Glossary of Legal Terms

The amount that any person may give away in each calendar year without incurring gift tax. Not all gifts will qualify for the annual exclusion. Only outright gifts or gifts of a present interest made to certain types of trusts will qualify. In 2009 the annual exclusion amount is $13,000 and is indexed for inflation.

The person whose life span is used for making income payments. The owner of the annuity policy will determine whose life will be used as the measuring life and in many cases the owner and the annuitant will be the same.

The process of converting the balance in a deferred annuity contract into a stream of payments for a period of years or for someone's lifetime.

Two common usages exist. The first refers to a tax-deferred contract with an insurance company or other entity that provides for the payment of income for a predetermined amount of time, such as a person's lifetime or a certain number of years. See also deferred annuity and immediate annuity. The second common usage refers to a stream of payments being made in an estate planning context with a certain amount (annuity) being paid each year and the remainder being distributed to another person or charity.

The amount of assets that can pass without the imposition of an estate tax or gift tax. The AEA equates to a credit against the estate tax or gift tax. In 2009 the federal estate tax exemption is $3,500,000 and the gift tax exemption is $1,000,000. Based on current legislation, the estate tax is set to be abolished for one year in 2010. In 2011 the exemption is scheduled to be permanently reduced back down to the 2001 level of $1,000,000. The federal gift tax exemption is scheduled to remain at $1,000,000 during this entire period of time. The AEA was previously referred to as the unified credit exemption; however, this term became obsolete in 2001 when the estate tax and gift tax ceased to be “unified” and different exemption amounts came into existence.

The process of structuring one's estate to obtain more advantageous creditor protection from future lawsuits and claims. Different types of asset protection solutions are available depending on the size of estate and the desire to obtain the best possible asset protection solutions.

Trusts designed to hold assets in a creditor protected entity. Asset protection trusts are most protective and effective when created as offshore trusts as they are typically out of the reach of US courts. Currently eleven states have enacted onshore asset protection trust legislation however this legislation has never been tested or endorsed by a US court and it is currently unknown whether onshore or domestic asset protection trusts will be a successful asset protection solution.

Depending on the context, a beneficiary will be a person or entity named in either: (i) a trust to receive real or personal property in accordance with the terms contained in the trust agreement or declaration of trust; or (ii) an annuity to receive money remaining in the annuity upon the death of the owner or annuitant.

A split interest trust with a charitable beneficiary that has the right to receive a series of annual payments in the form of an annuity amount each year for a predetermined or stated term. A family member or non-charitable beneficiary has the right to receive the remaining trust assets when the trust term expires. The annuity amount payable to the charity is calculated on the initial value of the trust assets at the time the trust is created.

A split interest trust where the charity receives income and the non-charitable beneficiary receives everything that is left (i.e. the remainder of the trust) after the charitable payments have been made for the required term. Charitable lead trusts are frequently used with stock in closely held or family business with low basis to help achieve both tax and charitable planning goals.

A trust where the charitable beneficiary has the right to receive a unitrust or annuity payment each year for a specified term. The annuity amount is calculated based upon the value of the trust assets at the beginning of each year of the trust. After the stated term, the remaining trust balance will be distributed to the designated family member or to the non-charitable beneficiary.

A trust wherein a family member or non-charitable beneficiary has the right to receive the annuity payment each year during a stated term of years or for the beneficiary's lifetime. The annuity amount will be calculated on the initial value of the trust assets when the trust is created. After the stated term or the beneficiary's death, the remainder of the trust will be distributed to the charitable beneficiary.

A trust where a family member or non-charitable beneficiary receives a stream of payments and the charitable beneficiary receives the balance or remainder of the trust. Often used to achieve both charitable, estate and income tax goals with low-basis stock holdings while providing income payments to the grantor.

A trust where the non-charitable beneficiary has the right to receive a unitrust or annuity amount each year during the specified term or for the beneficiary's lifetime. The annuity amount is calculated based on the value of the trust assets at the beginning of each year of the trust. After passage of the stated term or upon the beneficiary's death, the remainder of the trust is distributed to the charitable beneficiary.

A type of annuity or retirement account issued by an insurance company that is intended to provide tax-deferred growth on the accumulated income. This type of product may have good asset protection qualities depending on state laws.

No one can force you to accept an inheritance and when you elect to turn down or refuse an inheritance it is called a disclaimer. Disclaimers are usually in the form of a written document and can be used to accept some but not all of an inheritance. In order for a disclaimer to be qualified under the Internal Revenue Code as a non-taxable transfer the disclaimer must be made within nine months after the date of the death or transfer, must be made in compliance with state laws and no income or benefits may have been received by the person disclaiming.

A self-settled spendthrift trust drafted under the laws of one of the ten states that have abolished the rule against self-settled spendthrift trusts thereby permitting grantors to create their own asset protection trust. The eleven states that now permit onshore asset protection trusts include Alaska, Delaware, Missouri, Nevada, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah and Wyoming. No significant cases exist that have endorsed the use of onshore or domestic asset protection trusts as a viable asset protection planning solution.

An asset protection term used to describe one or more of the trustees of the asset protection trust. The domestic trustee may be an individual or corporate fiduciary and may serve alone or in conjunction with a foreign trustee, depending on how the asset protection trust is designed.

A transfer tax imposed on transfers occurring at the decedent's death. The estate tax in 2009 is 45% on all assets in excess of the $3,500,000 applicable exemption amount. Each decedent has an exemption from estate taxes that was previously referred to as the unified credit exemption of $3,500,000. The amount that can be passed at death free from estate tax is reduced by any lifetime gifts, unless an exclusion or exemption is used to exempt otherwise taxable gifts made during lifetime. In 2011 estates in excess of $1,000,000 will be taxed at 55%.

A special type of tax-deferred annuity that guarantees a return based on a stated percentage of a predetermined index such as the S & P 500 Index.

An asset protection planning solution that is most effective when the limited partnership interests are owned by a domestic or foreign asset protection trust instead of an individual or estate planning trust. The partnership interests are typically owned by family members instead of business partners. See limited partnership for more information.

A designation that refers either to an offshore asset protection trust, a trust with one or more foreign trustee or a trust which pursuant to IRC §7701 is not classified as a domestic trust for income tax purposes.

A transfer tax imposed at a rate equal to the highest estate tax rate on gifts or estate transfers where the transferred assets pass, or will pass, to recipients two or more generations below the donor, without being subject to the imposition of estate tax at the intervening generations. Each donor has an exemption that may be used to offset the GST tax.

An inter vivos trust or testamentary trust designed to exist for more than one generation into the future and qualify for the generation skipping transfer tax exemption, while avoiding inclusion in the estates of the beneficiaries for estate tax purposes.

A transfer tax imposed on transfers made by a donor during their lifetime that are in excess of the federal applicable exemption amount of $1,000,000, which amount is not indexed for inflation or scheduled to increase. In the event the gift tax exemption is not fully used during a person's lifetime, the unused exemption will exempt transfers made at death from the federal estate tax. Any person may make an unlimited number of annual exclusion gifts each year without incurring a gift tax liability.

A trust designed to hold gifted or inherited assets for the benefit of individuals or charities. Typically created for beneficiaries who are unable to manage gifted assets, to obtain asset protection, or to minimize gift, estate and generation skipping transfer taxes to the grantor and the beneficiaries.

The person or entity that transfers real or personal property in trust to a trustee or co-trustees under written or oral directions to the trustee to hold, manage, invest, account for and distribute the property to those specified as a trust beneficiary in accordance with the terms set forth in the trust instrument.

An irrevocable inter vivos trust under which a grantor transfers his or her interest in real or personal property to a trustee they have selected to hold these assets for the specified term or duration of the trust. During each year of the term, the grantor receives an annuity amount based upon the value of the assets at the creation of the trust. Upon expiration of the term, the trust property passes to the remainder beneficiary or beneficiaries. Primarily used to gift property 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 property is expected to appreciate in value.

A GRUT is an irrevocable inter vivos grantor trust under which a grantor transfers their interest in real or personal property to a trustee they select to hold some of their assets during a specified trust term. The grantor will receive an annuity payment based on the value of the assets at the beginning of the year for each year the trust is in existence. When the trust term expires, the trust property passes to the remainder beneficiaries. This technique is primarily used for gifting purposes to efficiently transfer family wealth to a remainder beneficiary by taking advantage of valuation and actuarial discounts based on the grantor's age and the term of the trust, which is most advantageous when the property is expected to significantly appreciate in value.

An annuity that is purchased with a lump sum and that is required to return payments to its owner within a time frame no longer than twelve months. Immediate annuities may be fixed or variable depending on the terms and investments.

An IDGT is an irrevocable inter vivos trust created by a grantor for the benefit of beneficiaries (other than the grantor) that has the unique treatment under the Internal Revenue Code of having all of the income taxed to the grantor instead of the beneficiaries. IDGTs are typically used to assist the grantor in making gifts to his or her descendants for purposes of excluding the property from the grantor's taxable estate for estate tax purposes. Since the grantor is legally responsible for paying the tax on the income earned by the trust, the grantor's estate tax savings are enhanced and the trust assets increased since the trust isn't reduced by the amount of income tax that otherwise would have been paid from the trust. This technique is frequently used in conjunction with a sale of discounted assets by the grantor to the trust with the effect of avoiding capital gains on the sale of the assets.

A trust created during the grantor's lifetime, usually by means of a written trust instrument or agreement. A trust created after the death of the grantor is referred to as a testamentary trust.

A trust that cannot by its terms be amended or revoked by the grantor. Irrevocable trusts can be created during a grantor's lifetime for asset protection purposes, for life insurance or for completed gifting trusts, generation skipping trusts, qualified personal residence trusts (QPRT), grantor retained annuity trusts (GRAT), intentionally defective grantor trusts (IDGT), charitable remainder trusts or charitable lead trusts. Some common types of irrevocable trusts which are created at the death of the grantor as testamentary trusts include applicable exemption or unified credit trusts, charitable remainder or charitable lead trusts created under another trust agreement, or generation skipping trusts which are frequently designed as asset protection trusts for current and future family members.

An irrevocable life insurance trust or ILIT is a trust that is intended to hold primarily life insurance policies on the life of the grantor or, on occasion, a policy on the joint lives of the grantor and the grantor's spouse. The major estate planning advantage is to remove the death benefit from the grantor's taxable estate for estate tax purposes. The major asset protection purpose is to use the irrevocable trust to provide a creditor protected entity for the spouse or children. Insurance trusts need to be carefully designed to qualify for annual exclusions gifts, as typically gifts made in trust won't qualify as transfers of a present interest and therefore, absent proper planning, a gift tax would arise when the insurance premiums are paid. Many insurance trusts are designed as asset protection trusts, beneficiary controlled trust or dynasty trusts which would all contain provisions for continuing testamentary trusts after the grantor's death for the grantor's spouse, children, grandchildren and other family or charitable beneficiaries.

A business or asset protection planning technique that helps to protect the owner from lawsuits originating against the LLC. Different states have different laws that significantly affect the ability to protect the owner's personal assets. LLCs are most effective when used in conjunction with a domestic or foreign asset protection trust and when the LLCs are created in a state that, by statute, limits the remedies to charging orders of protection only.

A limited partnership is a partnership created under the limited partnership laws of a particular state. A limited partnership has a general partner, who has unlimited liability for operation of the partnership and limited partners who are not subject to the claims of creditors of the partnership. Limited partnerships are used in conjunction with many asset protection trusts. Limited partners do not participate in the management of the partnership. General partners have the ability to manage the operations of the partnership, as well as to determine when and if any distributions will be made to the limited partners. Most partnership agreements restrict a limited partner from transferring their partnership interest. From an asset protection perspective, a limited partnership as a standalone solution is not very effective. When used in conjunction with an asset protection trust, the limited partnership offers a higher degree of protection.

The marital deduction is an unlimited deduction against estate tax and gift tax for transfers made by a married person to their spouse during their life or at death, either outright or in qualifying trusts created specifically to protect the unlimited marital deduction. This is primarily a technique to avoid the loss of an estate on the death of the first spouse by deferring estate taxes until the death of the surviving spouse thereby ensuring 100% of the estate being available for the survivor.

A trust that is designed to qualify for the unlimited marital deduction for estate and gift tax purposes. Several types of trusts can qualify for the unlimited marital deduction including: general power of appointment marital trusts, qualified terminable interest property trusts, and qualified domestic trusts which are used if the surviving spouse is not a citizen of the US.

An annuity that is tax deferred and purchased by its owner with after-tax dollars instead of in a tax qualified retirement plan like an IRA.

A corporation created under applicable state law to be exempt from income taxes. A not-for-profit corporation is typically a charitable entity created for educational, religious, scientific, artistic or charitable purposes the operation of which is required to be in accordance with applicable state law and tax laws.

A trust created with one of the objectives being to obtain creditor protection from future lawsuits and to preserve accumulated wealth from future litigation claims. Offshore asset protection trusts are created under the law of countries with legislation that is more protective than the laws of the United States and may have both US trustees and foreign trustees. Offshore asset protection trusts are viewed by most knowledgeable planners as offering the highest level of creditor protection possible.

A person or entity named in a Last Will and Testament and/or appointed by the Probate Court who is responsible for collecting the decedent's assets, paying the decedent's debts, taxes, and expenses, selling assets of the estate, and distributing the remaining property and money according to the terms of the Will or in accordance with the laws of intestate succession of the state of residence. The personal representative is a court-appointed fiduciary with great responsibilities such as the preservation and protection of the estate assets, accounting to the heirs and estate beneficiaries for all income and expenses, filing of all required personal federal and state estate tax returns for the decedent and the estate.

A Contract agreed to by both spouses after their marriage that defines each spouse's rights to their marital, non-marital, community and jointly-owned property in the event of divorce, legal separation or the death of one of the parties. A postnuptial contract is considered to be valid and enforceable if it complies with the statutory requirements for pre-nuptial agreements. This is a first level asset protection planning technique for anyone with significant assets who remarried without having sought the advice of a legal advisor prior to their remarriage. Although the use of postnuptial agreements is not as common as pre-marital agreements, they do provide some protection if both parties are willing to agree to the terms and waive some of their marital rights after the fact. Pre-nuptial agreements are normally viewed to be a better asset protection solution as the terms are voluntarily agreed to prior to the marriage.

A Contract entered into by an engaged couple prior to their marriage which sets forth their respective rights in marital, non-marital, community and jointly-owned property in the event of divorce, legal separation, or the death of one of the parties. In order for pre-nuptial agreements to be enforceable, most states require that: (i) there be a full and fair disclosure of the earnings and property of each party; (ii) the parties have had an adequate time to review the agreement prior to the wedding; (iii) each party had the opportunity to consult with legal counsel of their own choice; and (iv) the agreement be in writing, executed and acknowledged by the parties in the presence of witnesses and a notary public.

A trust or not-for-profit corporation that provides for distributions only to charities during its term. Foundations may be structured as a perpetual trust or as a corporation. The governing bodies would be either board of trustees or a board of directors.

The legal process of re-titling wealth from the name of the decedent to its new owner. Probate is required whenever the size of the estate is greater than the statutory amount, which is typically $50,000 to $100,000. The probate judge determines if the decedent's will is valid and appoints the personal representative or executor to collect the decedent's assets, pay the outstanding debts and transfer the remaining assets to the decedent's trust or named heirs.

Probate assets only include assets held in the sole name of the decedent at the time of death or payable to the estate. Since a deceased person can no longer own assets, the probate court needs to determine who the new owner of each asset will be. Probate provides virtually no asset protection since notice to all creditors is required and each creditor has months in which to file a claim against the estate. Property held in more than one name such as joint tenancy with rights of survivorship, or community property with rights of survivorship are not included in the decedent's probate estate and will pass to the surviving owner. In addition, if a proper beneficiary designation was made for proceeds of life insurance, annuities, IRAs or qualified retirement benefits, they will not normally be included in the decedent's estate unless the beneficiary designation specifically designates the decedent's estate or was not properly made.

An annuity that is purchased with pre-tax dollars in a tax-deferred and qualified retirement plan such as an IRA account.

An inter vivos or living trust to which the grantor transfers their interest in a personal residence to the trustee to hold for the grantor's use and occupation for the specified term of the trust and at the termination of the trust term, the residence passes to the remainder beneficiaries. This technique is typically used to make gifts of a vacation or second home to the grantor's children or grandchildren. QPRTs receive advantageous valuation discounts, as well as actuarial discounts based on the grantor's age and the term of the trust, and when a home that is appreciating in value is put into the QPRT, the best benefits are received.

An inter vivos or living trust that is designed to be amended or revoked by the grantor or settlor. This is the type of trust used for estate planning purposes to avoid probate and has no asset protection qualities for the grantor. Properly drafted revocable living trusts (RLTs) typically contain lifetime provisions for the care of the grantor, the grantor's spouse and children, as well as provisions for taking care of the grantor upon the grantor's disability and death. RLTs should also contain dispositive terms that govern the amount and timing of the distribution of the grantor's assets after their death.

The person who settled or created a trust. Also referred to as the grantor.

A gift or transfer which will be divided into a charitable share and non-charitable share. Some common examples of split interest trusts would be a Charitable Remainder Trust or a Charitable Lead Trust.

A type of investment that is not subject to current income taxation. Typically an insurance product such as an annuity or a retirement solution such as an IRA. Income is accumulated and all income taxes are deferred until withdrawals are made.

IRC § 1031 and 1035 govern tax-deferred exchanges of real estate and insurance products. These sections permit a taxpayer to exchange property, insurance policies or annuities for other similar property without having to pay a gain on the income or increase in value. From an asset protection standpoint, §1035 permits an individual to exchange a policy with a large cash value into a new policy that may have better asset protection features, including Swiss annuities or foreign life insurance.

A trust created after the grantor's death in accordance with the terms stated in a Last Will or Testament or in accordance with the provisions of another revocable trust agreement.

A legal arrangement under which the grantor or settlor transfers their assets, including real and personal property, investments, and business interests to a trustee or trustees with specific oral or preferably written directions to the trustee as to how the trust assets should be held, managed, invested, accounted for, and distributed to the beneficiaries on the terms set forth in the trust instrument. Trusts may be created for asset protection purposes, estate planning purposes or simply to govern the lifetime management and distribution of accumulated wealth.

A person or corporation named in a trust agreement who is acting in a fiduciary capacity for the benefit of the grantor and the grantor's trust beneficiaries. The trustee is responsible for holding, managing, investing, accounting for and distributing property from the trust to the trust beneficiaries.

A term originating from English common law that refers to a “watch dog”, being a person or corporation who has certain powers such as the ability to hire or fire trustees, to veto trust distributions or to add new beneficiaries. Trust protectors are routinely used in all domestic and offshore asset protection trusts as well as in many irrevocable trusts such as life insurance trusts.

More properly referred to as the "applicable exemption amount" which is the amount of assets that can pass without imposition of an estate tax or gift tax on the transfer. In 2009 the federal estate tax and the generation skipping tax exemption is $3,500,000 and in 2010 when the estate tax is slated to be abolished for one year, the exemption appears to be unlimited. In 2011 the exemption is scheduled to be permanently reduced back to $1,000,000. The federal gift tax exemption is $1,000,000 and not scheduled to increase at any time during this entire period of time.

A type of annuity where the account balance fluctuates in accordance with the underlying investments. The contract owner, not the insurance company, is responsible for making the investment decisions.

A formal written document by which a person who is over the age of eighteen (18) may direct the disposition of their personal and real property after death. Wills are used to name legal guardians for minor children and to name personal representatives or executors. When a person dies without having properly prepared their Last Will and Testament, the distribution of their estate will be made in accordance with the default rules of the state in which they were residing which rules are referred to as the “laws of intestacy”. These laws completely govern who receives how much of that person's estate regardless of what the decedent may have desired.