ADVANCED PLANNING GLOSSARY

# | A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

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2503(c) Trust for Minors – A trust designed to comply with Section 2503(c) of the Internal Revenue Code so that a gift placed in such a trust for the benefit of a minor will qualify for the gift tax annual exclusion

401(k) Retirement Plan – A qualified retirement plan established under IRC Section 401(k) in which an employee is allowed to defer a portion of salary without current income taxation into an employer-sponsored retirement plan

403(b) Plan (tax-sheltered annuity) – A retirement or tax-deferred program available only to employees of a public education organization or a 501(c)(3) tax-exempt organization

A

Acid Test Ratio – The ratio of “quick” current assets to current liabilities, used as an indicator of the business’s ability to meet short-term obligations as they come due

Active Participant –  An individual who is covered by or receives allocations under a qualified retirement plan. When it comes to determining whether an IRA contribution is deductible, the individual does not have to actually participate in the plan to be considered an active participant—simply being eligible is enough under this definition.

Accumulated Earnings Tax – A federal tax that may be imposed upon the undistributed earnings of corporations that are deemed to have accumulated retained earnings in excess of certain limits permitted by federal tax law

Adjusted Gross Income – Gross income reduced by adjustments to income, as allowed in the enumerated deductions set forth in the income tax code

Advance Medical Directive – An umbrella term that includes living wills, health care powers of attorney, medical directives, and instructions for organ donations

Alternate Valuation Date – A date other than the date of death (generally six months after death) that an executor may elect as the valuation date for estate assets

Alternative Minimum Tax (AMT) – A federal tax on tax preference items that may be imposed on individual taxpayers and corporations when the tax is greater than the regularly calculated federal income tax

Annual Exclusion, Gift Tax – A provision of the federal gift tax law that exempts up to $14,000 per year (for 2017) per done from the gift tax, provided the gift is of a present interest in property

Annuity Interest – An income from property for life or a specified period of years

Applicable Credit Amount – Another term for the federal gift and estate tax unified credit

Applicable Exclusion Amount – Another term for the federal gift and estate tax “exemption equivalent” or the amount of transfers sheltered from tax by the unified credit in any given year

Arm’s-Length Transaction – Typically, a financial transaction where the negotiating parties are on equal footing and independent of each other. The concept is closely related to fair market value in the sense that fair market value would not be arrived at without an arm’s-length transaction.

Articles of Incorporation –  A document filed with a state to incorporate a business under the laws of that state

B

Balance Sheet – A financial statement that reflects the financial condition of a business on a given date in terms of assets, liabilities and owners’ equity

Basis – The acquisition cost of an asset; usually the purchase price of the asset or the basis that carries over by transfer. Basis may be affected by certain conditions (i.e. reduced by any depreciation taken against the asset).

Bequest – A transfer of property made by will.

Blockage Discount – A discount which may apply to the value of stock to reflect that a large block of stock on the market at one time will tend to depress the price

Business Overhead Expense Protection with Disability Income Insurance – A type of disability insurance coverage that pays specified overhead expenses of a business up to a stated monthly maximum when the insured business owner suffers a disability.

Business Valuation – The process of determining the worth of a business

Buy-Sell Agreement – An arrangement which provides for the disposition of a business owner’s share of the business at the time of the owner’s death or disability; for example, the agreement may provide that the remaining owners will purchase a deceased or disabled owner’s interest at an agreed-upon price and that the deceased owner’s estate, or the disabled owner, is obligated to sell the interest at that price.

Bypass Trust – An estate planning device (also called a credit shelter trust, family trust, or B trust in “AB” plans where the A trust funds for the marital deduction) used to minimize the combined estate taxes payable by spouses whereby, at the death of the first spouse, the estate is divided into two parts and one part is placed in trust usually to benefit the surviving spouse without being taxed at the surviving spouse’s death, while the other part passes outright to the surviving spouse or is placed in a marital deduction trust.

C

C Corporation – An incorporated business that is taxed under Subchapter C of the Internal Revenue Code; also called a regular or ordinary corporation.

Cafeteria Plan (Section 125 plan, flexible benefits plan) – A benefits plan that, when established to meet the Code Section 125 requirements, allows employees to freely choose from a “compensation menu” that includes both taxable and nontaxable benefits without rendering the nontaxable items subject to income taxation

Capital Gain – Profit from the sale, exchange, or other disposition for consideration of a capital asset (sale price minus basis).

Capital Replacement (wealth replacement) – A method of employing life insurance in combination with a charitable remainder trust and an irrevocable life insurance trust so that a donor can make a gift to charity while potentially maintaining the value of property which will pass to his or her heirs.

Cash-Balance Pension Plan – A type of hybrid defined benefit plan in which participants are credited with a percentage of their pay each year, along with interest on these amounts; when participants become entitled to receive benefits under the plan, the normal form of benefit is a joint and survivor annuity for named participants and a single life annuity for non-named participants; cash-balance plans also generally permit lump-sum payments.

Catch-Up Contributions (age 50 and over) –  Participants age 50 and over are permitted to make contributions to retirement plans and IRAs that exceed the regular limits.

Charitable Deduction – A deduction available to taxpayers who make charitable contributions

Charitable Gift Annuity – An arrangement whereby the donor makes a gift to charity and receives back a guaranteed lifetime (or joint lifetime) income based on the age(s) of the annuitant(s).

Charitable Lead Trust – An arrangement whereby the charity receives an income from a trust for a period of years, then the remainder is paid to non-charitable beneficiaries (generally either the donor or the donor’s heirs),

Charitable Remainder Annuity Trust – A charitable trust arrangement whereby the donor or other beneficiary is paid annually an income of a fixed amount of at least 5% but not more than 50% of the initial fair market value of property placed in the trust, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.

Charitable Remainder Unitrust – A charitable trust arrangement whereby the donor or other beneficiary is paid annually an income of a fixed percentage of at least 5% but not more than 50% of the annually revalued trust assets, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.

Charitable Remainder Trust – A trust arrangement whereby the donor or other noncharitable beneficiary is paid a specified income at least annually for a specified period of time, with the remainder then paid to one or more charitable organizations.

Closely Held Corporation – A corporation owned and usually controlled by one or a few shareholders; stock is not publicly traded.

Codicil – A legal document which supplements and changes an existing will, generally restricted to minor changes to the original will.

Collateral Assignment Method (split dollar) –  A policy ownership arrangement under a split-dollar arrangement using life insurance where the employee (or a third party) owns the policy and names a personal beneficiary but assigns it to the employer as collateral for the employer’s premium advances under the policy.

Community Property – Property acquired during marriage in which each spouse is deemed by law to own 50%. Nine states recognize community property—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. While not community property states, Alaska and Tennessee allow married couples to enter into an agreement that treats property as community property.

Constructive Dividend – A distribution by a corporation which, though not in the form of a dividend, is deemed to be a camouflaged distribution of earnings and profits to the shareholder.

Constructive Receipt Doctrine –  A federal tax rule holding that when a taxpayer has an unrestricted right to receive a pecuniary benefit, that benefit is considered to have been received for income tax purposes whether or not it was actually received.

Corporation – A business entity incorporated under the laws of a state that has a legal existence separate from its owner(s).

Coverdell Education Savings Account (formerly, Education IRA) – A trust or custodial account in which contributions are not tax-deductible but earnings can grow federal income tax-free if distributions are used for certain elementary, secondary, or post-secondary educational expenses.

Cross-Purchase Buy-Sell Agreement – An arrangement whereby the other owners agree to purchase a deceased or disabled owner’s business interest; the buyout may be funded by life insurance or disability insurance on the owners where each owner buys a policy on every other owner.

Crummey Power – The power of a trust beneficiary to demand a distribution from the trust of amounts contributed to the trust, limited as to amount and duration of the exercise period.

Cumulative Tax – A cumulative tax is one in which prior transactions—in this case, taxable gifts—boost the tax bracket for later transactions.

Current Assets –  Liquid assets such as cash, accounts receivable, and inventory; more generally, assets that will be converted to cash or used within a year.

Current Liabilities – Debts of a business that will be paid within a year.

Current Ratio – The ratio of current assets to current liabilities; used as an indicator of a business’s ability to pay current obligations.

Custodianship – Generally means an ownership arrangement in which property management rights are given to a custodian for the benefit of a child beneficiary under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act; a custodian’s duties resemble those of a trustee, although the custodian does not take legal title to the trust property and custodianship ends when the minor reaches the age of majority as specified by state law.

D

Death Benefit Only Arrangement – A type of deferred compensation arrangement in which an employer agrees to pay only a death benefit to a deceased employee’s heirs rather than the customary retirement benefit (and perhaps ancillary benefits) associated with conventional deferred compensation.

Deceased Spousal Unused Exclusion Amount – Any applicable exclusion amount that remains unused as of the death of a spouse who dies after 2010 generally is available for use by the surviving spouse as an addition to the surviving spouse’s own applicable exclusion amount. Also defined as the portability of unused exemption between spouses.

Deferred Compensation Arrangement – A non-qualified incentive compensation arrangement established by employers to provide retirement income and perhaps death and disability benefits to selected key-executive employees.

Deferred Gift Annuity – An arrangement whereby the starting date of income payments from a charitable gift annuity may be deferred for at least one year, thereby increasing both the annuity amount and the charitable deduction.

Defined Benefit Pension Plan – A qualified retirement plan which promises either a stated benefit at retirement or provides a benefit which is determined according to a fixed formula.

Defined Contribution Plan – A qualified retirement plan which provides for the employer and/or employee to make annual contributions to the plan; the amount of each employee’s retirement benefit ultimately depends on the investment performance of that particular employee’s account rather than the employer’s promise to pay a stated benefit as in a defined benefit plan.

Digital Assets – Assets, including digital currency, content and online accounts, that are stored electronically and which the owner has the right to use.

Direct Skip – An event which triggers the generation-skipping transfer tax when a grantor bypasses his or her children completely and gives assets either outright or in trust for the benefit of grandchildren, more remote descendants, or other “skip” person(s).

Direct Rollover – A method of transferring funds directly from one IRA to another, or from one qualified retirement plan to another or to an IRA, which avoids the withholding tax on rollovers that pass through the hands of the participant or IRA owner.

Disability Buy-Out Agreement –  A buy-sell agreement in which the business or the other owners agree to purchase the business interest of an owner who becomes disabled.

Dower and Curtesy Interests – Dower and Curtesy interests were, under common law, the rights of a wife and a husband, respectively, in the property of the other spouse. Most states have adopted statutory substitutes for the old common law interests, and have made the rights of spouses identical.

Durable Power of Attorney – A legal document which allows one person (the principal) to authorize another person (the attorney-in-fact or agent) to act on his or her behalf with respect to specified types of property, and which may remain in effect during a subsequent disability or incompetency of the principal.

Durable Power of Attorney for Health Care (a.k.a. health care proxy) – A legal document which grants decision-making powers related to health care to an agent; generally provides for removal of a physician, the right to have the incompetent patient discharged against medical advice, the right to medical records, and the right to have the patient moved or to engage other treatment.

Dynasty Trust – A multi-generational trust established in a state that has revised or repealed the rule against perpetuities. When properly established and administered, it can conserve family wealth through successive generations by minimizing the effect of federal transfer taxes.

E

Economic Benefit Doctrine – A federal tax rule holding that when an employer provides an economic benefit to an employee, that benefit is includable in the employee’s gross income even if not received in cash or property.

Education IRA (officially renamed “Coverdell Education Savings Accounts”) – A trust or custodial account in which contributions are not tax-deductible but earnings can grow federal income tax-free if distributions are used for certain elementary, secondary, or post-secondary education expenses.

Employer-Pay-All or Noncontributory Plan (split dollar) – A split-dollar arrangement where the employer advances the entire premium for life insurance on the employee’s life.

Endorsement Method (split dollar) – A life insurance policy ownership arrangement under a split-dollar arrangement in which the employer owns the policy and an endorsement to the policy spells out the employee’s rights.

Entity Attribution Rules – Federal tax rules that may cause the ownership of stock by an entity such as a trust, estate or business to be attributed to an individual for purposes of determining the income tax consequences of a distribution by the corporation in redemption of stock.

Entity or Stock Redemption Agreement – An entity or stock redemption agreement is one in which the business entity rather than the individual owners carries out the buyout.

Entity-Purchase Buy-Sell Agreement – An arrangement whereby the business entity (corporation, LLC, or partnership) agrees to purchase a deceased or disabled owner’s business interest; usually funded by business-owned life insurance.

Equity Split-Dollar – An arrangement in which the employer’s share of the cash value and death benefit of life insurance on an employee’s life is confined to its aggregate net premium payments; any cash value in excess of the employer’s premiums inures to the benefit of the other party (employee or third party); an equity arrangement has important tax consequences under IRS regulations.

ERISA – The acronym for the Employee Retirement Income Security Act of 1974, a federal law that established minimum standards for certain employee benefit plans, especially qualified employer retirement plans.

Estate Tax Marital Deduction – A federal estate tax deduction for all property passing between spouses at death, where the recipient-spouse is a U.S. citizen, provided such transfers are not of a terminable interest.

Estate Trust – A special kind of trust qualifying for the estate tax marital deduction which allows trust income to be accumulated rather than paid out annually to the surviving spouse, but upon such spouse’s death, principal and accumulated interest are payable to the spouse’s estate.

Executive Bonus (Section 162) Arrangement – An arrangement whereby the employer pays a bonus each year to selected employees for the purchase of personally owned life insurance or other products, either in cash or through direct premium payments.

Executor – The person nominated by an individual to carry out the terms of his or her will, and appointed to do so by the probate court or by various state statutes.

F

Fair Market Value (FMV) – The price at which a willing buyer would buy, and a willing seller would sell, neither being under any compulsion and both having complete knowledge of the pertinent facts. This concept is related to the concept of arm’s-length transaction.

Family Attribution Rules –  Federal tax rules that may cause the ownership of stock by one family member to be attributed to another for purposes of determining the income tax consequences of a distribution by the corporation in redemption of stock.

Family Limited Liability Company (FLLC) – A limited liability company (LLC) used in the family setting to achieve goals related to the transfer of family wealth in a tax-minimizing way to younger generations, business succession planning, and/or personal income tax planning.

Family Limited Partnership (FLP) – A limited partnership used in the family setting to achieve goals related to the transfer of family wealth in a tax-minimizing way to younger generations, business succession planning, and/or personal income tax planning.

Federal Estate Tax – A tax imposed by the U.S. government on the transfer of property at death.

Federal Gift Tax – A tax imposed by the federal government on gratuitous transfers of property during the life of the donor.

Five-and-Five Power – A right given to a trust beneficiary to withdraw annually up to $5,000 or 5% of the trust corpus, whichever is greater.

Fixed Assets – the real property, plant and equipment of a business.

Funded Deferred Compensation Agreement – A deferred compensation arrangement under which the employer sets aside specific assets to meet its future obligations with the employee as beneficiary.

Funded Irrevocable Life Insurance Trust – An irrevocable life insurance trust which holds not only the life insurance policy, but also other property from which the premium payments may be made without annual cash transfers to the trust.

Future Interest – An ownership interest in property in which unlimited possession or enjoyment of property is delayed until some future time.

G

Gain on Sale of Capital Asset – The appreciation in the value of a capital asset (i.e., the difference between sales proceeds and cost basis) that is realized as a capital gain when the asset is sold or exchanged.

General Partner – A partner who is jointly and severally liable for debts incurred by the partnership, and who may legally bind the partnership; subject to unlimited liability for partnership obligations.

General Power of Appointment – The right of an individual over property often held in trust where the individual could have required the distribution of such property to the individual or the individual’s estate, creditors, or estate’s creditors.

Generation-Skipping Transfer Tax – A tax enacted by Congress to eliminate the ability of estate owners to avoid estate taxes by skipping a generation of heirs.

Gift – A transfer of property which is gratuitous, complete, and voluntary

Gift Splitting – A gift tax-saving technique available to a married couple whereby one spouse makes a gift to a third party and the other spouse elects to join the gift for tax purposes, thereby doubling the annual exclusion and/or applicable credit amounts.

Gift Tax Annual Exclusion – A provision of the federal gift tax law that exempts up to $14,000 per year (for 2017) per done from the gift tax, provided the gift is of a present interest in property.

Gift Tax Annual Exclusion (non-US citizen spouse) – A provision in the federal gift tax law that exempts up to $148,000 per year (for 2017) for gifts to a noncitizen spouse of gifts of a present interest in property.

Gift Tax Marital Deduction – A deduction that applies to gifts between spouses to eliminate any gift tax on such transfers, provided the donee-spouse is a U.S. citizen and the gifts are not of a terminable interest

GRAT (grantor retained annuity trust) – A trust that pays the grantor a fixed payment annually; the value of the grantor’s retained interest can be taken into account in reducing the value of the gift to the remaindermen, if the GRAT requirements are met.

GRUT (grantor retained unitrust) – A trust that pays the grantor a fixed percentage of the trust assets as revalued annually; the value of the grantor’s retained interest can be taken into account in reducing the value of the gift to the remaindermen, if the GRUT requirements are met.

Gross Estate – Generally includes the value of all property which the decedent owned, had an interest in, or controlled at the time of death; includes property that avoids probate such as joint tenancy property with rights of survivorship and life insurance proceeds paid to a named beneficiary.

Group Carve-Out Program – An employer may carve out one or more employees from a group-term life insurance program, and provide them with supplemental or alternative coverage under individual life insurance policies.

Group-Term Life Insurance Program – An employer may provide employees with life insurance coverage through an IRC Section 79 group-term policy, the first $50,000 of which generally produces no taxable cost to the employee.

H

None

I

Incidents of Ownership – Includes a variety of rights and powers that an insured decedent may have held over a life insurance policy; the possession of one or more of these incidents of ownership within three years of death will bring the policy proceeds into the insured’s gross estate.

Income in Respect of a Decedent (IRD) – Income earned by a decedent or income to which the decedent had a right prior to death, but which was not properly includible in his or her gross income prior to death.

Income Statement – A financial statement that shows a business’s operating results for a period of time; also called a profit and loss statement.

Individual Retirement Account/Annuity (IRA) – An individual plan which allows workers and their spouses to save for retirement on a tax-deferred basis; contributions to traditional IRAs are deductible for some IRA participants; see also Roth IRA, education IRA.

Intentionally Defective Grantor Trust (IDGT) – A type of irrevocable trust for which the grantor keeps a certain power over trust assets which causes trust income to be taxed to the grantor rather than the trust itself, but the assets remain outside of the grantor’s estate for federal estate tax purposes.

Intestate – When an individual dies without a valid will, requiring property to be distributed under the succession statutes of the state in which the individual lived at the time of death.

Irrevocable Life Insurance Trust – A trust which holds a life insurance policy and in which the grantor completely gives up all rights in the property transferred to the trust and retains no rights to revoke, terminate, or modify the trust in any material way; beneficiaries usually hold Crummey powers that give them withdrawal rights over trust corpus.

 

J

Joint Tenancy with Rights of Survivorship – An arrangement whereby two or more persons own property jointly, all owners hold an equal interest in the property, and surviving co-owners succeed to the interest of a deceased co-owner

K

Keogh Plan (HR-10 plan) – A qualified retirement plan maintained by a self-employed person (sole proprietor or partner)

Key Employee Life Insurance – Insurance on the life of a key employee purchased to help protect an employer from economic loss caused by the death of the employee.

Kiddie Tax – Nickname of the tax on the unearned income of (a) all children under age 18; (b) children age 18 who provide less than half of his or her support with earned income; and (c) children age 19 to 23 who are students and provide less than half of their support with earned income. Generally, such income is taxed at the parent’s marginal tax bracket, not the child’s, once a small exempted amount has been exceeded.

L

Life Estate – The right to use, occupy and enjoy property (or the income from property) for life, where at death the property may revert to the original owner or pass to another person.

Limitation Year – For use in determining limits on contributions and benefits associated with a qualified retirement plan, a term of 12 consecutive months (usually a calendar year unless stated otherwise in the plan document).

Limited Liability Company (LLC) – A form of business entity permitted by all states and the District of Columbia that is generally intended to provide the liability protection afforded to shareholders in a corporation, combined with the advantages of partnership taxation.

Limited Partnership – A partnership with one or more general partners and one or more limited partners.

Living Will – A document which allows people to specify in advance of an illness or injury medical treatments to be administered or withheld.

Long-Term Capital Gain –  Gain on the sale of a capital asset held for more than 12 months (for most types of capital assets).

Long-Term Care Insurance – Insurance which generally covers nursing home costs, home health care costs, and custodial care required due to a chronic illness or condition.

Lump-Sum Distribution – A benefit payment arrangement under a qualified retirement plan wherein the participant receives the full plan benefit within one taxable year generally after death, disability, attainment of age 59½, or separation from service; eligible for favored tax treatment for certain grandfathered recipients.

M

Majority – The age at which a person is considered an emancipated adult and legally responsible for his or her actions, usually the age at which he or she is permitted to vote.

Marital Deduction – A tax deduction which shelters from federal gift and estate tax most property transferred from one spouse to another, provided the spouse receiving the property is a U.S. citizen.

Marketability Discount, lack of – A discount to the value of an interest in a closely held business because of the limited market for a sale of the interest.

Medicaid – A government medical assistance program for individuals and families who qualify for benefits because their incomes and assets fall below defined limits

Medical Directive – A document which sets forth an individual’s wishes with regard to the termination of life support under various circumstances.

Medicare – The government’s medical insurance program for persons 65 and older.

Minimum Required Distribution (MRD) – A minimum annual amount that must be taken from an IRA or qualified plan after age 70½ (or actual retirement in the case of certain qualified plan participants); also known as required minimum distribution (RMD).

Minority Interest Discount – A discount to the value of a minority owner’s interest in a closely held business because of its limited appeal to an outside purchaser.

Money Purchase Pension Plan – A defined contribution qualified retirement plan where employer contributions are based on a percentage of each employee’s salary; the employer is required to make annual contributions to the plan.


N

None

O

None

P

PPA (Pension Protection Act of 2006 – Pub. L. 109-280) –  The most comprehensive pension reform legislation since ERISA (1974), the PPA addressed funding rules, reporting and disclosure requirements, plan documentation and numerous other provisions pertaining to tax-favored retirement arrangements,

P.S. 58 rates – Rates provided by the government to compute the taxable economic benefit to the employee in a split-dollar arrangement, or for life insurance which is part of a qualified retirement plan; use after 12-31-2001 is limited.

Partial Interest – Life estates, remainder interests, reversionary interests, and annuity interests in property where the beneficial ownership of property is split between two or more persons.

Partnership – An association of two or more persons to carry on a business as co-owners for profit, usually under a formal, written partnership agreement.

PATH Act (Protecting Americans from Tax Hikes Act of 2015 – Pub. L. 114-113) – Legislation that extended some favorable tax provisions and made others permanent, as well as modifying various miscellaneous tax and tax administration matters.

Personal Holding Company – A corporation in which more than half of its stock is owned by five or less individuals, and where at least 60 percent of its adjusted ordinary gross income comes from investments and certain personal service contracts.

Pension Income Supplemental Life Insurance – An alternative to company-sponsored retirement-plan payout options, utilizing a life-income option annuity election from an employer’s retirement plan in combination with a separate life insurance policy on the retiring worker’s life.

PPA (Pension Protection Act of 2006 – Pub. L. 109-280) – The most comprehensive pension reform legislation since ERISA (1974), the PPA addressed funding rules, reporting and disclosure requirements, plan documentation and numerous other provisions pertaining to tax-favored retirement arrangements.

Pooled Income Fund – A trust arrangement which accepts gifts of cash or certain properties from persons who want to provide support for the charitable organization; gifts made to the fund are commingled and invested by the trustee and units of participation are awarded to the donor for his or her gift; income is then paid to the donor proportionate to his or her share of fund earnings.

Portability –  see “deceased spousal unused exclusion amount”

Pourover Provision – A provision in a will which directs that the remainder of the probate estate, after payment of taxes and costs, pass to a trust, usually one which had been established prior to death.

Power of Appointment – A device used by a person making a will to give another named individual control over the disposition of property.

Present Interest – The right of a gift recipient to have immediate possession or enjoyment of the gifted property.

Probate – The judicial determination of the validity of a will and the distribution of estate assets under a valid will

Probate Estate – Consists of all the assets owned by the decedent that pass through the court-supervised probate process and are ultimately distributed under the terms of the decedent’s will or state intestacy laws if there was no valid will.

Profit and Loss Statement – A financial statement that shows a business’s operating results for a period of time; also called an income statement.

Profit-Sharing Plan (discretionary plan) –  A defined contribution qualified retirement plan under which the amount of an employee’s retirement benefit depends on the amount in his or her account at retirement; the distinguishing factor from other defined contribution plans is that the employer is not obligated to make contributions each year, but contributions must be substantial and recurring.

Proprietorship, sole – An unincorporated business that is owned and usually managed by one person.

Prudent Man Rule – an ERISA rule that requires fiduciaries to act with the care, skill, prudence and diligence that a prudent man would exercise in similar circumstances.

Publicly Held Corporation – A corporation whose shares are traded on an established stock exchange or market.

Q

Qualified (public) Charity –  A charitable organization with a broad base of public support and organized for certain charitable purposes; qualified charities, sometimes called public charities, enjoy the most attractive rules for the deductibility of donor contributions.

Qualified Domestic Trust – A trust arrangement which allows property transferred to a surviving spouse who is not a U.S. citizen to qualify for a special exclusion in lieu of the regular marital deduction; and which ensures that, at the death of the surviving spouse who is not a United States citizen, the assets placed in such a trust will incur federal estate taxation since the tax was avoided at the first spouse’s death.

Qualified Retirement Plans – Retirement programs which qualify for favorable tax treatment when plan qualification requirements specified by the IRS are met.

Qualified Terminable Interest Property (QTIP) – Property in a decedent’s estate that, even though the surviving spouse’s interest is subject to certain restrictions, can still qualify for the estate tax marital deduction (also includes property given to a spouse during life that qualifies for the gift tax marital deduction).

R

Rabbi Trust – A trust arrangement in which deferred compensation plan assets are placed in an irrevocable trust out of the reach of the employer or any of the employer’s successors, but are still subject to attachment by the general creditors of the employer.

Remainder Interest – A future interest, one which is delayed until some future time, often when another life estate terminates.

Remainder Interest in Personal Residence or Farm (gift of) – An arrangement whereby a donor gives a remainder interest in a personal residence or farm to charity, but reserves the right to live there for life (or for joint lifetimes).

Required Minimum Distribution (RMD) – A minimum annual amount that must be taken from an IRA or qualified plan after age 70½ (or actual retirement in the case of certain qualified plan participants); also sometimes referred to as “minimum required distribution” (MRD).

Restricted Bonus Arrangement – A type of executive bonus arrangement in which the policy on the employee’s life has a special endorsement that prohibits the employee from surrendering the policy or borrowing against it without the employer’s consent.

Retained Earnings – A business’s accumulated net income after taxes from prior years, less any dividends distributed.

Retained Powers or Interests – The right to income from property, to possess the property, or to control the enjoyment of the property given to another.

Reversionary Interest – An expectancy of receiving property back that one has given away, usually by outliving the recipient.

Revocable Living Trust – A trust created during the grantor’s lifetime that the grantor may alter, amend, or revoke; the trust may become irrevocable or terminate at the grantor’s death.

Rollover – A method of delaying payment of taxes on certain distributions from a qualified retirement plan accomplished by transferring all or part of the distribution to an IRA or to another qualified retirement plan.

Roth IRA – A type of retirement savings account in which contributions are not tax-deductible but earnings grow federal income tax-free and distributions are also federal income tax-free if certain requirements are met upon distribution.

S

S Corporation – A business that is taxed under Subchapter S of the Internal Revenue Code; enables the shareholders to be taxed similarly to partners in a partnership.

Salary Continuation (deferred compensation) Plan – A type of non-qualified deferred compensation in which the benefits are paid by the employer in addition to the employee’s other compensation; the employee does not take a salary reduction or forego a salary increase to provide the deferred benefits.

Salary Continuation (sick pay) Plan – A formal plan established by an employer to pay disability benefits to disabled employees.

Salary Reduction Simplified Employee Pension Plan (SARSEP) – Employers with 25 or fewer eligible employees were permitted establish a SARSEP up through 12/31/96, under which each eligible employee may elect to have deferred salary contributions made to the plan; SARSEP contributions are not currently taxed to the employee; new SARSEPs may not be established after 12/31/96 but contributions may continue to be made to grandfathered plans.

Section 125 Plan (cafeteria plan, flexible benefits program) – A benefits plan that, when established to meet the IRC Section 125 requirements, allows employees to freely choose from a menu of benefits that can be purchased with pre-tax dollars, typically including health insurance, group-term life insurance and “voluntary” supplemental insurance (dental, vision, cancer, hospital confinement, accident, etc.).

Section 162 Arrangement (executive bonus arrangement) – An arrangement whereby the employer pays a bonus each year to selected employees for the purchase of personally owned life insurance or other products, either in cash or through direct premium payments.

Section 303 Redemption – When certain requirements are met, this section of the Internal Revenue Code allows a shareholder’s estate or heirs to sell to the deceased’s closely held corporation enough stock to pay federal and state death taxes, costs of estate administration, and funeral expenses without the corporation’s distribution being treated as a dividend for tax purposes.

Section 401(k) Plan – A qualified retirement plan established under IRC Section 401(k) in which an employee is allowed to defer a portion of salary without current income taxation into an employer-sponsored retirement plan.

Section 403(b) Plan –  A tax-favored retirement program available only to employees of a public education organization or a 501(c)(3) tax-exempt organization

Section 412(e)(3) Fully Insured Plan [formerly 412(i) plan] – Type of defined benefit pension plan that is fully insured, i.e., funded entirely by a combination of individual life insurance and annuity contracts, or solely with annuity contracts, issued by an insurance company; benefits are backed by the claims-paying ability of the issuing insurer.

Section 457 Plan – A plan which provides an exclusion from gross income for a certain portion of salary deferred by a participant under the plan of a state or local government, a tax-exempt organization (excluding churches), or of an independent contractor of such government or organization (e.g., a physician providing independent services to a hospital).

Section 1035 Exchange – Section 1035 provides that no gain or loss shall be recognized on the exchange of:

(1) a life insurance policy for another life insurance policy, or an endowment or annuity contract, or a qualified long-term care insurance policy; or

(2) an endowment policy for (A) another endowment policy which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) an annuity contract, or (C) a qualified long-term care insurance contract; or

(3) an annuity contract for another annuity contract or a qualified long-term care insurance policy; or

(4) a qualified long-term care insurance policy for another qualified long-term care insurance policy.

Section 2503(c) Trust for Minor – A trust designed to comply with Section 2503(c) of the Internal Revenue Code so that a gift placed in such a trust for the benefit of a minor will qualify for the gift tax annual exclusion.

Section 6166 – A section of the Internal Revenue Code that allows for a 14-year spreadout of the federal estate tax for estates that qualify (generally estates that include closely held businesses or farms).

Secular Trust – A trust arrangement in which deferred compensation plan assets are placed in trust to provide employees with a great level of security, but without tax deferral of contributions to the plan; in some cases, double taxation can occur where employees are taxed on current contributions and the employer is denied a current tax deduction.

Short-Term Capital Gain – Gain on the sale of a capital asset held for one year or less.

SIMPLE Retirement Plan – A type of tax-favored employer retirement plan funded by a combination of employee salary deferrals and matching employer contributions; may take the form of a SIMPLE IRA or SIMPLE 401(k).

Simplified Employee Pension Plan (SEP) – An employer-funded retirement plan under which an employer makes contributions to an employee’s individual retirement account or individual retirement annuity.

Sole Proprietorship – An unincorporated business which is owned and usually managed by one person; the business has no separate legal existence apart from the owner.

Special Use Valuation of Farm and Business Real Estate – Subject to certain conditions, an executor may elect to value real property, devoted to farming or a closely held business use, and which is included in the decedent’s estate, on the basis of the property’s current use value as a farm or in a closely held business rather than its “highest and best use” (e.g., as the site of a suburban office park).

Split-Dollar Life Insurance Arrangement – A method of purchasing life insurance whereby the policy benefits and premiums are divided in some predetermined way, usually between a business and an employee, or two individuals or an individual and a trust.

Split-Dollar Rollout – An arrangement whereby, after split-dollar life insurance has been in effect for some time, the arrangement is terminated and policy values are rolled out to reimburse the employer for its aggregate premium advances under the plan, or given to the employee as a bonus.

Split-Funded Qualified Retirement Plan – A funding arrangement for a qualified retirement plan whereby part of the benefits are funded through life insurance and part of the benefits are funded through an investment account which is managed by the plan trustee.

Spousal IRA – An additional contribution may be made to an IRA by a worker whose spouse has little or no earned income for the year.

Spousal Limited Access Trust (SLAT) – An irrevocable life insurance trust that includes a provision which allows the grantor’s spouse limited access to trust assets. Thus, the trust assets remain out of the grantor’s estate, but someone close to the grantor has limited access to those assets.

Stepped-Up Basis – The higher income tax basis that becomes available to an heir following the death of the former property owner, equal to the fair market value of the property on the date of death (or alternate valuation date) as finally determined for federal estate tax purposes.

Stock Redemption Buy-Sell Agreement – An arrangement whereby a corporation agrees to purchase a deceased shareholder’s interest; the buyout is funded by life insurance on the lives of the owners where the corporation owns the policies and is the beneficiary of each policy.

Survival Clause – A will provision which states that the surviving spouse must outlive the decedent by up to but not exceeding six months in order to inherit property under the will.

T

Table 2001 Rates – Rates provided by the IRS to compute the taxable economic benefit to the employee in a split-dollar arrangement, or for life insurance that is part of a qualified retirement plan.

Tangible Personal Property – Physical property such as antiques, autos, boats, artworks, collections, books, and jewelry.

Target Benefit Plan – A defined contribution qualified retirement plan whereby the annual employer contribution is based on the amount required to accumulate a fund that will pay a target benefit at the employee’s normal retirement age.

Tax-Sheltered Annuity (a.k.a. 403(b) plan) – A retirement or tax-deferred program available only to employees of a public education organization or a 501(c)(3) tax-exempt organization.

Taxable Distribution – Any distribution from a trust to a skip person which is neither a direct skip nor a taxable termination.

Taxable Termination – An arrangement whereby the transferor places assets in a trust which pays income to his or her child for life with the remainder passing to grandchildren or later descendants after the child is deceased. The law treats the child’s death in this situation as a taxable event which triggers the generation-skipping transfer tax.

Tenancy by the Entirety – An arrangement whereby spouses own property jointly and when one spouse dies the other becomes the sole outright owner of the property.

Tenancy in Common – A property ownership arrangement in which two or more persons own property jointly (owners may hold unequal interests in the property); there is generally no right of survivorship when one co-owner dies, so that when a tenant in common dies the ownership percentages of the surviving owners usually remain unchanged.

Terminable Interest – A spouse’s property interest that would expire due to the passage of time, the occurrence of some future event, or the failure of some future event to occur; such a limited interest will usually disqualify the property in question for the marital deduction.

Testamentary Capacity – Requires that a person must be (1) of sound mind and (2) of the minimum legal age to execute a valid will.

Testator –  A person who executes a will.

Transfer for Value Rule  –  A federal income tax rule which states that, if ownership of a life insurance policy was transferred for a valuable consideration, a portion of the death proceeds may be includible in gross income rather than qualifying for the usual income tax exemption of death proceeds.

Trust – A legal entity created by a grantor under which a trustee takes legal title to and manages property transferred into the trust.

Trusteed Cross-Purchase Buy-Sell Agreement – The use of a third party (“trustee”) to hold the life insurance policies that fund a cross-purchase agreement, and to see that the terms of the agreement are fulfilled at an owner’s death; may be used in a partnership to avoid a multiplicity of policies when several owners are involved, but can cause transfer for value problems in a corporation.

U

Unfunded Deferred Compensation Arrangement – A deferred compensation arrangement under which the employee has only an unsecured contractual right to receive benefits in the future; there is either no reserve set aside to pay promised benefits or, if any reserve is so established, it remains a general asset of the employer subject to the claims of creditors.

Unfunded Life Insurance Trust – An irrevocable life insurance trust that holds a life insurance policy but usually no other property, thus requiring the trustee to use annual cash transfers from the grantor or to tap cash values in order to pay the policy premiums.

Unified Credit – A credit against the federal gift and estate taxes available to all taxpayers.

Uniform Gifts to Minors Act (UGMA) – Provides a simple and inexpensive method of making a gift to minors by means of a custodianship arrangement.

Uniform Transfers to Minors Act (UTMA) – Provides donors with a means to transfer property or gifts to minors via a custodian; the UTMA has replaced the UGMA in most states.

V

None

W

Wait-and-See Buy-Sell Agreement – A special type of buy-sell agreement between the owners of a business and the business itself, in which, typically, the business entity has a first option to purchase a deceased owner’s interest; the surviving owners then have a second option to purchase any portion of the interest not already acquired by the business; and finally, the business entity is required to purchase any remaining interest not already sold under the two options.

Wealth Replacement (capital replacement) – A method of employing life insurance in combination with a charitable remainder trust and an irrevocable life insurance trust so that a donor can make a gift to charity while potentially maintaining the value of property that will pass to the donor’s heirs.

Will – An individual’s written declaration of intentions for the disposition of assets after death.

Will Contest – The challenge of a will’s validity by heirs in probate court.

X

None

Y

None

Z

None