Probate and Estate Terms

Florida Trust Terms
Crummey Letter A written notification to the beneficiaries that contributions of money — typically to an irrevocable life insurance trust — have been received on their behalf. The beneficiaries then have a period of time to withdraw the funds. If the beneficiaries do not withdraw the money, they are regarded as having received a gift. The funds can then be used to pay the premium on insurance on the grantor’s life. Use of a Crummey Letter can avoid certain potential tax problems arising from the gift of a future interest.

Grantor: The designation for a person who is transferring their property through a trust or a deed.

Grantor Trust : For income tax purposes this is a trust, in which the grantor or a third party, because of certain rights to income or principal or certain powers over the disposition of income and principal, is treated as the owner of the trust and taxed on the income thereof. Consequently, a grantor trust is not treated as a separate entity for income tax purposes. A grantor does not need to get a separate id number for a revocable trust until the trust becomes irrevocable.

Incidents of Ownership Includes a variety of rights and powers that an insured decedent may have held over a life insurance policy; the possession of one or more of these incidents of ownership within three years of death will bring the policy proceeds into the insured’s gross estate. This may subject them to estate tax if the estate has more money then the applicable exclusion amount under current law. As of 2004 this amount is $1.5 million.

Income Beneficiary: The beneficiary of a trust who is entitled to receive the income from it.

Inter Vivos Trust: A trust that takes effect while a grantor is still living.

Irrevocable Trust – A trust that is not amendable or revocable by the grantor. Can be created during a grantor’s lifetime, often called an “inter vivos” trust, or upon a grantor’s death, often called a testamentary trust. Some common types of irrevocable inter vivos trusts include life insurance trusts, gift trusts, generation skipping trusts, Qualified Personal Residence Trusts (QPRT) Grantor Retained Annuity Trusts (“Grat”), Intentionally Defective Grantor Trusts, Charitable Remainder Annuity Trusts (CRAT) and Charitable remainder Unitrusts (CRUT), Charitable LEAD Annuity Trusts (CLAT) and Charitable Lead Unitrusts (CLUT). Some common types of testamentary trusts include, unified credit exemption trusts, marital trusts, generation skipping trusts, testamentary charitable remainder trusts and charitable lead trusts.

Insurance Trust: An irrevocable trust established to own an insurance policy or policies and thereby prevent them from being included in the insured’s estate. The insured must not retain any incidents of ownership. These trusts are typically used just by those who anticipate they may have more property then the applicable exclusion amount would allow them to shelter upon their passing or the passing of their spouse so it can save money from potentially having to pay estate taxes on the proceeds. There are additional administrative costs and responsibilities involved with this but with the estate tax starting at around 41% it can be a very useful way to save on estate taxes.

Intentionally defective grantor trust – An irrevocable inter vivos trust created by a grantor for beneficiaries other than the grantor that attributes all income tax to the grantor. Generally used when the grantor wants to irrevocably gift the property to the beneficiaries and exclude the property from the grantor’s taxable estate for estate tax purposes, but intends that the transfer be ignored for income tax purposes. Often used in conjunction with a sale of discounted assets by the grantor to the trust, to avoid capital gain on the sale of the assets.

Section 2503(c) Trust for Minors A trust designed to comply with Section 2503(c) of the Internal Revenue Code so that a gift placed in such a trust for the benefit of a minor will qualify for the gift tax annual exclusion although they are not gifts of a present interest.

Special Needs Trust/Supplemental Needs Trust: A trust established for the benefit of a disabled person to provide supplemental support without disqualifying the beneficiary from eligibility for governmental assistance programs such as Florida Medicaid. It is a discretionary trust that a person other then the disabled person serves as trustee for.

Step Up In Basis A decedent’s property that passes to others escaping capital gains tax when sold by the person who inherits the property. Persons inheriting the property receive it at date-of-death fair market value. (Internal Revenue Code section 1014) In effect, the basis in this property is deemed to be “stepped up” and does not reflect the decedent’s original cost basis for determining applicable capital gains tax on the sale of the property.

Tax basis The owner’s cost of an asset for income and estate tax purposes as determined under the Internal Revenue Code and IRS regulations.

Unified Credit amount also known as the Applicable Exclusion amount is an amount of assets that can pass without imposition of an estate tax or gift tax on the transfer. The estate tax now has an applicable exclusion of $1.5 million that can pass upon death if there have not been prior taxable gifts or this amount subtracted from the amount of prior taxable gifts. $1 million in taxable assets may be gifted during one¿s lifetime (in addition to annual exclusion amounts and other non taxable or otherwise exempt amounts such as payment of educational or medical expenses directly to the provider for a child) The estate tax exemption amount will remain $1.5 million next year then rise to $2 million until 2009 when it is $3.5 million for a year. In 2010 the estate tax is repealed and there will be no estate tax although under current law it returns to $1 million.

Applicable Exclusion Amount: an amount that can pass free of estate tax. Currently this amount is $1.5m and is scheduled to progressively rise to $2m in 2006 $3.5m in 2009 and unlimited in 2010 prior to returning to $1m in 2011. When there is a husband and wife the estates need to be properly planned though or the exclusion amount of the first spouse to die may be wasted. The Gift Tax Exclusion amount remains at $1m and is not currently scheduled to change.

Cost Basis: The amount originally paid for property. The Tax Basis is the value that is used to determine gain or loss for income tax purposes. Generally, the tax basis will equal the cost basis plus the cost of capital improvements, less depreciation. Once the property is transferred upon the owner’s death, it is revalued as of the date of death; this is called the Stepped-up Basis for Federal Income Tax purposes.

Fair Market value: This is what a willing buyer will pay a will seller with neither being under a compulsion to buy or to sell and both having knowledge of all relevant facts.

Escheat: Property that passes back to the state of Florida because there was no will or trust validly directing the property and no heirs at law who it would pass. This is very rare as the intestate laws of Florida have numerous options if property is not validly devised to anyone.

Intangible property Property that only represents real value such as bonds, stock certificates, promissory notes, certificates of deposit, bank accounts, contracts, leases, and other similar items.

Intestate succession: The distribution of property to heirs according to the statutes of the State of Florida upon the death of a person who owned the property but did not leave a valid will.

Income in Respect of a Decedent (IRD): Income earned by a decedent or income to which the decedent had a right prior to death, but which was not properly includible in his or her gross income prior to death (This is Internal Revenue Code section 691).

Individual Retirement Account (IRA) A tax-deferred retirement account for an individual that can be established by a person with earned income and the spouse who files a joint return. Earnings accumulate tax-deferred until the funds are withdrawn beginning at age 59.5 or later and are required to be started by the age of 70.5 (or earlier then 59.5, with a 10% penalty). A Roth IRA does not provide an initial tax deduction for the money but both the money and the subsequent appreciation grow tax free and will pass tax free when the property is withdrawn. Distributions are not required to be started upon reaching 70.5 and it can continue to accumulate tax free.

Inventory: A list of the assets of the decedent or disabled person that is prepared by an attorney and signed by the fiduciary (personal representative or conservator/guardian). This is required to be filed in Probate court.

Joint tenancy: A form of joint asset ownership by two or more persons in which each person has an equal undivided ownership interest that passes directly to the surviving joint tenant(s) upon the death of any joint tenant. Any joint tenant can petition the court seeking to compel partition of a joint tenancy asset but they cannot do so with tenancy by the entireties. (A form of joint tenants only available to husband and wife). If the joint tenants are not husband and wife and the intention is that it pass with right of survivorship in Florida it is important that the deed specifically provide that it shall pass with the rights of survivorship.

Kiddie Tax Unearned income (dividends, rents, interest, etc) Unearned income of a child under age 14 will be taxed to the child at the parent’s income tax rate.

Lack of Marketability Discount: When the value of an asset is less than its initial or expected fair market value due to unusual circumstances that make it not readily saleable. For example, a limited partnership interest.

Gift: A voluntary transfer of property for which nothing of value is received in return. If Internal Revenue Service is to recognize a transfer as a gift, the donor(s) must unconditionally transfer all title and control of the property to the recipient(s) at the time the gift is given. It is not a completed gift if full control over the property is not given away. With adequate disclosure of the gift the Internal Revenue Service is not allowed to revalue the gift after 3 years.

Heir: person, who inherits property from the estate of a deceased person who died without a will.

Limited Liability Company (LLC) An entity formed under state statute that has the legal characteristic of limited liability similar to that of a corporation, while it may qualify to be treated as a partnership for tax purposes. In Florida there is a 5.5% state tax on Limited Liability Companies. Limited Liability Companies are covered by Florida statutes chapter 609.

Limited Partner A partner in a partnership who can’t participate in the management of the partnership’s business. A limited partner’s liability is limited to the loss of his or her investment in the partnership.

Limited Partnership: Form of partnership composed of both a general partner(s) and a limited partner(s); the limited partners have no control in the management of the company and are usually financially liable only to the extent of their investment in the partnership.

Living Will A legal document in which an individual states, in advance of final illness or injury, his or her wishes regarding which procedures and equipment designed to extend life they choose to avoid. Basically it is a document that says if extraordinary measures are needed and they will merely extend the time but not the quality of life that the person chooses to have the plug pulled and to have a natural death. This is very important that it be done and not leave your fate to the government or the court who may act contrary to your desires.

Marital Deduction A deduction allowing for the unlimited transfer of any or all property from one spouse to the other generally free of estate and gift tax. This is usually just a deferral of tax and an exemption from it so it is usually not advisable to have everything pass outright in a manner that would qualify for the marital deduction. In the spouses revocable trust should be a credit shelter trust to make sure each spouse is able to use their exclusion amount.

Marital deduction trust – A trust that qualifies for the marital deduction for estate tax and gift tax purposes. Several types of trusts so qualify, including: general power of appointment marital trusts, qualified terminable interest property trusts, and qualified domestic trusts. Unless the property is then deferred from tax but unless it is spent or is the spouse is under the exclusion amount upon the passing of the surviving spouse the marital property is subject to estate tax on the death of the surviving spouse.

Minority Discount: A discount applied to the value of an interest in a corporation, limited liability company or limited partnership that is not publicly marketable to reflect the fact that a minority interest in the company has less value than a controlling interest, since the holder of the former cannot control business actions.

Minor: In Florida, a person who is under the age of 18 who is not married or legally emancipated.

Notary is a person with a state commission to attest to the validity of the signatures on documents. A will, trust and power of attorney are all required to be notarized.

Pay on Death (POD) Designation is the selecting of a beneficiary to receive an account balance on one¿s death. This can also be referred to as Transfer on Death or (TOD).

Per Stirpes: A way of distributing an estate so that the surviving descendants will receive only what their immediate ancestor would have received if he or she had been alive at the time of death. State law definitions can vary. This means that if a decedent dies with two children one of who had predeceased him and the predeceased child left two children each of them will receive 1/4 of the property or collectively 1/2 of the property that was to go to the children and the other child would receive the other half.

Pour Over Will This is a Will used to transfer (pour over) into a trust any property that is left in a person’s estate after death.

Postnuptial agreements – Contracts entered into by a husband and wife after marriage, defining the rights of each spouse in their marital, non-marital and jointly-owned property in the event of divorce, legal separation or the death of one of the parties.

Prenuptial (Antenuptial) agreements – Contracts couples can enter into prior to marriage in order to govern their respective rights in marital, non-marital, and jointly-owned property in the event of divorce, legal separation, or the death of one of the parties. It is advisable to execute these documents well in advance of the marriage to avoid the potential claim of duress as a means to attack the document. Each side should have independent attorneys of their own choosing.

“Prudent Investor” Rule : Legal term that refers to the duty of the fiduciary to invest and manage assets in the best interests of another.

Testamentary Trust: A trust that is part of a person’s will. It does not become effective until the person passes away.

Testate: This occurs when a person dies with a valid will in existence.

Testator: The person who makes a will.

Trust: A written document which provides for the management and disposition of assets. It normally involves three parties: the person who establishes the trust (In Florida usually called a grantor sometimes could also be called a donor, settlor, or trustor), a trustee, and one or more beneficiaries.

Trustee: A financial institution or adult who has mental capacity and has not been convicted of a felony that is designated to be responsible for the administration of a trust. There may be more than one trustee (co-trustees), and an individual and a financial institution may serve as co-trustees.

Qualified Domestic Trust (also known as a QDOT) A trust arrangement which allows property transferred to a surviving spouse who is not a U.S. citizen to qualify for a special exclusion instead of the regular marital deduction; and which ensures that, at the death of the surviving spouse who is not a United States citizen, the assets placed in such a trust will incur federal estate taxation since the tax was avoided at the first spouse’s death
Qualified Personal Residence Trust (“QPRT”) – An irrevocable inter vivos trust under which a grantor transfers his/her interest in a personal residence to the trustee to hold for the grantor’s use and occupation during a specified term of years, and, upon expiration of the term, the residence passes to the remainder beneficiary or beneficiaries. Primarily used to gift the residence to the remainder beneficiary that is susceptible to application of valuation discounts and actuarial discounts based on the grantor’s age and the term of the trust, and is most beneficial if the residence is expected to significantly appreciate in value. It is allowed for a primary residence or one vacation home. Although it could be helpful to put a home in this trust from a tax perspective it is possible it could destroy the homestead exemption for creditor purposes since the home is no longer owned by a natural person as required in Article X section 4 of the Florida Constitution.

Qualified Terminable Interest Property (QTIP) Property qualifying for the marital deduction at the election of the donor or the decedent’s personal representative. The spouse retains a qualified income interest in the property for life, with the income payable at least annually. The corpus ultimately passes to a specified remainderman, under a special power of appointment given to the spouse. This can be especially helpful in second marriage situations where the donor wants the spouse to receive the income from the property but then have the property itself actually pass to their children (or in some other designated beneficiary).

S Corporation: A corporation whose income is generally taxed to its shareholders, thus avoiding a corporate level tax. An election available to a corporation to be treated as a partnership for income tax purposes. To be eligible to make the election, a corporation must meet certain requirements as to kind and number of shareholders, classes of stock, and sources of income. The rules for S Corporations are in Internal Revenue Code Sections 1361-1378.

Tenants in common: A form of asset ownership in which two or more persons have an undivided interest in the asset, where the ownership shares are not required to be equal, and where ownership interests can be inherited.

Tenancy-by-the-Entirety : Ownership of property only available between husband and wife. Each owns an undivided interest in the property which will pass with right of survivorship to the survivor. Creditors of just one of the spouses can not reach the property for claims. If the properties divorce it ceases to be tenancy by the entireties. While it is tenancy by the entireties joint action is needed to sell it.

Uniform Gifts To Minors Act: A method to hold property for the benefit of a minor, which is similar to a trust but the rules are governed by state law and the child has to receive the property upon becoming an adult.

Witness A will requires two witnesses and a notary. Each witness must be in the presence of each other, the notary and the testator at the time the time that the testator signs the will, the notary acknowledges it and the other witness signs the document. Unless the witnesses are personally known to the notary they should provide identification such as a Florida Drivers license.

401(k) Plan A qualified profit sharing or stock bonus plan under which plan participants have an option to put money into the plan or receive the same amount as taxable cash compensation. Amounts contributed to the plan are not taxable to the participants until withdrawn. Generally funded entirely or in part through salary reductions elected by employees. Salary reductions are subject to an annual limit.

403(b) Plan A tax-deferred annuity retirement plan available to employees of public schools and certain nonprofit organizations.