Estate Planning Vocab: A Primer

By , December 17, 2009


These exact words were directed at me a few years ago by my Trusts professor in law school.  The professor is a very well-known scholar in the wills/trusts/probate field, but as someone who doesn’t practice he failed to recognize that I was saying “ILIT,” common parlance in the field for an Irrevocable Life Insurance Trust.

My professor’s problem illustrates a potential one for Estate Planning clients.  Most attorneys realize that they are dealing with complex and often obtuse concepts that can make an uninitiated client dizzy, and do their best to explain things carefully and at a reasonable pace.  However, it may still be a challenge to take in, particularly with terms that sound confusing (like ILIT) or are used interchangeably with other terms, so after the jump, a glossary of common terms likely to cause confusion:

Testator, Testacy, Testate, Intestacy, and Intestate:
teh-STAY-ter, (in-)TESS-tuh-see, (in-)TESS-tate — These terms deal with whether or not a person who died had a will.  A person who dies with a will is a testator, and they died “testate” or “in testacy.”  A person who died “intestate” or in a state of “intestacy” did not have a will which was valid, and a probate court will give their property to the person’s legal heirs. On rare cases a person will die with a will that doesn’t distribute everything that they own, and judges and lawyers may refer to portions of the decedent’s property as being testate (covered by the will) and intestate (not covered).

Settlor, Grantor, and Trustor:
Technically, the act of creating a trust is called “settling” it, and because of that, a person who creates a trust is called a settlor (SETT-lore, SEH-tih-ler).  A grantor (GRAN-tore) is any person who gives anything away, but because the person who creates a trust is almost always the person who puts property into the trust, a settlor may also be called a grantor.  Trustor is just another word for settlor, but even though it seems more obvious, it is much less common.

It’s worth noting that the federal government has created special types of trusts for people with special needs that require that person to be the settlor/grantor of the trust.   This is often done only as a formality, with the bulk of the money going into the trust coming from a family member.

Totten Trust:
This is more commonly referred to as a “pay-on-death account” or “P.O.D. account”.  It’s very common for older people to put a child’s name on their bank account to make it easier for the child to access the funds if anything happens to the parent, and while it succeeds at that, the account will be part of the parent’s estate on death.  The funds would have to go through probate, and don’t belong to the child unless the parent’s will says so.  A pay-on-death account, on the other hand, creates a completed gift that does not go through probate.  It’s called a Totten trust after the name of the first court case to rule that this type of bank account could be treated like a trust (i.e. avoid probate).

Crummey Power:
The federal government requires all people to report gifts made to anyone besides their spouse of more than $13,000 in a given year, and all reported gifts count against the amount of the free pass every person gets from gift taxes and estate taxes.  If a person may someday have to pay gift or estate taxes, and want to make a large gift to someone, they can avoid extra taxes by giving small gifts over a long period of time.  This is tricky if you’re giving these gifts through a trust, because a gift hasn’t legally been made until the recipient has access to it, and if a trust only allows a person to get the gift in one large payment, it will be treated as if the entire gift was made that one year, and has to be reported.   A Crummey power is a paragraph added to a trust that gives a gift recipient a small window of time (usually a month) to access the trust each year, which ensures that the little yearly additions don’t get treated as one big gift.

Each of these is a type of advanced estate planning trust.  While the details can be complicated and are different for each, at their core they work the same way:

  1. You put something of value into a trust.
  2. You designate one “group” – either yourself, family & friends, or charity – to be current beneficiaries of the trust
  3. That group gets a fixed cut of the trust on a recurring basis (at least yearly) for a set period of time.
  4. You designate a different group – either family & friends or charity – who will get whatever is left when that period of time ends.

Doing this saves people money in a variety of ways.  If a charity is involved, you get an income tax deduction when you make the gift, and possibly more on any money earned by the trust.  Also, if the second group is friends or family, then you are making a gift the year you create the trust, and the value of the gift is determined then based on how the financial market is expected to perform.  A person with assets that are expected to grow much better than the market rate (for example, stock in a family business right before you sell it) can put them in these types of trusts and owe much less (often no) gift taxes than the gift was worth.  Finally, in many cases the trust is outside of the grantor’s estate, which offers it’s own benefits.

A QPERT (KEW-purt), or Qualified Personal Residence Trust, is similar to the you-then-family version of the trusts just mentioned, except the trust holds a home (sometimes two) instead of investments, and you get to live in them or collect rent instead of just getting money.

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