Glossary: Common Estate Planning Terms Explained
Community Property (CP):
A form of ownership allowed only between husband and wife, and allowed only in “community property states”; includes all earnings and all appreciation on community property accrued during marriage unless otherwise agreed upon in a pre-marital agreement; CP is treated as owned one-half by each spouse. Each spouse has the right to dispose of his or her one-half of the CP by will or by trust.
Separate Property (SP):
All property earned prior to marriage, and all gifts and inheritances before or during marriage (i.e., a child’s inheritance from his or her parent will be separate property of that child even if the child is married). A spouse can convert his or her own separate property to community property of both spouses by agreement or by commingling assets (so as to be untraceable to separate property).
Tax Basis (also called Cost Basis):
The acquisition cost of an asset. Generally, capital gain or loss for income tax purposes is measured by the difference between tax basis and selling price.
Assets inherited from a decedent receive a new tax basis equal to the fair market value of the asset as of date of death; i.e., the new tax basis is “stepped-up” to the date of death value. For appreciated property, the effect of the “stepped-up” basis is that the appreciation accrued from date of acquisition to the date of death completely escapes income taxation.
A public court process required to transfer assets to beneficiaries according to a Will or according to the California Probate Code if there is no Will; the probate court oversees the identification of beneficiaries and distribution of assets; probates are costly and time-consuming proceedings (“simple” estates can take a year to go through probate).
A document which allows you to nominate guardians for your minor children; also serves as a back-up device for assets not properly titled in your Family Trust’s name. If an asset is not properly owned by your Family Trust on your passing, your Will instructs the executor to “pour over” such assets into your Family Trust and distribute them in accordance with the trust terms; becomes a public document upon your passing; a Will requires a probate proceeding to make distributions.
Agent designated in your Will to be appointed as the “manager” of your probate estate during the term of the probate proceeding; authority is given only by order of the probate court during a probate proceeding; if the Family Trust is maintained properly, your executor will not need to act because no probate proceeding will be needed.
Person appointed by a court to be legally responsible for the care of a minor child (for California, a child under the age of 18 years); parents should nominate their preferred guardians in a Will to provide the court with guidance on whom to appoint.
Family Trust Terms:
Family Trust (also called Revocable Trust):
A vehicle to hold and own assets of your estate; can be revoked or terminated at any time by the settlor of the trust; preserves privacy regarding the management and distribution of your estate; allows your estate to be distributed without probate; you name successor trustees of your trust who will manage your trust if you are unable; provides clear directions for your successor trustees on how you wish your assets to be handled in event of your disability or death.
Settlor (also called Grantor or Trustor):
The person who creates a trust and funds the trust with his/her assets; funding occurs when assets are titled in the name of the trust.
The person for whose benefit the trust was created; typically the settlor is the present beneficiary of the trust for his or her lifetime; after the settlor’s passing, the beneficiaries of the trust are usually the spouse and/or children.
The person who manages the trust assets; typically the settlor is also the trustee of the trust during his or her lifetime; the trust document generally provides directions to the trustee on how to manage.
Lineal descendants (i.e., your children, grandchildren, great-grandchildren, etc.)
Closest living relative according to the Probate Code; if there are no issue, the closest living relative are parents, then siblings, then siblings’ issue, etc.
The first spouse to pass away is the deceased spouse; the other spouse is the surviving spouse.
The process of distributing assets of a Family Trust after the settlor’s death; the trustee of the trust manages this process; the assets owned by the decedent are valued as of date of death and valid obligations (debts, expenses, taxes, etc.) of the decedent are paid by the trustee using the decedent’s trust estate prior to distribution of assets.
Estate Tax Terms
A transfer tax imposed upon the value of property owned by a person at date of death; the estate tax is paid by the decedent’s estate before distribution to beneficiaries; the federal estate tax rate for 2017 is 40%; California currently has no estate tax.
Estate Tax Exemption:
An estate tax rule that allows each individual to pass a certain amount of property owned at death free of estate tax; the exemption is non-transferable and must be used by the individual during life or at death, or the exemption will be lost; the exemption amount is $5,490,000 for 2017.
Estate Tax Return:
Tax return required to report and pay estate taxes for each estate with a value equal to or greater than the applicable estate tax exemption amount; must file and pay within 9 months of date of death.
Unlimited Marital Deduction:
For married couples, an estate tax rule which allows each individual to pass an unlimited amount of property owned at death to a spouse without estate taxation at that time. If all of the decedent’s property passes to the surviving spouse, the decedent’s estate tax exemption amount will not be used. Property passed to the surviving spouse is included in the surviving spouse’s estate when the survivor passes away so the unlimited marital deduction only postpones estate tax until the surviving spouse’s passing. NOTE: Use of the estate tax exemption amount avoids estate tax completely on that amount.
Bypass Trust (also called a Credit Shelter Trust, or an Exemption Trust):
Note: If not automatic, then may be called a Disclaimer Trust
For married couples; an automatic irrevocable trust created via a Family Trust to save the deceased spouse’s estate tax exemption amount; rather than all property passing to the surviving spouse using the unlimited marital deduction, the deceased spouse’s estate tax exemption amount is used with the creation of the Bypass Trust. The Bypass Trust is funded with the decedent’s property up to the estate tax exemption amount. Usually, the surviving spouse is the primary beneficiary of the Bypass Trust. Upon the surviving spouse’s passing the Bypass Trust assets pass to beneficiaries designated by the deceased spouse. The purposes of the Bypass Trust are to (1) “bypass” the estate tax by using the estate tax exemption amount of the first spouse to pass away; and (2) preserve the remainder wishes of the first spouse to pass away.