Trusts and Estates Glossary

A generic phrase referring to a written document that either

designates who will make health care decisions for you if you are unable to do so yourself, or

expresses your wishes and desires regarding the use or nonuse of medical treatments or procedures.

For Illinois residents, there are generally 5 different types:

• Durable Power of Attorney for Health Care
• Health Care Memorandum
• Living Will
• DNR/POLST (Do-Not-Resuscitate/Physician Orders for Life Sustaining Treatment)
• Mental Health Treatment Preference Declaration

Notes: Durable Power of Attorney for Health Care is a separate topic described in this Glossary under the item Powers of Attorney. Each of the other 4 Advance Directives is, itself, a separate item described in this Glossary.

The person who receives an Annuity. Depending upon the provisions of the Annuity Contract, there can be two Annuitants.

Note: Annuity, Annuity Contract, and Charitable Gift Annuity, are separate items described in this Glossary.

A fixed amount of money which is normally paid to the Annuitant (the person who receives the Annuity). However, if the Annuity Contract so specifies, the fixed amount of money can be paid to 2 Annuitants, and can continue to be paid after the Annuitant’s death to a designated beneficiary.

The fixed amount of money is normally paid for a fixed period of time, for the lifetime of the Annuitant (and thereafter for the lifetime of a designated beneficiary), or for the joint lifetimes of the Annuitant and another person.

Note: Annuitant, Annuity Contract, and Charitable Gift Annuity, are separate items described in this Glossary.

Although an Annuity Contract can be issued by an individual person, it is normally a Contract issued by a life insurance company, and is issued in consideration for a single lump sum premium payment, or for premium payments that are paid over a period of time at specified intervals—i.e., monthly, quarterly or annually. In exchange for receiving the premium payment(s), the issuer of the Annuity Contract agrees to pay a specified Annuity to the person(s), and upon the terms and conditions, specified in the Annuity Contract.

Note: Annuitant, and Annuity are separate items described in this Glossary.

Generally, the total original cost paid to acquire property or any other asset. Basis can be increased by such items as capital improvements or decreased by items such as depreciation. Basis is used to compute taxable gain whenever the property or other asset is sold.

Example: Bob purchased 1 share of XYZ stock at a cost of $18. The stock has a cost basis equal to $18. If Bob sells the share at a price of $98, he will realize a capital gain of $80. Depending upon how long Bob owns the share, the capital gain realized upon the sale will be either a short-term capital gain or a long-term capital gain. Bob will be required to report the capital gain on his personal income tax return for the year in which the sale occurs.

Note: To learn about the adjustments that must be made to the cost basis of certain assets owned by, and inherited from, a Decedent, please see the separate item in this Glossary entitled Stepped-Up Cost Basis.

This is a generic term that generally refers to a person who inherits property or assets as a result of someone’s death. The Beneficiary may inherit property or assets as a surviving joint tenant, or pursuant to a Will, a Trust, or a Beneficiary Designation Form under a Death Benefit Asset such as a Life Insurance Policy, Annuity Contract, IRA, 401(k) Plan, other type of Retirement Plan, or third-party beneficiary type of contract (such as a Salary Continuation Agreement, Deferred Compensation Agreement, Consulting Agreement).

A Beneficiary sometimes also refers to a Trust that receives property or assets as a result of someone’s death. For example, a Trust may be named as the direct Beneficiary of proceeds payable under a life insurance policy, or as the Beneficiary under a person’s Pour Over Will.

In addition, a Beneficiary may be a person who receives a gift from someone during the lifetime of the person making the gift—i.e., during the lifetime of the Donor. Such a Beneficiary can also be referred to as a Donee.

Note: Beneficiary Designation Form, and Pour Over Will, are separate items described in this Glossary.

A written form that is used to designate one or more beneficiaries who will receive Death Benefit Assets after you die.

Death Benefit Assets normally include death proceeds payable under

life insurance policies,

annuity contracts,

IRAs (Individual Retirement Accounts),

401(k) Plans and other types of qualified retirement plans, and third party beneficiary types of Contracts such as Deferred Compensation, Salary Continuation, and Consulting Agreements.

Beneficiary Designation Forms should be carefully completed so that the disposition of your Death Benefit Assets is coordinated with your overall estate plan.

In almost all cases, we recommend that you name not only a Primary Beneficiary, but also one or more Contingent, or Secondary, Beneficiaries, for your Death Benefit Assets. In that way, if your Primary Beneficiary does not survive you, the particular Death Benefit Asset will be paid to your Contingent Beneficiary or Beneficiaries, thus avoiding Probate.

In addition, if your Primary Beneficiary survives you, he or she may wish to refuse to accept a portion or all of the Death Benefits. To do so, your Primary Beneficiary will need to sign a written document called a Disclaimer. Naming Contingent or Secondary Beneficiaries can facilitate the use of a Disclaimer.

Note: Probate, and Disclaimer, are separate items described in this Glossary.

The difference between the amount received in a sale or exchange of an asset, and its cost basis.

The capital gain or loss will either be short-term, or long-term, depending upon the length of time the asset was owned.

Note: Basis (a/k/a Cost Basis) is a separate item described in this Glossary.

Note: Please see Beneficiary Designation Form, which is a separate item in this Glossary.

A way to make a gift to your favorite Charity and, in exchange, receive Annuity payments for life, or for the joint lives of you and one other person. In addition, if you itemize your deductions, you can also receive an income tax charitable deduction.

The terms of the Charitable Gift Annuity are described in an irrevocable Contract between you and the Charity.

For a complete discussion of Charitable Gift Annuities, how they work, and their pros and cons, please visit the website of the American Council on Gift Annuities at https://www.acga-web.org/.

Established by Clients who wish (a) to leave assets to one or more charitable organizations (“Charities), but also benefit one or two individual (non-charitable) beneficiaries, and (b) receive an income tax and estate tax charitable deduction for the portion of the Trust that passes to the Charity.

A Charitable Trust you establish during your lifetime will be irrevocable. You may also establish, in your Will or Living Trust, a Charitable Trust that will take effect upon your death.

Some of the most popular types of Charitable Trusts include the following:

• Charitable Lead Trust

A Trust in which one or more Charities have the current right to receive distributions of an income or an annuity interest for a specified term of years. Upon the expiration of the specified term, all remaining Trust assets are transferred to individual (non-charitable) beneficiaries who have been designated by the Trustmaker(s) in the Trust instrument. In this type of Trust, the current interest that is initially provided for the Charity or Charities Leads the interest that is later provided for the individual (non-charitable) beneficiaries.

There are basically two different types:

A Charitable Lead Annuity Trust, which is sometimes referred to as a CLAT; and

A Charitable Lead Unitrust, which is sometimes referred to as a CLUT.

• Charitable Remainder Trust

A Trust in which the Trustmaker(s), or the individual (non-charitable) beneficiary or beneficiaries named by the Trustmaker(s), have the current right to receive distributions of income or an annuity interest for a specified term, for the life of the beneficiary, or for the joint lives of the beneficiaries. Upon the expiration of the specified term, or upon the death of the beneficiary, or upon the death of the surviving beneficiary, all remaining Trust assets are transferred to one or more Charities designated by the Trustsmaker(s) in the Trust instrument. In this type of Trust, the Charity or Charities receive the interest in the Trust that Remains after the current interest that is initially provided for the individual (non-charitable) beneficiary or beneficiaries.

There are basically three different types:

A Charitable Remainder Annuity Trust, which is sometimes referred to as a CRAT; and

A Charitable Remainder Unitrust, which is sometimes referred to as a CRUT; and

A Net Income Makeup Charitable Remainder Unitrust, which is sometimes referred to as a NIMCRUT.

Note: Income, Principal, or Income and Principal is a separate item described in this Glossary.

Historically and literally, a Codicil has been used to refer to a "little codex,"—i.e., a little bit of writing on a small piece of writing material, used to add to or change something about a larger piece of writing.

Today, a Codicil is a formal written document that changes—i.e., amends or supplements-- a previously signed Will.

In order for a Codicil of an Illinois resident to be valid, it must meet the same requirements for a Will to be valid—i.e., the resident must be at least 18 years of age and mentally competent, and the Codicil must be signed in the presence of at least 2 credible witnesses.

There is no limit on the number of Codicils a person may sign. For example, a person may have a Will, and a First Codicil, a Second Codicil, a Third Codicil, and so on. However, at some point, it is often easier and simpler for everyone to have a new Will signed that automatically revokes all previously signed Wills and Codicils. Having one Will means that you don’t have to, say, read a Will and 3 separate Codicils—i.e., 4 documents--together to determine what provisions apply.

Note: Will is a separate item described in this Glossary.

A type of ownership in which property or assets, excluding gifts and inheritances, acquired during marriage are deemed to be owned equally by both spouses, regardless of how the title actually reads. There are currently 9 Community Property States, and each has its own unique version of Community Property Laws: Wisconsin, New Mexico, Louisiana, Nevada, Arizona, California, Idaho, Washington, and Texas. In addition, there is 1 “opt-in” Community Property State—i.e., residents of Alaska may “opt in” to the Alaska community property laws.

In order to explain what a Crummey Power is, it is first necessary to provide some background:

The Federal Gift Tax Annual Exclusion for gifts made in 2018 or 2019 was, and is, $15,000 per person per calendar year. This means that you may make as many gifts, and to as many different people (whether related to you or not), as you wish, and as long as the total value of gifts you make to any one person does not exceed $15,000 in any one calendar year, there will be no gift tax, or income tax, ramifications to anyone, and no tax returns for anyone to file.

Example: On February 1, 2018, you give Bill a check for $11,000. On September 1, 2018, you give Bill another check for $2,000. On December 25, 2018, you give Bill a third check for $1,500. Your 3 gifts to Bill during 2018 total $14,500. Since these gifts do not exceed $15,000 during the calendar year of 2018, you do not have to file a Federal Gift Tax Return, and neither you nor Bill owe any Federal Gift Tax. In addition, the gifts received by Bill do not constitute taxable income to him.

In order to qualify for the Federal Gift Tax Annual Exclusion, however, the gift must be a gift of a present interest. In the above Example, the 3 gifts to Bill were all gifts of a present interest, as Bill had immediate possession of the gifted funds.

In contrast to gifts of a present interest that are made to individual persons, gifts that are made to a Trust are generally characterized as gifts of a future interest, as the Trust beneficiaries do not normally receive immediate possession of such gifts. As a result, since such gifts are not gifts of a present interest, they do not qualify for the Federal Gift Tax Annual Exclusion.

If, however, the provisions of the Trust give the beneficiary, or each of the beneficiaries, a limited power to withdraw any gift made to the Trust, then the gift to the Trust can be treated as a gift of a present interest, and as such will qualify for the Federal Gift Tax Annual Exclusion. These types of beneficiary withdrawal powers are commonly used in an Irrevocable Life Insurance Trust.

Such a limited power authorizing Trust beneficiaries to withdraw gifts made to a Trust was first legitimatized in the case of Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). Hence, the name “Crummey Power”.

Note: Irrevocable Life Insurance Trust (a/k/a an ILIT), is a separate item described in this Glossary.

A person who has died.

A person who is related, by blood or adoption, to someone from an earlier generation. So, a person’s descendants include his or her children, grandchildren, great grandchildren, great great grandchildren, great great great (whew!) grandchildren, and so on, as far down the generational line as is possible. However, a person’s descendants does not include any one who is or was married to a descendant.

Note: Descendants per stirpes, is a separate item described in this Glossary.

The phrase descendants, per stirpes, is commonly used to describe how a deceased person’s assets are to be distributed among his or her descendants. Its application depends upon which descendants survive, and how closely related each is to the deceased person.

For example, a Living Trust might contain the following provision:

“Upon my death, and after paying all proper debts, taxes and expenses, the Trustee shall distribute all of the remaining Trust assets to my surviving descendants, per stirpes.”

Unfortunately, however, the meaning of this phrase is not readily apparent to Clients. In many cases, and after reading the phrase, a Client will often ask “OK, just exactly who am I leaving my money to?”

The phrase is a favorite among estate planning attorneys, because it is short, concise, well defined under the law, and, after a somewhat lengthy discussion, understandable by Clients. Use of the phrase also saves the estate planning attorney from having to draft, as replacement language, 3 to 4 additional pages of legalese which would likely be even more baffling to Clients. Accordingly, use of this phrase, followed by a discussion with the Clients, seems to be the option that is most preferred by estate planning attorneys.

The “per stirpes” portion of the phrase literally means “by the stirrups”, or “by right of representation”, and, in our opinion, should never be used to modify “children”, “grandchildren”, or “great grandchildren” etc. Rather, “per stirpes” should only ever be used to modify “descendants”, as that term includes, potentially, persons in more than one generation.

This phrase is utilized when a Client wishes each branch of his or her family (but with each branch consisting only of the Client’s descendants) to inherit an equal portion of the assets. And, if the descendant in a particular branch who is most closely related to the Client is not living, then that deceased person’s then living descendants, per stirpes, will share the portion that the deceased person would have received if he or she were living. Sounds simple, right?

Since a picture is worth a whole lot of words, please click here to see, in a visual and colorful format, how a distribution to descendants, per stirpes, would be made in four different Scenarios.

Note: Descendant is a separate item described in this Glossary.

A Disclaimer is a legal “No Thank You”—i.e., it is the refusal by a Beneficiary to accept a bequest or inheritance, or a portion of a bequest or inheritance.

Example 1: In a properly filed Beneficiary Designation Form, Bill named his 60-year old brother, Bob, as the sole Primary Beneficiary of his $100,000 Traditional IRA. Bill also named Bob’s three children as the equal Contingent Beneficiaries of the IRA. Bill’s children are 32, 30 and 28 years old, and they all survived Bill.

After Bill dies, Bob talks to his estate planning attorney, and learns that he, Bob, will have to pay income tax on the entire $100,000 IRA if he receives it in a lump sum. Bob also learns, alternatively, that he has the option to treat the IRA as an Inherited IRA, and if he does so, he must begin withdrawing an annual Required Minimum Distribution (“RMD”) amount beginning in the year after Bill’s death. The amount of each such annual RMD will be determined by using Bob’s remaining life expectancy under the IRS Single Life Table, and each annual RMD will constitute taxable income to Bob in the year it is withdrawn.

While talking with his estate planning attorney, Bob also learns that he can refuse to accept a portion, or all, of Bill’s IRA by signing a written Disclaimer. In order to be effective, the Disclaimer must be signed and delivered to the IRA Custodian/Trustee within 9 months following Bill’s death, and must be written in such a way that it is treated as a Qualified Disclaimer under the Internal Revenue Code. In addition, Bob must not receive any benefits from Bill’s IRA.

Bob decides that he has enough assets for his retirement years, and would like his children to receive all of Bill’s IRA. Accordingly, Bob signs the Qualified Disclaimer prepared by his estate planning attorney. The Qualified Disclaimer states that Bob refuses to accept any portion of Bill’s IRA. Bob never receives any benefit from the IRA. The signed Qualified Disclaimer is then delivered to the IRA Custodian/Trustee on the 60th day following Bill’s death.

The following results will occur as a consequence of the signing and delivery of Bob’s Qualified Disclaimer:

the IRA will be administered by the IRA Custodian/Trustee in the same manner as if Bob had died before Bill—i.e., it will be administered equally for the benefit of Bob’s 3 children, as they are listed as the Contingent Beneficiaries;

since Bob’s 3 children are much younger than he is, their respective life expectancies under the IRS Single Life Table are much longer than Bob’s life expectancy. Accordingly, if Bob’s 3 children each establish an Inherited IRA for their respective 1/3 portions of the $100,000 IRA, their annual RMDs will, in the aggregate, be much smaller than the annual RMDs Bob would have otherwise been required to withdraw; and

the transfers of 1/3 of the $100,000 IRA into separate Inherited IRAs for each of Bob’s 3 children will not be treated as gifts made by Bob to each of his 3 children—rather, the transfers will be treated as inheritances received by each of Bob’s 3 children from Bill—and as a result, the Federal Gift tax rules will not apply to such transfers.

Example 2: Bill includes in his Living Trust a bequest of $100,000 to Bob. Bill also provides in his Living Trust that if Bob does not survive him, the $100,000 bequest is to be paid equally to those of Bob’s 3 children who survive him.

Bob signs a Qualified Disclaimer stating that he refuses to accept 3/5 ($60,000) of the $100,000 bequest. The signed Qualified Disclaimer is then delivered to the successor Trustee of Bill’s Living Trust on the 60th day following Bill’s death. In addition, prior to delivering the Qualified Disclaimer, Bob does not receive any portion of the bequest.

The following results will occur as a consequence of the signing and delivery of Bob’s Qualified Disclaimer:

2/5 of the $100,000 bequest, or $40,000, will be paid to Bob;

3/5 of the $100,000 bequest, or $60,000, will be paid in the same manner as if Bob died before Bill—i.e., the $60,000 portion of the bequest will be paid equally to Bob’s 3 children, as that is what the provisions of Bill’s Living Trust require; and

the payments to Bob’s 3 children will not be treated as gifts made by Bob to his children--rather, such payments will be considered to be inheritances received by each of Bob’s 3 children from Bill, with the result that, again, the Federal Gift Tax rules will not apply to these payments.

Note: Beneficiary, Beneficiary Designation Form, and RMD (a/k/a Required Minimum Distribution) are separate items described in this Glossary.

Emergency medical personnel are required to do everything they can to attempt to save a person’s life.

Traditionally, a signed DNR (Do-Not-Resuscitate) Advance Directive has been used to alert emergency medical personnel that they are not required to do everything possible to save a person’s life.

Illinois has revised the DNR Advance Directive, and it is now known as a POLST, which stands for Physician Orders for Life-Sustaining Treatment.

The POLST is a signed medical order for documenting the life-sustaining treatment wishes of seriously ill patients, and travels with the patient to assure that treatment preferences are honored across all settings of care. The document must be signed by the patient or patient representative, by an attending physician, and by one witness. It may be revoked by the patient at any time.

The POLST is designed for persons of any age for whom death within the next year would not be unexpected. It is not intended for persons with a chronic but stable disability.

Section A of the POLST still allows a patient to determine if he or she wishes to have Cardio Pulmonary Resuscitation administered, or not administered (DNR), if he or she is ever found to have no pulse and not be breathing.

The requirement that a POLST must be signed by an attending physician is to ensure that the physician will have an opportunity to explain to the patient what may happen if different treatments are tried.

Note: An Advance Directive is a separate item described in this Glossary.

Estate can refer either to an Estate for Estate Tax purposes, or to an Estate for Probate purposes.

Estate for Estate Tax purposes: To determine if any Federal, or Illinois, Estate Tax is due after someone dies, it is first necessary to add up all assets that are, under the applicable tax laws, “included” in the Decedent’s Estate. It doesn’t matter whether such assets are subject to probate, whether the Decedent has a valid Will in effect, or whether the Decedent has signed a revocable Living Trust. The key is whether the Decedent is considered to own an asset, own an interest in an asset, or to have control over an asset.

Generally, such included assets are all assets, or interests in assets, that

are owned by the Decedent in his or her name alone,

are jointly owned by the Decedent with one or more other joint owners, or

are controlled by the Decedent, such as the death proceeds under any life insurance policy owned by the Decedent and that insures the Decedent’s life, and all benefits payable under any IRA, Retirement Plan or Annuity owned by the Decedent.

Only after listing and totaling such included assets can a determination be made as to whether any deductions or exemptions are available that will reduce or eliminate an Estate Tax.

Estate for Probate purposes: To determine if it will be necessary to open a Probate Estate for a person who has become incapacitated, it is first necessary to list all of the Decedent’s assets that are titled in his or her name alone, and then determine if such assets may be used for his or her benefit pursuant to a Power of Attorney for Property the person may have signed.

To determine if it will be necessary to open a Probate Estate for a Decedent, it is first necessary to list, and total the values for, all of the Decedent’s solely-owned assets. For this purpose, a Decedent’s solely-owned assets are those assets titled in the Decedent’s name alone, and for which there is no surviving beneficiary.

Note: Estate Tax, Probate, and Annuity are separate items described in this Glossary

Note: Please see Fiduciary Income Tax, which is a separate item in this Glossary.

Although it can mean many different things to different people, an Estate Plan almost always results from two different approaches: (a) the Pro-Active Approach; and (b) the Passive Approach:

• Pro-Active Approach:

This Approach begins with your decision to protect your beneficiaries and preserve your assets and family values through responsible planning.

That decision is then followed by

having one or more meetings to provide an experienced estate planning attorney with information about the nature and extent of your assets and liabilities, and to discuss your unique goals and circumstances and how best to address them;

reviewing and then signing appropriate Estate Planning documents to implement your particular plan;

completing all necessary Funding, so that the disposition of your assets is coordinated with your Estate Planning documents;

reviewing your Estate Planning documents on a regular basis to ensure that they are up to date—i.e., that they continue to address your goals and circumstances--and that they continue to comply with the changing applicable laws; and

reviewing your Funding on a regular basis to ensure that the disposition of any new assets you may acquire is coordinated with your Estate Planning documents.

As you can see, an Estate Plan that results from this approach is not a “one and done” event where you simply sign documents and then set them aside until they are needed; rather, an effective Estate Plan results from a process that ensures that it is not only properly designed and funded to begin with, but will also continue to meet your goals and circumstances in the future, even if they change.

Such an Estate Plan may include many different types of Estate Planning documents, including Living Trusts, Wills, Powers of Attorney for Property, Powers of Attorney for Health Care, Health Care Memoranda, Living Wills, and HIPAA Authorizations.

• Passive Approach:

This Approach is normally caused by procrastination, resulting in a failure to complete proper, or any, planning or Funding.

Procrastinating is, of course, the easiest option to take, particularly when you are trying to balance family responsibilities, children’s extracurricular activities, work, etc. However, the decision to procrastinate is also the most difficult from which to recover if improper (or no) planning is in place when life’s twists and turns take control.

To be sure, this Approach is, in fact, a type of estate plan that is normally characterized by failing to sign appropriate Estate Planning documents, and/or not completing sufficient, or any, Funding.

For example, if you fail to sign a Will, then you are agreeing that the Last Will and Testament provided by the State of Illinois*** to dispose of your solely-owned assets is acceptable to you, even though

Probate may be required at your death;

The Administrator who will be appointed to be in charge of your Probate estate may not be the one you would have chosen;

An individual Administrator will be required to purchase an expensive surety bond, and your Probate estate will pay for the bond premium;

A Guardian of the Person for any minor children of yours will be appointed by the Probate Court, and the Guardian may not be the one you would have chosen, and

All items pertaining to your Probate estate will be public and therefore able to be viewed by anyone.

*** We have included in the Resources section of our Website a sample of the Last Will and Testament that is provided by the State of Illinois.

Obviously, there can be a significant cost savings if this Approach is adopted, as attorney’s fees for estate planning can be completely avoided. However, if you ever become incapacitated, and upon your death, the additional costs, expenses and attorney’s fees that can then be incurred will oftentimes greatly exceed such cost savings.

Please review the Section of this Website entitled Becoming an Estate Planning Client. As you will see, if you make an investment of your time by completing our Estate Planning Questionnaire, and then having an initial meeting with us, we, in turn, will invest our time to review your Questionnaire, and to meet with you, all at no charge. Then, if you decide not to proceed, you will have incurred no financial obligation, and, at the very least, will be better organized, and have a better understanding of estate planning in general.

Note: The above discussion refers to certain terms and phrases that are each a separate item in this Glossary: Administrator; Beneficiary; Estate Planning; Funding; Guardian of the Person; Health Care Memorandum; Powers of Attorney; Probate; Trust; and Will.

Estate Planning can mean many different things to different people.

However, despite what you may have heard, Estate Planning isn’t about documents, it’s about people. Each Client has unique goals and circumstances. Your Estate Plan should address these goals and circumstances.

Over the years, we have developed a general definition of Estate Planning that has proven to be meaningful for our Clients, at least as a starting point:

Maintaining control of your property while you are alive and competent;

Taking care of yourself and your loved ones during any period in which you are incapacitated;

After your death, getting what you have to whom you want, the way you want, and when you want; and

Saving every last tax dollar, professional fee, and court cost possible.

To be sure, having the proper documents in force is an important part of Estate Planning. Typically, these documents can include Living Trusts, Wills, Powers of Attorney for Property, Powers of Attorney for Health Care, Living Wills, Health Care Memoranda, and HIPAA Authorizations. In some cases, other types of estate planning documents may also be called for.

However, Estate Planning involves much more than simply signing the proper documents, and then filing them away. It is a process that involves several elements:

providing your estate planning attorney with all information pertaining to your assets, liabilities and potential beneficiaries;

discussing with your estate planning attorney your concerns and goals;

analyzing the various options suggested by your estate planning attorney;

signing the documents necessary to establish an appropriate Estate Plan, or to revise an existing Estate Plan;

completing the Funding necessary to ensure that the disposition of your assets is coordinated with your Estate Plan; and

reviewing your Estate Plan, and your Funding, on a regular basis to make sure they continues to be appropriate, and up to date.

Note: The above discussion refers to certain terms and phrases that are each a separate item in this Glossary: Estate Plan; Funding; Health Care Memorandum; Living Will; Powers of Attorney; Trust; and Will.

The Estate of a deceased Illinois resident normally must be concerned with 2 types of Estate Taxes: a Federal Estate Tax; and an Illinois Estate Tax.

In addition, if an Illinois resident owns real estate located in another state, the laws of such other state may impose a state estate tax or a state inheritance tax with respect to such real estate.

An Estate Tax is not to be confused with an Inheritance Tax

An Estate Tax is a type of excise tax levied on the privilege of transferring wealth at death.

The Estate of a deceased Illinois resident has the obligation to file any Estate Tax Return that may be required to be filed, and to pay any Estate tax that may be due, within nine (9) months after the date of death.

Estate Tax Deductions: In computing any Estate Tax that may be due, the Estate may deduct from the gross value of all assets owned by a deceased Illinois resident any property or assets that are required to be distributed (a) to a qualified charitable organization, or (b) to, or in some cases for the benefit of, a surviving spouse. Debts due at the date of death, some taxes, and applicable fees and other expenses, may also be deducted from the gross value of the assets.

Estate Tax Exemptions: In addition, in computing any Estate Tax that may be due, each Decedent’s Estate currently (2019) may utilize the following Exemptions:

For Federal Estate Tax purposes, an exemption, sometimes referred to as an Applicable Exclusion Amount, of $11.4 million.

For Illinois Estate Tax purposes, an exemption of $4 million.

Note: The recently enacted Tax Cut and Jobs Act provides that the current Federal Estate Tax Exemption of $11.4 million will remain in effect for estates of persons dying in 2025 or earlier. However, for estates of persons dying on or after January 1, 2026, the Exemption will revert back to what it was in 2017—i.e., $5.49 million—but indexed for inflation.

Note: An Inheritance Tax, is a separate item described in this Glossary.

The person(s) and/or institution named in the Will of a Decedent and who will be responsible for administering the Decedent’s Probate estate. If none of the Executors named in the Will are willing and able to act as Executor, then an Administrator will be appointed to administer the Decedent’s Probate estate.

Note: Probate is a separate item described in this Glossary. For a more thorough description of the duties of an Executor, please refer to Probate.

Note: Administrator is a separate item described in this Glossary.

A Trust created at the Decedent’s death to ensure full utilization of the Decedent’s Federal Estate Tax Exemption, which is currently (2019) $11,400,000, and/or the Decedent’s Illinois Estate Tax Exemption, which is currently (2019) $4,000,00. Full utilization of the Exemption will, in turn, mean that the assets remaining in the Family Trust at a surviving spouse’s death will not be subject to Federal Estate Taxes or to Illinois Estate Taxes in the surviving spouse’s estate.

The provisions of a Family Trust will often authorize the Trustee to make discretionary payments of Trust Income and Trust Principal for the support, health, education and maintenance, of the Decedent’s surviving spouse.

Alternatively, such provisions may authorize the Trustee to make discretionary payments of Trust Income and Trust Principal for the support, health, education and maintenance, of the Decedent’s surviving spouse and surviving children (or surviving descendants).

However, this Trust will also typically be drafted in a way that will not cause the surviving spouse to be the owner of the Trust; as a result, the assets in this Trust will not be subject to estate tax in the surviving spouse’s subsequent estate, even if such assets have appreciated in value during the surviving spouse’s lifetime. In addition, this Trust can provide the surviving spouse with creditor protection.

Such a Trust may be created either within the provisions of the Decedent’s Will, or, more commonly, within the provisions of the Decedent’s Living Trust.

Note: Income, Principal, or Income and Principal is a separate item described in this Glossary.

“Fiduciary” is derived from the Latin “fiducia”, meaning "trust". A Fiduciary is a person or institution (such as a bank, trust company, or stock brokerage firm) who has the power and obligation to act for one or more others under circumstances that require the Fiduciary to act with total trust, good faith and honesty.

Common examples of a Fiduciary include the following:

a Trustee, who owes a fiduciary duty to the Trust beneficiaries to act with total trust, good faith and honesty;

an Executor or Administrator, who owes such a fiduciary duty to the beneficiaries or heirs of a Probate Estate; and

a Guardian, who owes such a fiduciary duty to the minor or disabled adult for whom the Guardianship has been established.

A Trust established by a deceased Trustmaker, or a Probate Estate, is a separate income-tax-paying entity for Federal and Illinois income tax purposes, and must pay income tax on any income or realized capital gains that is retained in the Trust or Estate, instead of paid out to the Beneficiaries or Heirs.

A Fiduciary Income Tax Return is required to be filed on behalf of a Probate Estate, or on behalf of a Trust established by a deceased Trustmaker. Unlike personal income tax returns (Forms 1040 and IL-1040), Fiduciary Income Tax Returns are prepared and filed using Forms 1041 and IL-1041.

Example: Bill died on March 10, 2019. Bill’s wife, Sally, is appointed as the Executor of Bill’s Probate Estate. As Executor, Sally will be able to sign Bill’s 2019 Federal and Illinois personal income tax returns, and such returns may be joint returns. These personal income tax returns will include all income earned by Sally during 2019, and all income earned by Bill for the period beginning on January 1, 2019, and ending on March 10, 2019. A statement will be included on these 2019 personal income tax returns stating that Bill died on March 10, 2019. In that way, the taxing authorities will be notified that, as far as Bill is concerned, there will be no further personal income tax returns filed on his behalf.

As Executor, Sally will also sign Federal and Illinois Fiduciary Income Tax Returns on behalf of Bill’s Probate Estate. These returns will include all income earned by the Estate for the period beginning on March 11, 2019, and ending on the last day of the Estate’s tax year.

Unlike humans, an Estate may select a tax year that ends on the last day of a month other than December. For example, Sally may select a tax year for the Probate Estate that ends on any of the following dates in 2019: March 31, April 30, May 31, June 30, July 31, August 31, September 30, November 30 and December 31; or on any of the following dates in 2020: January 31, and February 28.

If Sally selects a tax year for the Probate Estate that ends on February 28, 2020, then the Fiduciary Income Tax Returns for such year will include all income received by the Probate Estate for the period beginning on March 11, 2019, and ending on February 28, 2019. These Fiduciary Returns must be filed, and any income tax that is due must be paid, on or before June 15, 2020. In other words, an Estate or Trust has the same time to file Fiduciary income tax returns as we humans have to file personal income tax returns—i.e., 3 months and 15 days after the close of the tax year.

The manner in which the Fiduciary income tax is computed is totally different from the manner in which the personal income tax is computed, and is beyond the scope of this topic. Suffice it to say, if income is distributed to a Beneficiary or Heir, then the Beneficiary or Heir must include such income on his or her personal income tax return.

On the other hand, to the extent that income is retained in the Trust or Estate, instead of being distributed to the Beneficiaries or Heirs, then the Trust or Estate will pay the income tax, using its separate (and most expensive) bracket.

In 2019 a Trust or Estate is in the highest Federal income tax bracket (37%) when its taxable income reaches $12,750. On the other hand, a single Beneficiary or Heir does not reach the highest Federal income tax bracket (again, 37%) until his or her taxable income reaches $510,300.

Note: Beneficiary, and Heir, are separate items described in this Glossary.

A period of one year or less that may, or may not, coincide with a Calendar Year. Any consecutive 12-month period used by a business as its accounting period.

For an Estate, or a Trust established by a Decedent that makes an election to be treated as an Estate solely for income tax purposes, a period of one year or less that may, or may not, coincide with a Calendar Year, and that is used by the Estate or Trust as its year for income tax purposes.

Note: Please see the Example under Fiduciary Income Tax, which is a separate item in this Glossary.

In order for your estate plan to work as it has been designed, it is essential that you complete and maintain proper Funding of your assets.

Funding consists of the following:

• ensuring that the Beneficiary Designation Forms for your Death Benefit Assets are correctly completed so that the disposition of these assets is coordinated with your overall Estate plan--Death Benefit Assets include Life Insurance Policies, Annuity Contracts, IRAs, 401(k) Plans, other types of Retirement Plans, and third-party beneficiary types of contracts such as Salary Continuation, Deferred Compensation, and Consulting Agreements; and
• ensuring that the title, or ownership, of All Other Assets you own is changed so that the disposition of these assets is also coordinated with your overall Estate Plan.

Since it is such a critical part of Estate Planning, we assist you in completing the necessary Funding.

Note: Beneficiary Designation Form (a/k/a Change of Beneficiary Form) is a separate item described in this Glossary.

A tax imposed on any person who voluntarily transfers cash, property or other assets to someone else and does not receive equivalent monetary value in return. Illinois residents need only be concerned with the Federal Gift Tax, as there is currently (2019) no Illinois Gift Tax in force.

The person making the gift (the “Donor”) has the primary responsibility to file any Gift Tax Return that may be required, and to pay any Gift tax that may be due, on or before April 15 of the year following the calendar year in which the gift was made.

Gift Tax Deductions: In computing any Gift Tax that may be due, the Donor may deduct any property or assets that are transferred, or gifted, (a) to a qualified charitable organization, or (b) to, or in some cases for the benefit of, the Donor’s spouse.

Gift Tax Annual Exclusion: In addition to the Gift Tax Lifetime Exemption described below, there is also a Gift Tax Annual Exclusion for all gifts of a present interest that are made to each different individual person during each calendar year. There is no limit as to the number of recipients to whom a gift can be made, and a recipient need not be related to the Donor. At the current time (2019), the Gift Tax Annual Exclusion is $15,000 per person per calendar year. Please note that the amount of this Exclusion is indexed for inflation, and hence can periodically change.

Gift Tax Exclusion for Medical and Tuition Expenses: In addition, payments made for a person’s medical expenses directly to the provider of such medical expenses, and tuition payments made directly to an educational organization on behalf of a person, are not treated as taxable gifts, regardless of the amount. Tuition means the amount required for enrollment, and does not include books, supplies, room and board or similar expenses.

Gift Tax Lifetime Exemption: In addition to the Gift Tax Annual Exclusion described above, in computing any Gift Tax that may be due, the Donor currently (2019) has a Lifetime Exemption of $11.4 million. The IRS refers to this Exemption as the basic exclusion amount.

Example: Bill is a single person and has never before made a gift. However, he wants to make a gift in November, 2019, of $15,000 to each of his 2 sisters, and to his neighbor. If Bill gives each of the 3 recipients a check for $15,000 in November, 2019, and makes no other gifts during 2019, then Bill will not be required to file a Gift Tax Return with the IRS, or to pay any gift tax with respect to such gifts. When Bill’s 2 sisters and his neighbor each receive and deposit their respective checks, the amount of these gifts is not subject to income tax or any other tax, and they do not have to file any forms with respect to these gifts.

Bill can then make identical gifts to the same 3 recipients in January, 2020, with the same results, as he will then be making gifts in a different calendar year.

However, if Bill makes such identical gifts in January, 2020, and then later on in 2020 makes any additional gifts to any of these 3 recipients, then he will be required to file with the IRS a 2020 Federal Gift Tax Return (Form 709). The Return will need to be filed on or before April 15, 2021.

A Guardian of the Estate is an individual or institution appointed by the Probate Court to manage the financial affairs of a minor (in Illinois and 46 other states, a person younger than 18), or a disabled adult.

Note: A Guardian of the Person is a separate item described in this Glossary.

A Guardian of the Person is an individual appointed by the Probate Court to make non-financial decisions on behalf of a minor (in Illinois and 46 other states, a person younger than 18), or on behalf of a disabled adult.

Note: A Guardian of the Estate is a separate item described in this Glossary.

It is important to have a Durable Power of Attorney for Health Care in force, as this document specifies who will make health care decisions for you if you are ever unable to do so yourself. However, this document provides your health-care-decision makers with very little guidance as to how they should make health care and end-of-life decisions for you.

Generally, our Clients believe that their health-care decision makers should make health care and end-of-life decisions for them based upon each Client’s personal philosophy, even if the personal philosophies of their health-care decision makers are different. To provide a written record of how health care and end-of-life decisions should be made for you, we recommend that you consider signing a written Health Care Memorandum.

The Health Care Memorandum is not designed to be furnished to your doctors or hospitals. Rather, it is designed to act as a “road map” for your health care decision makers to assist them in making health care and end-of-life decisions for you if they are ever called upon to do so. It is a written record of your personal philosophies as to how such decisions should be made.

Note: Durable Power of Attorney for Health Care is a separate topic described in this Glossary under the item Powers of Attorney.

A beneficiary specified in the Illinois Statute of Descent and Distribution who will inherit the net solely-owned property and assets of a deceased Illinois resident who dies without having a valid Will in effect. In other words, if you die without having a valid Will in effect, the State of Illinois has a Will for you. Note: We have included a sample of the Last Will and Testament provided by the State of Illinois in the Resources Section of our Website.

Example: Bill was an Illinois resident who died without having a valid Will in effect. Bill was never married, and never had or adopted any children. Bill’s father, and Bill’s only sister, died before Bill. Bill is survived by his mother, by his 3 brothers, and by his deceased sister’s two children. Bill did not have any other brothers or sisters, and Bill’s sister did not have or adopt any other children.

The Illinois Statute of Descent and Distribution requires that after the payment of all applicable debts, taxes and expenses, Bill’s remaining solely-owned property and assets—i.e., the remainder of his Probate estate-- are to be distributed as follows:

1/3 to Bill’s mother (since Bill’s father did not survive him, Bill’s mother receives a double share—i.e., a 1/6 share for herself, and another 1/6 share for Bill’s father = 2/6

1/6 to each of Bill’s 3 surviving brothers = 3/6

1/12 to each of the 2 surviving children of Bill’s deceased sister (these children share equally the 1/6 share that would have been paid to Bill’s sister if she had survived Bill) = 1/6

An acronym that stands for Health Insurance Portability and Accountability Act, a Federal statute that was enacted in 1996. This statute gives you rights with regard to your health information, and establishes rules and limits on who can access or look at such information, whether it is in paper or electronic form.

The Agent under your Power of Attorney for Health Care may access and look at your personal health information in the same manner as you could. However, the Trustee under your revocable Living Trust, or the Executor or Administrator of your Probate estate, is not authorized under law to access or look at your personal health information.

As a result, we recommend that all Clients sign a HIPAA Authorization document that authorizes the Trustee under your revocable Living Trust, and the Executor or Administrator of any Probate estate of yours, to access and view your Health Information, as they will, in most instances, be responsible for paying all of your health care bills during any period in which you may be incapacitated, as well as the balance due on all such bills at the time of your death.

Note: Power of Attorney for Health Care is a one of the topics under the separate item in this Glossary entitled Powers of Attorney.

Every Trust authorizes, or requires, the Trustee to administer the Trust Income, and the Trust Principal, pursuant to specific provisions that are set forth in the Trust instrument.

Trust Income consists of the interest, dividends, and rents, earned by the Trust assets.

Trust Principal consists of the Trust assets themselves.

The following 3 Examples show how the Trust instrument may authorize or require the Trustee to administer the Trust Income and Trust Principal:

Example 1: The Trust instrument requires the Trustee to pay all Trust Income to Bob on a monthly basis. The amount that Bob will receive each month will depend upon how the Trustee invests the Trust assets—i.e., the Trust Principal--and also upon how frequently such investments pay Income to the Trustee. If the Trustee invests some of the Trust Principal in common stocks, some of those stocks may pay quarterly dividends on the first days of January, April, July, and October, and others may pay dividends on the first days of February, May, August, and November. If the Trustee invests some of the assets in CDs, some CD’s may pay interest semi-annually, and others may pay interest annually.

Example 2: The Trust instrument requires the Trustee to pay all Trust Income to Bob on a monthly basis. Again, the amount that Bob will receive each month will depend upon how the Trustee invests the Trust Principal, and also upon how frequently such investments pay Income to the Trustee. The Trust instrument also authorizes, but does not require, the Trustee to pay to Bob such amounts of Trust Principal as the Trustee determines is necessary or advisable to provide for Bob’s support, health, education and maintenance. In exercising the discretion to pay Trust Principal to Bob, the Trustee is directed to take into consideration the other income and resources that are available to Bob from all other sources. If the Trustee makes a discretionary Principal payment to Bob, then obviously the Trust Principal will be reduced. As a result, the Trust Income may thereafter also be reduced, as there will be less Principal to invest in assets that produce Income.

Example 3: The Trust instrument authorizes, but does not require, the Trustee to pay to Bob as much of the Trust Income and the Trust Principal as the Trustee determines is necessary or advisable to provide for Bob’s support, health, education and maintenance. In exercising the discretion to pay Trust Income and Principal to Bob, the Trustee is directed to take into consideration the other income and resources that are available to Bob from all other sources. To the extent that Trust Income is paid to Bob, he will include such Income on his personal income tax return. To the extent that Trust Income is not paid to Bob but is instead retained in the Trust, then the Trust, as a separate income-tax-paying entity, will include such retained Income on its Fiduciary income tax return, and will, itself, pay the resulting income tax using its (most expensive) bracket.

Note: For a more thorough discussion of how a Trust or Estate is taxed for income tax purposes, please see Fiduciary Income Tax, which is a separate item described in this Glossary.

People often confuse an Inheritance Tax with an Estate Tax, as they are both collected after and as a result of someone’s death. However, these taxes are different.

An Estate Tax is based upon the value of the property owned by a Decedent, and is payable by the Decedent’s estate.

An Inheritance Tax, on the other hand, is generally based upon who receives a Decedent’s assets, how closely related the beneficiary is to the Decedent, and the value of the property or assets received by the beneficiary. Normally, the beneficiary is responsible for paying the Inheritance Tax, although the Decedent’s Will or Living Trust may include language requiring the Inheritance Tax to be paid by the Decedent’s Estate or Living Trust.

As of 2018, 12 states, including Illinois, and the District of Columbia, have an Estate Tax, and 6 states have an Inheritance Tax.

The Former Illinois Inheritance Tax: Illinois used to have an Inheritance Tax, but abolished it on January 1, 1983, in favor of an Estate Tax.

Prior to its abolishment, the Illinois Inheritance Tax caused considerable distress and anxiety among a Decedent’s surviving beneficiaries, as it resulted in Banks and other institutions cross checking their customer lists with obituary notices, and then (a) sealing safe deposit boxes rented or co-rented by a Decedent until a representative of the Illinois Attorney General could make a physical inventory of the safe deposit box, and (b) placing a freeze on accounts owned or co-owned by a Decedent until an Illinois Inheritance Tax Consent could be obtained from the Illinois Attorney General and presented to the Bank.

We still occasionally receive calls from a surviving beneficiary stating that a relative or friend has just died, and then asking if they should run down to the Bank, remove everything in the “joint” safe deposit box, and withdraw all funds in the joint Bank accounts, presumably on the assumption that they will be able to do so before the Bank learns of the death. The answer continues to be a resounding “No, you don’t have to run—you can simply walk, as the Banks no longer seal safe deposit boxes or freeze bank accounts”.

Note: Estate Tax is a separate item described in this Glossary.

An adverb that describes a person who dies without having a valid Will in effect (“Bill died intestate”), or an adjective that describes the estate of such a person (“an intestate estate was opened for Bill, may he rest in peace”).

This can also be an interesting term to bring up after a cocktail party has been under way for a while: “Marge and I used to be intestate, but last Thursday we both went in and became testate. If any of you guys are still intestate, you really ought to consider making a change!”

Note: Please see RMD (a/k/a Required Minimum Distribution), which is a separate item in this Glossary.

A Trust which is both the owner and the beneficiary of a life insurance policy, and which typically owns no other assets except, perhaps, a minimum balance checking account. The purpose of establishing such a Trust is to remove the life insurance proceeds from the estate of the person who is both the Trustmaker of the Trust, and also the Insured under the policy.

Example: Bob establishes an irrevocable Life Insurance Trust, and names Bill as the Trustee. At the time the Trust is established, and each year thereafter, Bob transfers sufficient funds to the ILIT to permit the Trustee to purchase, and thereafter to pay the annual premium on, a life insurance policy that insures Bob’s life. Since the initial and annual transfers by Bob will constitute gifts to the ILIT, the ILIT will normally include provisions providing that, within certain limits, the beneficiaries of the ILIT will have rights for a limited period of time to withdraw any such gifts. In that way, the gifts can qualify for the Gift Tax Annual Exclusion. These rights to withdraw are commonly referred to as Crummey Powers.

Generally, the Trustee under the irrevocable Life Insurance Trust is the initial owner and beneficiary of the policy.

Upon Bob’s death, the Trustee will apply for and collect the death proceeds under the Policy. At the time they are received by the Trustee, the life insurance proceeds themselves will not be subject to income tax. However, if the insurance company pays any post-death interest, such interest will constitute interest income to the ILIT.

Since Bob never owned the Policy, the policy proceeds will not be included in Bob’s estate for estate tax purposes. The Trustee will dispose of the death proceeds pursuant to the provisions that are included in the ILIT.

Note: Crummey Powers is a separate item described in this Glossary.

Note: Gift Tax Annual Exclusion is a separate topic described in this Glossary under the item Gift Tax.

A method in which property or other assets are titled in the names of 2 or more persons who are known as joint tenants. This type of ownership includes a built-in right of survivorship in favor of the surviving joint tenant(s).

Example: A bank account is titled in the names of Bill and his wife, Sally, as joint tenants. Bill and Sally are the joint owners, and normally either joint owner, acting alone and without the signature or consent of the other joint owner, may exercise all ownership rights with respect to the joint bank account, including the right to withdraw all funds in the Account. If Sally survives Bill, upon Bill’s death the joint account is not subject to probate, and its disposition is not controlled by any Will or Living Trust that Bill may have signed, or by the Illinois Statute of Descent and Distribution that governs the disposition of Bill’s solely-owned property and other assets if he dies without having a valid Will in effect. Rather, the right of survivorship that is included within this type of ownership takes priority, and upon Bill’s death Sally automatically becomes the sole owner of the account. Caveat: the account is now, however, effectively a solely-owned account of Sally (even if Bill’s name continues to appear for a period of time on the account records), and hence is now subject to Probate if Sally ever becomes incapacitated, and upon Sally’s death.

Note: Please see Schedule K-1, which is a separate item in this Glossary.

A written document that is not, technically, a Will, as it does not dispose of a person’s solely-owned property and assets upon his or her death.

Rather, a Living Will is a written document that expresses a person’s end-of-life preference that death-delaying procedures shall not be used to prolong life. This document will only become effective if and when the person is suffering from a terminal condition and cannot actively participate in decisions about himself or herself.

If a person has signed both a Durable Power of Attorney for Health Care, and a Living Will, then so long as an Agent is acting under the Durable Power of Attorney for Health Care, the Living Will has no legal effect.

Note: A Durable Power of Attorney for Health Care is a separate topic described in this Glossary under the general item Powers of Attorney.

A Trust that is typically created at the Decedent’s death and that receives any assets that are in excess of the Federal or Illinois Estate Tax Exemption. Transferring any such excess assets into a Marital Trust will ensure that there will be no Federal or Illinois estate tax payable in the estate of the first spouse to die, regardless of the value of such estate. The assets that are transferred to a Marital Trust may be deductible in computing the Decedent’s estate tax liability, as such assets may qualify for the unlimited marital deduction. So, although no estate tax may be due in the Decedent’s estate with respect to the assets that are transferred to a Marital Trust, there is a flip side: whatever assets remain in the Marital Trust at the subsequent death of the Decedent’s surviving spouse will be subject to estate tax in the surviving spouse’s estate.

While there are several different types of Marital Trusts, the IRS imposes several restrictions on how a Marital Trust may be designed. For example, each Marital Trust must be established for the sole and exclusive benefit of the Decedent’s surviving spouse—i.e., during the surviving spouse’s lifetime, only the surviving spouse can be a beneficiary of the Marital Trust. In addition, generally all of the Marital Trust Income must be paid at least annually to the surviving spouse, and the surviving spouse must have the right to direct the Trustee to convert any non-productive assets into income-producing assets.

Note: Income, Principal, or Income and Principal is a separate item described in this Glossary.

Note: Estate Tax Exemptions is a separate topic described in this Glossary under the general item Estate Tax.

Note: Please see Advance Directive, which is a separate item in this Glossary.

This document allows you to state in advance whether you want to receive electroconvulsive treatment or psychotropic medicine, and whether you wish to be admitted to a mental health facility for up to 17 days, if you ever have a mental illness and are at that time unable to make such decisions yourself.

A resident Illinois who is younger than eighteen (18).

This is a phrase that is sometimes used to describe how assets are to be distributed to 2 or more beneficiaries. It is , basically, equivalent to “in equal shares”.

For example, a Living Trust might contain the following alternative but equivalent provisions:

“Upon my death, and after paying all proper debts, taxes and expenses, the Trustee shall distribute all of the remaining Trust assets to

[my grandchildren who survive me, per capita”]

OR

“[in equal shares to those of my grandchildren who survive me.”]

If there are 8 grandchildren, and all 8 survive, then each grandchild will receive a 1/8 share. However, if only 7 of the 8 grandchildren survive, then each grandchild will receive a 1/7 share, and any children and grandchildren of the deceased grandchild will receive nothing.

Although this phrase may be applied to beneficiaries in different generations, it is typically used, as in the above example, only for beneficiaries in the same generation.

Note: Contrast “per capita” with “descendants per stirpes”, which is a separate item described in this Glossary.

Please see Descendants per stirpes, which is a separate item described in this Glossary.

Many Banks, Savings and Loan institutions, and Credit Unions, permit POD Accounts to be established. These types of accounts were apparently first legitimatized in a 1904 New York case known as Matter of Totten. As a result, they are sometimes also referred to as Totten Trust accounts.

Example: Bob establishes a savings account that is titled in his name alone, but that also has a POD feature that names his brother, Bill, to be the designated beneficiary upon Bob’s death.

During Bob’s lifetime, Bob is the only person who has any authority over the savings account, and Bill has no authority whatsoever. Upon Bob’s death, and regardless of the provisions of any Will or Living Trust Bob may have signed, the entire balance in the savings account will be paid to Bill, if he survives Bob, and will not be subject to Probate in Bob's estate.

If the savings account had been established in the joint names of Bob and Bill, then upon Bob’s death, the entire account would be owned by Bill, if he survived Bob, and, like the POD savings account discussed above, would not be subject to Probate. However, during Bob’s lifetime, both Bob and Bill would have authority over the savings account.

Whenever a Revocable Living Trust is utilized, we don’t normally recommend, for many reasons, that the Trustmaker also establish POD accounts.

Having the account titled in the Revocable Living Trust provides much greater flexibility as to the disposition of the account upon the Trustmaker’s death. In addition, if the Trustmaker ever becomes incapacitated, then the successor Trustee under the Trustmaker’s Revocable Living Trust will generally have a much easier time in utilizing the account for the Trustmaker’s benefit than will an Agent acting under the Trustmaker’s financial Power of Attorney.

An acronym that stands for Physician Orders for Life-Sustaining Treatment.

Note: Please see DNR/POLST Do Not Resuscitate/Physician Orders for Life-Sustaining Treatment, which is a separate item described in this Glossary.

A type of Will that should always be signed by a Trustmaker who establishes a revocable Living Trust.

A Pour Over Will provides that after all debts, taxes and expenses are paid, any and all remaining solely-owned property and assets owned by a Trustmaker at the time of his or her death will be distributed, or “poured over”, to the Trustee(s) acting under the Trustmaker’s Living Trust. As a result, such solely-owned property and assets will eventually be disposed of pursuant to the terms of the Living Trust.

A Power normally given to a Beneficiary under the terms of a Trust. Although the Power must be exercised by the Beneficiary during his or her lifetime—i.e., while the Beneficiary is living—the Power can be drafted to take effect only during the Beneficiary’s lifetime, only after the Beneficiary dies, or during the Beneficiary’s lifetime and after the beneficiary dies.

Powers of Appointment can provide tremendous flexibility in terms of how Trust assets are ultimately distributed or managed.

Example: Bill establishes a revocable Living Trust that provides that if his wife, Mary, survives him, all Trust assets will be held in a separate Lifetime Trust for her benefit. Mary is named as the sole Trustee. The Living Trust provides that the Trustee (which is Mary, to begin with) has discretion to distribute to herself as much or all of the Trust Income and Trust Principal as the Trustee (which, again, is Mary) thinks is necessary or advisable for Mary’s support, health, and maintenance. The Trust further provides for the following Termination Provisions: upon Mary’s death, all remaining assets are to be distributed equally to Bill’s three children, who are also Mary’s children.

However, Bill’s Living Trust contains an additional provision that gives Mary what is known as a Testamentary Power of Appointment—i.e., a Power that Mary must exercise during her lifetime, but that will only take effect after Mary dies. This Testamentary Power of Appointment provides that Mary may, if she wishes, change, or override, the Termination Provisions in Bill’s Living Trust. However, if she does choose to exercise her Testamentary Power of Appointment to change or override the Termination Provisions, she must comply with the following restriction that Bill has also included in his Living Trust: Mary may only exercise the Power in a manner that benefits those of Bill’s children, grandchildren, great grandchildren, and more remote descendants who survive Mary. She may not, for example, exercise the Power in a manner that benefits her next-door neighbor, or anyone else who is not a descendant of Bill. Bill included this restriction to ensure that the Trust assets will remain in his “family”—i.e., only Bill’s descendants will ever receive Trust assets.

Why would Mary ever want to exercise such a Power? Well, there are many potential possibilities. However, let’s say that 5 years after Bill’s death, one of the 3 children suffers a serious accident, and is going to require extensive medical care, and will never be able to earn a salary that is commensurate with what he was previously earning. Since the accident happened after Bill died, he never knew about it!

Mary, however, can exercise the Power and change the Termination Provisions to provide, for example, that one-half, instead of one-third, of the assets remaining after Mary’s death will be held in a specially-designed Trust to protect the child who had the accident, and that each of the other 2 children will receive one-fourth of such assets.

Because the Power was included in Bill’s Trust Agreement, Mary has the necessary flexibility to cope with any situation she is aware of that first arises after Bill’s death.

Because of the tremendous flexibility that these Powers of Appointment add, we almost always recommend including them in the Trust Agreements that we prepare.

Note: Descendants, and Income, Principal, or Income and Principal, are separate items described in this Glossary.

Generally, Powers of Attorney for Illinois residents come in 2 different flavors: a Durable Power of Attorney for Health Care, and a financial power of attorney known as a Durable Power of Attorney for Property.

Durable Power of Attorney for Health Care: A written document that names someone as your Agent, and that should also name one or more persons as Backup Agents. This document will take effect If your doctor ever believes that you lack capacity to give informed consent to any health care that the doctor believes is necessary. In that event, this document authorizes your Agent, or Backup Agent, as the case may be, to make all health care decisions for you.

The word “Durable” means that the document “endures”, or remains in effect, even after you ever become incapacitated.

Powers of Attorney for Health Care generally have no effect after your death, except that they may authorize your Agent, or Backup Agent, as the case may be, to make anatomical gifts of tissue or organs, to provide consent for an autopsy, and to make a disposition of your remains (including the ability to authorize that your remains be cremated).

Durable Power of Attorney for Property: A written document that names someone as your Agent, and that should also name one or more Backup Agents. This document authorizes your Agent, or Backup Agent, as the case may be, to make financial decisions on your behalf.

This document, itself, comes in two different flavors:

one that is effective as soon as you sign it, and that gives your Agent, or Backup Agent, the power to represent you right away with respect to financial matters, even though you may be 100% mentally competent; and

one that is signed, but only becomes effective in the future if and when you ever become incapacitated.

Again, the word “Durable” means that the document “endures”, or remains in effect, even after you ever become incapacitated.

Powers of Attorney for Property generally have no effect after your death.

By signing this document, you are providing your Agent, or Backup Agent, as the case may be, with the legal authority to make financial decisions on your behalf—i.e., your Agent, and Backup Agents, receive such authority from the Power of Attorney document itself.

Alternatively, if you become incapacitated and have not signed such a document, it may be necessary to open a guardianship estate in the Probate Court and have a Guardian appointed by the Probate Court to represent you. The Guardian will then receive legal authority from the Probate Court to make financial decisions on your behalf.

Note: Please see Income, Principal, or Income and Principal, which is a separate item in this Glossary.

There are two types of Probate, namely a Living Probate, and a Death Probate.

Living Probate

Introductory Example: While he is living, Bill becomes incapacitated. He owns several Bank accounts, and the total value of all such accounts is approximately $75,000. Bill is the sole owner of all of the accounts—i.e., there are no joint owners on any of the accounts. In addition, Bill has not signed any type of financial Power of Attorney.

Problem: Since Bill is incapacitated, neither he nor anyone else has the legal authority to sign checks or otherwise use the account assets to pay Bill’s expenses and, in general, to manage Bill’s assets for his best interests.

A Living Probate is the legal process that has been enacted in all states to address this Problem.

A Living Probate is supervised by the Probate Court and is designed to accomplish the following:

• • To administer all assets that have been left, or that are payable, to a Minor beneficiary;
  • To prove in Probate Court that an Adult person is truly incapacitated; and
  • To appoint a Guardian as the person or institution who will be responsible (with the supervision of the Probate Court) for taking all steps necessary to administer the solely-owned property and assets of the Minor, or of the incapacitated Adult, for his or her best interests.

Death Probate

Introductory Example: Bill, an Illinois resident, dies owning several Bank accounts. The total value of all such accounts is approximately $150,000. Bill is the sole owner of all of the accounts—i.e., there are no joint owners on any of the accounts. In addition, there is no surviving beneficiary designated on any of such accounts.

Problem: Since Bill is deceased, neither he nor anyone else has the legal authority to sign checks or otherwise use the account assets to pay the debts, taxes, fees and expenses that are properly payable after his death, to determine the proper persons who are entitled to inherit the remaining funds in Bill’s accounts, and then to distribute to each such person his or her proper share of all such remaining funds.

A Death Probate is the legal process that has been enacted in all states to address this Problem.

There are 2 types of Death Probate, namely a Normal Death Probate, and an Ancillary Probate:

Normal Death Probate is the legal process supervised by the Probate Court that is designed to accomplish the following:

• • Proving in Probate Court that a Decedent’s Will, if there is one, is valid;
  • Appointing the person(s) and/or institution who will be responsible to administer the Decedent’s Probate estate:
    • If the Decedent has a valid Will in effect, the Probate Court will appoint the Executor or Executors named in the Will; or
    • If there is no person(s) and/or institution named in the Will who is qualified and willing to act as Executor(s), or if the Decedent does not have a valid Will in effect, the Probate Court will appoint an Administrator;
  • Identifying, inventorying and appraising the Decedent’s solely-owned property and assets;
  • Ensuring that all valid debts of the Decedent, and all applicable court costs, expenses, fees and taxes, are properly paid;
  • If the Decedent dies with a valid Will in effect, distributing the Decedent’s remaining solely-owned property and assets to his or her Beneficiaries pursuant to the terms of the Decedent’s Will; or
  • If the Decedent dies without having a valid Will in effect, distributing the Decedent’s assets to his or her Heirs pursuant to the Illinois Statute of Descent and Distribution—i.e., pursuant to the Last Will and Testament that is provided by the State of Illinois to all Illinois residents who die without having their own valid Will in effect.

Note: We have included a sample of the Last Will and Testament provided by the State of Illinois in the Resources Section of our Website.

A Normal Death Probate does not apply to the following types of property and assets, and the disposition of such property and assets is not controlled by a Will, or by the Illinois Statute of Descent and Distribution that describes how the solely-owned property and assets of a person dying without a valid Will are to be distributed:

Certain Jointly-Titled Property and Assets: Property and assets titled in the names of the Decedent and one or more other joint owners who survive the Decedent—in this instance, such property or assets automatically become owned by the surviving joint owner, or if there is more than one surviving joint owner, equally by the surviving joint owners. Examples: joint tenancy bank accounts, securities, stock brokerage accounts, real estate (including an Illinois principal residence titled in the names of a married couple as Tenants by the Entirety);

Death Benefit Assets: If the Decedent has completed, signed and properly filed a Beneficiary Designation Form for a particular Death Benefit Asset, and if the Beneficiary named in the Form survives the Decedent, or is a Trust that is in existence upon the Decedent’s death, then that particular Death Benefit Asset will be distributed directly to such Beneficiary.

Property and Assets Titled in a Trust Established by the Decedent: Property and assets that are titled in a Trust established by the Decedent are not subject to probate upon the Decedent’s death. Rather, such assets will normally be administered for, or distributed to, one or more surviving beneficiaries named in the Trust.

Property and Assets Titled in a Trust Established by Someone Else: If the Decedent is the beneficiary of a Trust established by someone else, then the provisions of the Trust instrument will normally provide that upon the Decedent’s death, the remaining Trust property and assets will be administered for, or distributed to, one or more surviving beneficiaries. In that event, such assets are not subject to probate in the Decedent’s estate. Caveat: Depending upon the terms of the Trust instrument, such assets may, or may not, be subject to Estate tax in the Decedent’s estate.

A Normal Death Probate does, however, apply to property and assets that are titled in the Decedent’s name alone, and for which there is no designated surviving beneficiary—i.e., solely-owned property and assets.

Ancillary Probate, on the other hand, is a process that takes place in a Probate Court in a jurisdiction other than Illinois and that may be required whenever a deceased Illinois resident owns real estate in such other jurisdiction.

Example: In addition to owning several Bank accounts having an approximate total value of $150,000, Bill, an Illinois resident, also owns a small Condominium in Naples, Florida. Bill is the sole owner of all of the accounts, and of the Condo—i.e., there are no joint owners on any of such assets. In addition, there is no surviving beneficiary designated on any of such assets.

Since Bill is deceased, neither he nor anyone else has the legal authority to sign checks or otherwise use any of the solely-owned property and assets to pay the debts, taxes, fees and expenses that are properly payable after his death, to determine the proper persons who are entitled to inherit the remaining property and assets, and then to distribute to each such person his or her proper share of the remaining property and assets.

Probate is the legal process that has been enacted in all states, including Illinois and Florida, to address this Problem.

In this instance, it will normally be necessary to open (1) a primary Probate, or Normal Death Probate, in Illinois to pay the debts, taxes, fees and expenses that are properly payable after Bill’s death, and then to transfer to each of Bill’s Beneficiaries or Heirs his or her proper share of all remaining funds held in his Bank accounts; and (2) a secondary Probate, or Ancillary Probate, in Florida to deal with the Florida Condo. The Ancillary Probate in Florida will permit the proper share of the Florida Condo to be transferred to each of Bill’s Beneficiaries or Heirs, or, alternatively, will permit the Florida Condo to be sold and the proper share of the net sales proceeds to be transferred to each of Bill’s Beneficiaries or Heirs.

Note: Beneficiary, and Heir, are separate items described in this Glossary.

This is a phrase that is primarily used to describe a specific type of Marital Trust, whether it is created in a Revocable Living Trust, or in a Will. For the purposes of this topic, the term “Trustmaker” shall refer both to the person who establishes a QTIP Marital Trust within the provisions of a Revocable Living Trust, or within the provisions of a Will.

If a QTIP Marital Trust is established, the assets transferred to it will qualify for the unlimited Estate Tax marital deduction in the Trustmaker’s estate, even if the Trustmaker’s surviving spouse is not, as is normally required, given a General Power of Appointment—i.e., even though the Trustmaker’s surviving spouse is not given an “unlimited” power to direct to whom and how the QTIP Marital Trust assets will be distributed at the surviving spouse’s death. In other words, the Trustmaker may specify to whom and how any such remaining assets will be distributed after the surviving spouse’s death.

In order to qualify as a QTIP Marital Trust, the trust instrument must require that during the surviving spouse’s lifetime, (a) the sole beneficiary will be the spouse; (b) all QTIP Marital Trust Income will be distributed at least annually to the surviving spouse, (c) the surviving spouse will have the right to direct the Trustee of the QTIP Marital Trust to convert any non-productive property to productive property; and (d) the spouse will be the only one who has any power to appoint Trust assets. Although not required, the Trustmaker may also include a provision that gives the Trustee discretion to distribute the QTIP Marital Trust Principal to the surviving spouse, based upon a specified standard.

In addition, an election must be made on Schedule M of the Federal Estate Tax Return filed on behalf of the Trustmaker’s Estate, to qualify the Marital Trust for QTIP treatment. By making such an election on a timely-filed Federal Estate Tax Return, all assets transferred to the QTIP Marital Trust will qualify for the unlimited marital deduction in the Trustmaker’s estate, and the entire value of the QTIP Marital Trust assets will be subject to estate tax in the surviving spouse’s subsequent estate, in the same manner as if such assets of the QTIP Marital Trust were owned in the sole name of the surviving spouse.

While most QTIP Marital Trusts are designed to take effect upon the Trustmaker’s death, a Trustmaker may also establish a Lifetime QTIP Marital Trust. If such a Trust is established, the assets transferred to it will qualify for the unlimited Gift Tax marital deduction.

QTIP elections can also be made for Illinois estate tax purposes.

Note: Each of the following is a separate item in this Glossary: Estate Tax; Gift Tax; Income, Principal, or Income and Principal; Marital Trust; Power of Appointment; Revocable Living Trust; Will.

Note: Please see Disclaimer, which is a separate item in this Glossary.

A Deed that transfers whatever interest, if any, that a person has in real estate—i.e., the person signing the Deed makes absolutely no warranties whatsoever concerning his or her ownership of the real estate conveyed in the Deed.

Note: Contrast a Quit Claim Deed with a Warranty Deed, which is a separate item described in this Glossary.

A separate trust that is established by a Trustmaker for the sole purpose of being the designated Primary Beneficiary, or Contingent Beneficiary, of the Trustmaker’s IRAs and other retirement plan benefits. Except for a nominal funding, during the Trustmaker’s lifetime, this type of Trust has no assets that are titled in it. Rather, it is designated as a beneficiary of a Trustmaker’s IRAs and retirement plan assets.

Example: Bob, who is single, owns a $100,000 IRA and wants to name his only child, an adult son, as the sole Primary Beneficiary, and his son’s two minor children—i.e., Bob’s grandchildren—as the equal Contingent Beneficiaries.

However, Bob is concerned that his son may simply cash out the IRA after Bob’s death, pay the income taxes that are due, and then spend the remainder of the IRA proceeds.

Bob would rather have an Inherited IRA established for his son so that the annual Required Minimum Distributions can be stretched out over his son’s remaining life expectancy. Such a stretch-out can take advantage of the tremendous power of tax-deferred compounding that is available by utilizing Inherited IRAs.

In addition, Bob wants the remainder of the IRA to be available for his son’s two minor children after his son’s death.

Finally, Bob would like to ensure that the IRA proceeds will not be subject to the claims of any creditors his son, or grandchildren, may have.

As a result, Bob establishes a Retirement Preservation Trust, and names the Trust as the sole beneficiary of his IRA.

To more fully understand IRAs, Inherited IRAs, and the stretch-out concept, please ask us about the Brochure we have written entitled Fitting IRAs Into Your Overall Estate Plan.

Note: RMD (a/k/a Required Minimum Distribution) is a separate item described in this Glossary.

A Revocable Living Trust is an extremely popular type of Trust that is established during your lifetime, as contrasted with a Testamentary Trust, which is a type of Trust that is included within the provisions of your Will, and therefore takes effect only upon your death.

Like all Trusts, a Revocable Living Trust is a legal arrangement among 3 separate parties:

• The person or persons who establish the Trust. Such person or persons are sometimes referred to as the Trustmaker(s), Grantor(s), Settlor(s), or Trustor(s).
• The person or persons, and/or Bank or Trust Company, who are nominated in the Trust Agreement, and who accept the nomination, to act as Trustee(s). It is not a requirement that a Bank or Trust Company be nominated as a Trustee.
• The Beneficiary or Beneficiaries named in the Trust Agreement who are to benefit from distributions made from the Trust.

The same person may be the Trustmaker, Trustee, and Beneficiary, or may be one of the Trustmakers, Trustees or Beneficiaries.

Since the Trustmaker retains the right to amend, or revoke, the Living Trust, the Trustmaker

retains complete control over the assets,

is considered to be the owner of the Trust assets for income, gift, and estate tax purposes, and

retains the flexibility to change the provisions of the Living Trust if family or other circumstances warrant.

Because the Trustmaker retains the above rights, the Trustmaker is also considered to be the owner of the Trust assets for creditor rights purposes—i.e., simply titling the assets in a Revocable Living Trust does not protect the assets from the Trustmaker’s creditors.

What, then, are the advantages of a Revocable Living Trust?

• assets that are titled in the Revocable Living Trust are not subject to Probate in the event that the Trustmaker ever becomes incapacitated, with the result that the publicity and loss of control that can occur in a Probate Court Guardianship—i.e., in a Living Probate--can be avoided.
• assets that are titled in the Living Trust, or that are made payable to it, are not subject to probate upon the Trustmaker’s death, with the result that the publicity and loss of control that can occur in a Death Probate can also be avoided.

Revocable Living Trusts normally include the Trustmaker’s instructions as to how the Trust assets are to be managed or disposed of during 4 separate time periods:

while the Trustmaker is alive and competent,

during any period in which the Trustmaker is incapacitated,

upon the Trustmaker’s death, and

and after the Trustmaker’s death.

The amount that you must withdraw each year from your Traditional, Rollover, Simple or SEP IRA, and also from certain qualified retirement plans, once you reach age 70 1/2. If you fail to withdraw all of your RMD for any given year, the IRS will impose a penalty tax equal to 50% of the shortfall, and then will require you to withdraw the shortfall with the RMD for the following year.

Example: Bob, who is single, was born on July 10, 1948. As a result, Bob attained age 70 ½ on January 10, 2019. Accordingly, the first year for which Bob must begin withdrawing annual RMDs from his Traditional IRA is 2019.

The 2019 RMD that Bob must withdraw is computed as follows:

Value of Bob’s IRA at close of business on the
previous December 31—i.e., on 12/31/2018 $100,000

Divided the above value by the Applicable Factor under the IRS
Uniform Lifetime Table for Bob’s attained age in 2019 – since
Bob will attain age 71 on July 10, 2019, the Factor under
such Table for a 71-year old is: 26.5

Dividing $100,000 by 26.5 equals $3,753.58

Since 2019 is the 1^st year for which Bob must begin withdrawing annual RMDs, Bob has an option as to when he must withdraw his 1st RMD of $3,753.58:

(a) he may make the withdrawal on or before December 31, 2019; or

(b) he may postpone making the withdrawal until no later than April 1, 2020.

Most people do not elect to postpone withdrawing their 1^st annual RMD, because if they do so, they will then be required to withdraw 2 RMDs in the 2^nd year—i.e., Bob would be required to withdraw both the 2019 and 2020 RMDs during 2020. That could then cause a bunching of income within the 2^nd year that could result in higher income taxes.

For Bob’s RMDs for 2020 and each subsequent year, Bob is required to withdraw each year’s RMD on or before December 31 of that year.

The Trustee or Custodian of Bob’s Traditional IRA is required to compute, and then inform Bob, of the amount of his RMD for each year.

If you inherit an IRA, or certain types of retirement plans, from a Decedent, the “Age 70 ½ Rule” described above does not apply to the inherited IRA or retirement plan. In that instance, if you are a surviving spouse, you have certain preferred elections. However, if you are not a surviving spouse, then regardless of your age, you must begin withdrawing annual RMDs, based upon your life expectancy under the IRS Single Life Table, in the year following the year in which the Decedent dies.

To more fully understand RMDs, IRAs, and Inherited IRAs, please ask us about the Brochure we have written entitled Fitting IRAs Into Your Overall Estate Plan.

A Schedule K-1 is a separate form that is a part of a Partnership Income Tax Return (Form 1065), a Sub-Chapter S Corporation Income Tax Return (Form 1120-S), and a Fiduciary Income Tax Return (Form 1041) filed on behalf of an Estate or a Trust.

With respect to an Estate or Trust, the Schedule K-1 is furnished to each Beneficiary or Heir for any year in which the Beneficiary or Heir receives a distribution from the Estate or Trust.

Receiving a Schedule K-1 from an Estate or Trust is akin to receiving a Form 1099. The Schedule K-1 lists the Beneficiary’s or Heir’s share of the Current Year’s income, deductions, credits and other items, and, like a Form 1099, should be furnished to the person who is preparing the personal income tax return(s) for the Beneficiary or Heir.

Note: Beneficiary, and Heir, are separate items described in this Glossary.

Social Security Disability Insurance. SSDI is funded through payroll taxes. SSDI recipients are considered "insured" because they have worked for a certain number of years and have made contributions to the Social Security trust fund in the form of FICA Social Security taxes. SSDI candidates must be younger than 65 and have earned a certain number of "work credits."

Supplemental Security Income. Supplemental Security Income (SSI) is a Federal income supplement program funded by general tax revenues (not Social Security taxes).

It is designed to help aged, blind, and disabled people, who have little or no income. In addition, it provides cash to meet basic needs for food, clothing, and shelter.

SSI is strictly need-based, according to income and assets. It is often referred to as a “needs-tested” program, meaning it has nothing to do with work history, but strictly with financial need. To meet the current SSI income requirement you must have less than $2,000 in assets (or $3,000 for a couple) and a very limited income.

Social Security Number (or Social Security Account Number).

When a person dies owning assets that fluctuate in value—i.e., typically real estate, stocks and bonds—then each such asset must be valued on the date of death, or if a Federal estate tax is payable and certain other rules are met, also on the Alternate Valuation Date. For the purposes of this discussion, we will assume that the Alternate Valuation Date does not apply.

The date of death value, then, becomes the new “stepped-up” cost basis for each such asset, with the result that all life-time gain for capital gains tax purposes is eliminated.

The “Stepped-Up Cost Basis” rule does not, however, apply to certain types of assets, the most common of which are for any amount payable as a result of death under an Annuity Contract, an IRA or any Retirement Plan.

Example: Bill bought 1 share of XYZ Corporation common stock 25 years ago at a cost of $18. At the time of Bill’s death, the 1 share was worth $98. Had Bill sold the 1 share for $98 on the day before he died, he would have realized a capital gain of $80 [$98 sales price less $18 cost basis].

However, as a result of Bill’s death, the cost basis of the 1 share of XYZ Corporation common stock is “stepped-up” to its value on Bill’s date of death—i.e., from $18 to $98. As a result, if the Trustee of Bill’s Living Trust sells the 1 share after Bill’s death for $100, the Trust will realize a long-term capital gain of $2 [$100 sales price less $98 “stepped-up” cost basis].

A method in which the principal residence of a married couple residing in Illinois may be held during the marriage. This type of ownership has many of the same attributes as Joint Tenancy, including a built-in right of survivorship.

The advantage of this type of ownership is that a creditor of only 1 spouse may not foreclose on the principal residence—i.e., may not force the principal residence to be sold--in order to utilize the debtor-spouse’s ½ share of the net sales proceeds to pay off the debt.

On the other hand, if the principal residence of a married Illinois couple is held in joint tenancy, then a creditor of only 1 spouse may foreclose on the principal residence—i.e., may force the principal residence to be sold--and may then utilize the debtor-spouse’s ½ share of the net sales proceeds to pay the debt.

A method that is primarily used in titling real estate.

Example: Bill and Bob are brothers who inherited real estate from their deceased parents as Tenants in Common. Bill and Bob are considered to own the real estate as equal Tenants in Common. This means that each of them owns an undivided 50% of the entire parcel of real estate, and each of them may sell such interest, or otherwise transfer such interest, during his lifetime. If no change is made in the titling of the real estate, then upon the death of either of them, the deceased brother’s interest in the real estate will normally be subject to probate in the County and State where the real estate is located, and the deceased brother may provide in his Will who will inherit his 50% interest in the real estate. Alternatively, during his lifetime a brother may transfer his undivided 50% interest in the real estate to his Living Trust—if he does so, his undivided 50% interest in the real estate will not be subject to probate in the event he ever becomes incapacitated, or upon his death, and will be disposed of on his death pursuant to the provisions of his Living Trust.

Many stock brokerage firms permit TOD Accounts to be established.

Example: Bob establishes a stock brokerage account that is titled in his name alone, but that also has a TOD feature that names his brother, Bill, to be the designated beneficiary upon Bob’s death.

During Bob’s lifetime, Bob is the only person who has any authority over the stock brokerage account, and Bill has no such authority. Upon Bob’s death, and regardless of the provisions of his Will or Living Trust, the entire balance in the stock brokerage account will be paid to Bill, if he survives Bob, and will not be subject to Probate.

Whenever a Revocable Living Trust is utilized, we don’t normally recommend, for many reasons, that the Trustmaker also establish TOD accounts.

Having the stock brokerage titled in the Revocable Living Trust provides much greater flexibility as to the disposition of the account upon the Trustmaker’s death. In addition, if the Trustmaker ever becomes incapacitated, then the successor Trustee under the Trustmaker’s Revocable Living Trust will generally have a much easier time in utilizing the account for the Trustmaker’s benefit than will an Agent acting under the Trustmaker’s financial Power of Attorney.

Note: Please see POD (a/k/a Paid on Death, or Payable on Death), which is a separate item in this Glossary.

A Trust is a legal arrangement among 3 separate parties:

• The person or persons who establish the Trust. Such person or persons are sometimes referred to as the Trustmaker(s), Grantor(s), Settlor(s), or Trustor(s) if the Trust is established during lifetime.
• The person or persons, and/or Bank or Trust Company, who are nominated in the Trust instrument, and who accept the nomination, to act as Trustee(s). It is not a requirement that a Bank or Trust Company be nominated as a Trustee.
• The Beneficiary or Beneficiaries named in the Trust instrument who are to benefit from distributions made from the Trust.

The same person may be a Trustmaker, Trustee and Beneficiary, or may be one of the Trustmakers, Trustees or Beneficiaries.

Although there are many different kinds of Trusts, all Trusts can be divided into 2 basic types: the Inter Vivos Trust, and the Testamentary Trust:

• Inter Vivos Trust: A written Trust Agreement that is signed during the lifetime of the Trustmaker. The most popular type of Inter Vivos Trust is the Revocable Living Trust which, pursuant to its terms, allows the Trustmaker or Trustmakers to revoke and amend it. Unlike a Testamentary Trust, a Revocable Living Trust typically contains provisions that take effect during the lifetime of the Trustmaker, including provisions that provide how the Trust property and assets are to be administered during any period in which the Trustmaker is incapacitated.
• Testamentary Trust: This Trust is one that is established within the Will of a person who has died. As such, a Testamentary Trust has no effect during the lifetime of the person who has signed the Will, and only takes effect upon such person’s death.

A Revocable Living Trust only controls the disposition of those assets that are titled in the name(s) of the Trustee(s) of the Trust, or those Death Benefit Assets that are payable to such Trustee(s) under a properly filed Beneficiary Designation Form.

A Testamentary Trust only controls the disposition of the solely-owned property and assets that are left to it by the provisions of the Decedent’s Will, and those Death Benefit Assets that are payable to it under a properly filed Beneficiary Designation Form.

Note: Beneficiary is a separate item described in this Glossary.

Please see Fiduciary Income Tax, which is a separate item in this Glossary.

For estate planning purposes, there are basically 2 different types of assets: Death Benefit Assets, and All Other Assets:

• Death Benefit Assets are assets whose disposition upon death is controlled by a Beneficiary Designation Form that is properly completed, signed and processed.

Examples: Life Insurance Policies, Annuity Contracts, IRAs, 401(k) Plans, other types of Retirement Plans, and third-party beneficiary types of contracts such as Salary Continuation, Deferred Compensation, and Consulting Agreements). You should thoroughly discuss with your estate planning attorney how Beneficiary Designation Forms should be completed so that the disposition of your Death Benefit Assets is coordinated with your overall estate plan.

• All Other Assets are all assets other than Death Benefit Assets.

Note: For a discussion of how All Other Assets may be titled, please see Types of Ownership, which is a separate item in this Glossary.

There are several different types of ownership that may be used when titling All Other Assets:

• Sole Ownership, where the asset is titled in the name of one person.
• Joint Ownership, where the asset is titled in the names of 2 or more persons. Types of Joint Ownership include Joint Tenancy, Tenancy by the Entirety, and Tenancy in Common.
• Trust Ownership, where the asset is titled in the name(s) of the Trustee(s) of a Trust.
• Entity Ownership, where the asset is titled in an entity such as a Partnership, Limited Partnership, Limited Liability Partnership, Corporation, Limited Liability Company, or other entity.

Note: Joint Tenancy, Tenancy by the Entirety, and Tenancy in Common, are separate items described in this Glossary.

You should thoroughly discuss with your estate planning attorney how All Other Assets should be titled so that the disposition of such assets is coordinated with your overall estate plan.

A type of liability insurance that “sits over the top of” your homeowner’s, automobile, motorcycle, or boat insurance policies.

An Umbrella Insurance Policy provides coverage if and when the limits on your underlying policies are exceeded or exhausted. In addition, it can provide coverage for items that may not be covered under the underlying policies, such as false arrest, libel, slander, and liability for coverage on rental units.

In today’s world, when anyone can be sued, this type of coverage provides an extra layer of liability insurance that is available if you are held responsible for damages or bodily injuries resulting from a tragic accident.

Since Umbrella Insurance does not provide first dollar coverage, it is not nearly as expensive as your underlying policies.

We recommend that you look into purchasing Umbrella Insurance.

A law enacted in almost all states, including Illinois, that provides a useful, but often overlooked, tool for the management of assets for minors. An account established under the Illinois Uniform Transfers To Minors Act is an alternative to establishing a formal Trust for a minor, or to opening a Guardianship Estate for the Minor in the Probate Court.

A person or Trust company is named as a Custodian for the benefit of the minor. We highly recommend that Successor Custodians also be named.

During the existence of the Custodian account, the Custodian may use the Custodial assets as the Custodian considers advisable for the use and benefit of the minor, without court order and without regard to (a) the duty or ability of the Custodian personally or of any other person to support the minor, or (b) any other income or property of the minor which may be applicable or available for that purpose. When the “minor” attains age 21, the Custodian must transfer to the minor, in an appropriate manner, the remaining Custodial assets.

A Deed in which the signer warrants that he or she has good title to the property that is being conveyed in the Deed.

Note: Contrast a Warranty Deed with a Quit Claim Deed, which is a separate item described in this Glossary.