The following is a short list of common legal terms that may come up in an estate planning meeting. Take just a few minutes to familiarize yourself with this list and keep it handy for future reference.

A person who is named under a Power of Attorney to act on behalf of another person.

A person or entity that receives a benefit from an estate, trust or asset transfer vehicle.

Sometimes referred to as a "Credit Shelter", "Bypass" or "A-B" Trust. A Trust used to "shelter" the Exemption Amount of the first Spouse to die which would otherwise be unused if the deceased Spouse left everything to the surviving spouse. (See below discussion).

The legal process used to assemble and transfer a decedent's assets to the intended beneficiaries and settle a decedent's outstanding debts.

All the assets owned by a decedent upon his or her death. The word "estate" for practical purposes has two completely different meanings, which can be confusing.

One meaning is the individual's "probate estate". When a person dies, assets he held in his own name now belong to his "probate estate", which is an "entity" administered by the deceased person's executor (also called the "administrator" of the estate or the decedent's "personal representative"). Typically, the probate estate-entity is subject to the supervision of a state court. This "probate estate" may also acquire new property after the decedent's death (in addition to "automatically" owning everything the decedent owned in his sole name), for example, if it is named as the beneficiary of a life insurance policy, retirement plan, or trust.

The other meaning of "estate" is the property that is subject to federal estate tax on the individual's death. This "estate" is not an entity controlled by an executor, administrator or personal representative or subject to court supervision. It is rather just a list of assets compiled on an estate tax return, making up the decedent's "gross estate" or (after certain deductibles allowed by the federal tax law are taken out) his "adjusted gross estate" or (after taking out more allowable deductions) his "taxable estate". The federal gross estate includes not only all the property of the decedent's "probate" estate but also many other types of property in which the decedent had an interest, such as (to varying degrees) jointly held property, life insurance, retirement plans, and trusts created by the decedent during his lifetime over which he retained some type of control. In our letters, there will be frequent occasion to refer to both types of "estate". Hopefully in each case either the text or the context will make clear whether "probate" or "federal gross" is meant.

An amount which is, pursuant to the tax code, "exempt" or "sheltered" from federal estate taxes. Also referred to as the Exclusion Amount and the Unified Credit Exemption Equivalent. Note that the Exemption Amount for federal estate tax purposes does not equate to the exemption amount for all of the various states. Even if you live in a state where the state exemption amount equals the federal Exemption Amount, real estate in other states which have a lower Exemption Amount may subject your estate to state death taxes.

Executor/Personal Representative
The person responsible for settling a decedent's estate.

Generation Skipping Transfer Tax/Trusts.
A separate tax from the federal estate tax which is assessed upon transfers which skip a generation subject to certain exceptions. (See below discussion). A “GST” tax exempt trust is used to apply and preserve a trust which is designed to remain outside of your children’s estate (or the estates of other “non-skip” persons – i.e. a niece or nephew) and works in much the same fashion as a Credit Shelter Trust does for a spouse.

Guardian of the Person
A court-appointed supervisor in charge of the care of a minor or incompetent person's physical well-being.

Guardian of the Estate
A court-appointed supervisor in charge of the care of a minor or incompetent person's financial well-being.

Irrevocable Trust
A trust in which the trustor has not reserved the right to revoke and cannot change the wording in the trust.

Living Trust
A trust established and operating during the trustor's lifetime.

Personal Representative
A fiduciary charged with the duty to administer the estate of a deceased person. This can be an Executor (if named in a Will) or an administrator (if a person dies intestate.) Also, includes an Administrator, CTA when no named Executor can serve.

Revocable Trust
A trust in which the trustor reserves the right to revoke.

Trust
A legal arrangement created to facilitate the transfer of property to a trustee for the benefit of a beneficiary.

Trustee
A person or entity named in a trust agreement to be responsible for holding and administering the trust assets according to the terms of the trust.

Trustor
A person who creates a trust. (Also sometimes called a "grantor" or "settlor".)

Estate Tax. Current tax law concerning estate taxes provides an exemption amount (the “Exemption Amount”) of $1,500,000.00 per person. This means that each person can leave at death, a total of $1,500,000.00 (less any lifetime taxable gifts made) without any taxes being due and payable. The 2001 Tax Act gradually increases the Exemption Amount to $3,500,000 to be fully phased in through the year 2009 with a “repeal” of the estate tax in year 2010. We put the term “repeal” in quotes since the Estate Tax regime in essence reverts back to prior law in 2011. Although we are not political analysts, it is clear that the 2001 Tax Act has not resulted in an outright repeal of the Estate Tax although such a repeal is possible. Keep in mind that the 2001 Tax Act was the result of intense compromises by our politicians to match the budget realities to the tax cut goals outlined by President Bush and the Republican party. The fact that many baby boomers will begin retirement on or before 2011 is a sobering concern regardless of what revenues may be projected for prior periods. Under the 2001 Tax Act, the Exemption Amount is adjusted as follows:

Applicable Year	Exemption Amount	Top Estate Tax Rate
2005	$1,500,000.00	47%
2006-2008	$2,000,000.00	46% in 2006 and 45% in 2007 and 2008
2009	$3,500,000.00	45%
2010	N/A	Estate Tax Repealed
2011 and yrs. Following	$1,000,000.00	55% (plus 5% surtax for very large estates)

Of course, this legislation can be changed in any subsequent legislative session and as with all laws, must be reviewed periodically. (References to $1,500,000.00 as the Exemption Amount in this letter should be understood to rise to the above equivalents for future years and further references to combined savings for both spouse’s Exemption Amounts (i.e. $3,000,000) should be understood to rise to up to double the above equivalents for future years.)

Additionally current tax law provides for an unlimited marital deduction. This means that you may transfer an unlimited amount of property between you and your spouse without incurring any estate or gift taxes. If at the death of the first spouse all property goes to the surviving spouse, there is no estate tax because of the marital deduction. When the surviving spouse dies, he or she owns all of the family assets, has an exemption of $1,500,000 and anything over that amount is taxed at a rate that begins at 45%. In the scenario of the first spouse to die leaving everything to the surviving spouse, the $1,500,000 exemption of the first spouse to die is wasted. Combining the Exemption Equivalent with the unlimited marital deduction means that a married couple can have a combined estate of $3,000,000.00 which passes tax free at the death of the second spouse to die. The tax rate on any amount in excess of $3,000,000.00 is 48%. To ensure utilization of the $1,500,000.00 exemption, both of you should have property worth at least $1,500,000.00 (or one-half (½) of your combined estate if less than $3,000,000.00) held in your own names and not in survivorship.

A typical plan to fully utilize both $1,500,000.00 exemptions for a married couple is to place $1,500,000.00 in a trust.¹ The trust typically provides that all income is payable to a surviving spouse and the trustee may invade principal for the spouse's benefit. The balance of the estate, if any, is given outright to the surviving spouse. The surviving spouse, at his or her election, may then place this additional inherited amount into their own revocable trust or invest those assets on their own. Upon the death of the second spouse to die, all of the survivor's property is passed on to the children either outright or in a continuing trust. The $1,500,000.00 in the trust created upon the first spouse's death, together with any appreciation of principal, is not taxable again in the second spouse's estate. Enclosed please find a graphic illustration at the end of this letter reflecting the benefits of this approach using a hypothetical estate and plan.

Gift Tax. Alternatively, a now separate but still interrelated exemption amount may be gifted away during life. Before 2004, the gift and estate tax rates were “unified” but the exemption amounts for gift tax and for estate tax are no longer “unified” after 2003 in that the gift tax exemption is frozen at $1,000,000.00. Lifetime taxable gifts (i.e. gifts which can not qualify for the exclusions discussed in the next section) may still be recommended for people who are certain they will not need the gifted property during their lifetime, and are concerned about minimizing their estate tax obligations. By gifting property during their lifetime, they can each remove $1,000,000.00 of current value from their estate without paying gift taxes, as well as eliminate subsequent appreciation and income on the property from their estate. The appreciation accrues to the recipient of the gift and effectively gives the donor a larger tax free gift than if the transfer had been postponed until death.

A possible drawback to lifetime gifts which should be considered is the recipient's basis in the gift. A lifetime gift is transferred to the recipient with the donor's basis. If the property is sold by the recipient, income tax must be paid on all of the appreciation realized by the donor, as well as the recipient. If the property is passed at death, the property is transferred with the basis equal to its then current market value. Any capital appreciation realized by the donor is essentially forgiven and passes tax-free provided the combined value of all assets is within the Exemption Amount. Therefore, lifetime gifts should be made, as far as possible, from property which has experienced little growth in the donor's estate (thus retaining a “high basis”), but for which future growth is anticipated.

Annual Gift Exclusion. The current tax laws permit each individual to make annual gifts valued at up to $11,000.00 to any individual.² This amount does not count against the Exemption Amount discussed earlier. Traditionally, the annual exclusion is used to transfer property tax free to children. A married couple using this system can transfer $22,000.00 each year to each child tax free. It should be kept in mind, however, that this exemption is not restricted to children or other family members. The annual exclusion may be used to transfer property to anyone and for any purpose. If a regular gift giving program is followed, it can substantially reduce a taxable estate. Gifts may be given in trust if the donor so desires, provided the recipient is given a present interest in the trust. Further, gifts under IRC 2503(e) by payments made directly to health care providers and education providers for certain qualified medical and educational expenses remain available for use without being counted towards the Annual Exclusion and without reducing the Exemption Amount. Because IRC 2503(e), unlike annual exclusions gifts, are highly technical, please consult us or your tax preparer before assuming the gift qualifies.

Generation-Skipping Transfer Tax. If a person transfers assets to their grandchildren or more remote descendants, those assets will not be taxed in their children's estates. The generation-skipping transfer ("GST") tax, however, discourages these transfers by taxing them at the highest estate and gift tax rate (currently 47% in 2005, but slated to drop as set forth in Table One above). Likewise, your siblings’ children and grandchildren are viewed as your children and grandchildren for purposes of determining whether a GST has occurred. Transfers to persons outside your family who are more than 37 years younger than you are also subject to the GST tax. Transfers that qualify for the gift tax annual exclusion (described above) are generally exempt from the GST tax. Each individual can also make a total of $1,500,000.00 of other generation-skipping transfers free of GST tax.³ A typical situation for this type of planning is where one of your children is financially well off and may even have estate planning concerns of his or her own. In such a situation, a trust can be set up which the child can even control, to some extent and with some restrictions, for the child's benefit and your grandchildren's benefit, yet upon the child's death pass to your grandchildren free from any estate or GST taxes. The GST exemption equivalent is adjusted to an amount equal to the exemption equivalent in 2005-2009) which is available to reduce or eliminate generation skipping tax. Although changes have been made to the application of the GST rules by the 2001 Act, they are generally favorable to taxpayers. Because this alternative did not appear to be in keeping with your wishes, we did not address such a trust in your documents. We could, of course, revise the documents in the future if the need for GST planning becomes more desirable.

As of January 1, 2005, the state death credit has been eliminated and there is now only a deduction for death taxes (e.g., any estate, inheritance, legacy, or succession taxes) actually paid to any State or the District of Columbia, in respect of property included in the gross estate of a decedent. The impact of this change has depended upon the response each state has made and will make in the future. For instance, at present, the tax collected by Virginia does not result in a dollar for dollar offset of tax paid to the U.S. Government since our tax system is still “tied into” the federal exemption equivalents.⁴ Therefore, even if Virginia does not adopt a separate death tax in response to the 2001 Tax Act, the current Virginia state death tax complicates planning and results in a higher combined effective top tax rate (federal and state) than the rates suggested in Table One. For instance, for estates subject to Virginia Estate Tax, the top combined federal and Virginia estate tax rate is 55.48% (54.64% for 2006.)⁵

²Under the 97 Tax Act, the annual exclusion of $11,000.00 is indexed for inflation but goes up in $1,000 increments.

³The GST exemption is now tied in to the Exemption Amount until 2010.

⁴Under Virginia Code Section 58.1-901, the state death tax will not fall below the federal credit allowable under the IRC (Section 2011) as it existed on 1/1/78. The Virginia Department of Taxation’s current position is that Virginia law requires matching of the current and future Exemption Amounts.