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Palimony Back to Top

If a non-married partner dies or terminates the relationship, the other member of the partnership may be left without any basis for economic support. In the context of a marriage that dissolves the ex-spouse can sue for support (alimony) and a distribution of property. The non-marital partner may attempt under state law to sue for "palimony", analogous to alimony. In evaluating the appropriateness of such a payment the courts may consider a range of factors including concepts such as the value of services which the aggrieved partner provided (quantum meruit), whether some of the assets taken by the the other former partner belong in part to the aggrieved partner (constructive trust), whether there was an express or implied arrangement between the partners and more. To avoid many of the uncertainties of such a claim, partners should give careful thought to preparing and signing a living together agreement to address their financial and other arrangements in the event the partnership ends.

Partition Back to Top

This is a legal process of dividing up a jointly owned parcel of land. For example, you own investment land with your brother and the two of you haven't talked in decades. Your lack of cooperation prevents either of you from using the land. If your brother refuses any cooperation you can sue (bring an action) for the court to partition the property, so that you can each own an approximately equal parcel of the land individually and develop or sell it.

Partnership Back to Top

A syndicate, joint venture, group, or other arrangement in which two or more investors join their money and skills to carry out a business as co-owners and to earn a profit. A partnership is generally treated as a flow-through (conduit) so that the partners each report their share of partnership income or loss on their personal tax returns. The partnership files a Form 1065 as an information report with the IRS but doesn't pay any tax. An election is available to avoid being taxed as a partnership.

Passive Income Back to Top

The passive income and loss rules divide income into three types

Passive Loss Back to Top

Passive losses are tax losses from rental real estate properties (for example, as a result of depreciation write-offs) or from investments as a limited partner. Passive losses can generally only be used to offset passive income.

Payback Trusts Back to Top

Payback Trusts – This is often used to refer to first party SNTs (also called (d)(4)(A) trusts) so that on the death of the beneficiary the remaining trust assets must first be used to repay Medicaid. The balance of the assets can then be distributed to the remainder beneficiaries.

Pension Sub Trust Back to Top

This is a tax planning technique which does not appear to work. If you have such an arrangement you should have it reviewed by an independent tax attorney (not the person who set it up). Your pension plan sets up a trust that uses pre-tax pension dollars to buy life insurance on your life. The theory or goal is that the insurance is purchased with pre-tax dollars so its much cheaper to you then insurance you would buy outside the pension plan with post-tax dollars. To avoid the life insurance proceeds from being included in your estate the sub-trust under the pension owns the insurance, not the pension. Your rights over the sub-trust are structured to avoid inclusion in your taxable estate. The IRS has indicated that this technique will undermine the qualification of the entire pension plan.

Per Capita Back to Top

A distribution made equally to the number of persons receiving property. See Per Stirpes.

Per Stirpes Back to Top

A distribution made equally among family lines so that depending on the number of issue in that family line, the individuals may receive more or less than had the distribution been per capita. State law definitions can vary. See your estate planner.

Perpetual Trust Back to Top

A trust that continues forever, in perpetuity, is called a perpetual trust. Other names are also sometimes used such as "dynasty trust", "GST trust", "generation skipping trust", etc. However, the GST or generation skipping trust really refer to trust that consider planning for the generation skipping transfer tax and are not necessarily perpetual, although many if not most are. If you are going to establish a perpetual trust you need to do so in a state or country (jurisdiction) that has abolished an old common law legal doctrine, "the rule against perpetuities". This doctrine provides that interests in property must end after some defined period. Many states, such as Delaware, Alaska, South Dakota and others have abolished the rule against perpetuities so you can set up perpetual trusts. The concept of a perpetual trust is a powerful planning tool as it can be used to insulate assets from estate taxes forever (up to the GST exemption which in 2007 is $2 million, plus growth), protect assets from lawsuits against future heirs and the divorce of future heirs. Many sophisticated estate plans use perpetual trusts as their foundation.

Personal Property Back to Top

Furniture, equipment, and other moveable property and assets. Buildings and land are not personal property, they are real property. When buying or constructing a building, valuable tax benefits can be found by carefully identifying which property is properly treated as personal property instead of real property. This is because personal property can be written off (depreciated) more quickly than real property.

Personal Residence Trust (PRT) Back to Top

A Personal Residence Trust, as contrasted with a QPRT, was only designed to hold a residence, and nothing else, not even nominal cash.

Portability and GST Back to Top

GST Tax and Portability

For many clients, the decision to use trusts or not might be simplified by the introduction of GST tax considerations. The portability provisions are designed to eliminate the need for the “mere wealthy” to have to incur the cost and complexity of dividing title to assets and having a bypass trust. But for those who are the more than “mere wealthy,” portability was not extended to GST tax. Thus, for those estates wishing to take advantage of the GST exemption of the first spouse to die, a trust will have to be created in any event. As noted in an earlier discussion, if compound interest is the Eighth Wonder of the World, compounding inside a dynasty trust that is GST exempt is the Eighth Wonder of the World with whipped cream on top. Unless the portability benefit is extended to encompass GST, any family unit with potentially more than a $5 million estate should carefully evaluate the loss of GST benefits. If any significant wealth can be held onto through the generations, the GST benefits of trust planning on the first death could prove quite valuable over time.

Post nuptial Agreement Back to Top

This is an agreement made to address financial and other arrangements between a married couple after they are married. It is similar to a prenuptial agreement but signed after the marriage. Its effectiveness may be, depending on the facts and state law, less significant than that of a prenuptial agreement. In many instances a post-nuptial agreement could almost be akin to a negotiation of a divorce agreement before a divorce occurs. Sometimes post-nuptial agreements are used if a family member wants to gift an interest in a family business to one spouse, but if the marriage fails doesn't want the other spouse to gain access to the business. A post-nuptial is also referred to as an ante-nuptial.

See "Divorce Agreements".

Pour Over Will Back to Top

A will that distributes assets into a trust formed under a separate document. This is commonly done with revocable living trusts. You would sign a will that says in the event of your demise any assets owned by your estate should be poured into your revocable living trust. Too often this is handled in too simplistic a manner. First, a pour over will should still be a comprehensive document providing your personal representative with full powers, not a couple of page form. Second the pour over will should have dispositive provisions to address the possibility of your having revoked the revocable trust or it for some reason being invalid or unable to accept the pour over of estate assets. Third, don't assume that every revocable living trust should have a pour over will. In some instances it preferable that the revocable trust and the will dispositive provisions not be combined.

Power of Appointment Back to Top

The right and authority to transfer or dispose of property that you do not own. Depending on the nature of the power, this can cause the value of the asset to be included in your estate. This is generally done intentionally when establishing a QPRT in order to avoid adverse tax consequences to the transfer.

Powers of appointment Back to Top

A power of appointment is a right given to someone in a legal document to direct the distribution of property. For example, if you leave assets in trust to your son you may give him the right to direct in his will where the assets in the trust you set up will be distributed on his death. The advantage of using a power of appointment is it will give your son the ability to designate where assets should be distributed with the benefit of perhaps decades of knowledge of how assets should be distributed (e.g., how his children have grown). If you grant a power of appointment you should also provide for a contingent appointment of where assets should be distributed in case your son in this example does not use the power (exercise it). Powers can be general (unlimited and broad) or limited (e.g., you son can only appoint where the assets will be distributed among his descendants). There are very important tax implications to whether a power is general (it will be taxed in your son's estate if he can appoint it to his estate, creditors or creditors of his estate), and it will not be taxed in his estate if it is limited so that he cannot appoint it to his creditors, his estate or to creditors of his estate.

Preferred Stock Back to Top

Stock that has a preference over common stock for the payment of dividends and generally has only limited, if any, participation in the future economic growth of the corporation. Preferred stockholders also receive preference over common stockholders if the corporation is liquidated. Many preferred stocks are subject to call features that permit the corporation to redeem them under specified conditions. Some preferred stocks have a cumulative dividend. If a dividend is missed, it accumulates and must be paid in the future. A preferred stock differs from a bond in that it does not have a fixed maturity date.

Prenuptial Agreement Back to Top

An agreement entered into by a couple before they marry delineating economic arrangements for the marriage, if the marriage does not succeed, and for other circumstances. While the laws vary considerably from state to state, to have a prenuptial agreement respected by the courts, both husband and wife to be should have their own attorneys. The agreement should not offend public policy. It should be signed well in advance of the marriage (to avoid implications that one party signed it under the stress/threat that the imminent marriage might be called off). There should be full disclosure of all significant financial data by both parties.

Present Interest Back to Top

A gift must be a gift of a present interest (the beneficiary can enjoy the property given immediately) for it to qualify for the annual $10,000 gift tax exclusion.

Principal and Income Act Back to Top

The principal and income act is the name for a body of law, which varies by state, which provides rules for determining whether earnings of a trust, for example, are to be characterized as income or principal. This can be illustrated with a simple example. If you set up a trust to pay income to your son John and on his reaching age 25 to pay the principal to your daughter Jane. If the trust invests in a CD, the interest on the CD would be paid to John as "income". If the trust purchased a stock, the dividends received on the stock would be income paid to John. If the stock appreciated in value and was sold, the capital gain would be generally treated as principal and allocated to what Jane would get.

Two common concepts in the principal and income act in many states are the right to convert a trust that is set up as a simple income trust above into a uni-trust payment. This would have a fixed percentage, say 4% of the value of the trust paid each year to the current beneficiary instead of income. Another concept which many states have in their statute is a right for the trustee to make a transfer or "adjustment" as between income and principal.

The principal and income act is far more complex and detailed then this simple illustration. Provisions in the actual trust document can modify how state law applies to the trust.

Private Annuity Back to Top

A private annuity is an estate and financial planning transaction that typically involves a senior family member selling an asset, often (but not always) an interest in a family business, to a younger family member, say a child in the business (but see below regarding trusts). The child/buyer pays the senior family member an annuity (in many ways similar to a commercial annuity most people are familiar with) for the remainder of the parent/seller's lifetime. This approach/technique can provide an excellent way for a parent to rid themselves of the risks and issues of business returns and instead receive a fixed sum for life to live on. If the parent/seller/annuitant dies before their actuarial life expectancy, from an economic perspective the child/buyer/obligor will have potentially paid much less and the estate of the parent will be reduced. However, if the parent outlives their life expectancy, the child/buyer will pay more for the business then it may have be valued at. The taxation of private annuities was changed by proposed Treasury Regulations so that the seller must now recognize all gain on the sale in the year of the sale. This income tax consequence has resulted in many private annuity transactions being structured with the buyer being a grantor trust (defective trust) so that no gain will be recognized on sale. When this type of transaction is structured the trust should have some economic viability to mitigate against IRS claims that the seller/parent has retained an interest in the trust (thereby bringing the assets sold back into the parent/seller/annuitant's estate).

Private Split-Dollar Insurance Back to Top

Private split-dollar insurance is not a type of insurance but rather a method of structuring the ownership of life insurance on an insured. The concept of "private" split-dollar connotes an arrangement done between individuals and family trusts in contrast to a split-dollar arrangement between an employer and employee which is where the concept of split-dollar was first developed. An example of private split-dollar insurance would be to have an irrevocable life insurance trust ("ILIT") own an insurance policy on the life of the insured family member, and that insured, or another family member or family trust would share (split) the cost of the life insurance owned by the ILIT. For example, the ILIT could purchase a permanent life insurance policy and pay the portion of the premium that would be required for a term policy, with the insured or another family member (Premium Payor) paying the balance of the premium. This mechanism can substantially reduce the amount of cash the grantor/insured has to contribute to the ILIT and therefore reduce the gift tax cost of paying for the insurance in early years. The Premium Payor's interests in the policy would be secured by a collateral assignment of insurance proceeds so that in the event of death the Premium Payor would be repaid the premiums advanced. Under the 2003 Regulations governing split-dollar arrangements implemented following the effective date (or prior arrangements materially modified after that date) there are two paradigms used for the taxation of split-dollar arrangements, a loan regime and an economic benefit regime.

Pro-Rata Share Back to Top

In a simple (from an economic perspective) LLC or partnership arrangement, each Member shares a pro-rata in the income, expenses, profits, and losses of the LLC. In a more complex arrangement, special allocations of income, expenses, profits, and losses may be used instead.

Probate Back to Top

The process of marshalling assets of a deceased person, having the will recognized by the court (often called Surrogate's Court) and having the person designated in the will (personal administrator or executor) officially empowered to act (often by issuance of documents called letters testamentary). Ancillary probate is probate in a state other than the state in which you reside. Ancillary probate and the attendant fees and time delays can be avoided, in many instances, through planning.

Property Settlement Agreement Back to Top

When a couple divorces they generally negotiate, with the advice of a mediator or attorneys, a resolution of all outstanding issues. This resolution is generally embodied in an attorney prepared contract document referred to as a property settlement agreement (even though it may cover a range of issues well beyond property matters).

Prudent Investor Act Back to Top

The Prudent Investor Act, adopted in many states (but with often significant variations) is a law that addresses how a fiduciary (a person in a position of trust, such as an executor, guardian or trustee) must invest monies. In general, unless the trust, will or other governing document provides differently, the assets must be invested in a manner that comports with modern portfolio theory, diversification, consideration of risk and investment returns for the entire portfolio, not on an individual by individual security basis.

Publication Back to Top

Some legal actions or events require that formal legal notices be published in a specified manner, over a specified time period, and with specified disclosures. For example, if you form a limited liability company (LLC) in the state of New York you have to publish information for 6 consecutive weeks in two newspapers for your LLC to be valid.