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Summer 2007Guide & Reference Material, Brochure

Summary of Estate Planning Terms and Techniques

Wealth Planning Update

Estate planning employs many different techniques designed to efficiently transfer assets to the intended beneficiaries while also producing favorable tax consequences. Since a discussion of estate planning can involve many unfamiliar terms and concepts, it may seem that estate planning has a language all its own. In order to take some of the mystery out of the estate planning process, we offer the following summary of commonly used estate planning terms and techniques.

I. TRUSTS

Settlor: The person who creates a trust. Also referred to as a donor or grantor.

Revocable Trust: A trust created during the lifetime of a Settlor under which the Settlor retains the right to amend or revoke the trust. Often referred to as a “Living Trust”, this trust is usually created for the benefit of the Settlor and his or her family and is used as a substitute for a will. There is no gift upon creation.

Irrevocable Trust: A trust, created either during the lifetime or at the death of the Settlor, the terms of which cannot be changed. Creation results in a gift to the trust beneficiaries.

Marital Trust: A trust created for the Settlor’s spouse which qualifies for a gift or estate tax marital deduction. The spouse is the only beneficiary during spouse’s lifetime. Spouse must receive all income and trust may permit principal distributions. Assets of trust are included in spouse’s gross estate upon spouse’s death.

QTIP TRUST: Acronym for “Qualified Terminable Interest Property Trust”. A type of marital trust under which the Settlor can specify who is to receive the remaining assets after the spouse’s death.

CLT: Acronym for Charitable Lead Trust. This is a type of irrevocable trust under which the Settlor designates a charitable beneficiary to receive a series of payments for a specified period of time. At the end of that time, the remaining assets pass to individual beneficiaries. Creation of a CLT results in a taxable gift to the remainder beneficiaries equal to the value of assets placed in trust minus the actuarial value of the payments to charity. A CLT works particularly well in a low interest rate environment.

CRT: Acronym for Charitable Remainder Trust. This is a type of irrevocable trust under which a series of payments is made to the Settlor or other individual beneficiaries for a specified period of time. At the end of that time, the remaining assets pass to a designated charity. Creation of CRT results in an income tax deduction for the Settlor. A taxable gift occurs if income payments are made to a beneficiary other than the Settlor or the Settlor’s spouse.

Annuity Trust: An irrevocable trust that pays a fixed amount each year to the named beneficiary. For example, if a CLT pays a fixed amount to charity, it is referred to as a charitable lead annuity trust or CLAT. A CRT that pays an annuity is referred to as a CRAT.

Unitrust: An irrevocable trust that pays a fixed percentage of the trust’s value (as redetermined each year) to the named beneficiary. For example, if a CLT pays a fixed percentage to charity, it is referred to as a charitable lead unitrust or CLUT. A CRT that pays a fixed percentage is referred to as a CRUT.

GRAT: Acronym for Grantor Retained Annuity Trust. This is a type of irrevocable trust under which the trust pays a fixed amount to the Settlor for a stated period (either a certain number of years or the Settlor’s lifetime). After that the remaining assets pass to other individual beneficiaries. Creation of a GRAT results in a taxable gift equal to the value of assets placed in trust minus actuarial value of the payments made to the Settlor. All appreciation in the value of trust assets passes to the remainder beneficiaries tax-free. A GRAT works particularly well in a low interest rate environment.

II. ESTATES

Will: A document admitted to probate by the court which names beneficiaries to receive the decedent’s solely owned assets.

Probate Estate: Assets that were solely owned by a decedent and pass according to the terms of the Will or by intestacy if there is no Will. Probate estate does not include assets that pass by beneficiary designation (e.g. life insurance proceeds), by survivorship (e.g. joint property) or that are not titled in the name of the decedent (e.g. assets held in a revocable trust).

Personal Representative: The person responsible for settlement of a decedent’s estate. Sometimes referred to as “Executor”. Personal Representative may be named in a Will, but that person does not have authority to act until officially appointed by the probate court.

Probate Avoidance: Structuring the ownership of assets so that they will not be subject to probate. For example, transferring assets to a living trust so that they are no longer owned by the decedent. Other techniques for probate avoidance include: naming a “payable on death” beneficiary, titling assets in joint tenancy or transferring property by Washington Will. Assets that avoid probate are still subject to estate tax and generation skipping tax.

Probate: The process by which a court supervises the settlement of a decedent’s estate. Includes determination of whether or not Will is valid, appointment of Personal Representative, publishing notice to creditors, filing an inventory and accounting. (Note: Wisconsin charges an inventory filing fee of .2% of inventory value (e.g. filing fee for $1,000,000 inventory is $2,000)).

Marital Property Agreement: An agreement under Wisconsin’s Marital Property Act by which spouses may classify or reclassify (i.e. determine the ownership of) their assets. Agreement can change default classifications established by the Statute.

Washington Will: A provision in a Marital Property Agreement under which a spouse’s assets (which would otherwise be subject to probate) will pass directly to named beneficiaries without going through probate.

III. TAXES

Estate Tax: Tax imposed on the assets owned or controlled by a decedent valued as of the date of death (or in certain cases 6 months later). Current federal tax rate is 45%. (Note: Wisconsin currently imposes an estate tax, but that tax is scheduled to expire at the end of 2007.)

Gift Tax: Tax imposed on assets given to third parties during lifetime. Current tax rates range from 41% to 45%. (Note: Wisconsin does not impose a gift tax.)

Generation Skipping Tax: Tax (referred to as GST) imposed on assets passing to a beneficiary more than one generation younger (e.g. grandparent to grandchild). This tax is in addition to any gift or estate tax that may be due on that transfer. Current tax rate is 45%. (Note: Wisconsin does not impose a generation skipping tax.)

Gross Estate: Assets included in a decedent’s estate for purposes of computing estate tax. Includes all of the following which are owned or controlled by the decedent: real estate, cash, notes, stocks and bonds, life insurance proceeds (where the decedent could name the beneficiary or controlled the policy), joint property, IRA’s and retirement accounts, annuities, transfers where the decedent retained benefit or control (e.g. a revocable trust).

Estate Tax Deductions: Amounts that can be deducted from the gross estate before calculating the estate tax. They include: funeral expenses, the decedent’s debts, and expenses of administering the estate. Also deductible are amounts passing to a surviving spouse or to a marital trust (the “marital deduction”) or to charity (the “charitable deduction”).

Taxable Estate: The gross estate minus estate tax deductions. This is the amount subject to tax.

Estate Tax Exemption: The amount of the taxable estate that is exempt from estate tax. Current exemption is $2,000,000. It is scheduled to increase to $3,500,000 in 2009. (Note: The Wisconsin estate tax exemption is only $675,000, so Wisconsin estate tax may be payable even if no federal tax is due.)

Annual Exclusion: The amount that can be given each year to an individual without being counted as a taxable gift. Currently $12,000 per person per year. To qualify for the annual exclusion the gift must be a present (i.e. not future) interest gift.

Gift Tax Exemption: The amount of taxable gifts that may be made before gift tax becomes payable. Current federal exemption is $1,000,000. Use of gift tax exemption also reduces available estate tax exemption (e.g. if $500,000 of taxable gifts are made, an additional $1,500,000 is exempt for federal estate tax purposes).

GST Exemption: Amount of generation skipping transfers that may be made before generation skipping tax becomes payable. Current federal exemption is $2,000,000. It is scheduled to increase to $3,500,000 in 2009.

For more information, please contact Gordon K. Miller at 414.225.4930, or gkmiller@michaelbest.com.

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