Topics A-Z: American Wealth and Estate Planning Terms Explained
This page sets out, in full, the wealth and estate planning entries from the firm’s Topics A-Z glossary: the vocabulary of tax-optimized structuring, wealth transfer and family governance most relevant to United States persons of substantial means.
Figures stated are those in force for 2026. The material is provided for information only and does not constitute legal advice. Positions taken by the Internal Revenue Service, by state revenue departments and by foreign authorities differ, and the application of any rule depends on facts that this format cannot accommodate.
A · B · C · D · E · F · G · H · I · J · L · M · P · Q · R · S · T · U · V · W
A
Annual Exclusion
A donor may give up to nineteen thousand dollars per donee in 2026 without consuming any part of the lifetime exclusion and without filing a gift tax return, provided the gift is one of a present interest. Spouses who elect to split gifts may transfer twice that amount to each donee, although the election itself requires a return.
Transfers to a spouse who is not a United States citizen are not eligible for the unlimited marital deduction and are instead subject to an enhanced annual limit, one hundred ninety-four thousand dollars in 2026. Payments made directly to a qualifying educational institution for tuition or to a provider of medical care are excluded without limit and are not counted against either figure, a provision of considerable use in families supporting several generations.
Applicable Exclusion Amount
The basic exclusion amount is fifteen million dollars per person in 2026, indexed for later years, and applies in unified fashion to lifetime gifts and to transfers at death. A surviving spouse may add the portion unused by the first spouse to die, provided the election is made on a timely filed return for that first estate.
An estate of a decedent who was neither a citizen nor domiciled in the United States is allowed a unified credit of thirteen thousand dollars, the equivalent of an exclusion of sixty thousand dollars, applied to United States situs assets alone. Estate tax treaties, including those with Germany, France, the United Kingdom and a small number of other states, substitute a credit prorated by the ratio of United States situs assets to the worldwide estate, which in many cases eliminates the tax that domestic law would impose.
Art and Collectibles
Tangible personal property is situated where it physically lies, so a work owned by a non-resident and lent to an American museum is a United States situs asset for estate tax purposes if the owner dies while the loan is outstanding. The same objects are subject to gift tax when transferred by a non-resident, although securities are not, a distinction that determines the sequence in which a collection should be moved.
Collections raise questions that ordinary portfolios do not: a capital gains rate of twenty-eight percent on sale, restrictions on export in the country of origin, title risk arising from wartime provenance, and the practical difficulty of dividing indivisible objects among several heirs. Fractional charitable interests, sales through a private foundation, and dedicated collection vehicles each address part of the problem and each carries conditions that must be satisfied during the owner’s lifetime.
Asset Protection
Statutory protections come first: qualified retirement plans enjoy broad protection from creditors under federal law, several states exempt homestead property without limit, and tenancy by the entirety shields property held by spouses from the separate creditors of either. Structures beyond these, whether domestic trusts established in states that permit self-settled protection or foreign trusts, operate only where they are established before a claim is in prospect.
Transfers made with intent to hinder or delay creditors are voidable, and the analysis conducted by a court will consider the timing of the transfer, the solvency of the transferor and the degree of control retained. For institutions, a request to open an account in the name of a newly formed protective structure warrants the same diligence as any other change in beneficial ownership, particularly where the settlor retains powers that a court would treat as ownership in substance.
B
Basis Step-Up
Property acquired from a decedent takes a basis equal to its value at death, eliminating the gain accrued during the decedent’s lifetime. In community property states the entire community interest is adjusted at the first death rather than only the decedent’s half, which is among the more significant consequences of domicile for a married couple.
The rule does not extend to items of income in respect of a decedent, so retirement accounts, deferred compensation and accrued but unpaid income pass with the deferred tax intact. Property transferred by gift retains the donor’s basis, which makes the choice between lifetime transfer and transfer at death a comparison between transfer tax saved and income tax created. Heirs of a non-resident decedent generally take a stepped-up basis as well, a point worth confirming before a foreign family sells inherited American real property.
C
Charitable Lead Trust
A charitable lead trust pays an annuity or unitrust amount to charity for a term of years or for a measuring life, after which the remainder passes to the donor’s family. The value of the taxable gift is the remainder, computed by reference to the section 7520 rate, so the technique transfers appreciation above that rate to the family free of further transfer tax.
The structure performs best when interest rates are low and the assets contributed are expected to outperform them. It is generally unsuitable for generation-skipping transfers, since the exemption cannot be allocated efficiently to a lead annuity trust, and it demands assets that can support the required payments without forced sales.
Charitable Remainder Trust
The mirror image of the lead trust: the donor or another individual receives a payment for life or for a term not exceeding twenty years, and the remainder passes to charity. Contribution of appreciated property produces an income tax deduction for the present value of the remainder and permits the trust to sell without immediate recognition of gain, the payments thereafter carrying out income under a prescribed ordering.
The technique suits a donor holding a low-basis concentrated position who seeks diversification and a stream of income, and it is frequently paired with an irrevocable life insurance trust that restores the value of the remainder to the family. Non-resident beneficiaries complicate matters, since distributions to them are subject to withholding and the treaty analysis is rarely straightforward.
Closely Held Business Succession
An operating business is usually the least liquid and most valuable item in an estate, and the federal estate tax falls due nine months after death. Section 6166 permits an estate in which such an interest exceeds thirty-five percent of the adjusted gross estate to pay the attributable tax in instalments over as many as fourteen years, with interest at a favourable rate on part of the deferred amount.
Planning that anticipates the problem is preferable to relief that mitigates it: a shareholders’ agreement fixing the terms of transfer, insurance funding the purchase price, a defined management succession, and, where appropriate, transfers of non-voting interests during lifetime at discounted values. Where the business has foreign operations or foreign shareholders, the entity classification, the treaty position and the local law of forced heirship must be resolved before the ownership structure is settled.
Corporate Trustee
A bank or trust company accepting a fiduciary appointment assumes duties of loyalty, impartiality among successive beneficiaries, prudent investment and accounting, and it does so for a fee fixed by schedule or by the instrument. Its advantages are continuity, institutional capacity to hold and value unusual assets, and insulation from family conflict.
International appointments require attention to matters an ordinary domestic acceptance does not raise: whether accepting the appointment causes a trust to be foreign or domestic for tax purposes, whether the institution may act in the jurisdiction where beneficiaries reside, and how local reporting obligations concerning trusts will be discharged. Directed trust statutes allow the investment function to be separated from the administrative one, which frequently resolves a family’s reluctance to cede control.
D
Decanting
Statutes in a majority of states permit a trustee holding discretionary authority over principal to appoint that principal to a second trust with revised terms. The technique corrects drafting that has been overtaken by events, adds administrative provisions, changes governing law or situs, and in some circumstances divides a trust among branches of a family.
Limits apply. Decanting cannot ordinarily add beneficiaries, and exercises that alter beneficial interests raise questions under the transfer tax rules and, where the exemption for generation-skipping transfers has been allocated, may jeopardise the trust’s exempt status. Beneficiaries resident abroad introduce a further layer, since a change of trustee or governing law can alter the trust’s classification as domestic or foreign.
Digital Assets
Fiduciary access to electronic records is governed in most states by the Revised Uniform Fiduciary Access to Digital Assets Act, under which the provider’s own online tool controls if the user has completed one, followed by the terms of the will or trust, followed by the service agreement. Silence in all three ordinarily leaves the fiduciary with access to a catalogue of communications rather than their content.
Cryptocurrency presents a separate problem, since an asset controlled by a private key is irrecoverable if the key is lost and is not held by any intermediary from which it might be compelled. Custody arrangements, multi-signature schemes and instructions deposited with counsel are the practical responses, and a schedule of holdings maintained during lifetime is indispensable, since an executor cannot administer what cannot be found.
Directed Trust
Legislation in a number of states permits the functions of a trusteeship to be divided, so that an investment adviser directs the portfolio, a distribution committee governs payments and an administrative trustee maintains the records and the situs. Each holder of a divided function bears the duties associated with it, and the administrative trustee’s exposure is correspondingly narrowed.
The structure reconciles a family’s wish to retain investment authority, often over a concentrated holding or an operating business, with the advantages of institutional administration. Where the family members exercising those functions reside outside the United States, the classification of the trust as domestic or foreign must be examined, since the control test looks to the persons making substantial decisions.
Donor-Advised Fund
A donor-advised fund permits a contribution to be completed, and the deduction taken, in the year of transfer while the recommendation of grants follows over time. Administration is undertaken by the sponsoring organisation, the deduction limits are those applicable to public charities, and appreciated securities may be contributed without recognition of gain.
The vehicle suits families whose giving is substantial but does not warrant the governance, excise tax and reporting attached to a private foundation. Its limitation is that advice is advisory in law, the sponsor holding legal control, and that certain grants, including those satisfying a personal pledge or conferring a benefit on the donor, are not permitted. Families with international philanthropic objectives should confirm before contributing that the sponsor is willing to make grants abroad, since the expenditure responsibility rules impose real administrative burdens.
Dynasty Trust
A number of states have abolished or substantially extended the rule against perpetuities, permitting a trust to continue for many generations or in perpetuity. Funded with an allocation of the generation-skipping transfer tax exemption, fifteen million dollars per person in 2026, such a trust removes the property and its future appreciation from the transfer tax system for the duration.
The design questions are those of governance rather than of tax: how distributions are to be determined as the beneficiary class widens, who appoints and removes trustees, how an operating business or concentrated holding is to be managed, and how the trust may be amended as circumstances change over a century. Where beneficiaries live abroad, the reporting and taxation of distributions in their countries of residence should be considered at the outset, since a structure ideal under American law may be treated unfavourably elsewhere.
E
Estate Tax
The federal estate tax is imposed on the estate rather than on the recipients, at a top rate of forty percent, and is payable nine months after death. The exclusion is fifteen million dollars per person in 2026 for citizens and domiciliaries, while the estate of a person neither a citizen nor domiciled is taxed on United States situs assets alone with an exclusion of sixty thousand dollars.
Several states impose their own estate tax at thresholds far below the federal figure, and a small number impose an inheritance tax payable by the recipient according to relationship. The interaction of these levies with the income tax of the estate, and with foreign death duties, is where most of the planning value lies, and it is the reason the analysis begins with domicile and situs rather than with the will.
F
Family Governance
Structures transfer assets; governance determines whether the family that receives them remains capable of holding them together. The instruments are a family constitution recording shared purpose and decision rules, a council or assembly meeting on a fixed calendar, an education programme preparing rising members for ownership, and an explicit policy on employment, distributions and the resolution of disagreement.
The work is most valuable where an operating business, a concentrated holding or a jointly used property must survive a generational transfer, and where family members are dispersed across jurisdictions and legal cultures. It is frequently deferred because it is not urgent, and its absence becomes apparent only when a dispute arises among owners who have no forum in which to resolve it.
Family Limited Partnership
A limited partnership or limited liability company holding a family’s marketable securities, real estate or operating interests permits centralised management, restrictions on transfer, and the gifting of limited interests whose value reflects the absence of control and of a market. The discounts that follow have been the subject of sustained examination.
The authorities respect the structure where it is formed for reasons independent of tax, where formalities are observed, where the partnership is not used to pay the personal expenses of the senior generation, and where the transferor does not retain the enjoyment of the property transferred. Entities funded shortly before death, or operated as a personal account, are regularly included in the gross estate at undiscounted value.
Family Office
A single family office consolidates investment management, tax compliance, reporting, philanthropy and administration under the family’s own control, and at sufficient scale it replaces a set of external relationships with an internal capability. Structuring questions include the choice of entity, the deductibility of expenses following the suspension of miscellaneous itemised deductions, the registration position under the investment adviser rules and the employment of family members.
Cross-border families face additional questions: where the office is to be established and whether its activities create a taxable presence for the family’s entities, how information is to be gathered from custodians in several jurisdictions, and how the office is to discharge reporting obligations that differ by member according to citizenship and residence. Institutions dealing with a family office should establish at the outset which entity is the customer and who is authorised to instruct.
G
Generation-Skipping Transfer Tax
A separate tax at a flat forty percent applies to transfers to persons two or more generations below the transferor, whether made outright, through a taxable termination or by distribution from a trust. Each person has an exemption equal to the estate tax exclusion, fifteen million dollars in 2026, which must be allocated to the transfers intended to be sheltered.
Allocation is where the errors occur, and they surface decades later when property leaves the trust. Automatic allocation rules apply to certain transfers and not to others, elections in or out are available, and late allocation is possible in defined circumstances but at the value then current. The exemption is not portable between spouses, so an unused amount is lost at death.
For a transferor who is neither a citizen nor domiciled, the tax reaches only transfers that are themselves subject to American estate or gift tax, which confines it to United States situs property. Trusts intended to serve several generations of an international family should be tested against the treatment of the beneficiaries’ countries of residence, which may tax each distribution regardless of the American exemption.
Grantor Retained Annuity Trust
The settlor transfers property to a trust that pays back a fixed annuity for a term of years, retaining a right whose value is computed at the section 7520 rate. If the property outperforms that rate, the excess passes to the remainder beneficiaries at little or no transfer tax cost; if the settlor dies within the term, the property is brought back into the estate and the position is substantially as if nothing had been done.
Short rolling terms reduce mortality risk, and the technique suits assets expected to appreciate sharply or to produce a liquidity event. It is a poor vehicle for generation-skipping transfers, because the exemption cannot be allocated until the end of the term, and it requires either liquidity or in-kind distributions to satisfy the annuity.
Grantor Trust Rules
Where a settlor retains defined powers or interests, the trust is disregarded for income tax and its income is taxed to the settlor, although the assets may be entirely outside the settlor’s estate for transfer tax purposes. The asymmetry is deliberate and is the foundation of much planning, since the settlor’s payment of the trust’s tax is not itself a gift and permits the trust to compound undiminished.
The same rules apply on the inbound side to determine whether a foreign trust is a grantor trust as to its foreign settlor, which governs whether distributions to American beneficiaries are treated as gifts or as carrying out income. A change in the trust’s terms, or the death of the settlor, can reverse the classification, and the consequences of the reversal are rarely welcome if unplanned.
H
HIPAA Authorization
Federal privacy rules prevent providers from disclosing health information, including to close family members and to an agent under a financial power of attorney, without a separate authorisation. The document is short and is routinely omitted, with the result that the person named to make decisions cannot obtain the information needed to make them.
It is executed alongside the health care power of attorney and the advance directive, and for individuals who spend time in more than one country it should be paired with equivalent instruments under the law of the other jurisdiction, since a foreign document is seldom recognised by an American hospital and the reverse is equally true.
I
Incapacity Planning
A durable financial power of attorney, a health care proxy, an advance directive and a privacy authorisation together allow a chosen person to act when the principal cannot. Without them the family must apply for guardianship or conservatorship, a public proceeding conducted under continuing court supervision at material cost.
Institutions decline powers of attorney more often than families expect, on grounds of age, generality of language, unfamiliarity of form or foreign origin. Many will accept only their own document. A funded revocable trust avoids the problem for assets held in it, since the successor trustee takes over without any court involvement, which is one reason such trusts are recommended to clients with assets in several states or countries.
Intentionally Defective Grantor Trust
A trust drafted to be outside the settlor’s estate for transfer tax purposes but treated as owned by the settlor for income tax permits a sale of appreciating assets to the trust without recognition of gain, in exchange for a note bearing interest at the applicable federal rate. Growth above that rate accrues to the beneficiaries, and the settlor’s payment of the trust’s income tax further reduces the taxable estate without constituting a gift.
The technique is commonly combined with valuation discounts on the interests sold and with an allocation of the generation-skipping exemption at the time of an initial seed gift. Its execution requires attention to the adequacy of that seed capital, the substance of the note and the treatment on the settlor’s death, when grantor status terminates and the income tax consequences must be addressed.
Irrevocable Life Insurance Trust
Insurance owned by the insured is included in the gross estate. A trust that acquires and holds the policy, funded by gifts covering premiums, keeps the proceeds outside the estate while providing liquidity precisely when the estate tax falls due, which is of particular value where the estate consists of a business, real property or a collection.
Care is required with the three year rule applicable to policies transferred rather than acquired by the trust, with the notices given to beneficiaries to qualify premium gifts for the annual exclusion, and with the trust’s administration, which is frequently neglected once established. Where the insured or the beneficiaries are not American, the situs of the policy, the insurer’s jurisdiction and the tax treatment of proceeds in the beneficiaries’ countries must all be examined.
J
Jurisdiction and Trust Situs
The state whose law governs a trust determines the rule against perpetuities, the availability of self-settled protection, the permissibility of decanting and directed trusteeships, the rights of creditors and beneficiaries to information, and the state income tax payable by the trust. These differences are substantial, and several states have legislated deliberately to attract fiduciary business.
Situs is not immutable: trusts may be moved by their own terms, by the appointment of a successor trustee, by decanting or by court proceedings. Where a settlor, a trustee or beneficiaries are located outside the United States, the analysis must extend to whether the trust is domestic or foreign for federal tax purposes, which turns on court supervision and on who makes substantial decisions, and to how the trust will be characterised in the jurisdictions where the beneficiaries live.
L
Liquidity Planning
Federal estate tax is due nine months after death, before most illiquid assets can be sold on reasonable terms and often before an ancillary proceeding has even been opened. Estates concentrated in a business, in real property or in a collection therefore face the classic difficulty of a large liability against assets that cannot be realised quickly.
The instruments available include insurance held outside the estate, instalment payment under section 6166 for closely held business interests, borrowing against estate assets on terms the authorities will respect, pre-death sales or redemptions, and the accumulation of a reserve within a family entity. Cross-border estates should also account for foreign death duties that may fall due on a different timetable, and for the delay in releasing American assets where a transfer certificate is required.
M
Marital Deduction
Transfers to a surviving spouse who is a United States citizen are deductible without limit, deferring rather than eliminating tax, which falls due in the survivor’s estate. The deduction is available for outright transfers and for interests qualifying as terminable interest property where the election is made.
The deduction is not available where the surviving spouse is not a citizen, irrespective of residence or of the length of the marriage. The alternatives are a qualified domestic trust, which defers the tax until principal is distributed or the survivor dies, or naturalisation before the return is filed. Lifetime transfers to a non-citizen spouse are limited to an enhanced annual amount, one hundred ninety-four thousand dollars in 2026. This is the single most frequent planning failure in international marriages.
P
Portability
The exclusion unused by the first spouse to die may be transferred to the survivor, potentially approaching thirty million dollars in 2026 for a married couple. The transfer requires an election on a timely filed estate tax return for the first estate, even though no tax is due and no return would otherwise be required.
Failure to file is the most expensive omission in estates that appear modest at the first death, and relief for late elections, while available in defined circumstances, is not assured. Portability does not extend to the generation-skipping exemption, which is lost if unused, and it is unavailable to the estate of a non-domiciliary. A surviving spouse who is not a citizen can use it only through a qualified domestic trust.
Private Foundation
A private foundation offers durable family control of philanthropy, the ability to employ family members on reasonable terms, and a permanent institutional identity, at the price of an excise tax on investment income, a minimum annual distribution requirement, prohibitions on self-dealing and public disclosure of its return.
Grants to foreign organisations are permitted but require either a determination of equivalency or the exercise of expenditure responsibility, both of which impose administrative work that surprises families accustomed to giving informally abroad. Where the founders are not American, the interaction with the charitable regimes of their home jurisdictions, and with the estate and gift tax deductions available for foreign charities, should be examined before the entity is formed.
Private Placement Life Insurance
An institutionally priced insurance contract, available only to qualified purchasers, can hold an investment portfolio within a policy wrapper, deferring income tax during the insured’s life and delivering proceeds free of income tax at death. The structure depends on satisfying the diversification requirements and on the policyholder not exercising control over the underlying investments.
Its appeal to international families lies in the fact that insurance is recognised in most civil law systems, which trusts are not, so a policy frequently achieves a result that a trust cannot achieve in the same family. The treatment of the policy in each country where an owner or beneficiary resides, the situs of the contract, and the reporting of foreign policies where the insurer is not American, all require examination before the policy is issued.
Prudent Investor Rule
A trustee must invest as a prudent investor would, considering the purposes and terms of the trust, and the standard is applied to the portfolio as a whole rather than to individual holdings. Diversification is required unless the trustee reasonably determines that the purposes of the trust are better served without it.
The tension arises most acutely where a trust is funded with a concentrated position, an operating business or real property that the family expects to be retained. The instrument may authorise retention, and directed trust arrangements may assign the investment function elsewhere, but both require explicit drafting. A trustee who retains a concentrated holding without that authority, and without documenting the analysis, assumes the risk of its decline.
Q
Qualified Personal Residence Trust
A residence transferred to a trust in which the transferor retains the right to occupy it for a term of years passes to the remainder beneficiaries at a discounted gift value, since the retained interest is subtracted. If the transferor survives the term the property and its appreciation are outside the estate; if not, the position is substantially as though the trust had not been created.
Continued occupation after the term requires a lease at market rent, which further reduces the estate and is frequently the intended result, but it must be documented and observed. The technique is unsuited to property a family may wish to sell during the term, and where the residence is located abroad, the effect of the transfer under local property and transfer tax law must be confirmed before it is executed.
Qualified Terminable Interest Property
Property in which a surviving spouse receives all income for life, with the remainder passing as the first decedent directed, qualifies for the marital deduction if the executor so elects. The election permits the deferral of tax while the identity of the ultimate beneficiaries remains fixed by the first spouse to die.
It is the standard solution for second marriages and for families where children of an earlier marriage must be protected, and it permits a partial election, which gives the executor a measure of post-mortem flexibility in using the first decedent’s exclusion. Where the surviving spouse is not an American citizen the trust must additionally satisfy the requirements of a qualified domestic trust for the deduction to be available.
R
Required Minimum Distributions
Owners of traditional retirement accounts must begin withdrawals at age seventy-three, rising to seventy-five for later cohorts, calculated by reference to published life expectancy tables. Roth accounts are exempt during the owner’s lifetime, which is what makes them the preferred asset to leave to the next generation.
Most beneficiaries other than a surviving spouse must empty an inherited account within ten years, with annual distributions required in some cases, so the deferral once available over a beneficiary’s lifetime no longer exists. Foreign beneficiaries face withholding on each distribution and a treaty analysis that determines whether the income is taxable in the country of residence, in the United States or in both with credit.
Retirement Accounts
Employer plans and individual accounts are included in the gross estate at full value and simultaneously carry deferred income tax, since the balance is income in respect of a decedent and receives no basis adjustment. The same asset therefore bears two different taxes, which is the principal reason these accounts are often the least efficient to leave to children and the most efficient to leave to charity.
Spousal rights differ between plan types: the spouse of a participant in a qualified employer plan is the beneficiary by law unless a written waiver is given, while individual accounts carry no such protection except in community property states. For international families the beneficiary designation is the operative document, and it should be reviewed whenever residence or marital status changes.
Revocable Living Trust
A trust created during life and revocable at will, typically with the settlor as trustee and beneficiary, avoids probate for assets titled in it, provides for management on incapacity without a court proceeding, and keeps the disposition private. It confers no income or transfer tax advantage during the settlor’s life.
Its usefulness increases with the number of jurisdictions in which assets are held, since it can eliminate ancillary proceedings in several states at once. Its limitation is international: civil law jurisdictions do not recognise the trust as a matter of property law and tax it under rules of their own, so a trust that serves an American family well may create reporting obligations and unexpected charges where a beneficiary resides abroad. Funding is the step most often left incomplete, and an unfunded trust accomplishes nothing.
S
Section 6166 Deferral
Where an interest in a closely held business exceeds thirty-five percent of the adjusted gross estate, the estate may elect to pay the attributable estate tax in instalments, interest only for the first four years and thereafter in up to ten annual payments, with a favourable interest rate applying to a portion of the deferred tax.
The election requires attention to what constitutes a single closely held business, to aggregation among related entities, and to the events that accelerate the balance, including disposition of the interest or withdrawal of funds. A lien or bond may be required. Where the business has foreign operations or foreign shareholders, qualification is fact-intensive and should be assessed while the owner is alive, not by an executor working against the nine month deadline.
Spendthrift Provision
A provision restraining a beneficiary from assigning an interest, and creditors from reaching it before distribution, is enforced in most states subject to exceptions for support obligations and, in some jurisdictions, for claims of the state and of tort creditors. It does not protect distributions once made.
The protection is materially stronger where distributions are discretionary rather than mandatory, and stronger again where an independent trustee holds the discretion. Where beneficiaries reside abroad, the protection depends on the recognition given to the trust and to the clause in the jurisdiction where a creditor pursues the claim, which in civil law countries may be very little.
Spousal Lifetime Access Trust
One spouse creates an irrevocable trust for the other, using exclusion that would otherwise be lost, while the family retains indirect access to the property through the beneficiary spouse. The assets and their future appreciation are removed from both estates if the trust is properly structured.
The risks are the death or divorce of the beneficiary spouse, which ends the indirect access, and the reciprocal trust doctrine, which can unwind trusts created by each spouse for the other where the terms are substantially identical. Differences in timing, funding, terms and powers are what preserve the structure, and they must be genuine rather than cosmetic.
State Estate and Inheritance Taxes
A number of states impose estate tax at exemption levels far below the federal figure, in some cases around one million dollars, so that families untouched by federal tax are nonetheless exposed. A smaller group imposes inheritance tax payable by the recipient at rates graduated by relationship, and Maryland imposes both.
State tax follows domicile for intangibles and situs for real and tangible property, so a residence in a taxing state, or a vacation property there, brings the estate within its reach regardless of where the decedent lived. Changes of domicile are examined closely by revenue departments and are established by evidence accumulated over time rather than by declaration, which is why families contemplating a move should document the change contemporaneously.
Successor Trustee
The person or institution named to take office on the death, incapacity, resignation or removal of the acting trustee assumes office without court involvement, which is the principal practical advantage of a funded revocable trust over a will. A certification of trust ordinarily suffices to establish authority without disclosing the whole instrument.
For international families the choice carries a tax consequence: the classification of a trust as domestic or foreign depends on whether a United States court can exercise primary supervision and whether United States persons control substantial decisions. Naming a successor resident abroad can convert a domestic trust into a foreign one, with reporting obligations on both the trustee and the beneficiaries.
T
Trustee Selection
The choice lies among an individual known to the family, a corporate fiduciary, and a divided arrangement in which investment, distribution and administrative functions are held separately. Each carries a different balance of cost, continuity, expertise and independence, and the right answer changes as a trust matures and its beneficiary class widens.
International appointments raise questions a domestic appointment does not: whether the appointee may act in the relevant jurisdiction, whether the appointment changes the trust’s classification as domestic or foreign, whether the institution will accept assets such as operating companies, art or foreign real property, and how the trust will be reported where the beneficiaries live. These should be settled before the instrument is signed.
Trust Protector
An office created by the instrument and held by a person other than the trustee, with powers that may include removing and appointing trustees, changing the governing law or situs, approving distributions, and in some cases amending administrative provisions. The device permits a long-lasting trust to adapt without recourse to a court.
Whether the protector holds a fiduciary office is a question the instrument should answer expressly, since the law varies and the consequences for liability, for the protector’s own tax position and for the classification of the trust are significant. Where the protector resides outside the United States and holds powers over substantial decisions, the trust may be foreign for federal tax purposes even though its trustee is American.
Trusts
A trust divides legal ownership from beneficial enjoyment: a trustee holds property under enforceable duties for beneficiaries, on terms fixed by a settlor. It is not an entity in the civil law sense, and the flexibility that follows from this is the reason it is the central instrument of American wealth planning.
Civil law jurisdictions do not recognise the institution as a matter of property law and address it instead through tax and reporting rules of their own, which frequently produce charges and obligations the settlor did not anticipate. France taxes transfers made through a trust under a dedicated regime and requires annual declarations from the trustee; Germany treats contributions and distributions as acquisitions and may attribute the income of a foreign fund to a resident settlor or beneficiary. A trust that serves an American family faultlessly may therefore become a liability the moment a beneficiary moves abroad, which is why the residence of the beneficiary class belongs in the design.
U
Uniform Transfers to Minors Act
A custodial account permits property to be held for a minor without a trust, administered by a custodian until the age specified by state law, commonly eighteen or twenty-one. It is simple, inexpensive and irrevocable, and the property belongs to the minor.
Its defect is that the custodianship ends by operation of law, delivering the whole fund to a young adult at a fixed age regardless of circumstances, and the account is counted as the child’s asset for educational aid purposes. For sums of any significance a trust with staged distributions is preferable, and for international families it is preferable again, since a custodial account offers none of the protections or planning flexibility a trust provides.
V
Valuation Discounts
Interests in family entities are valued with reductions reflecting the absence of control and the absence of a market, and the combined effect is frequently substantial. The discounts are established by appraisal and are supported where the entity has a genuine purpose, observes its formalities and restricts transfers on terms an unrelated party might accept.
They are among the most examined positions in transfer tax practice. Entities funded on a deathbed, entities that pay the personal expenses of the senior generation, and entities whose restrictions exist only on paper are regularly disregarded. Where the entity holds foreign assets, or where the family members are resident abroad, the valuation must also be defensible under the law of those jurisdictions, which may recognise no discount at all.
W
Wills and Testaments
A will disposes of property held in the decedent’s sole name, appoints the fiduciary and, uniquely, appoints guardians for minor children. Formalities are prescribed by state law and generally require signature before two witnesses, with a self-proving affidavit that avoids the need to produce them later.
It governs only probate assets, so a will may prove almost entirely inoperative where accounts carry beneficiary designations and property is held jointly. International families should also verify that a foreign will is effective as to American assets: holographic wills valid in civil law jurisdictions are accepted in some states and refused in others, joint wills of the kind common in Germany are unusual and sometimes ineffective, and a choice of national law made under the European succession regulation does not bind an American court as to real property. Parallel wills, drafted so that the revocation clause in one does not destroy the other, are frequently the better course.
For the full alphabetical list, see the Topics A-Z page.