatively speaking this is a relatively newer area of the law and it is still evolving. Trust protectors are generally treated as an agent of the Grantor and protectors can be used in a variety of ways to ensure the intentions of the grantor are complied with in the administration of the trust. There are a variety of subtypes of Trust Protectors or Trust Advisors with different scopes of duties.
Investment Advisor: This is a Trust Advisor whose role is limited to advising the trustee on the kinds of assets to invest in.
Distribution Advisor: This is a Trust Advisor whose role is limited to advising the trustee on when to make or withhold distributions from the trust.
Trustee – This is the day-to-day decision maker for a trust. The trustee has a series of fiduciary duties to the beneficiaries to make sure that the trust is administered properly according to the trust’s terms and governing law, and that the beneficiaries’ interests are protected. There must always be a trustee for a valid trust to exist, and all trustees are always held to a fiduciary standard.
Investment Trustee –This is a special trustee whose job is limited to making investment decisions for the trust.
Distribution Trustee –This is a special trustee whose job is limited to making distributions from the trust to beneficiaries.
Administrative Trustee –This is a special trustee whose job is limited to keeping documents and records for the trust, often for the purpose of establishing an adequate connection between the trust and the desired state where the law should apply. (Infrequently used.)
VA Trust: Veterans Asset Protection Trust – A VA trust is an intentionally defective grantor trust and can be considered as an option for clients who are wartime Veterans or the surviving spouses of a wartime Veteran. This type of trust is designed to meet the eligibility requirements from the Veterans Administration (VA) of a complete gift or complete relinquishment.