Estate Planning Terms

---

ABLE Accounts are tax-advantaged savings accounts for individuals with disabilities and their families.  They have been made possible by the ABLE Act of 2014.    The beneficiary of the account is the account owner, and income earned by the accounts will not be taxed. Contributions to the account, which can be made by any person (the account beneficiary, family, friends, Special Needs Trust or Pooled Trust), must be made using post-taxed dollars and will not be tax deductible for purposes of federal taxes; however, some states may allow for state income tax deductions for contributions made to an ABLE account.  There is a cap of $16,000 a year in contributions and a total cap of $100,00 in the account at any one point in time (it can go higher under certain circumstances).  It is a  useful tool for approved regular occurring costs such as rent or even single events such as purchasing a car without jeopardizing government benefits.

Learn more about ABLE accounts here.

Instructions to medical providers and loved ones on how you want treatment options to be applied or withheld should you become unable to make those decisions for yourself. 

A Crummey Trust is a trust that is designed to avoid gift taxes and place money for children into a trust for protection for their use in the future.  What makes a Crummey Trust unique is that it temporarily makes the funds of the trust available to the beneficiary of the trust which creates a "withdrawal window" and thus completes the "gift" to the child in the eyes of the IRS.  This enables the ability to use the annual gift exemption each year to build up the trust assets for your beneficiary, while avoiding gift taxes, and not providing them with access to the assets until later in life.  

See our blog on Crummey Trusts to learn more.

In its simplest form decanting is a method of improving a trust by essentially creating a new trust.  The new trust will use the assets of the old trust and keep the beneficiaries the same, but may change other terms of the trust to make them more desirable.  This is accomplished using the discretionary powers of the trustee granted by the original trust to move the assets.  There are many reasons to engage in decanting, including: removal of ambiguities, increasing flexibility, adding trust protectors or directors, converting a trust from a grantor trust to a non-grantor trust or vice versa, or for other tax reasons; but the general idea is usually that the original trust has unforeseen problems and needs to be amended.  Virginia is fairly amenable to these changes.  

A traditional trust usually has one trustee that has all of the fiduciary responsibilities of the trustee or co-trustees in which they share the duties and powers equally. 

Directed trusts split up duties of trustees between trust directors and directed trustees.  Trust directors essentially have special duties or responsibilities within the trust (such as being the person responsible for investments) while the directed trustee follows their instructions (within reason) and fulfills other trustee duties.  

This type of trust is common in situations where family members may be appointed as a trustee but lacks the ability or desire to engage in all fiduciary duties (such as investing) and thus another person is appointed.  Another example would be where the grantor of the trust has a company that he or she wants to put into trust and then appoint a trust director to handle the business upon his death, separate from the other main trustee.

Multiple trust directors can be appointed. 

An irrevocable trust that is mostly designed to avoid generation skipping taxes while providing for your family for generations to come.  It permits the transfer of gifts into the trust under the yearly gift exemptions.  It also provides protection against creditors in the future under most circumstances.  

Employee Retirement Income Security Act Accounts are typically employer-sponsored retirement plans that include 401(k) plans, pension plans and some 403(b) plans.  Knowing the type of retirement plan you have is important because it will determine whether creditors can try to get assets within your retirement account. ERISA accounts are the best protected from creditors, bankruptcy proceedings, and civil lawsuits.  

The GST is a tax the IRS employs when a grantor provides a gift to someone that is more than one generation removed from them (even when they are not related to you).  The IRS wants to make sure each generation gets taxed and nothing is skipped.  In 2022 the GST is a flat 40% so it is important to consider during estate planning.  There is a GST Exemption, but it is important to note that it is not portable between spouses (which means you can't give your spouse your exemption when you die). 

See our Blog on the dangers of GST here. 

A gift is when you give someone something of value and do not receive equal consideration in return.  The IRS has a gift tax when this occurs.  Thankfully, however the IRS has a gift tax exclusion to make life a little simpler.  There is an annual gift tax exclusion of $16,000 (2022) per person/beneficiary and a lifetime exclusion of just over 12.06 million (2022).  As long as you stay under both of those two caps/exclusions then you don't have to pay a gift tax.  This is a pivotal way of passing on assets without incurring taxes on gifts or your estate, particularly if you have a sizable estate.  Note: if you are married the above amounts could be doubled if both spouses gift items.

See our blog to learn more about how to take advantage of the gift tax exclusion?  

An IDGT is a grantor trust that allows the transfer of assets from the grantor to another person.  The advantage of such a trust is that the assets are still taxed as if the grantor were the “owner” of the trust for income tax purposes.  You would choose this type of trust if you have  assets during life that are likely to appreciate (such as a house or business) and estate tax is a concern.   The process allows for the freezing of the value of the assets allowing any appreciation to pass to beneficiaries transfer tax free.  Sound complicated?  Don't worry we can explain it to you if this type of trust is right for you.

See our Blog on IDGTs to learn more. 

An ILIT is a type of irrevocable trust that places a life insurance policy inside the trust (naming it as the beneficiary), by doing this the proceeds from the insurance moves from your taxable estate into the ILIT.  Note that Grantors cannot be the trustee of the trust.  ILITs are a particularly useful mechanism for leaving insurance proceeds to minor children.  

ILITs can also be useful for avoiding Generation Skipping taxes when the correct steps are taken.

See our Blog on ILITs to learn more. 

A trust that is Irrevocable in the eyes of the law, but not in a practical sense if drafted properly using a "trust protector." A Trust protector may be given the right to amend and even revoke a trust.  They are mostly useful for asset protection, and maintaining eligibility for government programs. 

This is a trust typically designed to keep a house worth considerable value within the family so that it is passed on to future generations for enjoyment.  QPRTs (Qualified Personal Residence Trusts) are one avenue to pursue this goal, but have numerous drawbacks to them.  An alternative to protect these homes  for future generations is often an irrevocable trust with a trust protector makes more sense.  

Indicates who is in charge of medical decisions should you become incapacitated.  It is often combined with the Advance Medical Directive. 

Pooled special needs trusts are typically administered by professional administrators, and the funds that are transferred into the pooled trust are then put together and invested by an investment manager.  This type of trust can be beneficial to families who would like the benefits of a special needs trust without the burden of setting up and administering a separate trust.   The administrative fees tend to be less if you choose a professional.  However, note that pooled trusts may take a significant percentage of the trust or even not permit there to be remainder beneficiaries when the individual with special needs dies.  See our blog to learn more.

Grants another person authority to act on your behalf financially so your assets can be accessed should you become incapacitated.  These can be limited so that they are only in effect when you are incapacitated and also can be limited to specific actions.

Similar to a QTIP or Marital Trust.  It is a special kind of trust often used when one spouse is not a US citizen.  It is necessary because non-citizens cannot take advantage of the marital deduction for tax purposes which could result in expensive estate and gift taxes.  However if assets are placed in a QDOT the IRS allows the non-citizen to receive the benefit of the marital deduction.  

Qualified Terminable Interest Property (QTIP) is a type of irrevocable trust that is most likely to be used in second marriages where the grantor desires to take care of their current spouse for the duration of their life and then have the residue of the estate given to children from a first marriage, thus preventing the assets from transferring to the surviving spouse's new spouse should they remarry.  A QTIP can also help limit applicable death and gift taxes since estate tax is not levied until the second spouse passes away.  

A trust that is created and funded during one's lifetime. It has numerous advantages including avoiding probate and protecting inheritance to young children and individuals that may have a hard time managing money.

Self-Settled SNTs are also known as Medicaid Payback Trust:  It is a first party SNT funded with the beneficiary’s own assets.  Often used to protect public benefits after the special needs individual receives an inheritance, court-settlement, or other large sum of money.

See our blog to learn more.

Sometimes called a Supplemental Needs Trust, it is a trust that allows caregivers to supplement their special needs family member's life without sacrificing or losing governmental benefits.  This tends to be a long term estate planning tool that has many advantages and is a must for any family that has individuals with special needs or disabilities.   See our blog to learn more.

A spendthrift trust is a trust designed so that the beneficiary is unable to sell or give away her equitable interest in the trust property. The trustee is in control  of the assets within the trust.  Because the beneficiary is not in control of the trust property, creditors cannot gain access to those assets.   These trusts are typical when you have a beneficiary with gambling or drug addiction, or poor spending habits. 

Social Security Disability Insurance (SSDI)  supports individuals who are disabled and have a qualifying work history, either through their own employment or a family member (spouse/parent).  Generally, if you are approved for SSDI you will be approved for Medicare as well.  In 2020 the avg benefit was $1,128 and the maximum was $3,148 (Based on work history).

Supplemental Security Income (SSI).  SSI provides basic assistance to older adults and persons with disabilities (regardless of age).  It has strict limitations on how much income you may have.  Generally if you are approved for SSI, you will also be approved for Medicaid (depending on the state since Medicaid is ran through your state).  In 2020 the avg benefit was $577 and the maximum was $794 (single) and $1,191(married)(Based on work history).  

A spendthrift trust is a trust designed so that the beneficiary is unable to sell or give away her equitable interest in the trust property. The trustee is in control  of the assets within the trust.  Because the beneficiary is not in control of the trust property, creditors cannot gain access to those assets.   These trusts are typical when you have a beneficiary with gambling or drug addiction, or poor spending habits. 

A special needs trust that is created and funded by a “third party” – a person other than the disabled beneficiary (e.g., a parent, grandparent, or other individual).  Third-party SNTs preserve the beneficiary’s public benefits, but provide funds that can be used for expenses not covered by these benefit programs such as furniture, electronics, and vacations.   Unlike first-party SNTs, there is no Medicaid payback requirement for third-party SNTs. 

Want to learn more, please click here for our blog on this topic. 

A trust is an instrument created by a written document that places assets (now or in the future) into the trust.  A trustee then controls the assets of the trust and distributes them to the beneficiaries according to the terms of the trust.  The Trustee can be anyone or even an entity.  Whether you can act as initial Trustee depends on the goals of the trust.  There are many different types of trusts, but the two main categories of trusts are revocable and irrevocable trusts.  Please read about them above 

A document that directs how your assets are to be distributed to your heirs and survivors, and names an executor who will be responsible for making sure it is honored.  In Virginia There are self-proven wills that are difficult to challenge if the appropriate steps are followed.

Virginia is a 209(b) state (named after the legislation that created the SSI program.  The act prevents states from making criteria more strict than Medicaid, but they do have different criteria and VA also requires separate application.