Navigating tax structures requires intricate planning skills, especially for a significant portion of taxpayers with substantial incomes and estates. To safeguard their financial well-being, individuals often resort to various financial-planning techniques. This glossary aims to elucidate fundamental planning concepts. It assists in leveraging income and estate assets effectively, enhancing security for both individuals and their families, while also facilitating the pursuit of philanthropic goals.
Abatement – The reduction or nonpayment of a gift by will because there are not enough assets in the estate to pay it in full.
Actuarial Value of an Annuity – The amount it will cost at the present time to pay an annuitant “x” amount of dollars for the rest of his or her life, based on the mortality tables and certain interest assumptions.
Ademption – The extinction of a devise or bequest made in a will because the asset involved was not found in the estate.
Administrative Expenses – Those necessarily incurred in the administration of the estate—the collection of assets, the payment of debts, and the distribution of property. Examples include commissions, attorneys’ fees, and miscellaneous expenses.
Administrator – The person or entity (often a bank) appointed by the court to settle the affairs of a decedent who dies without a will, or whose named executor cannot or will not serve.
AFR – Applicable Federal Rate is the interest rate used to value the charitable interests in charitable remainder trusts and gift annuities. (The rate is sometimes referred to as the IRS discount rate, the Charitable Midterm Federal Rate [CMFR], and the Sec. 7520 rate.) The rate is equal to 120% of the applicable federal midterm rate rounded to the nearest two-tenths of 1% (e.g., 2.31% would be rounded to 2.4%). The rate changes monthly.
Alternate Valuation Date – Is the date six months following the date of death of a decedent that an executor may elect to use to value property included in the decedent’s gross estate.
Annuity – The financial arrangement or contract an annuitant makes with a third party (family members, insurance company, or charity) in which he or she will receive a specific amount at stated intervals for life or for a term certain in consideration of either cash or other assets.
Annuity Trust – See Charitable Remainder Annuity Trust.
Bargain Sale – The sale of property to a charity for less than its fair-market value. A charitable deduction is taken by the donor for the difference between the sale price and the fair-market value. However, because the adjusted cost basis must be allocated between the “sale” and “gift” portions of the transaction, some taxable gain may be realized.
Basis – The original acquisition price is the cost basis. Adjusted basis is generally cost basis less any allowance against basis, such as depreciation, plus any additional investment in the asset. Adjusted basis normally is the value used for tax purposes to determine gain or loss.
Beneficiary – The person or entity named in a will to receive a devise or legacy or the use of estate assets. Also, the person or entity to whom are payable death proceeds of an insurance policy, benefits under a retirement plan or IRA, and trust income and/or remainder.
Bequest – A direction by will to give personal property to a particular beneficiary; also called a legacy. A bequest may be general and unconditional, residuary, or contingent.
Capital Gain or Loss – The profit or loss resulting from the sale or other disposition of a capital asset. If the property was held for more than twelve months, the gain or loss is long-term. If the property was held for twelve months or less, the gain or loss is short-term. Capital loss—either long-term or short-term—may be used to offset capital gain and may be used to reduce ordinary income only to the extent of $3,000 per year, with the option to carry over losses in excess of $3,000 in future tax years.
Cash Value – The loan value or surrender value of certain types of life-insurance policies.
Charitable Deduction – The deduction allowable for gifts made to qualified charitable organizations. If a gift is made during the lifetime of the donor, it qualifies for income-tax and gift-tax charitable deductions. If it is made at the end of the donor’s life, it qualifies for an estate-tax charitable deduction.
Charitable Gift Annuity – A contract between a donor and a charity under which the charity, in exchange for a gift, agrees to pay the donor or the donor’s chosen beneficiaries fixed payments for life. The size of the payments is based on the age of the beneficiary(ies) and the amount of the gift. (This instrument is sometimes simply called a “gift annuity.”)
Note: Due to state regulations, we are not able to provide charitable gift annuities or deferred charitable gift annuities in all states.
Charitable Lead Trust – Also known as a charitable income trust, a lead trust pays the income to charity and distributes the remainder to noncharitable beneficiaries. It is the converse of a charitable remainder trust, which pays the income to noncharitable beneficiaries and then distributes the remainder to charity.
Charitable Remainder – The trust property that is distributed to charity when the trust terminates. For example, a donor may give property to fund a charitable remainder trust that pays the donor a life income and then distributes the trust principal and undistributed income to a designated charity. The property that passes to the charity is the charitable remainder.
Charitable Remainder Annuity Trust – A trust established by a donor whereby one or more beneficiaries will receive an income for life or a term certain (not to exceed 20 years), and the remainder will be distributed to one or more qualified charities. It pays a fixed dollar amount to the beneficiaries each year (at least 5 percent of the initial fair-market value of the transferred property).
Charitable Remainder Unitrust – Similar to an annuity trust except that the payment to beneficiaries is determined by multiplying a fixed percentage by the fair-market value of the trust assets as revalued each year. The fixed percentage must be at least 5 percent.
Community Property – The system prevailing in nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) whereby all property acquired during marriage by either husband or wife constitutes common property in which each spouse has an equal interest.
Corpus – The fund or capital upon which income is earned; also called principal.
Cost Basis – The basis of an asset equal to the amount paid for the asset plus other acquisition costs (such as a brokerage fee).
The original acquisition price is the cost basis. Adjusted basis is generally cost basis less any allowance against basis, such as depreciation, plus any additional investment in the asset. Adjusted basis normally is the value used for tax purposes to determine gain or loss.
Deduction Limits (for income tax)
- Cash – Gifts of cash are deductible up to 60 percent of a donor’s contribution base (generally, adjusted gross income–AGI). Any excess may be carried over for up to five years.
- Long-Term Capital-Gain Property – Gifts of appreciated property held long-term are deductible up to 30 percent of an individual’s contribution base. Any excess may be carried over for up to five years.
- Special Election – Permits a donor to elect to deduct a gift of long-term capital-gain property under the 60 percent ceiling. However, the deduction is limited to the donor’s basis in the property.
Deferred Gift Annuity/Flexible Deferred Gift Annuity – A contract between a donor and a charity under which, in exchange for a gift, payments to the beneficiary(ies) can start at a preselected future date, or (in the case of a Flexible Deferred Gift Annuity) within a specified later time frame. The size of the payments depends on the factors pertaining to a charitable gift annuity plus the beginning date of the payments.
Note: Due to state regulations, we are not able to provide charitable gift annuities or deferred gift annuities in all states.
Deferred Gift – Any arrangement whereby money or property is set aside for the future use and enjoyment of a charity.
Devise – The disposition of real property by will. (The disposition of personal property is called a bequest or a legacy).
Discount Rate – See AFR
Estate Tax – The tax imposed by the federal government and some states on the transfer of property at death.
Exclusion, Annual – The continuing right of a donor to make a tax-free gift of up to the allowed limit for the year in which that gift is made to each of any number of donees in any year; applies only to gifts of present interest; exclusion may be doubled if gift-splitting with one’s spouse.
Executor – The person or entity (often a bank) nominated in the will of another to carry out the terms of the will.
Fair-Market Value – The price at which a fully informed seller who is not being forced to sell would be willing to sell an asset to a fully informed buyer who is not being forced to buy.
Generation-Skipping Transfer Tax – A federal tax that applies to transfers in generation-skipping trusts and to direct gifts between the transferor and a person in a generation at least two below the transferor’s.
Generation-Skipping Trust – A trust designed to benefit successive generations—children, grandchildren, and great-children—with minimal tax cost. By limiting the interests of intervening generations (e.g., children and grandchildren) in the trust to a right to income, the trust corpus would not be includable in their gross estates. Thus, one or two generations could be skipped (without the imposition of federal estate taxes). The GST tax substantially reduces the tax savings formerly associated with generation-skipping transfers.
Gift-in-Kind – A gift of property other than cash or marketable securities (e.g., an automobile, livestock, or a painting).
Gift-Splitting – The annual exclusion may be doubled when a husband and wife join in the gift and file a statement with the IRS accordingly. There is no tax liability.
Gift Tax – A tax on the transfer (during the donor’s lifetime) of property worth more than the allowable exclusion amount per year to another person; payable primarily by the donor.
Grantee – The person to whom property is transferred.
Grantor – The person transferring property. This term is also used to refer to a person who transfers property in trust; in that context it is synonymous with the terms settlor and trustor.
Gross Estate – Includes all property in which the decedent owned an interest at his or her death. It embraces such items as personal property, real property, life insurance, and joint property. It can also include certain lifetime transfers in which the decedent retained the right to income, possession, or enjoyment of the property.
Inheritance Tax – A state tax, imposed by a few states, on an heir’s right to receive property, determined by the value of the asset received and on how closely related the recipient is to the donor.
Installment Sale – Sale of property over more than one tax year. The purpose of an installment sale is to spread the impact of any capital gain.
Insurance Trust – A trust consisting of insurance policies or proceeds.
- Funded – A trust to which other property is also transferred, with income to be used for the payment of premiums.
- Unfunded – A trust that contains no fund for payment of premiums.
Intestate – A person who dies intestate is one who has not executed a valid will.
Jointly Owned Property – Property owned by two or more persons with the right of ownership passing to the person or persons who survive; normally unaffected by a will.
Legacy – A disposition of personal property in a will.
- Demonstrative Legacy – A legacy payable primarily out of a specified fund but chargeable against the general estate if the primary source of payment is inadequate.
- General Legacy – A legacy, usually of money, payable out of the general estate.
- Specific Legacy – A legacy of a particular article or specified part of the estate.
Life Estate – An interest in property for life. For example, a person who has the right to occupy a residence for the duration of his or her life has a life estate in the property.
Life-Income Plan – An arrangement by which a person gives a principal sum or property to a charitable organization with the stipulation that income be paid to one or more beneficiaries for their lives, according to an agreed payout arrangement.
Long-Term Appreciated Property – Property that has increased in value, and has been held for more than the required holding period, currently 12 months.
Marital Deduction – A deduction allowed for property passing from one spouse to another, either by gift during life or transfer following death.
- Estate-Tax Deduction – A deduction from the gross estate of the decedent for property passing to the surviving spouse. The deduction is unlimited.
- Gift-Tax Deduction – Allowed for lifetime gifts to a spouse. Deduction is for full value of such gifts.
Marital Trust – (Also called Trust A). A trust in which the property transferred to it qualifies for the marital deduction
Non-Marital Trust – (Often referred to as Trust B). This trust receives property of the decedent over the amount designated for the marital trust. The surviving spouse typically receives the income from the trust, has a right to limited distributions of the principal at the discretion of the trustee, but has no general power of appointment over the trust. Because the trust corpus is not included in the surviving spouse’s gross estate at death, federal estate-tax savings may result.
Ordinary-Income Property – Property which, if sold at a profit, gives rise to ordinary income as distinguished from long-term capital gain. A gift of ordinary-income property to charity is deductible only to the extent of the donor’s adjusted basis in the property.
Outright Gift – Cash, securities, or other property for the immediate use of the charitable organization.
Pooled Income Fund – A fund established by a public charity in which all contributions are invested together with transfers of others who make similar gifts. The donor (or other designated beneficiary[ies]) receives his or her share of the pooled income fund earnings each year.
Pourover Will—A will directing that part or all of the testator’s assets be transferred or poured over after his or her death into a trust that has its own provisions for distribution of assets. The chief benefits are: (1) unified administration, (2) minimization of administration costs, and (3) protection of family privacy.
Power of Appointment – The right to direct the disposition of property one does not own, such as the right of a trust-income beneficiary to designate the person to receive the trust principal upon the beneficiary’s death.
- General Power – A power exercisable in favor of the holder of the power, or of his or her estate, creditors, or the creditors of the estate.
- Limited or Non-general Power – A power that is not a general power.
QTIP – Qualified terminable interest property. Terminable interest property qualifies for the marital deduction if the spouse is given the right to all income—paid at least annually—for life and no one has the right to appoint the property to a person other than the spouse during the spouse’s life. The donor or executor must elect to qualify the property for the marital deduction.
Probate – The court-supervised process of validating the will and administering and distributing probate property per the instructions of the will. Some property—for example, that which passes through a trust or by a beneficiary form—is not governed by the will and thus is not probate property.
Related-Use Rule – If the use of a donated item of tangible personal property is related to the exempt purposes of the charity, the donor is entitled to an income-tax charitable deduction for the full fair market value of the property, provided its sale would result in long-term capital gain. The deduction is subject to the 30 percent deduction ceiling and five-year carryover.
If the use is unrelated to the charity’s exempt purpose, the deduction is limited to the donor’s basis in the property.
Note: If an item of tangible personal property is left to charity by bequest, the standard of related-use does not apply.
Remainder Beneficiary – The person or entity entitled to receive what remains of the principal after a life interest (or other intervening interest) has terminated.
Residual Estate – That portion of the estate that remains after all administrative expenses, taxes, and specific bequests have been paid. The person or entity named to receive all or a portion of the residual estate is said to have a residual interest.
Revocable Living Trust – A revocable document (that becomes irrevocable at death) by which many people arrange for management and distribution of their assets. The person who creates a revocable living trust is entitled to all trust income, can withdraw capital, and can amend or terminate the trust. Assets transferred to the trust must be titled in its name.
Tangible Personal Property – Property other than cash, securities, or real estate that can be touched and is movable (e.g., a painting, stamp collection, or automobile).
Tenancy – An interest in real property.
- Joint Tenancy – See Jointly Owned Property.
- Tenancy by Entireties – The owning of real property by husband and wife, with the survivor taking all, and with interest generally non-separable during the life of both.
- Tenancy in Common – The owning of real property by several persons, with the share of the one dying passing under his or her will or under the intestacy laws to his or her heirs, and not to the survivors.
Totten Trust – A type of revocable trust, also known as a payable-on-death (POD) account, whereby assets in a bank or brokerage account can be paid directly to a named beneficiary without being subject to probate. If the beneficiary withdraws money while the depositor is living, a taxable event occurs subject to the annual exclusion. Any amount paid to the beneficiary at death is included in the depositor’s taxable estate.
Trust – The arrangement whereby property is held by a trustee (an individual or entity) for the benefit of another. The trustee holds legal title to the property. The beneficiary is the person or organization benefited. The person establishing the trust is called the grantor, creator, donor, or settlor.
Inter Vivos or Living Trust – A trust that is established and becomes operative during the lifetime of the person who created it.
Irrevocable Trust – A trust that cannot be ended by the person who created it.
Revocable Trust – A trust that may be ended by the person who created it.
Testamentary Trust – A trust created by will.
Unified Credit – The credit allowable against the tentative tax due on lifetime and death-time transfers. Use of available credit reduces the amount of credit available for subsequent transfers.
Unitrust – Charitable Remainder Unitrust.
Will – The legal declaration of a person’s intentions as to the disposition of his or her property upon death.