Trust Accounts and Fiduciary Responsibilities flashcards

This set of flashcards covers vocabulary related to trust entities, fiduciary standards, tax systems, and different types of trust account structures based on lecture notes.

Trust

A legal entity created to benefit a specific party, often used for managing family assets, supporting charitable goals, and reducing certain taxes.

Fiduciary

A third party who oversees another person’s assets and is legally required to act in the client’s best interest, putting the client's interests ahead of their own.

Uniform Prudent Investor Act (UPIA)

A general rule of law for fiduciary regulation that requires a holistic (big-picture) investment approach and allows trustees to delegate investment duties to third parties.

Grantor

The person who creates and funds a trust using a trust agreement.

Trust agreement

The document that establishes a trust, outlining its objectives, management instructions, and beneficiaries.

Trustees

Individuals appointed in the trust agreement to manage the trust as fiduciaries and follow the grantor’s instructions.

Beneficiary

A person or organization (such as a charity) for whose sole benefit the trust is managed.

Prudent Man Rule (PMR)

The standards that regulated many fiduciaries before the UPIA, which generally prohibited trustees from delegating most of their duties.

Revocable trust

Also called a living trust or inter vivos trust, this type of trust can be amended or terminated during the grantor’s lifetime and helps avoid probate.

Irrevocable trust

A trust that generally cannot be changed once established; the grantor gives up control and cannot serve as trustee, but the assets are not subject to estate taxes upon the grantor's death.

Progressive tax system

A system where higher income levels are taxed at higher rates, such as federal income tax which ranges from $10\%$ to $37\%$, as well as estate and gift taxes.

Regressive tax system

A system that applies the same tax rate regardless of income level or amount, such as sales tax or excise tax.

Simple trust

A trust that must distribute all investment income to beneficiaries annually and is prohibited from distributing principal.

Distributed net income (DNI)

The term used for income distributed by a trust to its beneficiaries.

Complex trust

A trust that does not meet simple trust requirements, specifically because it may accumulate investment income rather than distributing it every year.

Testamentary trust

A trust created through a person’s last will and testament that becomes effective upon death and generally goes through probate.

Tenants in Common (TIC)

A joint trust structure where each spouse owns a defined percentage of assets; at death, their portion passes according to their will or trust rather than automatically to the survivor.

Joint Tenants with Right of Survivorship (JTWROS)

A joint trust structure with equal and undivided ownership where the deceased's interest automatically passes to the surviving owner, avoiding probate.

Joint Beneficial Ownership (JBO)

A broad term for multiple parties sharing the benefits, income, and control of assets, applied to both trust and non-trust arrangements.