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Commonly Used Terms: Trusts as Estate Planning Solutions

Trusts are legal documents that can be as short as one page or as complex constituting hundreds of pages. In reviewing trusts, however, some common principles apply to all. It’s important to start by looking at some commonly used terms.

Trust: An arrangement whereby property is legally owned and managed by an individual or corporate fiduciary as trustee for the benefit of another, called a beneficiary, who is the equitable owner of the property.

Trust instrument: A document, including amendments thereto, executed by a grantor that contains terms under which the trust property must be managed and distributed. Also referred to as a trust agreement or declaration of trust.

Trustee: The individual or bank or trust company designated to hold and administer trust property (also generally referred to as a “fiduciary”). The term usually includes original (initial), additional, and successor trustees. A trustee has the duty to act in the best interests of the trust and its beneficiaries and in accordance with the terms of the trust instrument. A trustee must act personally (unless delegation is expressly permitted in the trust instrument), with the exception of certain administrative functions.

Settlor: Term frequently used for one who establishes or settles a trust. Also called a “trustor” or “grantor.”

Irrevocable trust: A trust that cannot be terminated or revoked or otherwise modified or amended by the grantor. As modern trust law continues to evolve, however, it may be possible to effect changes to irrevocable trusts through court actions or a process called decanting, which allows the assets of an existing irrevocable trust to be transferred to a new trust with different provisions.

Revocable trust: A trust created during lifetime over which the grantor reserves the right to terminate, revoke, modify, or amend.

Special needs trust: Trust established for the benefit of a disabled individual that is designed to allow him or her to be eligible for government financial aid by limiting the use of trust assets for purposes other than the beneficiary’s basic care.

Spendthrift provision: A trust provision restricting both voluntary and involuntary transfers of a beneficiary’s interest, frequently to protect assets from claims of the beneficiary’s creditors.

Living trust: A trust created by an individual during his or her lifetime, typically as a revocable trust. Also referred to as an “inter vivos” trust, “revocable living trust” or “loving trust.”

Grantor: A person who creates or contributes property to a trust. If more than one person creates or contributes property to a trust, each person is a grantor with respect to the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion. The grantor is also sometimes referred to as the “settlor,” the “trustor,” or the “donor.”

Grantor trust: A trust over which the grantor retains certain control such that the trust is disregarded for federal (and frequently state) income tax purposes, and the grantor is taxed individually on the trust’s income and pays the income taxes that otherwise would be payable by the trust or its beneficiaries. Such tax payments are not treated as gifts by the grantor to the trust or its beneficiaries. Provided the grantor does not retain certain powers or benefits, such as a life estate in the trust or the power to revoke the trust, the trust will not be included in the grantor’s estate for federal estate tax purposes.

Beneficiary: A person who will receive the benefit of property from an estate or trust through the right to receive a bequest or to receive income or trust principal over a period of time.

Annual exclusion: The amount an individual may give annually to each of an unlimited

number of recipients free of federal gift or other transfer taxes and without any IRS reporting requirements. In addition, these gifts do not use any of an individual’s federal gift tax exemption amount. The annual exclusion is indexed for inflation and is $16,000 per done for 2022. Payments made directly to providers of education or medical care services also are tax-free and do not count against the annual exclusion or gift tax exemption amounts.

Crummey trust: An irrevocable trust that grants a beneficiary of the trust the power to

withdraw all or a portion of assets contributed to the trust for a period of time after the

contribution. The typical purpose of a Crummey trust is to enable the contributions to the trust to qualify for the annual exclusion from gift tax. Exemption/Unified credit – The amount of money or assets that can be transferred as a gift, or transferred at death, without incurring federal taxation. It can be calculated as the amount of tax

forgiven by the IRS to a transferor. In that case, it is called the “unified credit.” The terms are synonymous. Other synonyms include the “exemption amount,” the exemption equivalent, or applicable exclusion amount. The current exemption amount is $5 million adjusted for inflation since 2010. The 2022 exemption is $12,060,000. Married spouses can share each other’s exemption so the total in 2022 is $24,120,000. When spouses share either their annual exclusions or exemption amounts, it is sometimes referred to as “split gifting.

This material is intended for informational purposes only and should not be construed as legal or tax advice. It is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.

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