Glossary

A

A-trust

Same as a revocable marital trust. An A-trust is the surviving spouse’s share of an A/B trust.

Abatement

Abatement is the legal process by which the state court addresses insufficient cash to meet taxes, expenses, debts, or other priority gifts specified in a will.

Absolute Beneficiary

An absolute beneficiary is an irrevocable beneficiary that cannot be changed without written consent from said beneficiary. An absolute beneficiary may be named on trusts, life insurance contracts, IRAs, etc.

Abstract Of Trust

An Abstract Of Trust is an abbreviated trust document that certifies the existence of a trust, without revealing confidential details such as beneficiaries and assets held in trust. Clients that prefer privacy and confidentiality of information may request an abstract of trust document to be used when possible.

Accredited Investor

An accredited investor meets certain qualifications of net worth or annual income amounts. Complex investment opportunities (such as hedge funds or private placements) can often accept unlimited dollar amounts from accredited investors or may be restricted to accredited investors that can more safely assume the risk. The Securities and Exchange Commission (SEC) does not require the same government filings of investments intended primarily for accredited investors.

Accumulation Trust

Beneficiaries do not receive income from an accumulation trust until trust requirements are met. Income accumulates in the trust in the absence of withdrawals.

Active Management

Active management is an investment strategy that uses the intellect, experience, and judgment of portfolio managers to select individual securities and determine porfolio mix. Under this philosophy, it is believed to be possible to outperform the general market.

Administrator

When an executor is not named or fails to meet stated requirements, probate court will assign an administrator who acts in the same capacity as an executor.

Advance Directive

An Advance Directive is a critical document along with a will. This document defines the end-of-life and critical care wishes of the owner (for example, views on life support). The document does not give decision-making power to a specific individual, like a power-of-attorney (POA) document.

Advanced Life Underwriting

When insurance needs are large and complex, advanced life underwriting is the process of combining life insurance, estate planning, and business insurance. Insurance professionals experienced in advanced life underwriting may be members of the Association of Advanced Life Underwriters.

After-Tax Rate Of Return

After-Tax Rate Of Return is a performance measure that accounts for all taxes paid on capital gains, dividends, and income. After-tax return is important for ultra-high net worth investors with taxable accounts. Examples of investment activity that can have a big impact on after-tax return are municipal bonds versus taxable bonds and short term versus long term gains.

Alpha

Alpha refers to the contribution of active management to an investment’s total return. Alpha may be positive or negative in excess of a passive market index’s return. While beta risk is unavoidable, the investment manager is responsible for alpha.

Alternative Investment

An Alternative Investment is any investment opportunity that is not highly correlated with the stock and bond markets. By behaving differently than traditional stock and bond markets, alternative investments offer diversification of general market risk (or beta). Real estate, hedge funds, commodities, and private equity or all examples of alternative investments. Alternatives are largely utilized by accredited investors with high-net worth or institutional investors, however some are available to non-accredited investors.

Alternative Minimum Tax

Alternative Minimum Tax (AMT) is enforced to ensure high income individuals do not avoid paying at least a minimum amount of taxes. Certain tax breaks, deductions, and credits are added back to calculate an alternative tax that is presumably higher than the person would otherwise pay. AMT applies to taxable estates, trusts, individuals, and corporations (only small corporations are exempt). The AMT exemption or hurdle amount is controversial because it is not automatically adjusted for inflation and often includes more upper-middle class taxpayers.

Ancillary Probate

Ancillary probate is a second probate process outside of the deceased person’s state of residence. An example is for property held in other states.

Annuities

Annuities are insurance contracts that pay annual income for a specified number of years or lifetime of the policy holder. Beneficiaries of annuities receive benefits outside of probate. Interest income is taxed upon withdrawal by the owner or beneficiary. The entire annuity balance (or survivor benefit) is also taxed as a part of the taxable estate. The beneficiary gets an income tax deduction on the double taxation of accumulated interest. While lifetime income is guaranteed with an annuity, the rate of return may be less than available elsewhere. Annuities can also be costly or difficult to liquidate with surrender charges. There are many benefit options or riders for annuities, such as spouse coverage (to continue payments until the last spouse dies), death benefits for beneficiaries, and cost-of-living or inflation adjustments.

Arbitrage Hedge Strategy

Arbitrage is a hedging practice which benefits from pricing inefficiencies. The same or similar security is bought and sold at the same time on different markets. A positive spread between the two prices is essentially riskless profit to the investor. An example of arbitrage is buying a security long and selling short a futures contract for the same security. Because markets are highly efficient, it is extremely difficult to identify arbitrage opportunities, but some exist for short periods of time and can be detected by technological aids.

Asset Allocation

Asset Allocation is the practice of diversifying investable dollars among asset classes with different correlations to reduce the volatility of performance of the entire portfolio. Individual asset classes may incur extreme appreciation or losses, but the entire portfolio’s performance will be moderated. This strategy aims to balance risk and reward while considering the client’s investment goals and time horizon. Academic research shows that asset allocation is the primary determinant of investment performance, while individual security selection is less important.

Asset Allocation

Strategic asset allocation is the portfolio mix that is selected to accomplish a specific risk/reward balance and goal. The portfolio is periodically rebalanced back to the strategic allocation when it strays due to market performance or other disturbances.

Asset Class

An Asset Class is a classification or grouping of securities with similar risk and reward characteristics, such as small cap vs. large cap companies, foreign vs. domestic securities, and high yield vs. investment grade bonds.

Assets

Assets in an estate may include real estate, jewelry, art and collectibles, and financial accounts.

Attestation

Attestation is the statement in a will recognizing the witnesses for the will.

Attorney-In-Fact

The person chosen to act on your behalf in a durable power of attorney document is called the attorney-in-fact. For example, this person can make gifts, sell property, or establish trusts on your behalf.

AUA (Assets Under Advisement)

AUA is the estimated dollar value of all assets held by the clients of the firm, for which the firm provides advice or consultation (e.g., investable assets as well as privately held real estate or other illiquid or personal use assets). The firm may or may not invest the assets or be involved in the decision-making process for all of these assets. Rather, the firm will use the information to provide a holistic viewpoint for the integrated planning for all the clients’ assets.

Augmented Estate

In community property or common law states, the surviving spouse is expected to receive at least one third of the augmented estate, which includes assets left through a will and outside of a will (gifts, trusts, joint tenancy ownerships).

AUM (Assets Under Management)

AUM is usually a subset of AUA, and refers to the dollar value of assets being managed by the firm. This term can be used in lieu of revenue or sales as a measure of the firm’s size. Assets included in AUM are the investable assets of the clients for which the firm makes decisions or has varying degrees of discretion, and for which the firm may design and/or implement an investment policy and asset allocation.

B

B-trust

Same as an irrevocable credit shelter trust. A B-trust is the deceased person’s share of an A/B trust.

Beneficiary

The Beneficiary is the recipient of assets and may include multiple persons.

Beneficiary Designation

Beneficiary Designation refers to the act of naming one or more individuals (or charities) to be recipients of your assets upon your death.

Bequest (bequeath)

Bequest is the action of giving personal property through a will.

Blind Trust

With a Blind Trust, beneficiaries are not made aware of the trust assets, and the trustee maintains full control of trust management. The purpose of a blind trust is to remove potential conflicts of interest.

Bonded

Trustees and executors may be bonded to ensure that the will and trust document is followed. If they fail to adhere to their duties, a bonding company will pay damages to affected persons or the estate. The executor or trustee must pay the bonding company a fee to be bonded, and a will can waive the requirement to be bonded or provide for bonding fees. The bond document specifies the limit of protection.

Bottom-Up Strategy

Bottom-up investment strategy involves studying companies for specific characteristics that are believed to perform well, regardless of the broader economy or industry conditions.

Broker

A broker sells investment securities and offers financial advice for clients. Typically, brokers are compensated with commission for transactions and offer non-discretionary accounts to clients. A license is required of registered representatives.

Business Expense Deduction

Business Expense Deduction reduce taxable income for business-related expenses. Deductible expenses include transportation, lodging, meals, and car rentals when travelling for business purposes. Home offices or cars that are used for both personal and business purposes are only deductible to the extent that they are used for business (as a percentage). To be considered deductible, the expense must be both ordinary and necessary for your type of business.

Business Promissory Note

A business promissory note is a loan contract to sell a business. When lending conditions are tight or financing is difficult to obtain from traditional banks, seller financing is an exit strategy option to sell with a written business promissory note between the two parties.

Buy/Sell Agreement

A Buy/Sell Agreement is a document that sets forth the price and terms of any buyout of the business and options for financing. When drafted prior to an owner’s death, the agreement allows the family to plan for the business future in the event of a death. The family limited partnership may own a life insurance policy on key business owners, and the death benefit amount can be used to fund the buy/sell agreement to ensure the business remains in the family.

Bypass Trust

Another term used for Credit Shelter Trust and Exemption trust. See those definitions for more information.

C

CAIA

Chartered Alternative Investments Analyst.

Call Option

A Call Option gives the holder the right to buy a stock at a specified strike price during the term of the option. If the stock price rises above the call strike price, the holder of a call option can buy the stock at the agreed upon strike price and immediately sell the stock at its higher market price for a gain on the sale.

Carry-Over Basis

The basis is used to determine the amount of taxable appreciation in property when sold. Generally, the donor’s cost basis carries over to the donee for gifted assets. For example, a stock is purchased in 1988 and gifted in 2008. The donee’s cost basis in the stock is the same as the donor’s (in this case the value in 1988). The donee is responsible for paying taxes on all capital gains made when the stock is sold at some point in the future, using the carry-over basis. However, losses are limited by the fair market value at the time the gift was made, rather than the carry-over basis.

Cash Value Life Insurance Policy

A cash value life insurance policy includes a tax-deferred investment component. See the definitions for whole life insurance, universal life insurance, and variable life insurance for more information. Term life insurance does not include a cash value.

CEBS

Certified Employee Benefit Specialist.

Certified Financial Planner

A certified financial planner (CFP) has passed the certification requirements of the Certified Financial Planner Board of Standards, including exams, education and experience requirements.

CFA

Chartered Financial Analyst.

CFP

Certified Financial Planner.

Charitable Deduction

The charitable deduction allows property to be transferred to an HMRC-approved charity through a will or gift without being subject to gift or estate taxes. Lifetime gifts are deductible on income tax returns; the annual deduction is limited and can be carried forward for a number of years. Bequeathed gifts are deductible on estate tax returns and unlimited. The charitable donation must be mentioned in the will in order to be deductible. The donation is not deductible from estate taxes if not mentioned in the will, even if all beneficiaries agree on the donation.

Charitable Gift Annuity

An owner transfers assets directly to a charitable organization for an immediate income tax deduction and lifetime annuity payments to the donor or beneficiary. The charitable organization is responsible for making the annuity payments (not a trust or some other entity), so the donor should be confident in the charity’s ability to make annuity payments. The Council on Gift Annuities publishes annuity rates based on donor ages and property values. The income tax deduction is based on annuity rates, donor ages, property values, and a federal discount. The donated assets are not included in the donor’s taxable estate.

Charitable Giving With a Life Insurance Policy

Charitable giving with a life insurance policy donates the entire death benefit to a charity. The donor receives a reduction in the taxable estate for the size of the policy and pays premiums that amount to only a fraction of the policy face value. Once the decision is made to gift a policy, all annual premiums paid from that point forward are deductible from income taxes. A charity can also be named as the sole or one of several beneficiaries to a policy with the ability to make changes in the future (In this case, premiums are not income tax deductible, and only the portion donated to charity is excluded from the taxable estate. The policy must be given irrevocably in order for the donor to receive full tax benefits.).

Charitable Giving With a Retirement Account

Charitable giving with a retirement account is accomplished by naming the charity as the beneficiary. The full amount is transferred to the charity without taxes. The donor receives a charitable deduction on estate taxes for the size of the donated retirement account. The charity also does not pay income taxes on distributions from inherited HMRCs (while a family heir would be responsible for income taxes on distributions). Spousal consent may be required in writing for the beneficiary designation to be valid.

Charitable Giving With Life Insurance Policy Dividends

Life insurance policy dividends (from a cash value policy) can be donated to charity as cash for an income tax deduction.

CIMA

Certified Investment Management Analyst.

Closely-Held Stock

A closely-held stock is not publicly traded. It is held by a small group of individuals that do not often sell shares. A family business that issues shares to family members is an example of closely-held stock.

Co-Trustee

When two trustees have equal authority and power in administering a trust, they are co-trustees. They normally work must work together and not independent of one another.

Codicil

A codicil is a legal document that modifies or makes additions to a will.

Common-Law Property

Common-law property states recognize property acquired by individuals during the course of marriage as belonging solely to the individual, unless specifically stated to include the spouse.

Complex Will

A complex will includes a testamentary trust.

Compound Annual Growth Rate (CAGR)

The year over year growth rate applied to a numerical figure over a multiple-year period. The formula for calculating CAGR is: [((Ending Value/Beginning Value)^(1/# of years)) – 1].

Comprehensive General Liability Insurance

Family business owners should consider liability insurance to protect their assets from a lawsuit brought on by their customers or employees. Property damage, injuries, and advertising/slander are examples of comprehensive general liability coverage.

Concentrated Stock

A concentrated stock position is when one equity holding becomes dominant and disproportionate percentage of an individual or family’s portfolio. The stock may have become concentrated due to being part of compensation from an employer or family business, being purchased at a low cost basis and appreciating over decades, or being held for emotional reasons. The individual or family’s wealth is highly dependent on the performance of an individual stock. Solutions for concentrated stock positions include calendar-based selling intervals (i.e. a number of shares every quarter), price-based selling (i.e. a number of shares in stop orders), exchange funds, charitable giving or trust strategies.

Concierge Services

Concierge services are a client service from family offices that covers non-specific duties, such as travel arrangements, household personnel management, document storage, and personal shopping.

Conservator

Similar to a guardian, a conservator is appointed to care for another adult.

Contest

To contest a will is to challenge whether a will is legally enforceable and valid. A will may be contested in cases of fraud, improper execution, or if the testator is believed to be influenced or lack full mental capacity.

Contingent Beneficiary

A contingent beneficiary does not receive assets unless something happens to the primary beneficiary. Their interests in the property are subordinate to the primary beneficiary.

Corpus

Corpus is Latin for body. Corpus refers to the principal amount in a trust and does not include interest earned, dividends, or gains.

Covered Call

A covered call (also known as buy-write) is a strategy for stocks that are expected to have little price movement. A covered call provides income to the investor by selling call options on a stock held long in portfolio. The upside potential for the stock is capped at the call strike price. Potential losses are somewhat compensated by income from the call option premium.

CPA

Certified Public Accountant.

CPM

Chartered Portfolio Manager.

CRC

Certified Retirement Counselor.

Credit Risk

Credit risk, also known as default risk, refers to the ability of another party to uphold their obligation. Credit risk applies particularly to investments in corporate bonds or mortgage bonds, where the bondholder is at risk of not receiving principal or interest payment from the bond issuer.

Credit Shelter Trust

A credit shelter trust transfers a deceased person’s assets to beneficiaries, meanwhile the surviving spouse maintains rights to those assets (and the income generated) during the remainder of their lifetime. The surviving spouse does not control the assets in a credit shelter trust, and it never becomes part of the spouse’s taxable estate. After the spouse’s death, the assets are transferred to the beneficiaries. The married couple each utilizes the personal exemption amounts, doubling the assets that pass to heirs without estate taxes.

CTFA

Certified Trust and Financial Advisor.

Currency Risk

Currency risk, also known as foreign exchange risk, refers to the volatility in currency prices for investors in foreign securities or foreign business deals. There are many instruments available to hedge exposure to currency risk.

Custodial Accounts

Custodial accounts are established for minors to transfer assets when the minor reaches legal age, whether the parent is alive or deceased. Parents are not permitted to use custodial accounts to pay for their parental obligations of food, clothing, and shelter. However, other guardians may use the account funds for these purposes after the parents are deceased. Custodial accounts are included in the custodian’s taxable estate if the minor has not yet become a legal adult and assumed full control of the assets. Custodial accounts are not subject to probate. Custodial accounts are generally irrevocable, and no alternate beneficiaries may be designated. If a child dies, the donor has no control over how assets are distributed. The donor is responsible for income taxes on custodial accounts

Custodian

The custodian is the financial institution responsible for safekeeping and recordkeeping of investments. One way to protect against fraud is to inquire whether a third-party custodian is used to maintain securities, independent of the portfolio or wealth manager.

D

Dangerous Asset

A dangerous asset carries more risk of injury or damage (examples include, commercial real estate, motor vehicles, and construction equipment). Dangerous assets should not be commingled with safe assets to protect family wealth in the case of a lawsuit. When placed in a separate trust or legal entity, a lawsuit cannot go after the safe assets as well.

Death Tax Clause

The death tax clause in a will names the accounts from which all related death taxes are to be paid.

Decedent

The decedent is the person that died (owner of the estate).

Dedicated Short Hedge Strategy

Dedicated short hedge strategies sell short positions in securities that are perceived to be overvalued or expected to drop in price. There are no long positions in a dedicated short strategy.

Deferred Annuity

A deferred annuity does not pay the account holder until a later date. The account grows tax-free during an accumulation phase, until payments begin during a distribution phase. Contributions are tax-deductible when they are made, and distributions are taxed as income.

Derivative

A derivative is a contract whose price is derived from the price of another asset (such as currencies, commodities, market indexes, or interest rates). Derivatives are usually leveraged and intended to hedge a risk, though they can also be speculative.

Directional Hedge Strategy

Directional hedging is tactical in nature, focusing on short-term investment opportunities. This includes many hedging strategies, such as long-short, global macro, and market neutral.

Disability Insurance Policy

A disability insurance policy can provide protection in the case of a long-term disability, especially for family business employees that are no longer able to work.

Disclaimed Property

Disclaimed property is unwanted or refused by the beneficiary. The beneficiary may disclaim property to avoid taxes or expenses associated with the inheritance. A will should outline how disclaimed property is to be handled by the executor.

Discounts for Lack of Marketability

The discounts for lack of marketability (DLOM) applies to the valuation of closely-held stock. The discount may range from around 30-50% to account for the lack of marketability of closely-held shares. A well-documented valuation method allows shares to be transferred to family members at a discount (with less tax impact).

Discretionary Account

A discretionary account turns over all control and investment management decisions to the financial advisor rather than the client. The financial advisor has fiduciary duty to act according to the client’s best interests. The client gives authority to the advisor to have the final decision without consulting them.

Disinherit

To disinherit is to exclude someone from a will (typically a family member).

Distressed Debt Hedge Strategy

Distressed debt is an event driven hedge strategy where investment managers are interested in companies that have been unfairly beaten down by some news or restructuring activity.

Dollar Cost Averaging (DCA)

Dollar cost averaging is an investment strategy of smoothing out long term investment returns. A set dollar amount is invested on a regular basis to purchase shares. When share prices are high, fewer shares are purchased with a set dollar amount. When share prices are low, more shares are purchased with a set dollar amount. Over time, the average cost to the investor is lower and returns are not dependent on a large chunk of money invested at one particular time.

Donor-Advised Funds

Donor-advised funds offer some control over charitable giving, while a third-party administers the funds. Contributions are income tax deductible. Donor-advised funds have higher caps on tax deductibility limits than private foundations. In addition, gifts of real property are deductible at fair market value with donor-advised funds (as opposed to cost with private foundations), which can result in higher amounts being removed from the taxable estate. Donor-advised funds are not required to file an HMRC form each year, do not pay excise taxes, and can be more confidential (as opposed to private foundations).

Dower and Curtesy

Dower and curtesy refers to the surviving spouse’s right to not accept the amount provided by the deceased person’s will and instead insist on receiving their forced share of the augmented estate by state law. (Dower typically applies to the wife and curtesy to the husband.).

Durable Power of Attorney

Durable power of attorney is a legal document giving authority to an individual to act on your behalf. The document should detail which specific powers are given and the conditions when powers will be delegated. Durable powers only end at the death of the individual protected (as opposed to limited powers) or a specified term in the document. Durable powers avoid court proceedings for conservatorship should the protected individual become incapacitated.

Dynasty Trust

A dynasty trust is created to pass wealth to multiple generations and avoid paying the generation-skipping transfer taxes and estate taxes at every transfer of assets from generation-to-generation. However, the trust is not subject to estate taxes until it expires. The trust is not tax-exempt from paying income taxes. Appreciation that occurs in the trust from the time the trust is funded is not subject to transfer taxes. The grantor may choose to fund the trust annually in amounts up to the personal gift tax exclusion amount per each beneficiary, or grantors may also fund the trust with a lifetime gift up to the generation-skipping transfer exemption. Commonly, the dynasty trust is funded by a life insurance policy death benefit. Dynasty trusts are irrevocable.

E

Earn-Out Sale

When business owners sell ownership in their family business in exchange for a share in annual earnings for a specified period of time. They are no longer control or manage the business, but benefit from future growth in the business. As opposed to an up-front cash sale, the business owners’ compensation is not guaranteed.

Educational Trust

An educational trust is established to pay for the education of beneficiaries. Trust payments are made directly to the beneficiaries, who may decide to spend it on tuition, books, or other educational expenses. A grantor can designate all children or grandchildren as beneficiaries to the trust.

Elective Share

Spouses are entitled to a minimum elective share (one-third to one-half depending on the state of residence) of the deceased person’s estate. Spouses cannot be disinherited entirely.

Employee Trust

An employee trust is established by an employer (grantor) for the benefit of employees (beneficiaries). See the definition for Employee Stock Option Plans for an example and more information.

Encumbrances

Property held as collateral for a loan cannot be freely given until debts are paid. Encumbered property is common among financial assets and real estate property. Before assets can be transferred, encumbrances (debts) must be fully paid. Property with restrictions on the title, such as conservation easements, is also said to be encumbered.

Endowment Fund

An endowment fund is intended to be a perpetual gift with the investment earnings funding charitable spending needs, while the principal (or corpus) remains untouched and lasting for the future. Examples of endowments are funds that pay annual scholarships or operating costs for a charity. Contributions are deductible for income, gift, and estate tax purposes.

Enhanced Indexing

Enhanced indexing is an investment strategy that blends tenets of both active and passive management styles. Stocks within the index that are poorly performing may be sold with the proceeds used to purchase other stocks within the index that are performing well. Under this philosophy, you wouldn’t hold a stock that is performing poorly just because it is part of the index. Portfolio managers use their judgement to buy and sell securities, while tracking closely to an index.

Equity Collars

An equity collar is created by selling call options and buying put options on the same security. A collar is a defensive strategy with a defined range of acceptable stock prices with limited upside and downside. The put protects from downward price movements but comes at a price. A call option is sold to provide income that offsets the cost of the put. The investor is protected from large losses but also does not participate in large price appreciations. Wealthy families and their investment managers may consider equity collars as a method to unwind concentrated stock positions.

Estate

Estate refers to the assets (and liablities) owned by a deceased person before they are distributed.

Estate Plan

An estate plan outlines the orderly distribution of your personal assets following your death. The plan may include caring for children, preserving wealth, minimizing taxes and legal expenses.

Estate Split

An estate split ignores the marital deduction available to surviving spouses to inherit all assets free of estate taxes. Instead of joint ownership between spouses, tenants in common splits the estate in half and allows each spouse to pass assets to their heirs or a trust using separate gift and estate tax unified credit exemption amounts (i.e. double the amount allowed to one person).

Estate Tax

A tax placed on the value of a deceased person’s taxable estate before distributions are made. Assets transferred to spouses or charities are generally exempt from estate taxes. Other vehicles, such as trusts and retained life estate, are available to transfer ownership and reduce the value of the estate subject to taxes. Only a small percentage of estates pay taxes because the majority fall under the HMRC standard estate tax exclusion amount. An estate tax form must be filed by the executor if the gross estate exceeds the standard exclusion amount.

Estate Transfer

Estate transfer is the legal process by which an individual transfers property to heirs (either while living as a gift or sale or once deceased through a will).

Estate Trust

An estate trust is a type of marital trust that provides discretionary income to a surviving spouse. Principal and income are transferred to the estate of a surviving spouse.

Event-Driven Hedge Strategy

Event-driven hedge strategies profit from one-time events. Distressed debt and merger arbitrage are both examples of event-driven strategies.

Exchange Funds

Exchange funds permit owners of concentrated stock positions to exchange their concentrated positions for units of a more diversified fund. Capital gains are not eliminated, but deferred until units of the exchange fund are sold. For family wealth planning, heirs and beneficiaries can receive units of the exchange fund, which are more diversified than receiving concentrated positions. Exchange funds are usually limited to accredited investors and have liquidity restrictions.

Executor

The executor is the overseer of the deceased affairs. It is their responsibility act as a fiduciary and to follow the deceased person’s will and distribution of assets. The executor must file a form with the HMRC to initiate and terminate their fiduciary relationship of caring for the deceased person’s affairs. Other duties include obtaining court acceptance of the will, filing federal and state tax returns, valuing estate assets, settling any debts, defend contested wills, submit a written report to probate court detailing all estate assets, expenses and distributions.

Exemption Trust

An exemption trust is irrevocable and avoids estate taxes on trust assets held by a married couple. The trust is funded from the first spouse’s estate. The trust is not subject to estate taxes when the second spouse dies. The surviving spouse may make withdrawals from the trust for health or living expenses or receive the net income from the trust, but does not control the assets in the trust. The assets bypass the surviving spouse’s taxable estate and pass on to the grantor’s chosen beneficiaries after death of the spouse.

Exit Strategy

An exit strategy prepares for the end of business ownership through a sale of the business, merger, or dissolving the business. When no family members or partners are interested in remaining involved with the family business, an exit strategy should be developed.

Exordium Clause

An exordium clause is the introductory statement in a will which names the individual testator, the purpose of the document as a will, and revokes all prior wills.

F

Family Business Planning

Family business planning is a client service from family offices that covers the ownership structure, governance, and taxation of family businesses. Succession planning and exit strategies are major focuses of this family office service.

Family Client

This term generally refers to the number of family groups the firm is serving. Each family group could be comprised of several households within the same family. Some firms look at each adult household or account as a separate family client – such distinction can depend on the size and complexity of the family, how assets are held, etc.

Family Income Rider

A family income rider is a death benefit option for life insurance to compensate beneficiaries for the monthly income amount of the deceased family member.

Family Limited Partnership

The family limited partnership is a legal entity with general partners and limited partners. A family limited partnership is similar to a limited liability company (LLC). Investment or business assets are held by the family limited partnership for management. Family members own shares of the partnership and can transition wealth between generations by gifting or transferring shares. The general partners (usually the parents) have the most control but also fully bear the liabilities, while limited partners (usually the next generation) have little control and are not responsible for liabilities.

Family limited partnership shares owned by the deceased are included in the taxable estate; however shares are generally discounted in value because of their illiquid nature. The discounted valuation reduces the size of the taxable estate and transfer taxes due when gifting or bequething shares to heirs. Generation skipping transfer taxes may apply when shares are transferred to a skip generation. Shareholders must also pay income taxes on their portion of partnership income.

Family Meetings

Family meetings are informative for multi-generations to be aware of family finances, goals, and updates of current activities. The family office helps run these meetings for each generation separately or combined. Each family member’s rights and responsibilities in managing family assets are shared. The family meeting can be a great value-added service offered by a family office.

Family Philanthropy

Family philanthropy is a client service from family offices that covers philanthropic goals and wealth transfers through charitable giving.

Family Risk Management

Family risk management is a client service from family offices that covers the insurance needs of the family. Risk management also reaches over into wealth management services for proper due diligence of outsourced investment managers.

Family Statement

A family statement in a will names the testators family members.

Family Tax Management

Family tax management is a client service from family offices that covers tax minimization strategies and filing and preparing returns. Estate planning, trust administration, and tax-efficient wealth transfers are major focuses of this family office service.

Family Wealth Management

Family wealth management is a client service from family offices that covers private wealth investing and cash flow management. Integral areas addressed through this family office service are defining client goals, risk tolerance, and developing an investment policy statement. Family offices offering investment services are required to register with the SEC as investment advisors.

Fee-Based Financial Advisor

A fee-based financial advisor places trades on your behalf and offers financial advice to clients. Contrary to traditional brokers, fee-based advisors are not compensated by commission on transactions. These advisors charge an annual fee (either a flat rate or percentage of client accounts) for ongoing services. The SEC and current industry trend encourages fee-based compensation because it aligns client and advisor interests.

Fiduciary

Fiduciary is another term for the trustee, who is expected to act in the best interest of the beneficiary.

Fiduciary Appointment Clause

A fiduciary appointment clause is a statement in a will naming the fiduciaries, executors, and/or guardians.

Fiduciary Powers Clause

A fiduciary powers clause is a statement in a will outlining the powers of the named fiduciaries.

Financial Agent

Same as attorney-in-fact.

Financial Planning

Financial planning addresses all of the financial goals for a client, including retirement, debt management, insurance, college and health savings, taxes, and investments. Financial plans should be comprehensive in nature and adaptable for life changes.

Fixed Annuity

A fixed annuity pays a guaranteed fixed payment to the account holder for life. The rate of return is usually a low or below market rate.

Full-Service Broker

A full-service broker offers more advice and planning for clients than a discount broker. In exchange, full-service brokers typically charge a higher commission.

Fundamental Analysis

Fundamental analysis evaluates all quantitative and qualitative information available on a particular investment opportunity to determine its intrinsic value. The current price is compared to its fundamental intrinsic value when deciding whether to invest.

Fundamental Indexing

Fundamental indexing is an investment strategy that blends tenets of both active and passive management styles. The index is defined based on various stock fundamentals (such as earnings or book value), rather than traditional market-cap weighted indexes. Under this philosophy, companies that are overvalued grow to be large portions of market cap-weighted indexes, and the passive investor loses when corrections in valuation occur. Fundamental index investors do not analyze individual companies but instead periodically rebalance to an index defined by stock fundamentals.

Funeral Trust

A funeral trust is established to prepay funeral expenses. The funeral home creates a “pooled income fund”, and the grantor transfers property to the trust to cover future funeral expenses. The grantor is responsible for income taxes on the trust.

Futures Contract

A futures contract is an agreement to purchase a commodity or other financial instrument. The terms of the contract specify the price, quantity, and a date in the future. Futures can be bought and sold at an exchange. They reduce risk for parties interested in locking in a price for an asset. A simple example is a futures contract for a farmer locking in a price for selling wheat before the field is planted.

G

General Power-of-Appointment Marital Trust

A general power-of-appointment marital trust is a type of marital trust that provides lifetime income to a surviving spouse. The surviving spouse has authority to control the assets in the trust, versus other types of marital trusts that do not offer the spouse access to principal. The trust is included in the taxable estate of the surviving spouse.

Gift of Equity

A gift of equity occurs when property is sold to a family member for less than market value. The difference between market value and the sale price is the gift of equity and affects the cost basis for the new owner and potential capital gains. When a letter is signed, the mortgage lender may consider the gift of equity as the down payment for a mortgage loan, allowing younger family members to begin home ownership without saving for a down payment.

Gift Splitting

Gift splitting is a tax rule that allows a married couple to split a gift’s value in half so that each married spouse is eligible to use their personal gift exemption. This doubles the amount that can be given before gift taxes apply.

Gift Tax

A gift tax is applied to the giver rather than the receiver. The receiver does not pay income tax on the gift transfer, but is liable for future income produced by the gifted property (or distributed from a trust). When an item is sold for any amount less than fair value, it is considered a gift. Interest-free loans or loans with interest less than the applicable federal rate are considered gifts. The use of property or right to receive income from property is considered a gift when any amount less than fair value is accepted, even if ownership of property is not transferred. Gifts made to spouses, political organizations, or charities are not subject to gift taxes regardless of value.

Medical and educational expenses paid directly to an institution are not subject to gift taxes. Tax-free gifts may be made to any number of people for less than the annual HMRC exclusion amount. Spouses are permitted to split a gift and each take the annual exclusion amount per person, doubling the amount given tax-free. Gifts made during a lifetime do not receive a step-up in basis; the recipient receives the same basis as the giver, referred to as carry-over basis.

Gifting Securities

Securities held more than one year may be gifted to charities for an income tax deduction. Additionally when the security is transferred directly (without being sold for cash), the donor is not responsible for capital gains tax. The gifted security also effectively reduces the size of the taxable estate.

Global Macro Hedge Strategy

Global macro is a directional hedge strategy involving a top-down analysis of broad economic conditions, political and financial environments, and market conditions. With few constraints, global macro hedge fund managers choose long and short positions based on their global views.

Grantee

A grantee is another term for the recipient (or beneficiary) of the assets.

Grantor

A grantor is another term for the trustor.

Gross Estate

The gross estate is the net worth (assets less liabilities) of the estate before taxes. The gross estate includes all real and personal property owned by the deceased individual, including life insurance policies and annuities payable to heirs and gifts made within three years of death. The current fair market value (not acquisition cost) is used when totaling the gross estate.

Growth at a Reasonable Price

Growth at a reasonable price (GARP) is an investment style that blends tenets of both growth and value styles. Under the GARP philosophy, investment managers select companies with consistent earnings growth and reasonable valuations.

Growth Style

Growth style investing is the practice of identifying stocks that are perceived to grow earnings faster than the general equity market. Companies that are highly profitable and expanding are ideal candidates for growth-style investing.

Guaranteed Death Benefit for Annuity

When the annuity account holder dies before receiving any payments, the guaranteed death benefit pays the beneficiary the higher of either the initial investment amount or the most recent statement amount.

Guaranteed Earning Increase Death Benefit

When the annuity account holder dies before receiving any payments, the guaranteed earning increase death benefit pays the beneficiary the higher of either the most recent statement amount or the initial investment plus an agreed upon additional amount.

Guaranteed Lifetime Withdrawal Benefit

The guaranteed lifetime withdrawal benefit is an optional rider for variable annuity contracts in the accumulation phase. Generally, elective withdrawals (outside of regular annuity distribution payments) result in penalty fees. This rider allows a minimum percentage to be liquidated without penalties during the accumulation phase, while the annuity account remains intact.

Guaranteed Minimum Accumulation Benefit

The guaranteed minimum accumulation benefit is an optional rider for variable annuity contracts. Because the distributions from variable annuities are dependent on investment performance during the accumulation phase, this rider offers some protection of a minimum accumulated amount regardless of market performance.

Guaranteed Minimum Income Benefit

The guaranteed minimum income benefit is an optional rider for variable annuity contracts. Because the distributions from variable annuities are dependent on investment performance during the accumulation phase, this rider offers some protection of a minimum income amount regardless of market performance.

Guaranteed Minimum Withdrawal Benefit

The guaranteed minimum withdrawal benefit is an optional rider for variable annuity contracts. Generally, elective withdrawals (outside of regular annuity distribution payments) result in penalty fees. This rider allows a maximum percentage to be liquidated without penalties each year, while the annuity account remains intact. The withdrawal is intended to protect the account holder in years of investment losses to recoup the initial investment.

Guardian

A guardian is appointed to care for minors (up to age 18) or disabled persons.

H

Health Reimbursement Account

A health reimbursement account reimburses employees for medical expenses. The family business can use health reimbursement accounts to cover family member employee’s health expenses in a tax-efficient way. The employer receives a tax deduction for distributions, and the employee receives the money tax-free. The employer can use discretion in funding the account.

Hedge Fund

A hedge fund employs various hedging techniques to reduce exposure to market risk. A hedge fund manager’s goal is to not be bound by the traditional stock and bond markets and instead perform independent of market fluctuations. Access to hedge funds is often limited to accredited investors, require high investment minimums, and offer low liquidity with withdrawal restrictions. Hedge funds are not as transparent or highly regulated as public securities (mutual funds and stocks). The tax treatment of hedge fund investments can be complex with significant short-term gain tax liability.

Heir

An heir is he recipient of an inheritance from a deceased person’s estate. Heirs do not have to pay income taxes on their inheritance. Estate taxes are assessed on the total taxable estate and paid by the executor of the estate (not typically paid by the heirs).

Holographic Will

A holographic will is not witnessed and is signed only by the person drafting the will. This type of will may not be legally valid.

I

Illiquid Assets

Family businesses and real estate (especially commercial real estate) are complicated assets to sell or liquidate. These assets are harder to value accurately because of few comparable sales. Because the market for these assets is more scarce, determining a value for estate planning and passing these assets on to descendents is more difficult. The value of illiquid assets may be the most highly appreciated assets in the estate, resulting in capital gains tax when sold.

Immediate Annuity

An immediate annuity begins paying an account holder immediately. A lump sum amount is invested and immediately converted to an annuity in a distribution phase.

Incentive Trust

With an incentive trust, the beneficiaries must meet certain requirements established in the trust agreement in order to receive distributions from the trust. For example, the grantor may require the beneficiary to obtain a college education, submit to drug tests, or match employment income. It is not legally permissible to require beneficiaries to accept religious practices or divorce a spouse.

Incident of Ownership

For tax purposes, incident of ownership is important to determine whether an asset is included as part of a taxable estate. This commonly applies to life insurance policies, financial accounts, and real property. In order to prevent from being included in the taxable estate, the deceased cannot have any legal right to control, use or benefit from the asset. The ability to influence control, such as with a spouse, may be considered an incident of ownership.

Income Tax

Income taxes are assessed on estates producing annual income over the basic income exclusion amount, similar to individuals. The executor of the estate files an income tax return, as well as an estate tax return. While income taxes are not owed on gifts or inheritances, the recipient is responsible for income taxes on distributions from trusts or income produced from gifted property or inherited property. Proceeds from life insurance policies are not taxable income for the beneficiary.

Individual Property

Individual property is owned by just one person (one spouse) as opposed to joint or community property.

Inflation Risk

Inflation risk refers to the power of inflation to erode the real purchasing power of cash or an asset. If the return on an asset does not at a minimum keep pace with inflation, the future value of the asset is lower than present value.

Inheritance Laws

Inheritance laws are laws that govern the distribution of assets in the case of intestate deaths.

Installment Distribution Option

An installment option allows regular payments to be made to beneficiaries over a fixed period of time.

Installment Sale

An installment sale occurs when the grantor loans an appreciating asset to a grantor trust. No gift taxes apply if the loan terms are at market value, borrower payments are required at least annually, and an interest rate is set at or above the applicable rate. Only outstanding loan amounts (unpaid interest and principal) are included in the grantor’s taxable estate. The borrower (beneficiary) is permitted to keep the appreciation of the trust assets. Appreciation on the trust assets (above the interest rate on the loan) is transferred to the beneficiary without paying estate taxes and available to the beneficiary immediately. Typically done with an intentionally defective trust. The loan and interest payments are not taxable income for the grantor.

Institutional Buyout

An institutional buyout takes ownership of a company by outside institutional investors, such as private equity firms, venture capitalists, or ultra-high net worth investors. The buyout is usually intended to be short-term in nature and profitable for the investor. Typically the investor has a fondness or particular interest in restructuring businesses or discovering new ventures.

Inter Vivos Gifts

Inter vivos gifts are gifts made during a lifetime with the purpose to reduce the taxable estate. In order to qualify, the donor cannot continue to benefit from the gift or maintain control or resume ownership.

Interest Rate Risk

Interest rate risk refers to the volatility in interest rates over a length of time. For example, an investor can purchase a ten-year bond with a fixed interest rate or hold a ladder of short-term CD’s with rates that fluctuate each time a CD matures. Bond prices move inversely of interest rates. The sensitivity of a bonds to changes in interest rates is called duration.

Intestate

When an individual dies without a will, the death is considered intestate, and the government determines how their property is distributed. The heirs are subjected to fees associated with probate.

Intra-Family Loan

Intra-family loans are loans made to family members at low or no interest rates. Intra-family loans are a viable wealth-transfer strategy in low interest rate environments. When the borrowed funds are reinvested, the wealth transfer is enhanced by the appreciation of the invested funds. Since the loan remains in the donor’s estate, an intra-family loan is not exempt from estate taxes, but it is fixed at the unpaid loan balance. A formal loan document, appropriate interest rate at or above prime rate, and regular loan payments are all important to avoid the loan from being considered a taxable gift.

Investment Policy Statement

The investment policy statement outlines the objective and constraints for investment management, tailored to a specific client. It addresses responsible parties and roles, risk controls, acceptable fees, long-term goals, strategies, and performance evaluation. It should be broad enough to be a lasting document and adaptable as circumstances change.

Irrevocable Life Insurance Trust

(ILIT) is a trust funded with proceeds from a life insurance policy. The amount of the life insurance policy is exempt from estate taxes of both the grantor and surviving spouse’s estate. The trust is the beneficiary of the life insurance policy, and the heirs are beneficiaries of the trust. The three-year rule applies so the trust must be created at least more than three years before death to avoid estate taxes. As the name implies, these trusts are irrevocable (not modifiable). Gifts of the insurance policy or cash to pay insurance premiums will be taxed as gifts, unless Crummey powers are included in the trust agreement (qualifying annual gift exemptions). The grantor is responsible for income taxes for the trust and gift taxes for amounts that exceed the annual exclusion or lifetime credit.

Irrevocable Trust

A trust becomes irrevocable once the grantor is deceased. The terms of the trust cannot be altered, and the trustee must follow the trust document. An irrevocable trust can also be established while the grantor is living to accomplish specific estate planning goals. Irrevocable trust assets are protected from creditors’ ability to place liens.

J

JD

Juris Doctor.

Joint Tenants by The Entirety

Joint tenants by the entirety is the same as joint tenants with right of survivorship for married couples.

Joint Tenants With Right of Survivorship

Joint tenants with right of survivorship determines how property is handled upon death of one of the joint owners. More than two persons can be joint tenants. When property is owned jointly with right of survivorship, the property rights of the deceased are transferred to the other owners (not to the deceased person’s heirs). An individual owner is permitted to sell or transfer his/her portion but not the entire asset. Property owned jointly is subject to the liabilities of each individual owner. Joint tenants with right of survivorship is not subject to probate upon death of a co-owner.

Joint Will

A joint will consists of one document belonging to two individuals. It covers instances when one or both parties dies. It cannot be revised or revoked by the surviving individual once one of the parties dies.

L

Life Income Distribution Option

A life income option allows regular payments to be made to beneficiaries for their lifetime (with the amount calculated based on their life expectancy). If principal remains when the beneficiary dies, a contingent beneficiary can receive the remainder with a refund option.

Life Insurance Policy

Life insurance policies are a contract with an insurance company to pay a benefit upon the death of the policy owner. Beneficiaries receive policy benefits outside of probate. Life insurance proceeds are tax-free for beneficiaries (not subject to income taxes). The policy is typically included in the taxable estate of the deceased, unless ownership is ownership is irrevocably transferred to another. Any legal right to change beneficiaries, cancel the policy, or use the policy as collateral represents incidents of ownership and causes the policy to be included in the taxable estate .

 

When the deceased person’s estate is named as a beneficiary, the death benefit is included in the taxable estate and subject to probate. When policies are irrevocably gifted in order to be removed from the taxable estate, the new owner must take over the premiums. However, annual gift exclusion amounts can be used to provide for premiums. Policies that are gifted or transferred within three years of death revert back to the taxable estate of the deceased, even if it was an irrevocable transfer of ownership.

Life Settlements

Life settlements are a method to remove a life insurance policy from the taxable estate. The policy is sold to a third party for an immediate cash payout. The buyer takes over the premium payments and receives the death benefit when the insured dies. Life settlements may preserve more value than the insurance company’s cash surrender value.

Limit Order

A limit order differs from a market order by defining a price threshold for the transaction to be completed. Market orders are carried out immediately regardless of the share price, while a limit order is only executed at a named price or better. A limit order can be beneficial for an investor interested in buying or selling securities with volatile prices.

Limited Power of Attorney

A limited power of attorney is a legal document giving authority to an individual to act on your behalf temporarily. The document should detail which specific powers are given and the conditions when powers will be delegated. Limited powers expire when you are deemed incompetent or incapacitated by a medical doctor (as opposed to durable powers which do not expire).

Liquid Assets

Liquid assets generally refers to investment accounts (cash, bonds, stock, mutual funds) where market values and sell opportunities are readily available.

Liquidity Risk

Liquidity risk refers to the inability to convert an asset to cash due to selling restrictions or limited market for the asset.

Living Trust

A living trust is created and funded during the grantor’s lifetime. (As opposed to a testamentary trust, which is created following a grantor’s death.) The grantor is responsible for income taxes for a living trust. A living trust is not subject to probate. Another benefit of living trust agreements is that successor trustees can assume management duties before death when it is no longer feasible for the trustor (such as Alzheimer’s disease or other illnesses).

LLM

Master in Law.

Lock-Up Period

A lock-up period is a time restriction where an investor is not permitted to sell or redeem shares. The purpose is to allows the investment fund manager to deploy capital in illiquid assets (such as real estate or privately held businesses). A lock-up period is typical of hedge funds and initial public offerings (IPOs).

Long-Short Hedge Strategy

Long-short strategy is a hedging practice where the investment manager chooses stocks that are believed to perform poorly and uses leverage to sell those stocks short. The cash proceeds from selling the stocks short is used to purchase stocks that are believed to outperform the market. When implemented successfully, the investor benefits from stocks (sold short) that are falling in price and stocks (bought long) that are appreciating. A common example of a long-short portfolio is a 130-30 strategy, which involves buying stocks long for 130% of the portfolio and selling stocks short for 30% of the portfolio.

Long-Term Care Insurance

Long-term care insurance policies provide protection for family members that need assistance due to illnesses, disabilities, or later in life with longer life expectancies. The policy can be set up to pay for care in the home, at a facility, or respite care (relief for family caregivers). Policy benefits can be paid based on actual expenses incurred or cash payments irregardless of expenses.

Longevity Risk

Longevity risk refers to the inability of assets to last for an entire lifetime. Because life expectancies are continually increasing, longevity risk is a concern for conservative investors whose assets may fall short of their lifetime spending needs.

Loss Carry-Forward

Investment losses can be used to offset capital gains or a minimal amount is deductible from taxable income. Any losses that cannot be used in a given tax year may be carried forward up to seven years to offset future income.

Lump Sum Distribution

A lump sum distribution pays beneficiaries with a one-time cash payment immediately or at a later date with an interest option.

M

Managed Futures Hedge Strategy

Managed futures is a hedging strategy that uses futures contracts to diversify the risk of a traditional stock/bond portfolio. Managed futures are negatively correlated to traditional asset classes. Diversified managed futures strategies invest in the futures for commodities (metals and agriculture), currencies, and energy markets.

Marital Deduction

The marital deduction allows unlimited property to be transferred to a spouse through a will or gift without being subject to gift or estate taxes. Once the surviving spouse dies and transfers assets to heirs, all assets above the personal lifetime exemption are subject to estate taxes.

Marital Trust

A marital trust transfers your estate to a spouse, while also protecting the inheritance for your children. The surviving spouse is not permitted to leave the inheritance to a future spouse or future children. The marital trust qualifies for the marital deduction and is exempt from both estate taxes and gift taxes. However, estate taxes may apply to the trust amount when the surviving spouse dies.

Market Capitalization

Market capitalization (or “market cap”) is a method of classifying companies based on their size. The total number of outstanding shares is multiplied by the current market price of one share to calculate market cap. Investors are the primary users of market cap data to define their investable universe. Small market cap companies are considered more risky than larger market cap companies because of limited access to capital and fewer diversified lines of business.

Market Neutral Hedge Strategy

Market neutral is a hedging practice that aims for positive absolute returns, regardless of general market returns. By taking long and short positions in different companies or sectors, the investment manager profits from individual stock performance even when the broader market goes down.

Market Risk

Market risk, also called systematic risk or beta, refers to the volatility in prices in the equity and bond markets from broad economic influences or events. This type of risk cannot be eliminated through diversification.

Master Limited Partnership

A master limited partnership benefits from the favorable tax treatment of limited partnerships, as well as the liquidity of publicly traded securities. A limited partner investor provides capital and receives income from cashflows but is not involved with management decisions. A general partner manages the business operations and receives a fee based on performance. To qualify as a master limited partnership, the business must be primarily involved with real estate, commodities, or natural resources.

Maturity Ladder

Maturity laddering is an investment strategy of smoothing out long term investment returns from fixed income securities. A set dollar amount is invested in bonds or certificates of deposit with multiple maturities. As bonds become due, the proceeds are used to continue purchasing further out on the ladder of maturities. Interest rate risk is reduced by constantly maturing instruments being invested in rising rate environments. Investors that do not want to lock up their money for long periods of time also benefit from the constant flow of cash from maturing instruments.

Medical Deduction

The medical deduction allows unlimited payment of medical expenses without being subject to gift or estate taxes if paid directly to the medical provider (and not the beneficiary).

Merger Arbitrage Hedge Strategy

Merger arbitrage is an event-driven hedging strategy which involves buying long and selling short the stocks of companies involved in merger and acquisition deals. The targeted companies are bought long when trading below the acquisition price. The acquiring company is sold short before the price drops to reflect the amount paid for the deal. If the deal is not completed for any reason or is disapproved of, prices can move in the wrong direction on either side of the transaction and negatively impact performance.

Minority Discounting

Minority discounting is a valuation method which accounts for the lack of marketability and lack of control of interests in a family business. When minority discounts are properly applied by an appraiser, family business interests can be transferred to heirs or gifted at lower estate and gift tax values. The interests in the family business are discounted to account for the recipients minority position (not able to control management or liquidation of the business) and smaller pool of available buyers for interests in a family business (often limited by bylaws to family members). The discount can be substantial, providing large tax breaks.

Momentum Strategy

Momentum strategy involves selecting investments based on trends and riding the performance momentum, assuming they will continue to follow the trend in the future. Momentum can be employed by buying a security whose price is trending upward, or selling short a security whose price is trending downward.

Monte Carlo Simulation

Monte Carlo simulation is method of running thousands of scenarios for possible outcomes of an investment. The probability of returns in a wide range of random variables is determined. While it is virtually impossible to accurately predict the future investment returns, the goal is to prepare clients for a range of probable outcomes.

Mortgage Backed Security

Mortgage-backed securities are bonds with cash flow tied to a pool of mortgage loans. Mortgage-backed securities fall under a class known as asset-backed securities, which are secured with collateral (in this case mortgage loans). Mortgage-backed securities are a way to invest in real estate, without directly investing in private real estate and managing property.

Multiple Family Office (MFO)

A multiple family office offers comprehensive financial services to multiple affluent or ultra-high net worth families. A multiple family office requires a lower minimum family net worth to be economically feasible to service. The minimum net worth requirement will vary by office but generally is at least several million dollars. Benefits of a multi-family office are greater accumulated assets to share expenses and gain access to exclusive investment products.

Mutual Will

A mutual will may consist of one or more documents and belong to two or more individuals. A mutual will is agreed upon by all parties and is irrevocable.

N

Naked Trusts

A naked trust transfers assets to beneficiaries at the age of 18 with no provisions or stipulations. The grantor has no control over trust assets once funded. The naked trust is a straight-forward transfer of ownership.

No-Load Annuity

No-load annuity contracts charge no commission and generally have lower expenses than commission loaded annuity contracts. No-load annuity contracts are available directly from the insurance company or from fee-based financial planners that do not accept commission from products sold.

Non-Accredited Investor

A non-accredited investor does not meet the net worth or annual income qualifications of an accredited investor. Investments intended primarily for non-accredited investors are more highly regulated by the Securities and Exchange Commission (SEC).

Non-Contestability Clause

A non-contestability clause is a statement in a will which penalizes any beneficiaries that challenge the will by reducing or eliminating their portion of the estate.

Non-Discretionary Account

A non-discretionary account retains control and decision-making with the client. The financial advisor may offer suggestions and input, but the client must make the final decision.

Non-Qualified Charitable Donations

A donation made to a non-qualified charitable organization is not tax-deductible. It is vitally important to confirm the donee organization qualifies as a part of your charitable giving plan. Examples of non-qualified organizations include chambers of commerce, civic leagues, country clubs, state bar associations, communist organizations, foreign organizations, or donations made to specific individuals or families (though they may be needy).

Nuncupative Will

A nuncupative will is a verbal will and is the least recognized by the state. It is only acceptable in cases of illness or sudden death where the person lacks the time or ability to draft a more formal will. The verbal will must be witnessed and often is limited by what it can include.

O

Open Architecture

An investment platform that provides to investors fund manager and strategy options from external sources. The term implies that the firm has no bias regarding which manager or strategy is chosen by the investor.

True open architecture means a firm is not offering any proprietary products. There are some firms that offer an open architecture platform as an option and also offer, but don’t require investment in, proprietary products. These latter firms offer a hybrid open architecture approach to investing for their clients. All firms designated as Leading Wealth Advisor offer an open architecture option.

Operating Assets

Operating assets are the income-generators of a business (equipment is an example). These items may be more easily transferrable to partners or heirs to reduce the taxable estate.

Opportunistic

Opportunistic is an investment strategy that is not confined by style boxes. Opportunistic managers are considered more aggressive in searching out investment opportunities in all areas with few constraints. Opportunistic investments may be more short-term in nature and exhibit greater portfolio turnover.

Options

Options are derivative securities that are bought and sold to give the holder the right (but not an obligation) to trade stocks at a specified price during the term of the option. The holder may exercise their right or let the option expire without action at the end of the term; however, the seller of an option is obligated to trade per the contract if the holder chooses to act. Calls and puts are two types of options.

P

Passive Management

Passive management is an investment strategy that follows a specific market index to model portfolio mix. Under this philosophy, it is not possible to outperform the general market because the markets are believed to be highly efficient and reflect all information available at all times.

Payable-On-Death Accounts

Payable-on-death accounts include bank or credit union accounts (i.e. checking, savings, certificates of deposit, savings bonds). These accounts can be distributed to named beneficiaries upon the client holder’s death outside of the probate process.

Per Capita at Each Generation Designation

When one beneficiary is deceased, their portion is transferred to their heirs, rather than redistributed to any other beneficiaries named. The difference from Per Capita is that only the amount belonging to the deceased beneficiary is passed to heirs, and the other beneficiaries retain their original planned amount (similar to Per Stirpes). In addition, this method ensures that the amount is divided equally among heirs at the same generation level.

Per Capita Designation

When one beneficiary is deceased, their portion is transferred equally to their heirs, rather than redistributed to any other beneficiaries named. The difference from Per Stirpes is that the amount is divided equally among the number of heirs regardless of the original amount planned.

Per Stirpes Designation

When one beneficiary is deceased, their portion is transferred to their heirs, rather than redistributed to any other beneficiaries named. For example, your son may be named a 50% beneficiary and his portion will go to his children, rather than your daughter who is also named a 50% beneficiary. The difference from Per Capita is that only the amount belonging to the deceased beneficiary is passed to heirs, and the other beneficiaries retain their original planned amount.

Permanent Life Insurance Policy

A permanent life insurance policy provides coverage for the owner’s entire life and does not need to be renewed. Premiums are based on the life expectancy of the insured. See the definitions for whole life insurance, universal life insurance, and variable life insurance for more information. Term life insurance has an expiration and is not permanent.

Personal Property

Personal property includes financial accounts, patents, jewelry, art and collectibles, and household items.

Pooled Income Fund Trust

Pooled income fund trusts are deductible; therefore reducing income and estate taxes. A pooled income fund is set up by a charitable organization to receive contributions from the public. The contributions are pooled and invested together with donors receiving lifetime income based on net investment income for the fund. The donor’s income portion is based on the size of their contribution to the overall size of the fund. When the donor dies, their contribution is removed from the fund and can be used by the charity for its charitable purposes.

 

The present value of the charity’s remainder interest (fair market value minus donor’s retained value) is tax deductible when the trust is established. Highly appreciated assets may be transferred to a pooled income fund trust without paying capital gains tax. For example, real estate or stock purchased at a low basis which has appreciated in value can be sold or transferred to the pooled income fund trust without paying capital gains tax.

Pour-Over Will

A pour-over will is a legal document that upon your death transfers assets to an established living trust that you did not transfer during your lifetime.

Price Risk

Price risk refers to the volatility in prices of an asset from the time it is purchased to when it is sold. Because price risk is specific to an asset, it can be minimized through diversification when prices of different assets move independently from one another.

Primary Beneficiary

The primary beneficiary is the first in line to receive assets. It can include more than one person with percentages designated for each beneficiary.

Private Equity

Private equity refers to investments in businesses that are not publicly-traded. Private equity deals are usually only available to accredited or institutional investors and are considered illiquid. They require large capital investments with strict lock-up periods.

Private Foundation

A private foundation is a non-profit but does not qualify as a public charity for tax purposes. Private foundations rely on a single donor for the majority of its funding rather than the general public. The foundation must make annual contributions towards charitable causes and pay a small excise tax on its investment earnings.

Private foundations are also required to file an HMRC form each year, and this information is public. Contributions are deductible for income, gift and estate tax purposes. The benefit of private foundations is a high-degree of donor control (as opposed to donor-advised funds).

Private Health Insurance

Private health insurance is an important financial planning consideration for individuals that are not covered by an employer, due to retirement, self-employment, or independently wealthy. A family business may seek out a group plan to protect all that participate in the family business. A health insurance policy provides coverage to the insured in the case of illnesses or accidents that could be costly drains to family wealth.

Private Infrastructure

Infrastructure investments include roadways, rail, water, and electricity or power systems. Government finances infrastructure through the issuance of municipal bonds. Private investors are becoming attracted to infrastructure as a portfolio diversifier and income component.

Private Placement

A private placement investment opportunity is not made available to the general public. Because the deal is only offered to select individuals, the capital requirement is usually high, a prospectus may not be available, and the deal is not registered with the SEC.

Private Real Estate

Private real estate is a direct investment in real estate property. Compared to REITs, private real estate is an illiquid investment and less diversified. Investors also must see that the property is managed and cared for to protect their investment.

Probate

Probate is the legal process by which the state court determines the legal validity of a will, assigns an executor or administrator for an estate, transfers ownership of a deceased person’s property to the heirs, and addresses debts and settlement costs. Probate can be avoided through a number of will-substitutes.

Probate Estate

The probate estate refers to the portion of an estate that must go through the probate process. These assets were not set up to avoid probate.

Professional Liability Insurance

Family members with professional careers, such as doctors and financial advisors, should consider liability insurance to protect their assets from a lawsuit brought on by their clients. Malpractice, negligence, and injuries are examples of professional liability coverage.

Profit Sharing Plan

A profit sharing plan is a method for sharing business profits with employees by making discretionary contributions. Profit sharing plans are defined contribution retirement plans with a vesting schedule and restrictions on withdrawals.

Property Control Trust

A property control trust places restrictions on beneficiaries. Examples are special needs trusts, spendthrift and sprinkling trusts.

Property Guardian

While a guardian is appointed to care for minors (up to age 18) or disabled persons, the property guardian’s responsibility is to manage the assets left to minors or disabled persons.

Put Option

A put option gives the holder the right to sell a stock at a specified strike price during the term of the option. If the stock price falls below the put strike price, the holder of a put option can sell the stock at the agreed upon strike price (which is better than selling at its lower market price).

Q

Qualified Annuity

A qualified annuity is ‘qualified’ by the HMRC to grow tax-free until distributions are made. Contributions are made with pre-tax pound sterling, and distributions are taxed as income.

Qualitative Analysis

Qualitative analysis uses human judgement to evaluate investment opportunities and performance. Qualitative factors cannot be quantified, such as management experience, competitive advantages (patents, strong research & development, or brands), and business cycles.

Quantitative Analysis

Quantitative analysis uses mathematical or statistical measures to evaluate investment opportunities and performance. Ratios are a frequently used quantitative measurement for evaluating investments.

Quantitative Strategy

Quantitative strategy is based purely on statistics or mathematical calculations to identify anomalies or investment opportunities. A quantitative approach is highly disciplined and removes all human emotion or judgment.

R

Real Estate Investment Trust

A real estate investment trust (REIT) is an investment security that invests in property or mortgages and has an income component. REIT’s trade on the securities exchange like a stock, making them an easily accessible and liquid avenue for investing in real estate. REIT’s must pass through a significant portion of their income as a dividend in order to qualify for special tax treatment. Publicly available REIT’s normally invest in commercial real estate, such as apartments, hotels, shopping malls, office complexes, and storage units. REIT’s are a way to invest in real estate without directly investing in private real estate and managing property.

Real Property

Real property includes land, buildings, and minerals.

Real Rate of Return

Real rate of return is a performance measure that accounts for annual inflation. Nominal returns are most frequently quoted to consumers, but real rate of return more accurately reflects the true growth in savings or investment purchasing power. In periods of high inflation, the real rate of return of fixed income products can quickly be eroded.

Rebalancing

Rebalancing is the act of returning a portfolio back to its targeted asset allocation mix. Assets that have appreciated above a certain level are sold, and the proceeds are used to buy underperforming assets. The practice of rebalancing follows the mantra, “buy low and sell high”.

Reciprocal Will

A reciprocal will consists of two separate wills for each spouse that are identical to one another and name each other as beneficiaries. This type of mutual will may increase estate taxes.

Relative Value Hedge Strategy

Relative value is a type of arbitrage hedge strategy attempting to profit from pricing differences, but the risk is not completely hedged. Prices can move on either side of the transaction and negatively impact performance. An example of relative value is buying a convertible bond and selling short the stock of the same company. If the stock price moves up, the investor still receives income from the bond. If the stock price moves down, the investor benefits from selling short.

Residuary Estate

After the estate pays all taxes, fees, and gifts/distributions, the residuary estate is the remainder. The residuary estate may be addressed through a pour-over will or transferred to a designated residuary beneficiary.

Retained Life Estate

Real estate placed in a life estate is ultimately donated to a charitable organization after death, while you retain the right to occupy the property during your lifetime and the lifetime of your spouse. The value of the real estate is removed from the taxable estate. The gift (fair market value of real estate property minus present value of the retained interest) is income tax deductible.

Reverse Mortgage

A reverse mortgage is loan with a guaranteed income arrangement for homeowners. The homeowner receives a guaranteed payment for life (or until the home is sold). The loan must be repaid with interest at the end of the homeowner’s life, presumably from the sales proceeds of the home. Because of the associated loan origination fees, home appreciation rates, and interest rates, this can be a risky venture.

Revocable Life Insurance Trust

A revocable life insurance trust (RLIT) is a trust funded with proceeds from a life insurance policy. As the name implies, these trusts are revocable (modifiable). When the grantor has ability to revoke the trust or make changes, the trust is usually included in the grantor’s taxable estate.

Revocable Living Trust

A revocable living trust is funded while the trustor is living. Benefits of revocable living trusts are that they are not subject to probate, and the trustor maintains control of the account and is able to make changes while living. When the grantor has ability to revoke the trust or make changes, the trust is usually included in the grantor’s taxable estate.

Revocable Trust

A revocable trust can be modified or revoked through a restatement (or an amendment).

Risk Tolerance

Risk tolerance refers to an investor’s appetite for risk. It varies by each person’s perception of market volatility and ability to withstand potential losses. Risk tolerance is used by investment managers to match clients with appropriate conservative to aggressive investing styles.

Rule of Survivorship

This rule of survivorship limits the legal life of a trust. Generally a trust cannot outlive a person alive when the trust was established, plus 21 years. Only charitable trusts are exempt from the rule of survivorship.

S

Safe Asset

A safe asset carry no increased likelihood of a lawsuit (examples include, stocks, bonds, and bank accounts). Safe assets should not be commingled with dangerous assets to protect family wealth in the case of a lawsuit.

Scenario Analysis

Scenario analysis uses computer programs to predict the expected outcome of investment returns given a specific scenario, such as changes in interest rates or the price of oil, etc. One approach would be to examine the historical relationship between the variables and investment returns. While it is virtually impossible to accurately predict a value for all scenarios, the goal is to prepare clients for a range of possible outcomes and “worst-case” scenarios.

Self-Proving

Self-proving is a statement in a will allowing the estate to go to probate without the physical presence of the witnesses in court.

Separate Account

A separate account is managed privately for an individual, as opposed to mutual funds which are managed collectively. Separate accounts typically have higher investment minimums to access than a mutual fund. An advantage of private management with a separate account is better tax planning in the form of tax loss harvesting or deferring capital gains.

Simple Will

A simple will usually consists of one document for a relatively small estate and does not include a testamentary trust.

Single Family Office

A Single Family Office (SFO) is a full balance sheet 360 degree ultra-affluent wealth management firm and CFO solution for a single individual or family.

Single Family Office

A single family office offers comprehensive financial services to a single affluent or ultra-high net worth family. A single family office requires a higher minimum family net worth to be economically feasible to service. Benefits of a single family office are more personalized service and family control.

Socially Responsible Investing (SRI)

Socially responsible investing (SRI) is an investment style identifying or excluding opportunities by certain criteria. The definition of “socially responsible” is debatable among various investors. Companies may be excluded based on involvement with tobacco, alcohol, gambling, weapons, animal testing, or environmental impact. Companies may be selected based on positive efforts in renewable or energy, worker welfare, human rights, or community investment donations.

Sophisticated Investor

A sophisticated investor, similar to an accredited investor, meets certain qualifications of higher net worth or annual income amounts. Sophisticated investors are also assumed to have more investment experience. Complex investment opportunities with no disclosures or prospectuses may be restricted to sophisticated investors that can more safely assume the risk of a total loss.

Stock Option

A stock option gives the holder the right to buy or sell a stock for a specified price in the future. Stock options can be transferred to heirs or gifted at substantial discounts, especially options on privately held stocks that are difficult to value. If exercised at some point in the future, the owner can achieve significant wealth gain on assets transferred for little value.

Stop-Loss Order

The purpose of a stop-loss order is to limit downside price risk exposure. When a stock price reaches the stop price, the stock is sold. Stop order transactions are completed automatically at set price triggers, therefore removing human judgment or emotion. Stop-loss orders are helpful for investors with concentrated stock positions or emotionally-attached stocks.

Succession Planning

Succession planning prepares for the departure of key business leaders in retirement or death. Multiple issues are considered and planned for, such as the financial consequences of selling the business and the transferring of ownership and control of business operations. Some family businesses may remain within the family and passed on to new generations. Some families may find that no one is interested or qualified to assume the family business and must search outside the family for a successor.

T

Tactical Asset Allocation

Tactical asset allocation is an active management strategy which temporarily adjusts the portfolio’s targeted asset allocation for anticipated market opportunities or avoidance of anticipated losses. Tactical opportunities are short-term in nature, and the portfolio tends to follow its strategic allocation over the long-term.

Take-Profit Order

The purpose of a take-profit order is to capture stock price appreciation. When a stock price reaches the take-profit price, the stock is sold. Take-profit order transactions are completed automatically at set price triggers, therefore removing human judgment or emotion. Take-profit orders are helpful for investors with concentrated stock positions or emotionally-attached stocks.

Tax-Efficient Asset Allocation

Tax-efficient asset allocation refers to the practice by wealth managers to place more tax-efficient investments (such as long-term stock holdings) in taxable accounts and the most tax-costly investments (such as fixed income or short term/high turnover stocks) in tax-deferred or tax-free accounts. The reasoning behind this strategy is that long-term capital gains tax rate is lower than interest income and short-term capital gains tax rates. Those investments with high amounts of interest income and short-term capital gains should be sheltered in a tax-deferred or tax-free account. Stocks placed in a taxable account can grow without incurring capital gains tax until sold, may be harvested for losses, step up in basis at the date of death, and can be gifted to charity without incurring capital gains tax.

Tax-Exempt Investments

Tax-exempt investments include municipal bonds. Tax-exempt status is also granted to some charities and religious groups. High-income individuals may earn a greater after-tax return on lower yielding municipal bonds when compared to taxable bonds with higher yields. Muni investors should use caution to confirm tax-exempt status; some municipal bonds, such as private-activity bonds, are not tax-exempt.

Tax-Loss Harvesting

Tax-loss harvesting is an income tax minimization strategy, where taxable losses are realized to offset realized capital gains in the same taxable year. The gains and losses may be taken from different securities, and the technique is complicated by the wash-sale rule when the same security is bought and sold.

Taxable Account

Taxable accounts are good candidates for leaving to heirs because the holdings are stepped up in basis at the date of death. Heirs will not be required to take distributions from the inherited account and capital gains are minimized by the step-up in basis.

Taxable Estate

The taxable estate is the gross estate less attorney and administrative settlement fees (funeral and other deductible expenses). Martial deductions and charitable deductions reduce the value of the taxable estate. Mortgage and other debt is deductible. Farm and business interests may qualify for valuation discounts. The taxable estate value is used to determine the amount of estate taxes owed.

Technical Analysis

Technical analysis uses charting or other statistical techniques to observe patterns in the trading volume or prices of an asset. Historical patterns are used to identify trends in performance. Rather than examining the attributes of a particular company, technical analysis uses trends to predict future price movements and evaluate the current price/volume in comparison to those trends.

Tenancy by Entirety

When property is owned jointly by a married couple and upon death, the property rights of the deceased are transferred to the spouse. Similar to joint tenants with right of survivorship, tenancy by entirety is not subject to probate.

Tenants in Common (TIC)

When two or more persons own property and upon death, the property rights are transferred to the heirs of the deceased, rather than to the other owners. Tenancy in common also permits owners to gift or sell property independent of the other owner. Tenants in common is subject to probate.

Term Life Insurance Policy

A term life insurance policy pays beneficiaries a guaranteed amount if the owner dies during the term of the insurance contract. The policy provides coverage until an expiration date and then must be renewed. There is no cash value or investment earnings with term life insurance. The premiums for term life insurance are fixed for the term of the policy and typically less than whole life coverage. However, premiums can increase upon renewal when the owner has aged.

 

Different provisions for renewability or conversion to whole life coverage can be inquired about with the insurance company. Beneficiaries are not taxed on their proceeds from a death benefit. However, life insurance policies may be included in the taxable estate depending on how they are structured.

Testamentary Trust

A testamentary trust is created after a death. (As opposed to a living trust which is created during the grantor’s lifetime.).

Testator

The testator is the person that died and left a will.

Top-Down Strategy

Top-down investment strategy involves studying the broader economic conditions, financial environment, and market conditions before narrowing to specific investment sectors or companies.

Totten Trust

Totten trust is another term for payable-on-death accounts. See payable-on-death accounts for more information.

Transfer Fax

Transfer taxes can come in the form of estate taxes, gift taxes, or generation-skipping transfer taxes. An estate plan addresses methods to minimize these taxes to preserve family wealth for multiple generations.

Transfer-On-Death Accounts

Transfer-on-death accounts includes investment accounts (i.e. stocks, bonds, and mutual funds) and in some countries, vehicles and real estate property. These assets can be transferred to named beneficiaries upon the client holder’s death outside of the probate process.

Trustee

The trustee is the administrator of the trust for the benefit of the recipient (or beneficiary).

Trustor

The trustor is granting property to other individuals (beneficiary) through a trust.

Trusts

Trusts are legally recognized accounts owned and funded by one party but managed for the benefit of another individual. Trusts are not subject to probate. Trusts can be funded from a variety of sources, however funding from tax-deferred accounts are treated as withdrawals for income tax purposes.

U

Umbrella Insurance Policy

An umbrella insurance policy protects in the case of lawsuits for property damage or injuries. The umbrella policy is typically added to a home or auto insurance policy. Families with significant wealth have more assets to protect and seek additional coverage that is beyond the limits of standard policies.

Unfunded Trust

An unfunded trust exists only in the trust document (agreements), but may not be funded until death.

Unified Credit

An HMRC tax credit for lifetime gifts that exceed the annual gift exclusion amount. A tax credit taken when a gift is made is subtracted from the lifetime credit amount and cannot be used again later in life. Gift taxes are owed on gifts that exceed the lifetime unified credit amount, and a gift tax form must be filed with the HMRC when taking the unified credit. In the past, estate and gift tax exemptions combined for a “unified credit”.

Unified Managed Account

A unified managed account (UMA) is a privately managed account that combines several different types of securities, such as stocks, bonds, mutual funds, and separate accounts. Rather than maintaining several individual accounts, the UMA offers a single account to manage a well-diversified portfolio.

Unified Managed Household Account

A unified managed household account (UMHA) is a privately managed account that combines several different types of securities, such as stocks, bonds, mutual funds, and separate accounts. The household account also allows transparency and access to the immediate family (parents and children) in a combined account, rather than maintaining individual accounts.

Universal Life Insurance Policy

A universal life insurance policy pays beneficiaries an adjustable amount when the owner dies. The policy provides coverage for the owner’s entire life (also known as permanent coverage) and does not need to be renewed. Similar to a tax-deferred investment, the policy’s cash value increases over time, and the earnings are only taxed when distributions are made.

 

Universal policies are similar to whole life policies, with the exception that premiums, death benefits, and cash values are adjustable depending on the owner’s insurance needs. Beneficiaries are not taxed on their proceeds from a death benefit. However, life insurance policies may be included in the taxable estate depending on how they are structured.

Up-Front Cash Sale

When business owners sell ownership in their family business in exchange for cash up-front. As opposed to an earn-out sale, the business owners’ compensation is guaranteed at a fixed amount, but they no longer benefit from future growth in the business.

V

Value Style

Value style investing is the practice of identifying stocks that are temporarily priced lower than their perceived long-term intrinsic value. Under this philosophy, stocks do not always trade at prices justified by fundamentals and instead may become over- or under-valued based on market reactions to news.

Variable Annuity

A variable annuity has an investment component which determines the size of payout. The guaranteed payment can fluctuate but has a chance of higher market returns.

Variable Life Insurance Policy

A variable life insurance policy pays beneficiaries an adjustable amount when the owner dies. The policy provides coverage for the owner’s entire life (also known as permanent coverage) and does not need to be renewed. Similar to a tax-deferred investment, the policy’s value increases over time, and the earnings are only taxed when distributions are made. Variable policies are similar to whole life policies, with the exception that death benefits and investment values are adjustable depending on investment performance.

 

The policy owner chooses among equities, bonds, mutual funds, and money markets for the investment component (rather than interest-bearing cash with traditional whole life). Beneficiaries are not taxed on their proceeds from a death benefit. However, life insurance policies may be included in the taxable estate depending on how they are structured. The earnings from a variable life policy can be used to pay premiums but cannot be withdrawn during the policy owner’s lifetime.

Variable Prepaid Forward Contracts

Variable prepaid forward contracts are entered into by individuals wishing to lock-in equity value and defer capital gains tax. The contract requires transfer of shares to a brokerage firm for holding during the term of the contract. At the time of transfer, the owner receives a large majority of the shares current fair market value.

 

However, ownership is not fully transferred and capital gains income is not recognized until a later date. The brokerage firm accepts all losses during the term of the contract and shares in the gains. An advantage of this strategy is the ability to turn concentrated stock positions into cash for diversified investing.

Variable Universal Life Insurance Policy

A variable universal life insurance policy pays beneficiaries an adjustable amount when the owner dies. The policy provides coverage for the owner’s entire life (also known as permanent coverage) and does not need to be renewed. Similar to a tax-deferred investment, the policy’s value increases over time, and the earnings are only taxed when distributions are made. Variable policies are similar to whole life policies, with the exception that death benefits and investment values are adjustable depending on investment performance.

 

The policy owner chooses among equities, bonds, mutual funds, and money markets for the investment component (rather than interest-bearing cash with traditional whole life). A variable universal policy gives maximum flexibility to change premiums, death benefits, and investment options depending on the owner’s insurance needs. Beneficiaries are not taxed on their proceeds from a death benefit. However, life insurance policies may be included in the taxable estate depending on how they are structured. The earnings from a variable life policy can be used to pay premiums but cannot be withdrawn during the policy owner’s lifetime.

W

Wash-Sale Rule

When the same (or identically similar) security is sold and purchased within 30 days, the wash-sale rule applies. Any wash-sale losses are not deductible and are not permitted to offset capital gains. Instead, the loss is added to the cost basis of the newly purchased security to minimize future gains. A security must be held for at least 30 days before recognizing any capital losses.

Wealth Management

Wealth management is more broad in scope than exclusively offering investment advice. Investing, tax and estate planning are all offered from the same financial advisory firm.

Whole Life Insurance

A whole life insurance policy pays beneficiaries a guaranteed amount when the owner dies. The policy provides coverage for the owner’s entire life (also known as permanent coverage) and does not need to be renewed. Similar to a tax-deferred investment, the policy’s cash value increases over time, and the earnings are only taxed when distributions are made.

 

With whole life policies, the premiums, death benefits, and cash values are fixed during the term of the policy. Beneficiaries are not taxed on their proceeds from a death benefit. However, life insurance policies may be included in the taxable estate depending on how they are structured.

Will

A will is a legal document that outlines how you would like your property and personal assets handled following your death.

Will Substitutes

Will substitutes transfer assets to beneficiaries outside of a will. They are not subject to probate. Examples of will substitutes include: life insurance, retirement accounts, annuities, custodial accounts, trusts, government savings bonds, property held by joint tenancy, property transferred by deeds of title or gifts, and payable-on-death or transfer-on-death accounts.

Witnessed Will

A witnessed will meets the requirements by the state regarding witness signatures.