Our tax structure—with its intricate provisions—places a high premium on skillful planning. A large number of taxpayers earn a substantial income and accumulate substantial estates. To conserve their incomes and their estates, they turn to financial-planning techniques.
The following glossary of financial-planning words and phrases is designed to explain some of the basic planning concepts that may help you utilize your income and estate assets to provide added security for yourself and your family and accomplish your philanthropic objectives.
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Actuarial value of an annuity - The amount it will cost at the present time to pay an annuitant "x" amount of dollars for the rest of his or her life, based on the mortality tables and certain interest assumptions.
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Administrator - The person or entity (often a bank) appointed by the court to settle the affairs of a decedent who dies without a will, or whose named executor cannot or will not serve.
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Administrative expenses - Those necessarily incurred in the administration of the estate—the collection of assets, the payment of debts, and the distribution of property. Examples include commissions, attorneys' fees, and miscellaneous expenses.
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Annuity - The financial arrangement or contract an annuitant makes with a third party (family members, insurance company, or charity) in which he or she will receive a specific amount at stated intervals for life or for a term certain in consideration of either cash or other assets.
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Annuity trust - See Charitable Remainder Annuity Trust.
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Basis - The original acquisition price is the cost basis. Adjusted basis is generally cost basis less any allowance against basis, such as depreciation, plus any additional investment in the asset. Adjusted basis normally is the value used for tax purposes to determine gain or loss.
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Beneficiary - The person or entity named in a will to receive a devise or a legacy or the use of estate assets. Also, the person or entity to whom death proceeds of an insurance policy are payable.
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Bequest - A direction by will to give personal property to a particular beneficiary; also called a legacy. A bequest may be general and unconditional, residuary, or contingent.
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Capital gain or loss - The profit or loss resulting from the sale or other disposition of a capital asset. If the property was held for more than twelve months, the gain or loss is long-term. If the property was held for twelve months or less, the gain or loss is short-term. Capital loss—either long-term or short-term—may be used to offset capital gain and may be used to reduce ordinary income only to the extent of $3,000 per year with the option to carry over losses in excess of $3,000 in future tax years.
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Cash value - The loan value or surrender value of certain types of life insurance policies.
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Charitable deduction - The deduction allowable for gifts made to qualified charitable institutions. If the gift consists of cash, the income-tax deduction is limited to 50 percent of the donor's contribution base. If the gift exceeds the limitation, the donor may deduct the excess in the following year or years (up to five years). There are no limitations on the charitable deductions allowable for gift- or estate-tax purposes.
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Charitable gift annuity - A legal contract with a charity under which an individual, in exchange for a gift, will receive fixed payments for life.
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Charitable lead trust - It is the converse of a charitable remainder trust. Whereas a remainder trust pays the income to noncharitable beneficiaries and then distributes the remainder to charity, a lead trust pays the income to charity and distributes the remainder to noncharitable beneficiaries.
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Charitable remainder - The trust property that is distributed to charity when the trust terminates. For example, a donor gives property to fund a charitable remainder trust that pays the donor a life income and then distributes the trust principal and undistributed income to a designated charity. The property that passes to the charity is the charitable remainder.
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Charitable remainder annuity trust - A trust established by a donor whereby one or more beneficiaries will receive an income for life or a term certain (not to exceed 20 years), and the remainder will be distributed to one or more qualified charities. It pays a fixed dollar amount to the beneficiaries each year (at least 5 percent of the initial fair-market value of the transferred property).
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Charitable remainder unitrust - Similar to an annuity trust except that the payment to beneficiaries is determined by multiplying a fixed percentage by the fair-market value of the trust assets as revalued each year. The fixed percentage must be at least 5 percent.
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Corpus - The fund or capital upon which income is earned; also called principal.
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Cost basis - The basis of an asset equal to the amount paid for the asset plus other acquisition costs (such as a brokerage fee).
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Deferred charitable gift annuity - A legal contract with a charity under which an individual, in exchange for a gift, will receive fixed payments, beginning at a pre-selected future date, for life.
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Deferred gift - Any arrangement whereby money or property is set aside for the future use and enjoyment of a charity.
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Estate Note - An irrevocable pledge against a donor's estate. The instrument binds the donor's estate to the extent that a pledge made during life has not been fully paid during the donor's lifetime. The pledge may be for either one or two lives. With a two-life Estate Note, the obligation is binding only on the estate of the person who lives longer.
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Estate tax - The graduated tax imposed by the federal government and some states on the transfer of property at death.
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Exclusion, annual - The continuing right of a donor to make a tax-free gift of up to $13,000 to each of any number of donees in any year; applies only to gifts of present interest; increased to $26,000 if gift-splitting with one's spouse.
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Executor - The person or entity (often a bank) nominated in the will of another to carry out the terms of the will.
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Fair-market value - The price at which a fully informed seller who is not being forced to sell would be willing to sell an asset to a fully informed buyer who is not being forced to buy.
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Generation-skipping transfer tax - A federal tax that applies to transfers in generation-skipping trusts and to direct gifts between the transferor and a person in a generation at least two below the transferor's.
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Gift-splitting - The annual exclusion is raised to $26,000 when a husband and wife join in the gift and file a statement with the IRS accordingly. There is no tax liability.
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Gift tax - A tax on the transfer (during the donor's lifetime) of property worth more than $13,000 per year to another person; payable primarily by the donor.
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Grantee - The person to whom property is transferred.
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Grantor - The person transferring property. This term is also used to refer to a person who transfers property in trust.
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Gross estate - Includes all property in which the decedent owned an interest at his or her death. It embraces such items as personal property, real property, life insurance, and joint property. It can also include certain lifetime transfers in which the decedent retained the right to income, possession, or enjoyment of the property.
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Inheritance tax - A state tax on an heir's right to receive property, determined by the value of the asset.
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Installment sale - Sale of property over more than one tax year. The purpose of an installment sale is to spread the impact of any capital gain.
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Inter vivos or living trust - A trust that is established and becomes operative during the lifetime of the person who created it.
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Intestate - A person who dies intestate is one who has not drawn a valid will.
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Irrevocable trust - A trust that cannot be ended by the person who created it.
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Jointly owned property - Property owned by two or more persons with the right of ownership passing to the person or persons who survive; normally unaffected by a will.
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Life estate - An interest in property for life. For example, a person who has the right to occupy a residence for the duration of his or her life has a life estate in the property.
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Life-income plan - An arrangement by which a person gives a principal sum or property to an institution with the stipulation that income be paid to one or more beneficiaries for their lives, according to an agreed-upon payout arrangement.
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Marital deduction -
- Estate-tax deduction - A deduction from the gross estate of the decedent for property passing to the surviving spouse. The deduction is unlimited.
- Gift-tax deduction - Allowed for lifetime gifts to spouse. Deduction is for full value of such gifts.
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Ordinary-income property - Property which, if sold at a profit, gives rise to ordinary income as distinguished from long-term capital gain. A gift of ordinary-income property to charity is deductible only to the extent of the donor's adjusted basis in the property.
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Outright gift - Cash, securities, or other property for the immediate use of the charitable organization.
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Pour-over will - A will directing that part or all of the testator's assets be transferred or poured over after his or her death into a trust that has its own provisions for distribution of assets. The chief benefits are: (1) unified administration, (2) minimization of administration costs, and (3) protection of family privacy.
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Power of appointment - The right to direct the disposition of property one does not own, such as the right of a trust-income beneficiary to designate the person to receive the trust principal upon the beneficiary's death.
- General power - A power exercisable in favor of the holder of the power or of his or her estate, creditors, or the creditors of the estate.
- Limited or nongeneral power - A power that is not a general power.
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QTIP - Qualified terminable interest property. Terminable interest property qualifies for the marital deduction if the spouse is given the right to all income—paid at least annually—for life and no one has the right to appoint the property to a person other than the spouse during the spouse's life. The donor or executor must elect to qualify the property for the marital deduction.
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Remainder beneficiary - The person or entity entitled to receive what remains of the principal after a life interest (or other intervening interest) has terminated.
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Residual estate - That portion of the estate that remains after all administrative expenses, taxes, and specific bequests have been paid. The person or entity named to receive all or a portion of the residual estate is said to have a residual interest.
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Revocable trust - A trust that may be ended by the person who created it.
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Tangible personal property - Property other than cash, securities, or real estate (e.g., a painting, stamp collection, or automobile).
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Tenancy - An interest in real property.
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Testamentary trust - A trust created by will.
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- Joint tenancy - See Jointly owned property.
- Tenancy by entireties - The owning of real property by husband and wife, with the survivor taking all and with interest generally nonseparable during the life of both.
- Tenancy in common - The owning of real property by several persons, with the share of the one dying passing under his or her will or under the intestacy laws to his or her heirs and not to the survivors.
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Trust - The arrangement whereby property is held by a trustee (an individual or entity) for the benefit of another. The trustee holds legal title to the property. The beneficiary is the person or institution who is benefited. The person establishing the trust is called the grantor, creator, donor, or settlor.
(See also Irrevocable trust, Revocable trust, Inter vivos or living trust, and testamentary trust.
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Unified credit - The credit allowable against the tentative tax due on lifetime and deathtime transfers. Use of available credit reduces amount of credit available for subsequent transfers.
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Unitrust - See Charitable Remainder Unitrust.
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Will - The legal declaration of a person's intentions as to the disposition of his or her property upon death.
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Updated on March 26, 2009