LEGAL TERMS RELATED TO WILLS AND TRUSTS, ESTATES AND PROBATE
Some of the words used to describe wills, trusts and estates or to describe planning and settling your affairs have a 1,000-year-old history. You may encounter them nowhere else. Understanding these legal terms will make the process easier and less mysterious.
Last Will and Testament
What you want done with your property when you are gone.
A contract in which one person, the Trustee, agrees to hold and manage property for the benefit of another, the beneficiary. The person who creates the Trust and contributes property to it is called the Settlor or Grantor.
The process of proving what a deceased person owned and owed and that the remainder has been distributed to the beneficiaries in his Will or, if he did not have one, to his heirs under the Texas Rules of Descent and Distribution.
Settling your affairs; settling your estate.
Someone appointed by a court to settle your affairs and estate, if you do not leave a valid Will. An Administrator and an Executor, the person you name to settle your affairs and estate in a Will, are also called a personal representative.
Court-supervised administration. A Court Order must be gotten to sell property , spend money or make distribution. Accountings must be produced for auditing by the Court and approved before the administrator is released from Court supervision.
Not court-supervised. The person settling your affairs only needs to go to court to obtain Letters Testamentary (if you have a Will) or Letters of Administration (if you do not). If there are no disputes, the only ther interaction with the Court consists of electronically filing affidavits and an Inventory, Appraisement and List of Claims owed to the estate.
A person, charity or trust with the right to receive money or property under a Will or a Trust or named the beneficiary of a life insurance policy, annuity, retirement account, pay-on-death bank account, or transfer-on-death brokerage account.
A person, charity or trust with the right to receive money or goods under a Will or Trust or named the beneficiary of a life insurance policy, annuity, retirement account or pay-on-death bank account if the owner and beneficiary are gone; sometimes called the secondary beneficiary.
A person who has the right to receive income earned by investments or assets held in a Trust but no right to the investments or assets themselves.
The person, charity or trust the Will or Trust or retirement account benefits first.
A person, charity or Trust which becomes a beneficiary if the initial beneficiary or beneficiaries have died or have received all benefits due under the terms of a Will or Trust.
A person, charity or trust with the right to receive money from a life insurance policy, annuity, retirement account or pay-on-death account if the owner and beneficiary are gone; sometimes called the contingent beneficiary.
Bond or Surety bond
Money or a contract from a bonding company or two personal guarantors given to the Court to assure that the administrator, executor or guardian does their job. In Texas, your Will can waive the need for your executor to post a bond.
Someone born to or adopted by the person, regardless of age.
A child under 18 is called a minor. The law will treat that person as an adult if they have married, joined the armed forces or are over 16, self-supporting, living on their own and have gotten a court order saying that they should be treated as an adult under the law.
Children born to someone and not children who are adopted.
Real or personal property belonging to a married couple, whether jointly or separately managed.
Annual limited powers of Trust beneficiaries to require a Trustee to distribute money (or, rarely, goods) from a Trust. Crummey Powers are typically effective for no more than 30 days.
To pour the assets of a Trust into a new Trust under Texas decanting rules. This may be done to preserve the Grantor’s intent in the face of changing circumstances or to combine two trusts.
The children born to someone (see “issue”), the children born to them and the children born to them and so on (not adopted children unless the document specifically includes them).
Transfer ownership, especially of real estate.
Eligible for benefits under the Social Security Act or, if referring to a private disability insurance policy, under that insurance policy.
Refuse an inheritance. This must be done within a specified time period. No benefits must have been received. The inheritance passes to the heirs of the person who disclaimed. For Medicaid eligibility purposes, a disclaimed inheritance is counted as an asset which was first received and then gifted.
Money or property given to a beneficiary under a Will or Trust or under a life insurance policy, an annuity, retirement account or pay-on-death bank account, a transfer-on-death brokerage account, or given to an heir of someone who died without a Will, dying intestate.
Where you intend to remain, even though you may sometimes live or reside elsewheere.
Your property; your assets.
Federal tax paid by the estate on an estate over an exempt amount ($11.7 million in 2021 but expected to fall to $3 or $5 million) or, for a married couple, combined estates of twice that.
An estate is taxed where it is probated. Texas has no estate or inheritance tax. Beneficiaries or heirs domiciled or residing in another state or another country might be subject to inheritance tax there.
The person you name to execute, that is, to carry out the instructions in your Will and appointed as such by the probate court. (Some people are ineligible by law).
Someone to help your Executor handle real property located outside of Texas or to help your Executor with your on-line accounts.
Someone who settles your affairs independent of court supervision.
A court-approved amount to support the family for a year during probate.
From fides, Latin for loyalty (Dogs are named “Fido” because they are loyal, man’s best friend.) Someone legally required to act putting the interest of beneficiaries, heirs or a person under guardianship first, such as an administrator, executor, guardian, Trustee or agent under your Power of Attorney. Your lawyer is also a fiduciary. Your broker and financial advisor are not (maybe they should be).
A tax to assure that either an estate or a gift tax is paid by each generation on money exceeding the amounts exempt from the federal estate and gift taxes.
Tax paid by the giver on a gift to any one person of over $17,000 (2023) in one year (or $85,000 (2023) in one year with the gift tax effect taken over five years) or on a total lifetime amount of $12.92 million (2023). The person receiving the gift receives it at the value it had in the hands of the giver. For U.S. tax (but not for Medicaid) purposes, direct payment of medical and education expenses is not treated as a gift subject to the gift tax nor are most gifts given by Will. Gifts given by Will in excess of $12.92 million (2023) are subject to the estate tax.
The person who creates or establishes a Trust, sometimes called the Settlor.
Someone who has a right to inherit under the Texas Law of Descent and Distribution. This law is derived from that of Colonial Spain and, before that, that of the Visigoths. (The mixed gender Visigoth army conquered, ruled and settled in medieval Spain. The Visigoths are the source of community property concepts.) The Texas Law of Descent and Distribution differs from Colonial English rules adopted by the 13 original states and from those of many other states and countries and, in some respects, from other community property states.
A court proceeding in which a court-appointed attorney represents unknown heirs, heirs whose location is unknown and heirs who, perhaps because they are minors, imprisoned or reside in an institution, cannot act for themselves.
Tax paid by the person who inherits. There is no U.S. or Texas inheritance tax. Some states and countries have an estate or inheritance tax or both. The estate tax is imposed on estates probated (proven) there. The inheritance tax is imposed on beneficiaries or heirs resident or domiciled there, depending on the state or country.
Inter vivos Trust
A Trust which operates while the person who creates it is alive: Inter vivos means during life.
A state-administered (and state- and federally-funded) program providing nursing home care (and care outside of a nursing home under a number of waiver programs) for people who show financial and medical need. There are 109 Medicaid programs in Texas.
A federal health insurance program for people 65 and older and disabled people receiving Social Security Disability Insurance for more than 24 months. Deductibles, co-pays and limits apply.
Medicare tax (Unearned Income Medicare Contribution, Net Investment Income Tax)
A 3.8% surtax on the lower of modified adjusted gross income (“MAGI”) or net investment income (“NIIT”). The exempt amount for a Trust is about 10% of that for an individual.
A Medicaid-compliant Trust which receives and pays income on behalf of the person receiving nursing home Medicaid to pay a personal needs allowance, medical expenses not paid by Medicare or Medicaid, a permitted spousal allowance and nursing home costs. Because it pays medical expenses not covered by Medicare or Medicaid and can divert income to a spouse, Miller Trusts allow many Texans to qualify for Medicaid on an income basis. (There are also asset limits.) Sometimes called a “Qualified Income Trust” or “QIT.”
Net Investment Income Tax (Unearned Income Medicare Contribution or Medicare Tax)
A 3.8% surtax on the lower of modified adjusted gross income or net investment income. The exempt amount for a Trust is about 10% of that for an individual.
Partition (Suit for Partition)
Any beneficiary or heir can bring a suit for inherited property to be divided, or partitioned. If it cannot be divided according to the terms of the Will or, if there is no Will, the Texas laws of descent and distribution, it must be sold and the money from the sale divided. Avoiding an expensive and time consuming suit for partition and the attendant family discord is a good argument for naming a trust as the grantee of a Transfer on Death or Lady Bird Dee.
“by the head.” Property which is willed per capita is divided among the children living. If one child dies before his parents, his own children will inherit nothing: everything will be divided among his living siblings.
“by the root.” Property which is willed per stirpes is divided among the children living and the descendants of any deceased children with each grandchild getting a fraction or percentage of what was left to the child who is his parent. For example, if one child has two children and the other has three, the children of the first child will each inherit 1/4th if their parent has died while the children of the second child will each inherit 1/6th if their parent has died. Even judges get confused. It is better to use plain English.
Qualified Domestic Relations Order or “QDRO”
A court order during or after a divorce suit distributing property and, if necessary, providing lifetime support for a child who is disabled. In Texas, a disabled child can seek this support order as an adult if no previous court order was made.
Qualified income trust (“QIT” or “Miller Trust”)
A Medicaid-compliant Trust which holds assets or investments and pays the income earned to the person receiving Medicaid for nursing home costs.
Qualified Terminable Interest in Property or (“QTIP”)
A trust which provides for a surviving spouse during her lifetime and, after her death, passes the property to others, often the children of a previous as well as those of the current marriage.
Where you live at present, whether or not you usually live there or intend to remain there.
The person who creates or establishes a Trust, sometimes called the Grantor.
An agreement in which one person, the Trustee, agrees to hold and manage property for the benefit of another, the beneficiary. The person who creates or establishes the Trust is called the Grantor or Settlor.
A Trust document provision guiding the Trustee’s distribution. The most common ascertainable standard is a “HEMS” Trust for health, education, maintenance and support. A Trustee may also be permitted to make distributions at his sole discretion. Other ascertainable standards include limiting the distributions to those which will not cause a disabled beneficiary to lose current or possible future government benefits; limiting the percentage distributed by a certain age; allowing larger distributions as direct payments for education and medical expenses; and allowing larger than usual annual distributions for the down payment on a first home, to start a business or if the beneficiary is unemployed or experiences a financial hardship for other reasons, such as divorce.
Asset Protection Trust
A Trust designed to protect certain assets from potential creditors.
Bypass Trust (A/B Trust, Credit Shelter Trust)
A Trust which provides separately for the surviving spouse and children to minimize gift and estate taxes when a married couple’s combined estate exceeds the federal estate and gift tax exemption amounts.
An irrevocable trust, usually for multiple beneficiaries, which permits the beneficiaries to exercise a withdrawal right during a limited period of time each year.
First Party Trust
A Special Needs Trust funded with money of the beneficiary. The Social Security Administration rules govern its creation and disbursements. Any state Medicaid agency which may have provided benefits must be named the remainder beneficiary.
A Trust in which the person contributing the assets to the Trust, called the Grantor or Settlor, may also be the Trustee.
Intentionally Defective Grantor Trust
A Grantor Trust which produces income treated as that of the Grantor while the Grantor is alive but which does not become part of the Grantor’s estate when he dies.
A Trust which is irrevocable but which can be modified in some circumstances by the trustee and beneficiaries and in others by court.
Irrevocable Life Insurance Trust
A Medicaid-exempt Trust which holds and borrows against a life insurance policy to pay medical and other bills of the person whose life is insured. Any money remaining generally becomes a life insurance policy death benefit.
Master Pooled Trust (“(d)(4)(C)Trust”)
A Trust which pools and invests the subaccounts of many disabled people, preserving their rights to government benefits. In Texas, contributions after age 65 are subject to a Medicaid penalty period but with a “half a loaf” plan, still supplement a nursing home Medicaid recipient’s measly $60 monthly personal needs allowance.
Minor’s Trust (“2503(c) trust”)
A Trust established under Section 2503(c) of the Internal Revenue Code which allows the beneficiary to exercise a withdrawal right after his 21st birthday. Some Texas probate judges require a withdrawal right after the 18th birthday.
Revocable Living Trust
A trust which the grantor sometimes called the settlor creates and can revoke or cancel during his lifetime but which becomes irrevocable upon his death. A revocable living trust is typically used to avoid probate of out-of-state real property, to provide for specified geriatric care or care for minor children, to maintain privacy and control distribution of property over time, or to allow one spouse to administer finances when the other no longer can without using a Durable Power of Attorney or applying to the court for Community Administration.
Sole benefit trust
A Trust which benefits one person during their lifetime, as is required for the beneficiary to receive Social Security disability benefits.
A Trust provision allowing the Trustee alone to decide if and when to distribute assets to a beneficiary.
Special Needs Trust (“Supplemental Needs Trust”)
A trust which holds money to supplement government benefits for someone who is disabled. The trust can be an independent document or created as part of a Will (typically as a contingent trust). It can also be an account with a Master Pooled Trust. In Texas any contributions after the beneficiary is 65 are subject to a penalty period if the beneficiary applies for nursing home Medicaid. However, using a “half a loaf” plan, the trust can still supplement the beneficiary’s measly $60 per month personal needs allowance.
A Trust which allows the Trustee to choose which beneficiary should receive how much each year, “sprinkling” Trust income and principal.
A trust created by a Will.
Third Party Trust
A Trust established with the money of someone other than the beneficiary. A Special Needs Trust which is a Third Party Trust is not required to name the state Medicaid agency as the remainder beneficiary.
Trust Advisor or Trust Protector
Someone who can remove the Trustee and, if the Trust document allows, receive reports from the Trustee and others, such as a care manager, and advise the Trustee. The Trust Advisor or Trust Protector is often a family member or friend of the beneficiary of a Trust administered by a bank, trust company or professional Trustee. The trust document specifies powers, duties and liability.
Trust Advisory Committee
A group of people who, acting together, can remove the Trustee and, if the Trust document allows, receive reports from the Trustee and others, such as a care manager, and advise the Trustee. The Trust Advisory Committee is often a group of family members or friends of the beneficiary of a Trust administered by a bank, trust company or professional Trustee. The trust document specifies powers and liability.
Unearned Income Medicare Contribution (Net Investment Income Tax, Medicare Tax)
A 3.8% surtax on the lower of modified adjusted gross income (“MAGI”) and net investment income (“NIIT”). The exemption for a Trust is about 10% of that for an individual.
A Trust which costs too much to administer. In Texas, a Trustee may decide that a Trust holding $50,000 or less is an uneconomical trust, terminate the Trust and distribute whatever it holds to the beneficiaries.