Stewart Law, P.A.

These definitions are intended to aid the non-professional user in understanding estate planning techniques

Trust – an arrangement where legal title is separated from beneficial title. The legal title is given to a Trustee with instructions to manage the assets in the trust for the beneficiaries.

Gift tax – a federal tax owed by the donor for gifts made to one or more donees. U.S. gift tax returns are due April 15th for gifts made in the previous calendar year.

Estate tax – a tax levied on the total value of assets owned by a decedent at his death. The U.S. Estate tax return is due 9 months after the decedent’s death.

Power of attorney – a document under which 1 person (the “Principal”) authorizes another person (the “Agent”) to handle transactions for him. Separate powers of attorney are commonly used for financial transactions and health care matters. Financial powers of attorney may be “general” (i.e., comprehensive) or limited.

Advance directive – a document in which a person specifies how he will want certain decisions handled in the event of described contingencies. Most commonly, a person will direct how to handle “life prolonging measures” if his health condition is not treatable.

Family Limited Partnership – traditionally, these were limited partnerships that were used by families to achieve a number of purposes such as protecting assets from creditors, facilitating gifts to children, equalizing estates to use tax exemptions more effectively and in some cases reducing estate taxes through discounting. Today, limited liability companies (LLCs) are often used instead of limited partnerships, but with the same objectives.

Grantor Retained Annuity Trust (“GRAT”) – a trust that is the same taxpayer as the person who established it (the “grantor”) for tax purposes.  A trust may be a grantor trust for income tax purposes- meaning that all of the trust’s income is taxable to the grantor or it may be a grantor trust for estate tax purposes- meaning that all of the trust’s assets are part of the taxable estate of the grantor for estate tax purposes.  It is possible for a trust to be a grantor trust for both income and estate tax purposes.  Finally, in some cases a trust to be a “grantor trust” for a period of time and then flip to a non-grantor trust.

Transfer taxes – gift taxes and estate taxes.

Grantor Retained Interest Trust (“GRIT”)

Qualified Personal Residence Trust (“QPRT”) – a trust that holds a grantor’s personal residence. The grantor retains the right to use the residence rent-free for a term of years. The transfer of the residence into the trust is a taxable gift transaction. At the end of the term, the residence passes to the beneficiaries named by the Grantor without any further gift taxes.

Grantor or Settlor – the person who establishes or funds a trust.

Revocable Trust – a trust in which the grantor retains the right to revoke the instrument. The most important consequences of this are: (1) the trust can be amended at any time until the grantor dies or becomes incapacitated, (2) a transfer of assets to the trust is not a taxable gift transaction, (3) the income of the trust is taxable to the grantor and (4) the assets in the trust will be taxable in the grantor’s estate at his death.

Irrevocable Trust– a trust in which the grantor parts with the right to revoke the instrument. The most important consequences of this are: (1) the trust cannot be amended by the grantor, (2) a transfer of assets to the trust is a taxable gift transaction (the income of the trust may still be taxable to the grantor for income tax purposes) and (3) the assets in the trust will generally not be taxable in the grantor’s estate at his death (though this does not necessarily follow from irrevocability).

Asset Protection – a category of estate planning that focuses on arranging your assets and affairs so as to minimize the risk of loss of assets to potential future creditors.

Grantor Trust – a trust that is the same taxpayer as the person who established it – the “grantor” – for tax purposes. A trust may be a grantor trust for income tax purposes – meaning that all of the trust’s income is taxable to the grantor or it may be a grantor trust for estate tax purposes -meaning that all of the trust’s assets are part of the taxable estate of the grantor for estate tax purposes. It is possible for a trust to be a grantor trust for both income and estate tax purposes. It is possible for a trust to be a “grantor trust” for a period of time and then flip to a non-grantor trust.