Here are some of the more commonly used terms you will find in the field of estate planning.
Adjusted Gross IncomeFor an estate it is the decedent’s total estate after administrative expenses, allowable debts and losses are deducted, as determined for federal estate tax purposes. For a person, it is the sum of all wages, dividends, tips, interest, capital gains, annuities, and any other income earned during a year
Administrator – The person or entity (often a bank) appointed by the court to settle the affairs of a decedent who died without a Will or whose named executor can not or will not serve.
Administrative Expenses – Those costs necessarily incurred om the administration of the estate or in the collection of assets, the payment of debts and the distribution of property to named heirs. Examples: attorney fees, sales commissions, costs of funeral and other miscellaneous expenditures.
Alternative Minimum Tax – A charitable gift, which normally would result in a charitable deduction, will yield a current-year tax benefit of only 24%, if the donor is subject to the AMT. If the gift is funded with long-term capital gains property, the appreciation is regarded as a tax preference item and the charitable deduction is limited to the donor’s cost basis in the property.
Annual Exclusion (Gift Tax) – The amount of dollars or other property of ascertainable value which a person can give to any one individual (excluding spouse) without incurring federal gift tax. The current amount is $13,000 in a taxable year.
Appreciated Property, Gifts of – A gift of property (securities, real estate, tangible personal) which has appreciated in value may be given to a qualified charity and result in a charitable deduction for its full fair market value. However, the charitable deduction is limited to 30% of the donor’s adjusted gross income (contribution base). If the contributions exceed the 30% limitation, the excess amount may be carried over for deduction in the five succeeding tax years, again subject to the 30% limitation.
Bargain Sale – When a Bargain Sale – i.e., sales proceeds are less than the property’s fair market value – is made to a qualified charity, the excess of the fair market value over the sales price represents a charitable contribution. Bargain Sales, like outright gifts of property, are subject to the Reduction Rules and Allocation of Tax Basis, which reduces the overall tax benefits. However, the tax benefits of the Bargain Sale are still greater than if the property were sold and the proceeds given to charity.
Beneficiary – The person or entity who receives funds, property or other benefits from a will, insurance policy, IRA, or trust instrument.
Bequest – A bequest is made when someone includes you in their Will.
Capital Gains Tax – A separate tax is assessed against the capital gain or appreciation in value on property. Short-Term Capital Gains from assets held one year or less are taxed at the ordinary income tax rate in effect for the year, ranging from 10% to 35%. Long-Term Capital Gains from assets held longer than one year are generally taxed at a special rate. The rate that applies depends on which ordinary income tax bracket you fall under. If your total income (including capital gain income) places you in the ten or fifteen percent tax brackets, then you will have Zero tax rate. If your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher, then you will have a 15% tax rate.
Cash Value – The loan value or the surrender value of certain types of life insurance policies. A donor can make a valuable gift to charity of an asset on which he is currently making premiums but whose value may have been superceded by other insurance. The charity may then “cash in” the policy or request that a paid-up policy be issued to them as the new owners.
Carryovers of Charitable Deductions – Contribution deductions which exceed the various percentage limitations (30% and 50%) may be “carried over” into the next tax year – up to five succeeding tax years, if necessary – to be counted as a charitable deduction. However, current contributions to both types of charitable donees (30% and 50%) must be considered before any carryover contributions from precious years are credited. Because of this carry-over allowance, donors can make a large gift in one year and be assured that the charitable deduction will not be lost, given the right circumstances, because that part of the deduction not utilized in the year of the gift can be carried over into subsequent years.
Charitable Contribution – A contribution or gift to – or for the use of – a qualified charity results in a deduction for income and gift tax purposes when the donor does not receive (nor expects to receive) any bargained-for benefit, or the benefit to the donor is only incidental to the benefit received by the general public. The gift must be complete – “no strings attached” – and irrevocable. The income tax advantages to the donor depends upon the donor’s tax bracket.
For Estate Tax purposes, a charitable contribution results in a deduction when the qualified charity is able and willing to accept the gift and the testator (the person who made the will) clearly intended to make such a gift for the charitable purposes of the charity.
Charitable Lead Trust – The Charitable Lead Trust is the mirror image of those giving arrangements wherein the remainder interest passes to charity. While this trust is also a split-interest gifting arrangement, as the name suggests, the charity receives the “lead” or income interest and the non-charitable beneficiaries receive the remaining interest.
The income interest is contributed to charity for a term of years or for the life or lives of one or more individuals. The remainder interest will be returned to the donor or other non-charitable beneficiaries.
Charitable Remainder Trusts – Essentially, there are two qualified charitable remainder trusts: the Charitable Remainder Annuity Trust (CRAT) and the Charitable Remainder Unitrust (CRU). While both are subject to separate rules under tax law, there are some rules which are common to both:
*Distribution of specified income, at least annually, to one or more beneficiaries, for life or for a term of years;
*The “remainder interest” is held irrevocably for the benefit of the charity;
*The specified income distribution for the CRAT must be a sum certainly not less than 5% of the initial fair market value; for the CRU it must be a fixed percentage not less than 5% of the trust’s value determined annually;
*The trust distributes its income on a four-tier basis; first as ordinary income, second as capital gains income; third as tax-exempt income and fourth as a tax-free distribution of principal.
A trust does not qualify as a charitable remainder trust if there is any provision in the language of the governing instrument that places restrictions upon the investment policy of the trustee or violates state law. In addition, the trust must qualify and act as a charitable remainder trust from its creation, when neither the grantor nor any other person is treated as the owner of the trust.
Corpus – The “body” or principal (cash, securities, real estate) upon which income is earned.
Cost Basis – The original price paid to acquire a property, adjusted by certain factors such as buying costs, depreciation and capital improvements. This is generally used to determine the gain or loss on the sale or disposition of the property.
Deferred Gift – Any arrangement whereby money or property is set aside for the future use and enjoyment of a charity. Also referred to as a Planned Gift.
Estate Tax – The estate tax is one of three different taxes which comprise our transfer tax system – gift, estate and generation-skipping taxes. The estate tax is imposed on transfers of property from the deceased to his/her heirs. Since 1981 the lifetime and testamentary transfer of property has been “unified” under the same schedule of tax rates, deductions and credits.
The estate tax is imposed on the value of property that a decedent possesses at death. The tax is both progressive (tax rates increase as value of the estate increases) and cumulative (value of the estate at death is increased by the value of all lifetime gifts in excess of the donor’s annual exclusion). A decedent’s estate is granted an unlimited deduction for gifts to spouse and charity.
Executor – The person or entity (such as a bank) named in the Will by the decedent to carry out the terms of the Will and settle the estate.
Fair Market Value (FMV) – The contribution deduction for any gift of property to a qualified charity is based upon the property’s fair market value. This value is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.” For listed securities this value generally is the mean between the highest and lowest selling prices on the date of the gift or the mean between the bid and asked prices of . With gifts of closely held stock the value is often determined by a qualified appraiser following IRS prescribed methods and guidelines.
The value of mutual fund shares is its public redemption price on the gift date. The value of a “life insurance policy” is essentially its replacement cost (paid-up) or the “interpolated terminal reserve” of a policy on which premiums remain to be paid, generally an amount slightly in excess of the cash surrender value.
A gift of real estate presents special problems because its valuation requires specialized knowledge and expertise. As a result, the services of a professional and qualified appraiser generally are required. In a similar fashion, gifts of inventory are also scrutinized by the IRS and their real value for deduction purposes must be weighed against prescribed guidelines and substantiated by expert appraisals.
Intestate – This term refers to someone who has died without making a will, or without having a valid will at the time of death.
Irrevocable – This means you have entered into a gift agreement that is legally binding. It also means that any assets you have used to fund the gift are not refundable.
Residuary Estate – This term, as used in estate planning, simply means everything your Will has not otherwise disposed of.
Revocable – This means that your gift agreement is changeable. Both wills and living trusts are revocable.
Testamentary pattern – Inheritance pattern
Your state’s intestate distribution laws – This refers to how your state determines who inherits your estate if you have not made a will. If someone dies without a will or trust, they die “intestate” and the laws of intestate succession are used to determine who will inherit the estate. In California, who will receive the estate depends on answering a series of questions about the person who died, beginning with if they were married or not.