From the Dictionary of Basic Estate Planning Terms
ADVANCEMENT
Partial distribution to a beneficiary of a legacy (an irrevocable gift), by a decedent prior to his death to thereby reduce the legacy.
Because it is often difficult to determine whether a decedent meant for an earlier payment to be part of the legacy, some statutes have prescribed specific methods for making advancements. These statutes often require a formal writing from the decedent and/or acknowledgement from the beneficiary. See U.P.C. § 2-109 (2011). In the absence of statutory requirements, the decedent’s intention is controlling in most instances. See, e.g., Barron v. Janney, 170 A.2d 176, 180 (Md. 1961) (holding that where the basic requisite of intestacy is missing, the conveyance of a property to a daughter was not an advancement but an absolute gift).
AGREEMENT TO MAKE A WILL
A contract, usually in writing, by which one party promises to make certain provisions in his or her will for the benefit of a second party as compensation for the second party’s performance of a promised act or if the second party promises something of value in return. <For example: Bob promises to leave property in his will to Susan who promises to nurse his wife and children while they are ill.>
Oral contracts to make a will can also be enforced as evidenced by early Supreme Court cases. See Brown v. Sutton, 129 U.S. 238, 242 (holding that decedent’s oral promise to give property deed to plaintiff was enforceable because construction of home on property was partial performance that satisfied the Statute of Frauds).
ALTERNATE VALUATION DATE
The date six months from a decedent’s date of death which may be chosen by his personal representative as time property included in the gross estate is to be valued for estate tax purposes. The valuation date is the date of the decedent’s death unless the executor elects the alternative valuation date. 26 C.F.R. § 20.7520–1 (2011).
CHARITABLE LEAD TRUST
An irrevocable trust which holds assets for both charitable and non-charitable interests. The charitable interest precedes, or “leads,” the non- charitable remainder interest. A specified amount is paid to charity either for a stated period of time or during the life of an individual. The remainder passes to non-charitable beneficiaries, such as the members of the grantor’s family, or reverts to the grantor. See Charitable Lead Annuity Trust and Charitable Lead Unitrust.
<For example, Henry puts $2 million in a ten-year charitable lead trust to benefit a university. That university will receive $200,000 annually. At the end of the term of the trust, the remainder will pass to Henry’s son.>
COERCION
The situation where one person forces another to sign a will, trust, antenuptial agreement or other document against his desires; this can form the basis of a will contest.
CONSERVATION EASEMENT
- A deed by which an individual makes a gift of an interest in real estate, (e.g., the exterior façade of a building, open vistas on a ranch, or development rights) to an organization dedicated to the preservation of historic buildings and/or land
- A recorded interest in real property that imposes restrictions or affirmative obligations on the property’s owner to protect the natural or scenic value of the property.
DISCLAIM
1. To reject a gift or inheritance.
2. To file a disclaimer.
(E): Originally referred to the relinquishment of a feudal lordship or tenancy.
DISCRETIONARY TRUST
A trust in which the trustee is given discretionary power. The grantor can grant
“sole, absolute and uncontrolled” discretion to the trustee or set limitations by using qualifying terms such as “sound” or “as the trustee deems appropriate.” Even absolute discretion is subject to judicial review.
ELECTIVE SHARE
The right of a surviving spouse to a share in the estate of a deceased spouse, which share is specified by state law, in contravention of the terms of the deceased spouse’s will. The amount is typically one-third.
FIVE PERCENT (5%) PROBABILITY TEST
A test for the tax qualification of a charitable remainder annuity trust by which the probability or chance that the principal of such a trust will be exhausted, before the charity receives its remainder interest, cannot exceed 5%. Rev. Rul. 70-452, 1970-2 C.B. 199. The IRS has suggested language that can be included in a trust to guarantee that such trust does not violate the 5% probability test: “the payout percentage (as adjusted to reflect the timing and frequency of annuity payments) shall not exceed that percentage that would result in a 5 percent probability that the Trust corpus will be exhausted before the death of the Recipient.” Rev. Proc. 90-32, 1990-25 I.R.B. 21.
GIFT SPLITTING
The tax treatment of gifts, to a child, grandchild or other third party, as if one-half was made by a husband and one-half was made by a wife, where both spouses consent, even if the gift came from the assets of only one spouse. Significant gift tax savings are possible through split gifts.
Gift splitting is only permitted if (1) Both spouses are U.S. citizens or residents at the time of the gift; (2) the spouses are married, but if subsequently divorced, neither remarries prior to the end of the calendar year; (3) both spouses consent to gift-splitting; (4) the donor spouse does not assign the consenting spouse a general power of appointment over the gift. I.R.C. §2513(a)(1)(1981)
GRANTOR RETAINED ANNUITY TRUST
An irrevocable trust in which the grantor receives a fixed annual dollar amount for a specified number of years (i.e., an annuity) and then principal passes to one or more other beneficiaries designated by thegrantor; usually the fixed annual dollar amount is a percentage of the fair market value of assets initially transferred to the trust.
This type of trust is effective in tax savings when the property’s income is greater than the assumed rate of return determined by the I.R.C. §7520 interest rate. Regardless of the annuity amount, the grantor must pay tax on the property’s entire income. However by doing so, the grantor is making a tax-free gift to the trust’s beneficiaries.
See Walton v. Comm’r, 115 T.C. 589 (2000). A GRAT by Audrey Walton (of Wal-Mart fame) was a successful plan, despite an IRS challenge.
IN TERROREM CLAUSE
A statement or paragraph in a will or trust that provides that if a beneficiary contests such will or trust, he forfeits all or part of his inheritance. Also known as an anti-contest clause.
Ety: The Latin in terrorem means to frighten.
JEOPARDY INVESTMENTS
An investment by a private foundation which undermines the pursuit of its exempt purpose and subjects it to excise taxes. Examples are trading on margin; trading in commodity futures; investments in working interests in oil and gas wells; puts, calls and straddles; warrants; and short sales.
The foundation will be charged an excise tax of ten percent of the amount unless it can show that the investment was due to reasonable cause and was corrected within the correction period. An excise tax is also imposed on the foundation manager in charge of the investment. If the investment is not removed within the correction period, an additional 25 percent will be imposed. I.R.C. §4944 (2006).
SITUS
1. The “home” of a trust.
2. The jurisdiction where assets of a trust are located, where a trustee will administer a trust or where the terms of a trust will be interpreted.
SPENDTHRIFT CLAUSE
A provision in a will or trust that prohibits a beneficiary from transferring his right to receive income or principal to any other person, usually contemplating his creditors…..
In the 1953 movie, Just This Once, Mark MacLene owes the IRS, the banks and others a lot of money. The problem is that his trust makes $1,000,000 a year, but he spends $150,000 every month. His trustee, Sam, uses the power of attorney and the spend thrift clause to hire frugal Lucille Duncan to manage Mark’s finances.
STEP–UP BASIS
The value of an asset on the day of death, rather than its actual cost, which may be used in determining the capital gain tax upon the sale of the asset. <A simple example: Adrian’s father bought beach front property in 1980 for 50,000. At the time of his father’s death in 2000, the property was valued at 500,000. When Adrian sells the home after inheriting it, he does not have to pay a capital gains tax. Had his father sold it prior to his death, he would have had to pay the tax.>
TOTTEN TRUST
A bank account in which the depositor holds title to an account, can use its funds, but designates a successor to automatically own the funds upon his death; often the titling is “John Doe, in trust for John Doe, Jr.”
VIRTUAL REPRESENTATION
Doctrine by which some interested parties may speak for other interested parties because their interests are similar. Virtually represented parties are then precluded from bringing similar claims in the future if: (1) they agreed to be bound by the judgment; (2) are in a pre-existing substantive legal relationship with the litigating party; (3) are adequately represented; or (4) assumed control over the litigation. Taylor v. Sturgell, 553 U.S. 880, 881 (2008).
