Glossary of Terms

Asset Protection Trust

An irrevocable trust that protects the trust assets from creditors, lawsuits, and judgments.

Bypass or Credit Shelter Trust (also called AB Trust)

An irrevocable trust used for estate planning purposes that helps married couples maximize usage of their estate planning exemptions. The trust allows funds to bypass the surviving spouse's estate and pass directly to the beneficiaries, usually the couple's children.

Credit shelter or “exemption” trust

This trust is typically funded with the community and separate property of the first spouse to die; the balance of property is funded into the survivor’s trust or, in some cases, into a marital trust.

Discretionary standard

Guidance for the distribution of income or, more commonly, principal from a trust. The most common discretionary standard is for a trustee to distribute funds for “health, education, maintenance and support” (or “HEMS”). Most trusts provide for income to be distributed but principal is usually in the discretion of the trustee.

Dynasty Trust

An irrevocable trust that allows wealth to be passed down though many generations all while avoiding transfer taxes (i.e., estate taxes, gift taxes, and generation skipping transfer taxes). Dynasty Trusts are also knowns as perpetual trusts or generation skipping trusts.

Family Trust

A trust for the benefit of grantor's family, either revocable or irrevocable.

Generation-skipping trust

A trust which benefits several generations of beneficiaries, but which is not includable for estate tax purposes in a beneficiary’s taxable estate.

Irrevocable trust

An irrevocable trust cannot be revoked or changed, in contrast to a revocable trust. Trustors normally retain the power to revoke and amend trusts during life, but trusts become irrevocable on the death of a trustor.

Martial or Spousal Trust (also called A Trust)

An irrevocable trust that defers estate taxes until the death of grantor's surviving spouse.

Per stirpes

Basically, by right of representation. Example—a gift to a child may pass to his/her children because the child predeceases a parent and his/her children take by right of representation. So if there are three grandchildren of the predeceased parent each will receive one-third of his/her parent’s share.

Power of Attorney

A legal document granting someone authority to act on your behalf in a variety of situations.

Power of appointment

A power of appointment allows a beneficiary to direct the distribution of a trust on his/her death. A general power is broader and will result in the trust property being includable in the taxable estate of the beneficiary; a limited power is more restrictive and does not have any tax consequences.

Revocable trust (contrast with irrevocable trust)

A revocable trust is one that can be revoked (or cancelled) by the trustor (or settlor); such a trust can typically also be amended, that is, the terms changed by the trustor.

Spendthrift

A clause in a trust agreement preventing any beneficiary from selling, spending, encumbering, or giving away trust assets without specific stipulations like trustee's consent. The spendthrift clause restricts the ability of trust assets being reached by a beneficiary and their creditors.

Spendthrift provision

This common provision in a trust is intended to protect the interest of a beneficiary against creditors and prevents the beneficiary from selling his/her interest as a way of “cashing out” of an interest.

“Split interest” trust

A split interest trust has a current income beneficiary(ies) and “remainder” beneficiary(ies) who will receive the remaining assets on the death of the income beneficiary(ies). Discretionary distributions made to the income beneficiary reduce the assets of the trust and thereby impact on the remainder beneficiary(ies).

Survivors trust

After the death of the first spouse, the community property and separate property of the surviving spouse is held within this trust and the surviving spouse retains the ability to revoke or amend the terms of this trust (including directing the assets elsewhere).

Trustor

The same as “settlor,” the trustor is the individual who establishes a trust; plural is “trustors” or “settlors.”