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Glossary of Estate Tax and
Wealth Transfer Terms

To help our web site visitors, we will be developing a glossary of terms. Please come back soon.

Below are brief descriptions of many common terms used for estate planning and wealth transfers. For more information and ways to avoid estate taxes, visit us at EstateTaxSecrets.com.

30%-type charities Generally, defined as all charities that are not 50%-type charities, particularly "Private family foundations"; deductions limited to 30% of your adjusted gross income for the year.
50%-type charity There are ten 50%-type charities including churches, educational institutions, hospitals, governmental units and operating foundations (i.e. a donor advised fund and supporting organization). Your charitable deduction to such organizations are limited to 50% of your adjusted gross income for the year.
Asset protection The art, under the law, of protecting your personal assets from claims of creditors and lawsuits.
Business succession The strategies, in the most tax effective manner, of passing control of a closely held business to children of the owner, employees or others (related or not).
Business Transfer A term used to distinguish the tax results of a business sale (from a transfer of a business). A sale from buyer to seller is always a taxable transaction. A transfer, when properly structured is tax-free (to both parties: the old owner-typically dad-and the new owner(s), his kids.
Buy/Sell agreement A document that sets forth the rights, duties and obligations of the owners of a "Closely held business" as pertains to the future ownership of the business.
Charitable gift annuity A charitable gift, a portion of which is deductible, in exchange for an annuity which can be deferred or start immediately and payable for a term certain (i.e. 20 years) or until the death of the donor (or the last to die of the donor and the donor's spouse).
Charitable lead trust Provides periodic (typically annually) distributions to a charity as opposed to an outright gift. The distributions are for a specific term, while the remainder interest (after the charitable term ends) is transferred (either outright or in further trust) to noncharitable beneficiaries, usually younger family members of the trust's creator. There are basically two types of such trusts: annuity (amount paid each year is fixed at inception and is the same each year and unitrust annuity (the amount varies depending on the value of the assets in the trust).
Charitable remainder trust (CRT) The reverse of a charitable lead trust with the benefits, in the form of an annuity, going to a noncharitable beneficiary (typically the creator of the trust). The annuity can be paid for a term of years (say 20), but more often is paid for the life of the trust's creator (or until the last to die of the creator and his/her spouse). There is more than one type of CLT.
C corporation A tax-paying corporation.
Closely held business A nonpublic company typically owned by one person, but could be more. More often than not, the owners of the business are active in its management.
Death benefit agreement A type of wage-continuation plan given to the founder (or major stockholder and on occasion to key employees) to continue such person's salary (usually a faction thereof, say 80%) until that person dies. Often, after the employee dies, about half the amount is paid to the employee's surviving spouse until such spouse dies.
Defective trust (often called an "intentionally defective trust"-IDT) The trust is intentionally defective for income tax purposes. An IDT is an excellent strategy to transfer a business (or other income producing assets), typically to younger family members, in a transaction that is tax-free to both the grantor (creator of trust) and beneficiaries (typically the grantor's children) of the IDT.
Deferred annuity The periodic payments (typically monthly, quarterly or annually) do not start immediately but are deferred to some date (selected by the purchaser of the annuity) in the future. Since most annuities are paid until the purchaser dies (or the second-to-die of the purchaser and his/her spouse), the dollar amount (usually stated as a percentage of the investment) increases the more years the annuity payments are deferred.
Deferred commercial annuity A deferred annuity purchased from an insurance company.
Donor advised fund (DAF) Typically used by affluent individuals who establish a DAF account with a gift (usually cash or stocks) that you ultimately would like to be granted to one or more charities. The account is professionally managed by a large qualified organization (like a bank) but it could be a community foundation. At your convenience, you suggest charitable grants to be made to the account manager who will be happy to oblige.
Dynasty trust An irrevocable trust designed to transfer family wealth to future generations without being depleted by gift or estate tax. Often, it is planned for each generation to have the trust buy large amounts of life insurance to assure asset growth and have funds available for distribution to future generations.
Estate tax A Federal tax levied on the value of property transferred by a decedent to his/her heirs.
Estate tax planning The art of planning to avoid the impact of the estate (and gift) tax. This website shows your how to do it-legally and easily.
Estate planning The art of planning the affairs of an individual to accomplish his/her goals in lifetime tax planning, business succession, retirement, valuing the family business, satisfying (to the extent possible) the goals of each family member, related areas, and in particular, legally avoiding the impact of the gift tax and the estate tax.
Estate tax deferral Generally, death immediately brings the estate tax into the picture. However, gifts to your spouse, at your death escape the clutches of the estate tax because of the "Marital deduction." So, the estate tax is deferred until the death of the spouse.
Family business See "Closely held business": Really the same, except the owners/managers are typically members of the same family.
Family limited partnership (FLIP) A much used strategy to transfer investment type assets (for example, real estate, stocks and bonds) usually to younger family members. Properly done a FLIP lowers your estate tax because of the discounts (normally in the 30% to 40% range) allowed to reduce the value of the assets in the FLIP for tax purposes. Also, an efficient and cost-effective asset protection device.
Freeze estate Various strategies (for example a family limited partnership, intentionally defective trust, gift or sale of one or more assets) used to remove the appreciation of an asset from an estate by transferring assets to younger family members as soon as possible (but always in a tax-advantaged way). Generation skipping transfer (GST) A rather complex set of rules that limits the amount you can transfer to younger generations. For example, a gift to your son would not be subject to the GST rules. A gift to your grandchild (or younger generation) is subject to the GST rules. GSTs are often set up using a GST trust. Violate the rules and you become subject to high GST tax. A husband and wife (grandpa and grandma) each have separate limits that escape the GST tax.
Gift tax A Federal tax levied against taxable gifts, (certain items and amounts escape the tax) made during life. At death, taxable gifts are added to your gross estate and increase the estate tax but you are given credit for any gift tax paid.
Gift tax exclusion Each year you (the donor) can make a gift-currently $12,000-to anyone you like (typically children and grandchildren) that is not considered a taxable gift. Your spouse can make the same nontaxable gift. So, a married couple can be the donor of $24,000 to each donee (the person receiving the gift).
Grantor annuity trust
Grantor retainer annuity trust (GRAT) An irrevocable trust where the grantor transfers property to the trust and reserves to himself the right to receive a fixed stream of payments (the annuity) for a specified term of years. The GRAT terminates at the end of the term, and the property passes to the remainder beneficiary (typically a younger family member).
Grantor retained income trust (GRIT) Generally, a GRIT should no longer be used unless the only property to be held by the trust is a residence (to be used as a personal residence) by persons holding term interests in the trust (see "Qualified personal residence trust").
Insurance trust A term that cannot be clearly identified, but most often used to describe a revocable "Pour-over trust" that is the owner and beneficiary of a life insurance policy (typically on the life of the creator of the trust or on the creator and his/her spouse).
Insurance trust A term that cannot be clearly identified, but most often used to describe a revocable "Pour-over trust" that is the owner and beneficiary of a life insurance policy (typically on the life of the creator of the trust or on the creator and his/her spouse).
Intentionally defective trust (IDT) See "Defective trust."
Irrevocable life insurance trust (ILIT) A trust that typically is the owner, applicant and beneficiary of a life insurance policy: either single life or second to die. An ILIT is the most common method used for legally avoiding the estate tax on life insurance.
Irrevocable living trust
Irrevocable trust Any of many trusts-for example an irrevocable life insurance trust, charitable remainder trust and charitable lead trust-where at the creation of the trust, by language contained in the trust, prevents it from being changed.
Leveraged charitable gift A gift to charity that, when all is said and done, will yield more dollars to the charity than the amount of dollars out-of-pocket by the benefactor. Typically, involves the use of life insurance or a charitable lead trust with a long term (in years).
Life expectancy How long, usually in years (but if the time period is short in months), that an individual is expected to live. It should be pointed out that the life expectancy gets longer with the passage of time (because of medical advances) and women outlive men by three to five years.
Life settlement (LS) Also synonymous with "Senior Settlement." The sale of an existing life insurance policy by the current owner who meets three basic requirement: (1) the insured is 65 years old or older; (2) the policy is $250,000 or more; (3) the sellers life expectancy is seven years or less. The shorter the life expectancy the more valuable the policy is when sold to investors. The seller is delighted to enter into an LS because he/she will get significantly more money selling the policy than terminating it to receive the cash surrender value. The investor(s) buy the policy because they normally make profits in the 15% range per year without market risk (see "Transferable insurance policy").
Life insurance Everyone knows what life insurance is: The insured (the person on whom the life policy is issued) pays premiums (or someone else pays them) to an insurance company, which pays a death benefit to the policy's beneficiary when the insured dies. What most people don't know is that life insurance, when properly structured, is actually a tax-advantaged investment (as explained in many places on this website). There are many types of life insurance, ways to hold title and pay the premiums, and an almost endless number of strategies to use life insurance to create tax-free wealth.
Limited liability co. An entity-often used to hold title (for example, real estate, stocks or bonds) or operate a business-that is considered a partnership under the tax law, but protects the entity's owners-like a corporation-from personal liability.
Living trust A document which is revocable (can be changed until the creator dies) that normally carries the estate plan of the trust's creator.
Long-term capital gain property Any property-tangible or intangible-that can be sold or exchanged, and the tax that results will be a long-term capital gain (as opposed to being taxed as ordinary income).
Long-term care insurance A specialty type of insurance that pays all (or a portion) of the costs resulting when an individual(s) (covered by the policy) can no longer care for themselves (as set forth in the policy).
Marital deduction A deduction allowed from the gross estate for interests in property which pass from the decedent to his/her surviving spouse. The properties are first included in the gross estate. Simply put, the property is included in the estate and then deducted, so the property that is part of the marital deduction escapes the estate tax at the death of the first spouse to die. Careful: The marital deduction property is taxed when the surviving spouse dies.
Marital trust Gifts-during life or at death-from one spouse to the other are not subject to gift tax (because of the 100% marital deduction). A trust where the gifts to a surviving spouse are intended to take effect at the death of the creator of the trust is known as the marital trust, which is one of the trusts contained in a typical "living trust" or "pour-over trust."
Pour-over will A will that pours over its assets to a "pour over trust" (See next term)
Pour-over trust Typically a "living trust" which holds title to most of the significant assets previously titled in the name of the trust's creator. In addition, assets still owned by the trust's creator at his/her death are technically owned by the decedent. These assets (now owned by the decedent's estate subject to claims and certain estate expenses and obligations) are "poured-over" into the living trust and administered by its terms.
Premium financing A method for paying life insurance premiums where the person buying the insurance (typically, the insured) does not pay the premiums directly. Instead, the premiums are paid by a lender (typically a bank). As a result of the way the transaction is structured, the out-of-pocket cost for buying large amounts of insurance ($5 million, $10 million or more) is significantly reduced.
Private annuity A method for transferring property from the property owner to his family, typically younger family members. The former property owner, in effect, exchanges his/her property for a stream of payments (the annuity) usually for a fixed term, to be received from a specific family member (hence "private" as opposed to receiving an annuity from a commercial insurance company).
Private family foundation A charitable organization created by an individual (and for his/her family) that is funded from one source (the individual family or a corporation controlled by them that receives its ongoing funding from investment income (rather than the consistent flow of charitable contributions) and that makes grants for charitable purposes to other persons or organizations, rather than conduct its own charitable programs.
Private retirement plan (PRP) A plan invented by this author that uses high cash surrender value life insurance to accumulate tax-free dollars to be used in the future for specific purposes: usually, as a college fund or a retirement fund. A tax-advantaged use of life insurance. PRPs are effective for new-borns and adults up to about age 52.
Probate A legal process, usually carried on in a county court to administer the estate of a decedent. Probate is usually avoided by the use of an appropriate trust: typically, a "Living trust" or "Pour-over trust."
Qualified personal residence trust (QPRT) An irrevocable trust that can only be used for a residence (no more than two), which is ultimately transferred to a member of the trust's creator's family. The creator of the QPRT continues to reside in the residence for a specific term of years, called the "retained interest." The QPRT's creator must survive the term in order to have the residence removed from his/her estate for estate tax purposes.
Qualified terminable interest property (QTIP) Property (1) which passes from the decedent, (2) in which the surviving spouse has a "qualifying income interest for life" and (3) as to which the executor makes a timely and irrevocable election (on the estate tax return) to have the marital deduction apply. In general, the interest qualifies if (a) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, and (b) no person has a power to appoint any part of the property to any person other than the surviving spouse, unless such power can be exercised only at or after the death of the surviving spouse.
Recapitalization Has more than one meaning, but as used on this website means exchanging (in a tax-free transaction) 100% of the issued and outstanding voting stack of a corporation for (1) voting stock (a small amount, say 100 shares) and (2) nonvoting stock (a large amount, say 10,000 shares). Typically, the nonvoting shares are transferred to the younger family members working in the family business, while the elder keeps the voting shares and control.
Residence charitable gift A gift to charity of a residence, where the donor retains the right to live in the residence for life. The donor receives a current charitable deduction for the present value of the remainder interest.
Residuary trust Typically a "Living trust" or a "Pour-over trust" contains two trusts: (1) the "Marital trust and the (2) Residuary trust." The latter is often called the "Family trust" or "Trust B" (the marital trust being "Trust A"). Usually the document creating the Residuary trust describes the specific property to become part of the marital trust and the balance of the property goes to the residuary trust. Revocable living trust See "Living trust."
S corporation A corporation that elects not to be treated as a C corporation (a tax-paying corporation). Subject to certain exceptions, does not pay income tax on its earnings, but for tax purposes is treated as a partnership (or as a sole proprietorship if one individual owns 100% of the stock).
Stock redemption When a corporation purchases its own stock from one or more of its shareholders. Typically, this stock is held by the corporation as "treasury stock," which is not entitled to vote.
Succession planning Planning by the current shareholders (typically managing the corporation) to transfer the future management, as well as the stock ownership, to (1) a younger family member(s), (2) an employee(s) or to (3) an outsider. The word "transfer" includes gift or sale or a combination.
Senior settlement See "Life settlement."
Transferable insurance policy (TIP) A TIP (TIPs is plural) is a fractional interest in a "Senior settlement." TIPs were invented by a public company (sells on the NASDAQ) that has become the darling of investors, returning 16.28% on average per year (at the time this was written) without market risk.
Wealth creation trust The same as an "Irrevocable life insurance trust."
Wealth transfer As used on this website, the art of transferring wealth to the next generation-every dollar of it-intact. For example, if you are worth $18 million (it can be any amount), the entire $18 million, all taxes-if any-paid in full, goes to your heirs. The plan to accomplish the wealth transfer is legal in every respect and easy to implement.
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