The Acronyms of Estate Planning

November 23, 2022

Sometimes the estate planning legal practice area looks like a bunch of capital letters jumbled together. HEMS, QTIP, CRAT, and ILIT get thrown around with assumptions that everyone knows what the letters stand for. Sometimes clients get overwhelmed with the alphabet soup.

The Popular Acronyms of Estate Planning

POA (Power of Attorney): A POA document is a legal instrument naming an agent and conveying powers to that agent to act in the grantor’s place. This can be immediate powers. It can be durable meaning that the powers last beyond incapacity. It can be springing which requires proof of incapacity to become effective. These are important incapacity planning documents that every adult over the age of 18 should have in place.

HEMS (Health, Education, Maintenance, Support): Many trusts are created using HEMS conditions which mean that the beneficiary can receive distributions of income for the purpose of paying items related to health, education, maintenance and support. This prevents frivolous spending.

SRT (Stand-Alone Retirement Account Trust): As a public policy regulation, creditors are prevented from accessing funds in a person’s Individual Retirement Account (IRA) or 401(k); however, this does not apply to an inherited retirement account. If a beneficiary has debt, then an SRT can be created and funded by the inherited retirement accounts to prevent access from creditors. Under the new SECURE Act, the funds must be distributed out within ten years.

ILIT (Irrevocable Life Insurance Trust): An ILIT is created and funded with a term or permanent life insurance policy or policies while the insured is still alive. It directs how the death benefit will be distributed upon the owner’s death. It is irrevocable and cannot be modified. Because of its irrevocability, the proceeds are not included in the decedent’s gross estate and therefore not subject to estate tax liability.

QTIP (Qualified Terminable Interest Property Trusts): These types of trusts can be beneficial for second or subsequent marriages when a spouse wants to provide income for the new spouse for his or her life, but then ensure that the trust principal is distributed to the children from the previous marriage at death.

QPRT (Qualified Personal Residence Trust): A grantor can reduce the size of his or her taxable estate by transferring a primary residence or vacation home into a trust. The value of the home is frozen from the date of the transfer. All appreciation on the residence is kept out of the taxable estate. The grantor can continue to reside in the home for a specified period rent-free.

GRAT (Grantor Retained Annuity Trust): Another strategy to remove assets from a grantor’s taxable estate is to fund a GRAT. The grantor continues to receive fixed payments on a regular basis based on a percentage of the fair market value of the asset at the time of the funding.

For more information on all the complex estate planning tools available and help deciphering the acronyms, contact the experienced attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.

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