The terms used in asset protection are far-ranging, and
those new to the field may find this glossary of legal terms
useful. A list of many of the most common legal terms used
follows; click on a term to see the entire definition.
Annual Exclusion. The amount that any person may give
away in each calendar year without incurring gift tax. Not
all gifts will qualify for the annual exclusion. Only
outright gifts or gifts of a present interest made to
certain types of trusts will qualify. In 2009 the annual
exclusion amount is $13,000 and is indexed for inflation.
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Annuitant. The person whose life span is used for
making income payments. The owner of the annuity policy will
determine whose life will be used as the measuring life and
in many cases the owner and the annuitant will be the same.
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Annuitize. The process of converting the balance in a
deferred annuity contract into a stream of payments for a
period of years or for someone's lifetime.
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Annuity. Two common usages exist. The first refers to
a tax-deferred contract with an insurance company or other
entity that provides for the payment of income for a
predetermined amount of time, such as a person's lifetime or
a certain number of years. See also
deferred annuity and
immediate annuity. The second common usage refers to a
stream of payments being made in an estate planning context
with a certain amount (annuity) being paid each year and the
remainder being distributed to another person or charity.
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Applicable Exemption Amount ("AEA"). The amount of
assets that can pass without the imposition of an estate tax
or gift tax. The AEA equates to a credit against the estate
tax or gift tax. In 2009 the federal estate tax exemption
is $3,500,000 and the gift tax exemption is $1,000,000. Based on current legislation, the estate tax is set to be abolished for one
year, the exemption amount appears to be unlimited for
estate tax purposes in 2010. In 2011 the exemption is
scheduled to be permanently reduced back down to the 2001
level of $1,000,000. The federal gift tax exemption is
scheduled to remain at $1,000,000 during this entire period
of time. The AEA was previously referred to as the unified
credit exemption; however, this term became obsolete in 2001
when the estate tax and gift tax ceased to be "unified" and
different exemption amounts came into existence.
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Asset Protection and Asset Protection Planning. The process
of structuring one's estate to obtain more advantageous
creditor protection from future lawsuits and claims.
Different types of asset protection solutions are available
depending on the size of estate and the desire to obtain the
best possible asset protection solutions.
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Asset Protection Trusts ("APT"). Trusts designed to
hold assets in a creditor protected entity. Asset protection
trusts are most protective and effective when created as
offshore trusts as they are typically out of the reach of US
courts. Currently eleven states have enacted onshore asset
protection trust legislation however this legislation has
never been tested or endorsed by a US court and it is
currently unknown whether onshore or domestic asset
protection trusts will be a successful asset protection
solution.
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Beneficiary. Depending on the context, a beneficiary will
be a person or entity named in either: (i) a trust to
receive real or personal property in accordance with the
terms contained in the trust agreement or declaration of
trust; or (ii) an annuity to receive money remaining in the
annuity upon the death of the owner or annuitant.
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Charitable Lead Annuity Trust ("CLAT"). A split
interest trust with a charitable beneficiary that has the
right to
receive a series of annual payments in the form of an
annuity amount each year for a predetermined or stated term.
A family member or non-charitable beneficiary has the right
to receive the remaining trust assets when the trust term
expires. The annuity amount payable to the charity is
calculated on the initial value of the trust assets at the
time the trust is created.
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Charitable Lead Trust ("CLT"). A split interest trust
where the charity receives income and the non-charitable
beneficiary receives everything that is left (i.e. the
remainder of the trust) after the charitable payments have
been made for the required term. Charitable lead trusts are
frequently used with stock in closely held or family
business with low basis to help achieve both tax and
charitable planning goals.
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Charitable
Lead Unitrust Trust ("CLUT"). A trust
where the charitable beneficiary has the right to receive a unitrust or annuity payment each year for a specified term.
The annuity amount is calculated based upon the value of the
trust assets at the beginning of each year of the trust.
After the stated term, the remaining trust balance will be
distributed to the designated family member or to the
non-charitable beneficiary.
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Charitable Remainder Annuity Trust ("CRAT"). A trust
wherein a family member or non-charitable beneficiary has
the right to receive the annuity payment each year during a
stated term of years or for the beneficiary's lifetime. The
annuity amount will be calculated on the initial value of
the trust assets when the trust is created. After the stated
term or the beneficiary's death, the remainder of the trust
will be distributed to the charitable beneficiary.
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Charitable Remainder Trust ("CRT"). A trust where a
family member or non-charitable beneficiary receives a
stream of payments and the charitable beneficiary receives
the balance or remainder of the trust. Often used to
achieve both charitable, estate and income tax goals with
low-basis stock holdings while providing income payments to
the grantor.
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Charitable Remainder Unitrust Trust ("CRUT"). A trust
where the non-charitable beneficiary has the right to
receive a unitrust or annuity amount each year during the
specified term or for the beneficiary's lifetime. The
annuity amount is calculated based on the value of the trust
assets at the beginning of each year of the trust. After
passage of the stated term or upon the beneficiary's death,
the remainder of the trust is distributed to the charitable
beneficiary.
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Deferred Annuity. A type of annuity or retirement account
issued by an insurance company that is intended to provide
tax-deferred growth on the accumulated income. This type of
product may have good asset protection qualities depending
on state laws.
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Disclaimer. No one can force you to accept an
inheritance and when you elect to turn down or refuse an
inheritance it is called a disclaimer. Disclaimers are
usually in the form of a written document and can be used to
accept some but not all of an inheritance. In order for a
disclaimer to be qualified under the Internal Revenue Code
as a non-taxable transfer the disclaimer must be made within
nine months after the date of the death or transfer, must be
made in compliance with state laws and no income or benefits
may have been received by the person disclaiming.
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Domestic Asset Protection Trust. A self-settled spendthrift
trust drafted under the laws of one of the ten states that
have abolished the rule against self-settled spendthrift
trusts thereby permitting grantors to create their own asset
protection trust. The eleven states that now permit onshore
asset protection trusts include Alaska, Delaware, Missouri,
Nevada, Oklahoma, Rhode Island, South Dakota, Tennessee,
Utah and Wyoming. No significant cases exist that have
endorsed the use of onshore or domestic asset protection
trusts as a viable asset protection planning solution.
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Domestic Trustee. An asset protection term used to describe
one or more of the trustees of the asset protection trust. The
domestic trustee may be an individual or corporate fiduciary
and may serve alone or in conjunction with a foreign trustee,
depending on how the asset protection trust is designed.
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Estate Tax. A transfer tax imposed on transfers
occurring at the decedent's death. The estate tax in 2009 is
45% on all assets in excess of the $3,500,000 applicable
exemption amount. Each decedent has an exemption from estate
taxes that was previously referred to as the unified credit
exemption. The amount that can be passed at death
free from estate tax is reduced by any lifetime gifts,
unless an exclusion or exemption is used to exempt otherwise
taxable gifts made during lifetime. In 2011 estates in
excess of $1,000,000 will be taxed at 55%.
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Equity Indexed Annuity. A special type of tax-deferred
annuity that guarantees a return based on a stated
percentage of a predetermined index such as the S & P 500
Index.
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Family Limited Partnership. An asset protection planning
solution that is most effective when the limited partnership
interests are owned by a domestic or foreign asset
protection trust instead of an individual or estate planning
trust. The partnership interests are typically owned by
family members instead of business partners. See
limited
partnership for more information.
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Foreign Trust. A designation that refers either to an
offshore asset protection trust, a trust with one or more
foreign trustee or a trust which pursuant to IRC §7701 is
not classified as a domestic trust for income tax purposes.
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Generation Skipping Transfer Tax. A transfer tax
imposed at a rate equal to the highest estate tax rate on gifts or estate transfers where the
transferred assets pass, or will pass, to recipients two or
more generations below the donor, without being subject to
the imposition of estate tax at the intervening generations.
Each donor has an exemption that may be used to offset the
GST tax.
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Generation Skipping Trust. An
inter vivos trust or
testamentary trust designed to exist for more than one
generation into the future and qualify for the generation
skipping transfer tax exemption, while avoiding inclusion in the
estates of the beneficiaries for estate tax purposes.
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Gift Tax. A transfer tax imposed at a rate equal to
the 46% estate tax rate on transfers made by a donor during
their lifetime that are in excess of the federal applicable
exemption amount of $1,000,000, which amount is not indexed
for inflation or scheduled to increase. In the event the
gift tax exemption is not fully used during a person's
lifetime, the unused exemption will exempt transfers made at
death from the federal estate tax. Any person may make an
unlimited number of annual exclusion gifts each year without
incurring a gift tax liability.
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Gift Trust or Gifting Trust. A trust designed to hold
gifted or inherited assets for the benefit of individuals or
charities.
Typically created for beneficiaries who are unable to manage
gifted assets, to obtain asset protection, or to minimize
gift, estate and generation skipping transfer taxes to the
grantor and the beneficiaries.
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Grantor. The person or entity that transfers real or
personal property in trust to a trustee or co-trustees under
written or oral directions to the trustee to hold,
manage, invest, account for and distribute the property to
those specified as a trust beneficiary in accordance with
the terms set forth in the trust instrument.
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Grantor Retained Annuity Trust ("GRAT"). An irrevocable
inter vivos trust under which a grantor transfers his or her
interest in real or personal property to a trustee they have
selected to hold these assets for the specified term or
duration of the trust. During each year of the term, the
grantor receives an annuity amount based upon the value of
the assets at the creation of the trust. Upon expiration of
the term, the trust property passes to the remainder
beneficiary or beneficiaries. Primarily used to gift
property to the remainder beneficiary that is susceptible to
application of valuation discounts and actuarial discounts
based on the grantor's age and the term of the trust, and is
most beneficial if the property is expected to appreciate in
value.
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Grantor Retained Unitrust Trust ("GRUT").
A GRUT is an
irrevocable inter vivos grantor trust under which a grantor
transfers their interest in real or personal property to a
trustee they select to hold some of their assets during a
specified trust term. The grantor will receive an annuity
payment based on the value of the assets at the beginning of
the year for each year the trust is in existence. When the
trust term expires, the trust property passes to the
remainder beneficiaries. This technique is primarily used
for gifting purposes to efficiently transfer family wealth
to a remainder beneficiary by taking advantage of valuation
and actuarial discounts based on the grantor's age and the
term of the trust, which is most advantageous when the
property is expected to significantly appreciate in value.
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Immediate Annuity. An annuity that is purchased with a lump
sum and that is required to return payments to its owner
within a time frame no longer than twelve months. Immediate
annuities may be fixed or variable depending on the terms
and investments.
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Intentionally Defective Grantor Trust ("IDGT"). An
IDGT is an irrevocable inter vivos trust created by a
grantor for the benefit of beneficiaries (other than the
grantor) that has the unique treatment under the Internal
Revenue Code of having all of the income taxed to the
grantor instead of the beneficiaries. IDGTs are typically
used to assist the grantor in making gifts to his or her
descendants for purposes of excluding the property from the
grantor's taxable estate for estate tax purposes. Since the
grantor is legally responsible for paying the tax on the
income earned by the trust, the grantor's estate tax savings
are enhanced and the trust assets increased since the trust
isn't reduced by the amount of income tax that otherwise
would have been paid from the trust. This technique is
frequently used in conjunction with a sale of discounted
assets by the grantor to the trust with the effect of
avoiding capital gains on the sale of the assets.
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Inter Vivos Trust. A trust created during the
grantor's lifetime, usually by means of a written trust
instrument or agreement. A trust created after the death of
the grantor is referred to as a testamentary trust.
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Irrevocable Trust. A trust that cannot by its terms
be amended or revoked by the grantor. Irrevocable trusts can
be created during a grantor's lifetime for asset protection
purposes, for life insurance or for completed gifting
trusts, generation skipping trusts, qualified personal
residence trusts (QPRT), grantor retained annuity trusts
(GRAT), intentionally defective grantor trusts (IDGT),
charitable remainder trusts or charitable lead trusts. Some
common types of irrevocable trusts which are created at the
death of the grantor as testamentary trusts include
applicable exemption or unified credit trusts, charitable
remainder or charitable lead trusts created under another
trust agreement, or generation skipping trusts which are
frequently designed as asset protection trusts for current
and future family members.
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Life Insurance Trust. An irrevocable life insurance
trust or ILIT is a trust that is intended to hold primarily
life insurance policies on the life of the grantor or, on
occasion, a policy on the joint lives of the grantor and the
grantor's spouse. The major estate planning advantage is to
remove the death benefit from the grantor's taxable estate
for estate tax purposes. The major asset protection purpose
is to use the irrevocable trust to provide a creditor
protected entity for the spouse or children. Insurance
trusts need to be carefully designed to qualify for annual
exclusions gifts, as typically gifts made in trust won't
qualify as transfers of a present interest and
therefore, absent proper planning, a gift tax would arise when
the insurance premiums are paid. Many insurance trusts are
designed as asset protection trusts, beneficiary controlled
trust or dynasty trusts which would all contain provisions for
continuing testamentary trusts after the grantor's death for
the grantor's spouse, children, grandchildren and other
family or charitable beneficiaries.
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Limited Liability Company ("LLC"). A business or asset
protection planning technique that helps to protect the
owner from lawsuits originating against the LLC. Different
states have different laws that significantly affect the
ability to protect the owner's personal assets. LLCs are
most effective when used in conjunction with a domestic or
foreign asset protection trust and when the LLCs are created
in a state that, by statute, limits the remedies to charging
orders of protection only.
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Limited Partnership. A limited partnership is a
partnership created under the limited partnership laws of
a particular state. A limited partnership has a general partner, who
has unlimited liability for operation of the partnership and
limited partners who are not subject to the claims of
creditors of the partnership. Limited partnerships are used
in conjunction with many asset protection trusts. Limited
partners do not participate in the management of the
partnership. General partners have the ability to manage the
operations of the partnership, as well as to determine when
and if any distributions will be made to the limited
partners. Most partnership agreements restrict a limited
partner from transferring their partnership interest. From
an asset protection perspective, a limited partnership as a
standalone solution is not very effective. When used
in conjunction with an asset protection trust, the limited
partnership offers a higher degree of protection.
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Marital Deduction. The marital deduction is an
unlimited deduction against estate tax and gift tax for
transfers made by a married person to their spouse during
their life or at death, either outright or in qualifying
trusts created specifically to protect the unlimited marital
deduction. This is primarily a technique to avoid the loss
of an estate on the death of the first spouse by deferring
estate taxes until the death of the surviving spouse thereby
ensuring 100% of the estate being available for the
survivor.
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Marital Deduction Trust. A trust that
is designed to
qualify for the unlimited marital deduction for estate and
gift tax purposes. Several types of trusts can qualify for
the unlimited marital deduction including: general power of
appointment marital trusts, qualified terminable interest
property trusts, and qualified domestic trusts which are
used if the surviving spouse is not a citizen of the US.
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Non-Qualified Annuity. An annuity that is tax deferred and
purchased by its owner with after-tax dollars instead of in
a tax qualified retirement plan like an IRA.
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Not-for-Profit Corporation or Non-Profit Corporation.
A corporation created under applicable state law to be
exempt from income taxes. A not-for-profit corporation is
typically a charitable entity created for educational,
religious, scientific, artistic or charitable purposes the
operation of which is required to be in accordance with
applicable state law and tax laws.
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Offshore Asset Protection Trust. A trust created with one of
the objectives being to obtain creditor protection from
future lawsuits and to preserve accumulated wealth from
future litigation claims. Offshore asset protection trusts
are created under the law of countries with
legislation that is more protective than the laws of the
United States and may have both US trustees and foreign
trustees. Offshore asset protection trusts are viewed by
most knowledgeable planners as offering the highest level of
creditor protection possible.
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Personal Representative (Executor). A person or entity
named in a Last Will and Testament and/or appointed by the
Probate Court who is responsible for collecting the
decedent's assets, paying the decedent's debts, taxes, and
expenses, selling assets of the estate, and distributing the
remaining property and money according to the terms of the
Will or in accordance with the laws of intestate succession
of the state of residence. The personal representative is a
court-appointed fiduciary with great responsibilities such
as the preservation and protection of the estate assets,
accounting to the heirs and estate beneficiaries for all
income and expenses, filing of all required personal federal
and state estate tax returns for the decedent and the
estate.
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Postnuptial Agreement. A Contract agreed to by both
spouses after their marriage that defines each spouse's
rights to their marital, non-marital, community and
jointly-owned property in the event of divorce, legal
separation or the death of one of the parties. A postnuptial
contract is considered to be valid and enforceable if it
complies with the statutory requirements for pre-nuptial
agreements. This is a first level asset protection planning
technique for anyone with significant assets who remarried
without having sought the advice of a legal advisor prior to
their remarriage. Although the use of postnuptial
agreements is not as common as pre-marital agreements, they
do provide some protection if both parties are willing to
agree to the terms and waive some of their marital rights
after the fact. Pre-nuptial agreements are normally viewed
to be a better asset protection solution as the terms are
voluntarily agreed to prior to the marriage.
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Pre-Nuptial Agreement. A Contract
entered into by an engaged couple prior to their marriage
which sets forth their respective rights in marital,
non-marital, community and jointly-owned property
in the event of divorce, legal separation, or the death of
one of the parties. In order for
pre-nuptial agreements to be enforceable, most states
require that: (i) there be
a full and fair disclosure of the earnings and property of
each party; (ii) the parties have had an adequate time
to review the agreement prior to the wedding; (iii) each party had the opportunity to consult with legal counsel
of their own choice; and (iv) the agreement be in
writing, executed and acknowledged by the parties in the
presence of witnesses and a notary public.
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Private Foundation. A trust or not-for-profit
corporation that provides for distributions only to
charities during its term. Foundations may be structured as
a perpetual trust or as a corporation. The governing bodies
would be either board of trustees or a board of directors.
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Probate. The legal process of re-titling wealth from
the name of the decedent to its new owner. Probate is
required whenever the size of the estate is greater than the
statutory amount, which is typically $50,000 to $100,000. The
probate judge determines if the decedent's will is valid and
appoints the personal representative or executor to collect
the decedent's assets, pay the outstanding debts and
transfer the remaining assets to the decedent's trust or
named heirs.
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Probate Estate. Probate assets only include assets
held in the sole name of the decedent at the time of death
or payable to the estate. Since a deceased person can no
longer own assets, the probate court needs to determine who
the new owner of each asset will be. Probate provides
virtually no asset protection since notice to all creditors
is required and each creditor has months in which to file a
claim against the estate. Property held in more than one
name such as joint tenancy with rights of survivorship, or
community property with rights of survivorship are not
included in the decedent's probate estate and will pass to
the surviving owner. In addition, if a proper beneficiary
designation was made for proceeds of life insurance,
annuities, IRAs or qualified retirement benefits, they will
not normally be included in the decedent's estate unless the
beneficiary designation specifically designates the
decedent's estate or was not properly made.
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Qualified Annuity. An annuity that is purchased with
pre-tax dollars in a tax-deferred and qualified retirement
plan such as an IRA account.
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Qualified Personal Residence Trust ("QPRT"). An
inter vivos
or living trust to which the grantor transfers their
interest in a personal residence to the trustee to hold for
the grantor's use and occupation for the specified term of
the trust and at the termination of the trust term, the
residence passes to the remainder beneficiaries. This
technique is typically used to make gifts of a vacation or
second home to the grantor's children or grandchildren.
QPRTs receive advantageous valuation discounts, as well as
actuarial discounts based on the grantor's age and the term
of the trust, and when a home that is appreciating in value
is put into the QPRT, the best benefits are received.
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Revocable Trust. An
inter vivos or living trust that is
designed to be amended or revoked by the grantor or settlor.
This is the type of trust used for estate planning purposes
to avoid probate and has no asset protection qualities for
the grantor. Properly drafted revocable living trusts (RLTs)
typically contain lifetime provisions for the care of the
grantor, the grantor's spouse and children, as well as
provisions for taking care of the grantor upon the grantor's
disability and death. RLTs should also contain dispositive
terms that govern the amount and timing of the distribution
of the grantor's assets after their death.
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Settlor. The person who settled or created a trust.
Also referred to as the grantor.
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Split Interest. A gift or transfer which will be divided
into a charitable share and non-charitable share. Some
common examples of split interest trusts would be a
Charitable Remainder Trust or a Charitable Lead Trust.
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Tax Deferred. A type of investment that is not subject to
current income taxation. Typically an insurance product such
as an annuity or a retirement solution such as an IRA.
Income is accumulated and all income taxes are deferred
until withdrawals are made.
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Tax Free Exchange. IRC § 1031 and 1035 govern tax-deferred
exchanges of real estate and insurance products. These
sections permit a taxpayer to exchange property, insurance
policies or annuities for other similar property without
having to pay a gain on the income or increase in value.
From an asset protection standpoint, §1035 permits an
individual to exchange a policy with a large cash value into
a new policy that may have better asset protection features,
including Swiss annuities or foreign life insurance.
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Testamentary Trust. A trust created after the
grantor's death in accordance with the terms stated in a
Last Will or Testament or in accordance with the provisions
of another revocable trust agreement.
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Trust. A legal arrangement under which the grantor or settlor transfers their assets, including real and personal
property, investments, and business interests to a trustee
or trustees with specific oral or preferably written
directions to the trustee as to how the trust assets should
be held, managed, invested, accounted for, and distributed
to the beneficiaries on the terms set forth in the trust
instrument. Trusts may be created for asset protection
purposes, estate planning purposes or simply to govern the
lifetime management and distribution of accumulated wealth.
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Trustee. A person or corporation named in a trust agreement
who is acting in a fiduciary capacity for the benefit of the
grantor and the grantor's trust beneficiaries. The trustee
is responsible for holding, managing, investing, accounting
for and distributing property from the trust to the trust
beneficiaries.
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Trust Protector. A term originating from English common law
that refers to a "watch dog", being a person or corporation
who has certain powers such as the ability to hire or fire
trustees, to veto trust distributions or to add new
beneficiaries. Trust protectors are routinely used in
all domestic and offshore asset protection trusts as well as
in many irrevocable trusts such as life insurance trusts.
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Unified Credit Exemption. More properly referred to as
the "applicable exemption amount" which is the amount of
assets that can pass without imposition of an estate tax or
gift tax on the transfer. In 2009 the
federal estate tax and the generation skipping tax exemption
is $3,500,000 and in 2010 when the
estate tax is slated to be abolished for one year, the
exemption appears to be unlimited. In 2011 the exemption is
scheduled to be permanently reduced back to $1,000,000. The
federal gift tax exemption is $1,000,000 and not scheduled
to increase at any time during this entire period of time.
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Variable Annuity. A type of annuity where the account
balance fluctuates in accordance with the underlying
investments. The contract owner, not the insurance company, is
responsible for making the investment decisions.
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Will or Last Will and Testament. A formal written document
by which a person who is over the age of eighteen (18) may
direct the disposition of their personal and real property
after death. Wills are used to name legal guardians for
minor children and to name personal representatives or
executors. When a person dies without having properly
prepared their Last Will and Testament, the distribution of
their estate will be made in accordance with the default
rules of the state in which they were residing which rules
are referred to as the "laws of intestacy". These laws
completely govern who receives how much of that person's
estate regardless of what the decedent may have desired.
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