Castle Estate Planning: Trust List
The following list of definitions is to enable the typical layperson to have a general working knowledge of some terms typically used in estate planning. Many of these terms are legal terms with legal significance. Because every state may have different statutory or court derived definitions of some of these terms, the following definitions are not state specific and may vary slightly from state to state. Furthermore, many of these terms can vary by the manner in which they are used. Always ask your attorney for help in understanding these terms and your specific documents.
A-B Trusts Planning:
The term A-B Trusts is a term used to explain the benefits of using both a Credit Shelter Trust and a Marital Deduction Trust in the planning of the first spouse to die. Using this planning, a married couples estate planning documents include wording that will set up a Credit Shelter Trust and a Marital Deduction Trust upon the death of the first spouse to die. Using these two trusts, assets placed in the Credit Shelter Trust will not be taxed upon the death of the first to die. Assets placed in the Marital Deduction Trust, because of the ability to move assets to a spouse at death without tax consequence, will be taxed in the estate of the second to die. Therefore, with proper planning, each spouses lifetime estate and gift tax credit exemption amount can be utilized to the fullest extent possible.
Accumulation Trust:
A trust by which the governing trust instrument instructs the trustees to accumulate the income generated by the trust assets and the gains generated by the sale of the trust assets. Such accumulated income and gains will eventually be distributed to the ultimate beneficiaries. Many states impose restrictions on the periods of time that a trust can accumulate income and gains.
Active Trust:
A trust that requires active management from the trustee. Compare with Passive Trust, ; below.
Affidavit of Trust:
An affidavit signed by the trustee stating that a trust is in place and giving details (the extent of which varies depending on the context in which the affidavit is being used) of certain provisions of the trust.
Alimony Trust:
A trust funded by one ex-spouse to secure alimony payments to the other ex-spouse.
Annuity Interest:
In the trust context, this refers to a payment made regularly (usually annually) of the same set dollar amount each time the payment is made. Compare with Unitrust Interest, ; below.
Bank Trust:
See Totten Trust, ; below.
Beneficiary:
One who benefits under the trust document.
Blind Trust:
A trust used to give management and decision-making powers over investments to someone not under the settlors control. Such trusts are used by individuals to avoid potential conflicts of interests.
Bond Trust:
A trust funded with bonds in which the income is generated by the bond interest.
By-Pass Trust:
See Credit Shelter Trust, ; below.
Charitable Lead Trust ( CLT ;):
A Charitable Lead Trust is a trust in which an income stream is given to a charity. Upon the termination of the income stream (usually after a term of years or an individuals life), the remaining assets in the trust are given to a non-charitable beneficiary (which could be the grantor). In addition to the benefit going to the charity during the term of the income stream, a significant benefit of this type of trust is that the grantor receives a charitable deduction upon its formation. A CLT may be either a Charitable Lead Annuity Trust or a Charitable Lead Unitrust (see definitions below).
Charitable Lead Annuity Trust ( CLAT ;):
A Charitable Lead Annuity Trust is a CLT that is drafted so that a fixed amount is paid not less than annually over the period of the income interest. For example, a CLT that pays $6,000 each year for a term of years to a charity, with the remainder going to a non-charity, is a CLAT. Compare with Charitable Lead Unitrust, ; below.
Charitable Lead Unitrust ( CLUT ;):
A Charitable Lead UniTrust is a CLT that is drafted so that the income stream is paid in amounts that represent a set percentage of the trust corpus. Such payments are determined by recalculating the payment each pay period. For example, a CLT that pays 6% of its remaining corpus each year to a charity, with the actual dollar amount of the payment recalculated each year by multiplying 6% by the remaining corpus, is a CLUT. Compare with Charitable Lead Annuity Trust, ; above.
Charitable Remainder Trust ( CRT ;):
A Charitable Remainder Trust is a trust in which during the life of the trust an amount is paid not less than annually to the grantor or to another non-charitable beneficiary. Upon the termination of the trust (usually after a term of years or an individuals life), the remainder of the assets in the trust are given to the charitable beneficiary. In addition to the benefit going to the charity at the end of the income term, a significant benefit of this type of trust is that the grantor receives a charitable deduction upon its formation. A CRT may be either a Charitable Remainder Annuity Trust or a Charitable Remainder UniTrust (see definitions below).
Charitable Remainder Annuity Trust (CRAT):
A Charitable Remainder Annuity Trust is a CRT that is drafted so that payments are made in equal amounts as installments over the period the life of the trust. For example, a CRT that pays $6,000 each year for a term of years to an individual with the amount remaining in the trust after the term of years paid to a charity is a CRAT. Compare with Charitable Remainder Unitrust, ; below.
Charitable Remainder Unitrust (CRUT):
A Charitable Remainder Trust is a CRT that is drafted so that payments are made in amounts that represent a set percentage of the trust corpus. Such payments are determined by recalculating the payment each pay period. For example, a CRT that pays 6% of its remaining corpus each year to an individual for a number of years after which the remaining amount is paid to a charity is a CRUT. Compare with Charitable Remainder Annuity Trust, ; above.
Charitable Trust:
A trust established for the benefit of a charitable organization.
Claflin Trust:
See Indestructible Trust, ; below.
Clifford Trust:
Prior to the enactment of the grantor trust rules of I.R.C. §671 et seq., Clifford Trusts were formed in an effort to shift income to individuals in lower tax brackets than the person actually owning the assets. A typical Clifford Trust would transfer the income of assets for a period of ten or more years, after which the assets would re-vest in the grantor.
Community Trust:
A business entity or agency established for the administration of funds placed in trust for the public benefit.
Complex Trust:
A trust in which the trustee may distribute or retain income. See I.R.C. §§661-63. Compare with Simple Trust, ; below.
Constructive Trust:
A type of Implied Trust. A Constructive Trust is implied by operation of law or act of a court, usually to compensate a party for a wrong at the hands of another.
Contingent Trust:
A trust in which the trust agreement is drafted, but in which the trust relationship does not form until the happening of some future event.
Corpus:
The principal of the trust. The assets that are in the trust at any point in time.
Credit Shelter Trust:
This type of trust is used to protect the total estate tax credit exemption amount upon the first to die of a married couple. This trust is typically created in a Will or other testamentary document. The Credit Shelter Trust is formed to provide an ultimate benefit to beneficiary other than the surviving spouse. In a majority of cases, the surviving spouse will be given a life interest in the trust, therefore providing income for such surviving spouses life. Upon the death of the surviving spouse, the trust pays out to the ultimate beneficiary, thereby avoiding inclusion in the taxable estate of the surviving spouse.
Defective Grantor Trust:
A trust that is drafted (intentionally or otherwise) so that it is a Grantor Trust (i.e., it is treated as owned by the grantor for income tax purposes). As an example, a trust that is drafted to be an irrevocable trust with a third-party trustee and non-grantor beneficiary, but which allows the grantor certain restricted controls over the trust corpus, may be determined to be a grantor trust (i.e., owned by the grantor) for income tax purposes, but not for estate and gift tax purposes.
Direct Trust:
See Express Trust, ; below.
Directory Trust:
A trust that is only generally defined by the trust document and intended to be funded and administered by later instructions.
Discretionary Trust:
A trust that is drafted to give the trustee the ability to apply as much of the principal and/or income to the benefit of the beneficiary as the trustee deems appropriate.
Dry Trust:
A trust that changes the title in the trust assets to the trustee but requires no duties on behalf of the trustee.
Dynasty Trust:
A trust that is statutorily authorized to continue for a very long time, typically many times the extent of using an ordinary statute of perpetuities timeline.
Educational Trust:
A trust established for the benefit of educational activities or institutions. The Internal Revenue Code (IRC) has various provisions for trusts of this type most notably IRC §529, frequently called a 529 plan. ;
Equipment Trust:
A financing mechanism under which title to certain equipment is transferred to a trustee to ensure repayment on a purchase debt. The railroad industry has made extensive use of this trust.
Estate Trust:
A trust that is established by one spouse, typically at that spouses death, for the benefit of the other (surviving) spouse during that other spouses life. The assets of the estate trust are then paid to the estate of the surviving spouse. This type of trust may be used to qualify assets for the marital deduction.
Executed Trust:
A trust in which all of the relationships among the parties have been defined, the management of the trust assets has been defined, and all documents required have been signed. A trust that is complete and needs no further documentation to be completely effective. Compare with Executory Trust, ; below.
Executory Trust:
A trust that requires the further drafting and/or execution of documents before it is completely effective. Compare with Executed Trust, ; above.
Exemption Equivalent Trust:
See Credit Shelter Trust, ; above.
Express Trust:
A trust created by the deliberate act of the settlor, usually in writing.
Fixed Trust:
A trust under which the trustee can not exercise the trustees discretion. A Non-discretionary Trust.
Fixed Investment Trust:
A trust that, under the terms of the trust agreement, can only invest in certain securities or investments. The amounts or proportions of the investments may also be specified under the trust agreement.
Foreign Trust:
A trust created and administered under non-U.S. law.
Foreign Situs Trust:
A trust that is treated for federal tax purposes as a non-resident individual because it is a Foreign Trust (defined above) or for other reasons.
Grantor:
The individual or entity that moves assets to a trust. Such a person is said to grant ; assets to the trust. See also Settlor, ; below.
Grantor Retained Income Trust ( GRIT ;).
Such a trust is established by a grantor who sets up an irrevocable trust and retains an income interest in the trust for a term that is the earlier of a set term of years or the life of the grantor, with the remainder interest going to a third party if the grantor survived the term of years, and to the grantors estate if the grantor did not.
Grantor Retained Annuity Trust ( GRAT ;):
A type of Grantor Retained Income Trust (defined above) that provides for a payout in equal dollar amounts each period.
Grantor Retained Unitrust ( GRUT ;):
A type of Grantor Retained Income Trust (defined above) that provides for a payout of a set percentage of the remaining corpus each period.
Grantor Trust:
A trust established with beneficiaries other than the grantor but which, for income tax purposes, remains owned by and taxable to the grantor. See I.R.C. §671 et seq.
Honorary Trust:
A trust for a specific purpose which is non-charitable. Additionally, this type of trust has no determinable beneficiary. These trusts are usually not respected and are therefore unenforceable.
Illusory Trust:
A relationship that appears to be a trust but does not transfer enough management rights of the trust assets to the trustee to be respected.
Imperfect Trust:
See Executory Trust, ; above.
Implied Trust:
A trust implied by the transactions of the parties through operation of law. An Implied Trust may be either a Constructive Trust or a Resulting Trust. Compare with Express Trust, ; above.
Indestructible Trust:
A trust drafted so that the beneficiaries are legally unable to terminate the trust.
Insurance Trust:
Generally, a trust drafted to hold insurance policies.
Intentionally Defective Irrevocable (or Income) Trust ( IDIT ;):
A trust that is intentionally drafted so that for income tax purposes, the transfer from the grantor to the trust is deemed not to have happened. Therefore, the grantor receives all the income tax benefits and obligations of the trust. However, for estate and gift tax purposes, the transfer to the trust is respected, and the property is not considered part of the grantors probate estate or part of the grantors estate for estate tax purposes at death.
Inter Vivos Trust:
A trust established during the life of the settlor.
Involuntary Trust:
See Constructive Trust, ; above.
Irrevocable Trust:
A trust that cannot be modified or revoked by the settlor once it is established. Such a trust is usually its own entity for tax purposes (meaning the income it generates will be taxed either to the beneficiaries that receive it or such income will be taxed to the trust if not distributed). Also, the assets in such a trust are usually not included in the taxable estate of the settlor at the settlors death.
Irrevocable Life Insurance Trust ( ILIT ;):
A trust that is established to hold life insurance on the settlor or his/her family. Such a life insurance trust is usually drafted to be an irrevocable trust so that the assets of the trust will not make up part of the settlors taxable estate at death. A settlor may fund an irrevocable life insurance trust in such a way that the moneys used to fund the trust does not count against the settlors lifetime estate and gift tax credit (meaning there is no chance that these transfers could lead to an estate tax at death). This funding scheme utilizes Crummey contributions. The moneys moved into the trust are used by the trust to purchase and maintain life insurance policies. Additionally, the insurance proceeds that are paid out at death do not go into the taxable estate of the decedent, and are therefore not subject to his or her estate tax.
Land Trust:
A trust drafted to hold real property in which the trustee appears to hold full powers over the administration of the real property. On the property records, the land is titled to the trustee through a deed of trust. However, these trusts typically give the beneficiary enough control over the real property or the trustee to negate the trust relationship for tax or other purposes.
Limited Trust:
A trust created for a set period of time.
Liquidation Trust:
A trust formed to receive the proceeds of the liquidation of a business or estate with the ultimate purpose to distribute the proceeds out to beneficiaries.
Living Trust:
A trust formed during the life of the settlor. An Inter Vivos Trust.
Marital Deduction Trust:
This trust is a testamentary trust often used in conjunction with the Credit Shelter Trust (see A-B Trust Planning ;). A Marital Deduction Trust is drafted to meet the requirements needed to use the unlimited marital deduction. Assets in the Marital Deduction Trust benefit a surviving spouse for life and are included in the surviving spouses taxable estate at death.
Medicaid Trust:
This refers to either (i) one of several trusts drafted according to the Medicaid rules which allows an individual in need of Medicaid benefits to place assets in trust for an approved purpose without risking a delay in qualification under the asset test of Medicaid qualification, or (ii) a Special Needs Trust, defined below.
Ministerial Trust:
A trust requiring the trustee to exercise only reason. Typically thought of as requiring only ministerial acts that most intelligent trustees could manage (a lower amount of expertise than a Discretionary Trust would require). Trusts meant to collect assets from a specific series of events and then distribute the assets to a set of known beneficiaries would fall under this category.
Naked Trust:
See Dry Trust, ; above.
Net Income Makeup Charitable Remainder UniTrust (NIMCRUT):
A Charitable Remainder Unitrust (see definition above) that provides for income payments to be made up over the term of the trust if there is not enough income generated in any period to pay out the full amount of the unitrust interest.
Nominee Trust:
An arrangement whereby trustees agree to hold property, pursuant to a written declaration of trust, for the benefit of undisclosed beneficiaries.
Non-Discretionary Trust:
See Fixed-Investment Trust, ; above.
Oral Trust:
A trust agreement formed between a grantor and trustee without the use of a written instrument.
Passive Trust:
A trust that requires the trustee only to hold title to the property. No active management is required by the trustee. Compare with Active Trust, ; above.
Perpetual Trust:
A trust drafted to continue indefinitely.
Pour Over Trust:
A trust created by will (typically referred to as a pour-over will) into which the will pours over ; all the decedents assets.
Power of Appointment Trust:
A trust used to qualify assets for the marital deduction. Assets are placed into trust by a spouse, typically at death, with the income of the trust required to be distributed to the surviving spouse for the life of such spouse. The surviving spouse is given an unqualified power of appointment to determine who should benefit from the trust assets at the death of the surviving spouse (with the ability to benefit the surviving spouses estate, creditors, etc.).
Precatory Trust:
A trust established by a court from language in a will not specific enough to establish a trust without court intervention.
Principal:
The assets that make up the trust.
Private Trust:
A trust created to benefit known beneficiaries or categories of beneficiaries that are not charitable.
Professional Trustee:
A Trustee that is independent and functions as a trustee in the normal course of its business. Most Professional Trustees are banks and trust companies.
Public Trust:
See Charitable Trust, ; above.
Qualified Domestic Trust ( QDOT ;):
A trust that qualifies for the unlimited marital deduction when the surviving spouse is not a U.S. citizen or resident.
Qualified Personal Residence Trust ( QPRT ;):
A trust that holds only an interest in one personal residence (and related assets) of the grantor and that complies with Treasury Regulation 25.2702-5(c). The grantor retains the right to occupy the residence for a period of time after which the residence becomes property of the beneficiary. If the donor dies prior to the term of the trust, the trust terminates and the property reverts to the grantors estate. If the grantor lives through the term of the trust, the beneficiaries receive the residence at a discounted gift value for the donor. This type of trust is one of a multitude of trusts designed primarily as a wealth transfer tool.
Qualified Terminable Interest Property Trust ( Q-TIP ;):
Such a trust is established to qualify for the unlimited marital deduction. Property placed in such a trust will be used for the benefit of a spouse during the life of such spouse. However, such spouse does not have the ability to appoint the property to anyone else at his/her death. Property in a Q-TIP trust qualifies for the marital deduction only to the extent a personal representative (also know as an executor) elects to have such property treated as terminable interest property.
Real Estate Investment Trust (REIT):
A REIT is a corporation that receives special tax treatment and is formed to allow many individuals or entities to invest in real estate. The REIT typically provides the real estate investment expertise and allows the investors to passively invest.
Reciprocal Trust:
A trust made for the benefit of a beneficiary who similarly makes a trust for the benefit of the grantor of the first trust.
Resulting Trust:
A trust arising by operation of law or act of court when it appears that the intent of the parties was to create a trust relationship.
Revocable Trust:
A trust that may be modified or revoked by the settlor. This type of trust is considered a grantor trust resulting in the income generated being taxed to the settlor and the assets in the trust at the settlors death being included in the settlors taxable estate.
Revocable Living Trust:
A trust created where the settlor is often both the trustee and the beneficiary (during the life of the settlor). Trust assets are held in trust but managed in largely the same way they were before establishment of the trust. Because of the nature of the trust relationship, a Revocable Living Trust is a non-entity for tax purposes. Income will flow to the settlor and assets in the trust will be included in the settlors taxable estate at death. However, assets in the trust will not require probate upon the death of the settlor. Additionally, because trusts are not recorded at death in the same manner as wills, a Revocable Living Trust can provide confidentiality to the family of a decedent (the gifts to beneficiaries are not a matter of public record).
Rule Against Perpetuities:
The rule, now modified in a significant number of jurisdictions, that no interest in property is good unless it must vest, if at all, not later than twenty-one years after some life or lives in being at the time of the creation of the trust.
Savings Account Trust:
See Totten Trust, ; below.
Secret Trust:
A relationship formed by oral agreement in which one party agrees to hold the other partys property for a period of time.
Settlor:
An individual who moves assets into trust during life. Such an individual is said to settle ; the trust. See also Grantor, ; above.
Shifting Trust:
A trust that provides for a change in the beneficiaries is certain contingencies come to pass.
Short Term Trust:
A trust that is drafted to exist for only a very limited period of time.
Simple Trust:
A trust that, by its terms, distributes all of its income currently. See I.R.C. §651-52. Compare with Complex Trust, ; above.
Special Trust:
A trust that is created to give a trustee powers needed to complete a specific task.
Special Needs Trust:
A trust created to provide benefit to a disabled individual without disqualifying such individual from private or public benefits programs such as Medicaid. This type of trust is a discretionary trust that will not provide the basics of care to an individual but will provide supplemental benefits to such person. Property drafted, such a trust will not disqualify an individual from a benefit program such as Medicaid nor will it be responsible for repayment of such benefits rendered after the death of the disabled person.
Spendthrift Trust:
A trust that has provisions protecting the beneficiary from the beneficiarys potential poor financial decisions or liability. Such a trust will prevent the beneficiary from transferring the beneficiarys interest in the trust and usually provides only discretionary distributions to the beneficiary.
Split Interest Trust:
A charitable trust in which the charity receives either a term (or life) income interest or in which the charity receives a remainder interest after a term (or life) interest. In either case, a non-charitable beneficiary receives the other interest.
Sprinkle Trust:
A trust that gives the trustee the discretion to pay as much of the income and principal as the trustee deems appropriate to the beneficiary. Alternately, a trustee may be given a sprinkle power in the trust to be used under certain circumstances or up to certain limits.
Spray Trust:
See Sprinkle Trust, ; above.
Supplemental Needs Trust:
See Special Needs Trust, ; above.
Support Trust:
A trust that gives the trustee the power make distributions to the beneficiary of amounts only for the beneficiarys support, education, and/or maintenance.
Testamentary Trust:
A trust established through a testamentary document (a Will or other trust) at the death of the decedent.
Totten Trust:
A bank account that that is payable upon death to another, subject to the creditors of the deceased.
Transgressive Trust:
A trust that violates the rule against perpetuities.
Trust:
A relationship formed by a settlor transferring assets to a trustee to be managed according to the trust document for the benefit of beneficiaries.
Trustee:
The individual or company that manages assets placed into a trust by following the language of the trust document. Trustees may be either family members, friends, or professional trustees such as trust companies or banks. In some situations, the trustee may be the original settlor and/or beneficiary (e.g., a Revocable Lead Trust).
Trustor:
See Settlor, ; above.
Unit Investment Trust:
An unmanaged fund of investments (typically bonds) sold in units of a set dollar amount.
Unitrust Interest:
In the trust context, a payment that is made regularly (usually annually) that is determined based on a percentage of the trusts total value of assets and recalculated each period. Compare with Annuity Interest, ; above.
Voting Trust:
A trust relationship formed by shareholders of a corporation whereby shares of various shareholders are pooled to be voted by a one shareholder or trustee as a block.