Glossary of Financial Terms
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401(k): An employer-sponsored retirement plan that permits employees to divert a pretax percentage of their gross pay into the plan and avoid current taxes on that income. Investment earnings from this plan accumulate tax free until they are withdrawn. (The name comes from the actual federal tax code.)
AEP®. Accredited Estate Planner®—National Association of Estate Planners and Councils, 888.226.2224, www.naepc.org/search_councils.web
Accidental Death & Dismemberment Insurance: A policy that pays a benefit if the insured dies by other than natural causes. It also pays a benefit if the insured loses sight, hearing, speech, or the use of a limb from an accident.
Accumulated Annuity: An annuity contract that provides payments to be postponed until a specified period of time has elapsed — for example, 10 years or when the annuitant reaches a certain age. The annuity can be purchased in one lump sum or with periodic (after-tax) payments until the withdrawing process begins.
Adjusted Gross Income: The amount remaining after certain adjustments are subtracted from a taxpayer’s gross income.
Administrator: The individual or organization approved by a probate court to settle the affairs of the person dying without a valid will.
Advance Health Care Directive: A legal document that gives the person(s) you select the power to make medical and health-care decisions for you in the event that you are unable to make those decisions yourself.
The American Opportunity Tax Credit (TAOTC): provides up to $2,500 in tax credits for people pursuing undergraduate education. It replaces and expands on the former Hope Credit. The TAOTC is scheduled to be effective for the years 2011 and 2012 only. This credit is worth up to $2,500 on the first $4,000 of qualifying educational expenses, which include course materials as well as tuition. TAOTC applies to all four years of undergraduate college education. The credit is gradually reduced (or “phased out”) for income from $80,000 to $90,000 (or $160,000 to $180,000 for joint filers). Up to 40% of the credit is refundable, meaning that it can generate a refund larger than the amount of payments you made.
Alternative Minimum Tax (AMT): A complicated income tax that is activated when there are excessive deductions and tax benefits.
Annuity: A contract that you purchase from an insurance company which stipulates that a certain sum will be paid on a regular basis over a specific amount of time or a lifetime.
Annuity, Accumulated: An annuity contract that provides payments to be postponed until a specified period of time has elapsed — for example, 10 years or when the annuitant reaches a certain age. The annuity can be purchased in one lump sum or with periodic (after-tax) payments until the withdrawing process begins.
Annuity, Deferred (Accumulated): An annuity whose contract provides that payments to the annuitant be postponed until a specified period of time has elapsed, for example, 10 years or when the annuitant reaches a certain age. It can be purchased in one lump sum or with periodic (after-tax) payments until the withdrawing process begins.
Annuity, Fixed: Always pays a set amount of income for the life of the contract. The investment risk is borne by the insurance company.
Annuity, Immediate Fixed: Begins payments as soon as you purchase the contract and always pays a set amount of income for the life of the contract. The investment risk is borne by the insurance company.
Annuity, Private: An annuity contract that is entered into by private parties, not an insurance company.
Annuity, Tax-Sheltered (TSA) or 403(b) Plan: Similar to a 401(k) plan, but set up for public employees and employees of nonprofit organizations.
Annuity, Variable: A regular monthly payment that varies in amount based on the performance of the securities held in the insurance company’s portfolio. These annuities are covered by insurance company laws that shelter gains from current taxation. They carry more stock market risk than fixed annuities, but have a greater potential for appreciation.
Asset Allocation: Diversifying investment dollars among a variety of asset classes such as cash equivalents, stocks, bonds, real estate, and precious metals.
Assets: What you own of value; also what is owed to you.
Assets, Liquid: Assets that have the ability to quickly convert from an investment portfolio into cash without suffering a noticeable loss in value. Stocks and bonds of highly traded companies are considered liquid, while real estate is illiquid.
Automatic Withdrawal: A regular monthly withdrawal from a checking, savings, or other type of cash account to automatically pay a bill such as a mortgage, utility, or insurance premium.
Balance Sheet: A financial form that lists, as of a specific date, the financial assets and liabilities of a person, family, or business, and shows the difference (net worth) between the two.
Bearer Bonds: Bonds that do not have the owner’s name registered on the books of the issuer. Interest and principal, when due, are payable to the holder.
Beneficiary: The person named in an insurance contract, will, or trust agreement who will receive the right to benefits, income, or property, upon the occurrence of some event, such as a death.
Benefits, Employment: An important part of your compensation package, they may include health insurance, life insurance, and retirement plans. Many benefits can be tax free to the individual.
Benefits, Insurance: The amount of money to be paid to the insured or the insured’s beneficiary by the insurer according to the terms of the insurance contract.
Bond: Basically an IOU or promissory note that can be issued by a corporation or a government agency. You lend money by purchasing the bond, and in return you receive a certain amount of fixed interest over the lifetime of the bond, and then get your money back at the maturity date.
Bonds, Corporate: Bonds issued by corporations are backed by corporate assets. In case of default, the bondholders have a legal claim on these assets. The holder of a corporate bond is a creditor of the corporation, not a part owner as is a shareholder.
Bonds, High-/Low-Quality: Bond rating companies, such as Standard & Poor’s and Moody’s, judge bonds on the ability of the issuer to fulfill its obligations to repay interest and the principal when due. The highest quality bonds are rated triple-A, while a low quality bond would be rated C or D.
Bonds, Intermediate: Bonds that have a maturity of three to 10 years.
Bonds, Long-Term: Bonds that have a maturity over nine years.
Bonds, Municipal: A method by which state or local government agencies borrow money. Income from these bonds is exempt from federal income taxes.
Bonds, Short-Term: Bonds that have a maturity of under three years.
Bonds, Treasury: See Treasury Bonds.
Bonds, U.S. Government Savings: Savings certificates issued by the government. They are sold at less than their face value but may be cashed in for their full value after a specified length of time.
Capital: Accumulated assets or net worth.
Capital Asset: Any property intended for use or possession over a long period of time. In a business it would include buildings and equipment; for individuals it can be homes, jewelry, household furnishings, automobiles, stocks, etc.
Cash/Cash Equivalents: Includes checking and savings accounts, certificates of deposit, money market accounts, savings bonds, money market funds, treasuries with a maturity date of under three months, and cash on hand.
Cash Flow: Where your income comes from and where it goes (expenses).
Cash Surrender Value: The amount of money an insurance policyholder would receive if the policy were cashed in. This would be made up of the policyholder’s cash within the policy, plus any unused premiums, plus any dividends, less any principal and interest on any loans.
CFA, Chartered Financial Analyst – member of the CFA Institute (CFAI), 800.247.8132.
CFP®, Certified Financial Planner® – member of the Financial Planning Association, 800.322.4237, www.fpanet.org/.
Charitable Gift Annuity: A method of planned giving whereby a contract between the donor and the charity provides for an annuity to the donor (or a person of the donor’s choice) for life, in exchange for a gift. Such gift annuities also offer the donor income tax, capital gains tax, and estate tax benefits.
Charitable (“Immortality”) Trust: A trust that is set up to provide an ongoing current benefit, such as a scholarship, or to grant funds for future generations.
Charitable Lead Trust (CLT): A CLT is often viewed as the opposite of a charitable remainder trust. A donor transfers property to the lead trust, which pays a percentage of the value of the trust assets to a named charity, usually for a term of years. At the end of the trust term, the remaining assets in the trust and any growth it has realized are distributed to your heirs or the beneficiaries you elect. Although there is no income tax deduction when you create a charitable lead trust, your gift or estate tax can be greatly discounted and any growth is passed to your heirs gift and estate tax free.
Charitable Remainder Trust (CRT): A trust into which assets are contributed that provides a donor with an income-tax deduction and a beneficiary with a current income over a period of time, with the remaining principal going to a charity.
Chart of Accounts: A systematically arranged list of accounts applicable to a specific concern, giving account names and numbers if any.
ChFC®, Chartered Financial Consultant, member of the Society of Financial Professionals, 888.243.2258, www.financialpro.org.
CLU®: Chartered Life Underwriter, member of the Society of Financial Professionals, 888.243.2258, www.financialpro.org.
Collateral: Security pledged by a borrower on a loan.
Common Stock: A share of ownership in a corporation. Common stockholders are last in line if a company goes under and thus have more risk than bondholders or preferred stockholders. In return they could gain more reward in the form of capital appreciation.
Community Property (CP): Property held equally (in community) by husband and wife, which has accumulated during marriage (except through inheritance or gift). Community property laws are in effect in eight states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.
Compound Investment Returns: The earning on earnings from invested principal when it is left to accumulate. This can be interest, dividends, or growth through appreciation.
Convertible Securities: Various forms of securities that can be exchanged for another form of security. These typically have a predefined conversion ratio. Convertible preferred stocks or bonds are frequently exchanged for common stock upon a liquidity event.
Corporation: A business that has been chartered by a state to be a legal entity owned by stockholders. Regarded by the courts as an artificial person, it may own property, incur debts, sue, or be sued. Its owners have limited liability, in that they can lose only what they have invested.
Corporation, “C”: The most common form of corporation used by larger companies, although it can also be a single person.. A “C” corporation gives its shareholders liability protection, but the IRS can tax the owners twice: it will tax the corporation for the profit and then tax the shareholders upon a distribution. Tax losses for the corporation cannot be passed on to be declared by individual shareholders.
Corporation, “S”: Similar to a general partnership, except that it gives shareholders the liability protection of a corporation. (Shareholders may deduct losses from their taxes only to the extent of their equity investment.) “S” corporations are limited to 100 shareholders.
Coverdell Education Savings Account (ESA): Set up to fund your children’s education costs, an ESA is an account to which nondeductible annual contributions of up to $2000, per child, may be made until the child turns 18. The funds grow tax free and can be used for the child’s qualified higher-education expenses without incurring taxes.
Cost Basis: The price you paid for an asset plus or minus any tax adjustments. In the case of stocks or mutual funds, your cost basis would be what you paid for it plus commissions, plus any capital gains, interest or dividends reinvested. If you receive stock or mutual funds as a gift, your basis is the basis of the donor, not the market value of the gift at the time of the transfer.
CPA: Certified Public Accountant, an accountant who has fulfilled certain state and federal requirements.
Current Value: The fair market value of real or personal property. The price a willing buyer will pay a willing seller in a non-distressed sale environment.
Deferred (Accumulated) Annuity: An annuity whose contract provides that payments to the annuitant be postponed until a specified period of time has elapsed, for example, 10 years or when the annuitant reaches a certain age. It can be purchased in one lump sum or with periodic (after-tax) payments until the withdrawing process begins.
Deferred Compensation Plan: A form of retirement plan or compensation, generally limited to management personnel, in which both the payment of compensation and the income tax on the compensation can be deferred for a period of years or until after retirement.
Defined Contribution Pension Plan: Employer-sponsored retirement plans, such as 401(k) plan, in which the employee is responsible for making a portion of the contributions toward the plan. The employer may or may not match the employee’s contributions.
Depreciation: Decline in the dollar value of an asset with use or over time.
Discretionary Spending: Spending — of funds available after mandatory spending — over which you have control or decision power, such as meals out or entertainment.
Dividend: A share of company profits distributed to stockholders.
Domestic Fixed Income: Includes U.S. domestic debt instruments, such as corporate or government bonds, certificates of deposit, deeds of trust, and notes receivable, with a maturity date of over three months.
Domestic Stocks: Includes U.S. stocks of larger companies, smaller companies, venture capital holdings, equity income, and convertible securities.
Durable Power of Attorney for Financial Management: A legal document that gives the person(s) you select the power to manage your assets in the event that you are unable to do so. It does not cover assets that are in a trust, as these are managed by the trustee.
Durable Power of Attorney for Health Care: This legal document gives the person(s) that you select the power to make medical and health care decisions for you in the event that you are unable to make those decisions yourself.
Educational Savings Account – Coverdale (ESA): Set up to fund your children’s education costs, an ESA is an account to which nondeductible annual contributions of up to $2000, per child, may be made until the child turns 18. The funds grow tax free and can be used for the child’s qualified higher-education expenses without incurring taxes.
Emerging Market Stocks: Stocks of companies from third world nations: newly developing markets traditionally have low liquidity, high risks, and the potential for high returns.
Equity Income: A characteristic of a company or mutual fund that has high dividends, such as a utility or a convertible bond.
Estate: The total of all types of property owned and debts incurred by a person at a particular time, usually upon his or her death.
Estate Planning: The process of developing a strategy to transfer and manage assets upon death or disability.
Estate Planning Law Specialist (EPLS): The Estate Law Specialist Board, Inc., an attorney-run subsidiary of the National Association of Estate Planners & Councils in Cleveland, Ohio, is the only American Bar Association-accredited program for certification of an attorney as an Estate Planning Law Specialist (EPLS). 866.226.2224, www.naepc.org/estate_law.web
Estate Tax: There is an estate exclusion of $5 million per person, and a top estate tax rate set at 35%; the $5 million exemption is indexed for inflation for decedents dying after 2011. For a decedent who died during 2010, the executor may elect the modified carryover basis rules established by the Economic Growth and Tax Relief Reconcilliation Act (EGTRRA) and also prevent the estate from being subjected to an estate tax.
Executor: The individual or organization appointed in a will to administer the disposition of an estate according to the instructions in the will.
FPA (Financial Planning Association), 800.322.4237, www.FPNET.org
Fair Market Value: The price a willing buyer will pay a willing seller in a non-distressed sale environment.
Financial Independence: The ability to do what you want, when you want, without having to concern yourself with “outside” financing.
Fixed Annuity: An annuity that always pays a set amount of income for the life of the contract. The investment risk is borne by the insurance company.
Fixed Income: Includes company, U.S. government, or foreign bonds that are issued directly or are part of a mutual fund, and other domestic or foreign debt instruments, such as certificates of deposit, deeds of trust, and notes receivable, with a maturity date of over one year.
Futures Contract: An agreement to buy a certain amount of a commodity (such as corn, soybeans, or gold) or even Treasury Bills or currency, at a stipulated price at a specified future month. As the time draws closer to the purchase date, the price of the contract can fluctuate widely up and down due to rain in Iowa or any number of variables, hopes and fears. A good way to make or lose a lot of money in just a few minutes.
General Partnership: A partnership in which each partner shares in the control and management of the business, and each partner is personally liable for the full amount of partnership indebtedness.
Generation-Skipping Tax: A tax applied when the recipient of a gift is two or more generations younger than the giver (for example, a gift from a grandparent to a grandchild). Generation-skipping transfers for decedents dying or gifts made after December 31, 2009 receive an exemption of $5 million with a 0% tax rate rate for transfers during 2010 and a maximum 35% rate for 2011 and 2012. After exemptions, this tax is assessed at a flat rate equal to the highest estate tax rate.
Gift Taxes: Lifetime gifts made in excess of the annual gift tax exclusion per donee ($13,000 subject to an inflation adjusted in 2012) in 2010 receive an applicable exclusion amount if $1 million. Gifts made in 2010, in excess of the applicable exclusion are subject to a maximum 35% tax rate. Gifts made after 2010 receive an exclusion amount of $5 million, with additional gifts taxed at a top tax rate of 35%.
Growth Stocks: A characteristic attributed to the stock of a company that has invested its capital and used its assets to realize a rate of return well in excess of the cost of that capital and assets.
Guardian of the Person: The person appointed in a will or by a court to care for minor children or an incompetent adult.
Guardian of the Property: The person appointed in a will or by a court to care for the property of minor children or an incompetent adult.
Hard Assets: Tangible assets such as precious metals, gems, art, antiques, and collectibles.
Health Maintenance Organization (HMO): An organization which contracts with a group of physicians and hospitals to provide services to individuals who subscribe to its health plan, either privately or through their employer. A fixed, prepaid fee is charged for services, regardless of the expense of the care rendered.
Home Equity Line of Credit: A line of credit using the equity in your home as collateral. The interest paid may be deductible even if the funds were used to buy a car.
Hope Scholarship Credit: This credit has been replaced with The American Opportunity Tax Credit (TAOTC).
Immediate Fixed Annuity: Begins payments as soon as you purchase the contract and always pays a set amount of income for the life of the contract. The investment risk is borne by the insurance company.
Immortality (Charitable) Trust: A trust that is set up in your name to provide an ongoing benefit, such as a scholarship or to grant funds for future generations.
Incentive Stock Option (ISO): An employee stock option plan that grants key employees options to purchase company stock at a predetermined price without incurring a tax liability at the time the option is granted or when exercised. It may create an alternative minimum tax exposure.
Income Risk: The risk that income which you are expecting does not occur.
In-Force Ledger Illustration: A report prepared by an insurance company to illustrate the current and future values of an existing life insurance policy.
Index: Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month.
Index Fund: A mutual fund whose portfolio matches that of a broad-based index such as Standard & Poor’s index, and whose performance therefore matches its particular market as a whole.
Individual Retirement Account (IRA): Any qualified worker can open an IRA and obtain a tax deduction for cash contributions up to $5,000 ($6,000 if you are over age 50) annually. Subject to certain limitations, each spouse is entitled to deduct up to $5,000 ($6,000 if you are over age 50), providing the couple’s combined earned income is at least that amount. These funds grow tax deferred.
Inheritance Tax: The state tax paid on the value of property and money received from another person at their death. Not all states have an inheritance tax.
Insider Trading Rules: It is against the law to buy or sell stocks in a company about which you have “insider” information that is unavailable to the general public.
Insurance, Accidental Death & Dismemberment: A policy that pays a benefit if the insured dies by other than natural causes. It also pays a benefit if the insured loses sight, hearing, speech, or the use of a limb from an accident.
Insurance, Cash Value Life: This type of life insurance has a savings element built into the policy. The premiums are higher, but cash values can build inside the policy. If your insurance needs are long-term (10 years or more), a good participating cash value-type policy could be less expensive than an annual renewable term policy.
Insurance, Casualty: This area of insurance includes Vehicle, Property, Business, and Liability Insurance. Casualty Insurance is primarily concerned with insurance covering losses due to property damage and legal liability to third persons.
Insurance, Disability: This insurance provides periodic payments to replace income when the insured is unable to work as a result of illness, injury, or disease.
Insurance, Financial: This area of insurance includes life, health, vision, dental, disability and long-term care insurance. Financial insurance is primarily concerned with covering costs related to health, loss of earnings, and the loss of life.
Insurance, Health: This insurance provides coverage for the cost of doctors’ fees, hospitalization, medication, and other related medical expenses resulting from sickness or accident. Medical insurance is often provided as a valuable benefit by employers.
Insurance, Health Maintenance Organization (HMO): Coverage for medical services provided by physicians and hospitals who have contracted with the HMO. A fixed, prepaid fee is charged for services, regardless of the expense of the care rendered. Policies are often received as a benefit of employment but can be purchased privately as well.
Insurance, Life: This insurance provides coverage for the loss of life. There are various types of life insurance policies marketed under various names, but generally they fall under two categories: term insurance and cash value insurance.
Insurance, Long-Term Care: This insurance provides money needed to cover the costs of long-term care in a nursing home or in the insured’s residence.
Insurance, Personal Liability Umbrella: This insurance protects against losses above and beyond those covered by basic homeowner’s, automobile, business, and other property liability insurance. It is usually written in increments of $1 million requires minimum underlying insurance from the casualty insurance policies.
Insurance, Preferred Provider Organization (PPO): Coverage for medical services provided by a limited group of physicians and hospitals who have contracted with the PPO. Generally, only services rendered to subscribers by member physicians and hospitals are covered in full. Policies are usually marketed through an insurance company.
Insurance, Term Life: This insurance provides a death benefit if death occurs while the policy is in force. It provides protection for a specific period of time. Once the period ends there are no death benefits or cash values. This type of life insurance is usually the least expensive on a year-by-year basis, with premiums gradually increasing each year as the insured ages.
Insurance, Universal Life: This policy combines term and whole life. It has a death benefit and cash values. The policy is flexible and allows you to adjust premium payments between the death benefit and the cash values.
Insurance, Variable Life: This is also a combination of term and whole life. It has a death benefit and cash value. Like universal life, the policy is flexible and allows you to adjust premium payments between the death benefit and the cash value. Variable life policies also allow you additional flexibility in that you can invest in various combinations of money market, stock, or bond funds.
Insurance, Whole Life: See Insurance, Cash Value Life.
International Fixed Income: Shares in a fund that includes foreign debt instruments.
International Stocks: Shares in any company incorporated and listed on an overseas/foreign stock exchange.
Irrevocable Trust: A trust in which the trustor, the individual who supplies that assets used in setting up a trust, does not retain the right to revoke or amend the trust.
Joint Tenancy with Rights of Survivorship (JT): A method of ownership in which two or more persons can hold equal or unequal percentages in real estate, financial investments, or personal property. If one dies, his or her share automatically goes to the others, even if a will specifies otherwise.
Joint Venture Company: An organization of two or more persons or companies that is formed for the purpose of working on a project together.
Keogh: A program by which self-employed individuals may make tax-deferred contributions to a retirement plan.
Large Companies: Companies with a capitalization of more than $1 billion.
Lease: An agreement that is entered into between a lessee and lessor, where the lessor provides certain property to the lessee under defined conditions for consideration.
Liabilities: What you owe. Your debts.
Life Insurance (Wealth Replacement) Trust: A trust that is usually set up as an irrevocable trust for the purpose of receiving life insurance. Properly structured, proceeds from this trust are estate tax and income tax free.
Lifetime Learning Credit: A 20% credit available against federal income taxes which is applied to the first $10,000 of qualified expenses (these include educational expenses to acquire or improve job skills). This credit applies to college juniors, seniors, graduate students, or working Americans pursuing job training skills. These credits apply to expenses paid for an academic year. This credit is phased out as income increases.
Limited Liability Company: An LLC is a state-approved hybrid entity where the principal assets of the owners (other than their interest in the LLC) are not subject to the risk of creditor claims for the company’s business debt. All owners participate in management, and profits and losses can be shared as agreed upon by the members. Most LLCs are designed to be taxed as partnerships, thereby avoiding the double layer of taxation encountered in a “C” corporation.
Limited Partnership: A partnership in which there must be at least one general partner who is responsible for the management and debts of the company, and one or more limited partners who have no control over management and are liable for indebtedness only to the extent of their investment.
Liquidity: The ability to quickly convert an investment portfolio to cash without suffering a noticeable loss in value. Stocks and bonds of widely traded companies are considered highly liquid, while real estate and limited partnership interests are not liquid.
Living (Intervivos) Trust: A trust that is created while the grantor is alive. It may be revocable or irrevocable.
Loan, Fixed or Variable Rate: Fixed or variable rate refers to the interest rate charged on the loan. Fixed-rate loans charge a set annual interest rate for a specific number of years, for example, 5% interest per year for 15 years. Variable-rate loans normally start with a reduced rate for a short period of time, called a “teaser rate.” Due to this teaser rate, variable-rate loans are usually less expensive in the short term. In the long term, depending on what happens to interest rates, either loan could be better. Variable-rate loans have the potential of lower payments if interest rates are stable or go down, but they also have the risk of higher payments if interest rates go up.
Loan, Revolving: A loan that can be paid down or borrowed against, such as a credit card or a line of credit.
Loan, Term: A loan that is repaid over a specified period of time.
Loan/Promisary Note: A written promise to pay back borrowed funds.
Loan, Second Mortgage: A loan secured by property that is secondary to a first mortgage. This is typically a home remodeling loan or a debt consolidation loan. The term is usually for three to 15 years.
Loan, Student: A special loan designed to help a student and his or her family fund the high costs of education. Examples include extra-credit loans, Stafford loans, Sallie Mae loans, and Educational Resources Institute loans. For information regarding these and other loan programs, contact the specific school you are interested in or specific financial institution that markets such loans.
Long-term Appreciated Assets: Assets that are held for more than one year.
Mandatory Spending: Required spending, such as a mortgage, lease payments, loan payments, and other necessities.
Master Account: A checking or money market account that is used as a control account where wages and investment income are deposited before being dispersed to spending accounts.
Matching Contribution: The funds paid by an employer in a defined benefit plan, such as a 401(k), to match the contributions of an employee. Some employers match dollar for dollar up to a limit; others match a fraction of the employee contribution, such as 25 or 50 cents on the dollar.
Medicaid: a joint federal and state program for people of any age who need assistance to pay their medical bills.
Medicare: a federal health insurance program for those 65 or older. Medicare A, the hospital part of Medicare, covers various inpatient services. Medicare B is an optional provision providing coverage of outpatient services, prescription drugs, and other covered costs. Medicare coverage is not comprehensive.
Medigap: any of a variety of supplemental insurance policies offered by private companies to provide coverage for medical expenses not covered by Medicare A and B.
Money Market Fund: A mutual fund whose investments are in high-yield money market instruments such as federal securities and certificates of deposit.
Mortgage: Sometimes called a deed of trust. It is a loan on property using the property as security for the loan.
Municipal Bonds: A method by which state or local government agencies borrow money. Income from these bonds is exempt from federal income taxes.
Mutual Fund: A portfolio of any combination of stocks, bonds, or government securities bought and sold by a money manager.
Mutual Fund, Balanced: A fund that has a combination of stocks and fixed income investments.
Mutual Fund, Blended: A fund that combines growth and value.
Mutual Fund, Closed-Ended: A type of pooled investment fund that has only a fixed number of shares to sell, and no more. Shares might be sold over the counter or on the stock exchange.
Mutual Fund, Open-Ended: The majority of mutual funds are open-end companies. They do not have a fixed number of shares; they issue more shares as investors want them. The price is based on the net asset value (NAV) of the underlying investments in the fund.
Negotiable Instrument: Unconditional order to pay an amount of money, easily transferable from one person to another, such as a check or promissory note.
NAEPC (National Association of Estate Planners & Councils): 888.226.2224, www.NAEPC.org
NAPFA (National Association of Personal Financial Advisors): 888.333.6659, www.napfa.org
Net Asset Value (NAV): Calculated by most mutual funds after the close of the exchanges each day, by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result by the total number of shares outstanding.
Net Worth: Total assets minus total liabilities.
No-Load Fund: A mutual fund that charges no commission on the purchase of its shares because there are no salespeople.
Non-qualified Stock Option (NQSO): These are granted to key individuals as a right to purchase company stock at a predetermined price. When the option is exercised, the difference between the option price and the fair market value is taxed as compensation.
Nontaxable Accounts: Savings and investment accounts in which the interest, dividends, or gains earned are not taxable until withdrawn. Such accounts include IRAs, 401(k)s, pension and profit-sharing plans, other retirement plans, annuities, and cash value life insurance.
Note Receivable/Loan: A written promise to repay borrowed funds.
Option: A purchased right to buy or sell a fixed amount of stock for a specified amount within a limited period of time.
Over the Counter: This is the principal market for bonds of all types. Actually conducted over the telephone, it also deals with stocks of companies without sufficient shares, stockholders, or earnings to warrant listing on an exchange.
Pension Plan: Money set aside to provide income or annuities to retired or disabled employees.
Periodic Spending Fund: A cash flow management account used to hold cash until expenditures, such as taxes, insurance premiums paid quarterly, or other periodic expenditures, are due.
Pooled Income Fund: A method of planned giving whereby gifts of cash or stock are “pooled” by the receiving charity into a special fund and invested. Each year, the donors receive their proportionate share of the investment income earned by the fund as well as significant income tax, capital gains tax, and estate tax benefits. At the donor’s death, the donor’s contributions to the fund pass directly to the charity.
Power of Appointment: A power or authority, which may be conferred by one person to another to dispose of property.
Power of Attorney: A written instrument, authorizing a person to act as the agent, or attorney-in-fact, and perform specific acts on behalf of another.
Power of Attorney for Health Care: A document that gives an agent or your appointee the power to make medical and health care decisions for you in the event you are unable to make those decisions yourself.
Power of Attorney for Financial Management: A document that gives your appointee the power to act on your behalf pertaining to assets outside a trust in the event you are unable to do so.
Preferred Provider Organization (PPO): A health insurance organization which contracts with a limited group of physicians and hospitals to provide services to individuals who subscribe to its health plan. Generally, only services rendered to members by physicians and hospitals within the PPO are covered in full.
Preferred Stock: A class of stock that is entitled to dividends and liquidated preferences prior to common stockholders. These generally pay less income than bonds issued by the same company.
Periodic Spending Fund: A cash flow management account used to hold cash until expenditures such as taxes, quarterly insurance premiums, or other periodic expenditures are due.
Primary Documents: One-of-a-kind documents such as stock confirmations, employee benefit statements, notes, deeds of trust, tax returns, insurance policies, wills, trusts, etc.
Prime Rate: The lowest interest rate charged by commercial banks to their most creditworthy customers.
Principal: The sum on which interest accrues (as distinguished from interest or income); also, a person who authorizes another person to represent him or her in a business transaction.
Principal Risk: The risk of losing part or all of the original investment.
Private Annuity: An annuity contract that is entered into by private parties, not an insurance company.
Probate: The legal process of administering the non-trust assets of the estate of a deceased person.
Profit-Sharing Plan: Any plan in which a portion of the profits of a company are set aside for distribution to its employees.
Purchase Lease: A lease entered into that is really a purchase; typically at the end of this lease, there is a $1 buyout.
Purchasing Power Risk: This is a consequence of inflation. If an investment’s total return doesn’t exceed the rate of inflation during the investment’s holding period, the investor suffers a loss of purchasing power.
Qualified Terminal Interest Property (Q-Tip) Trust:A trust created at death by a will or living trust which provides all of the income to the surviving spouse for life. Upon that survivor’s death, assets go to beneficiaries previously designated by the deceased spouse. Properly set up, this trust avoids any estate taxes on the estate of the first spouse. However, at the surviving spouse’s death, the Q-Tip is included in the estate of the surviving spouse. Depending on the overall size, it may be taxed as part of his or her estate.
RIA (Registered Investment Advisor): State Department of Corporations; and Financial Industry Regulatory Authority 301.590.6500, www.finra.org
Rate of Return: The cumulative earnings from an asset over a defined period of time, usually one year. The rate of return might include interest, dividends, appreciation, tax savings, or a combination of these. Rate of return is expressed as a percentage of the beginning principal amount, for example, a 5% rate of return.
Real Estate Investment Trust (REIT): An unincorporated association that invests in mortgages or real property and sells shares to the public.
Retained Life Estate: A method of planned giving whereby a personal residence or vacation home is given to charity, with the donor retaining the right to live in the property for life as well as receiving significant income tax, capital gains tax, and estate tax benefits.
Revolving Credit: A loan that can be paid down or borrowed against, such as a credit card or line of credit.
Rights of Survivorship: In joint tenancy, the right of a survivor to acquire the share of the property of the joint tenant who dies.
Roth IRA or Backloaded IRA: An Individual Retirement Account to which qualified workers may make nondeductible contributions. The maximum contribution is $5,000 ($6,000 if you are over age 50) less any contributions made to other IRAs or to workers compensation. The funds grow tax free. Up to $10,000 can be used for first-time home purchase by the worker, the worker’s spouse or lineal ancestors and descendents of the taxpayer. After age 59½, the account holder may withdraw any or all proceeds without incurring federal income tax, if certain conditions are met.
SEP (Simplified Employee Pension Plan): A qualified plan which accepts the employee’s and the employer’s contributions into the employee’s IRA..
Second Mortgage Loan: A loan secured by property that is secondary to a first mortgage. This is typically a home remodeling loan or a debt consolidation loan. The term is usually from 3 to 15 years.
Separate Property: Ownership of property solely in one person’s name. The property was acquired either prior to marriage or as a gift or inheritance.
Simplified Employee Pension Plan (SEP): A qualified plan which accepts the employee’s and the employer’s contributions into the employee’s IRA.
Small Companies: Companies that have capitalization value of under $1 billion.
Sole Proprietorship: An unincorporated business having only one owner.
Spending Account: A checking or money market account that is used to control monthly spending by having a predetermined amount deposited into it each month.
Stock Dividend: The issue of new stock from a corporation, proportionately to its shareholders based on the current stockholders’ holdings. Stock dividends do not represent a distribution of earnings.
Stock Option: A purchased right to buy or sell a fixed amount of a given stock for a specified amount within a limited period of time. It can also be an employee benefit, allowing the employee to purchase stock, usually at below market value.
Stock Option, Incentive (ISO): An employee stock option plan that grants key employees options to purchase company stock at a predetermined price without incurring a tax liability at the time the option is granted or when exercised. It may create an alternative minimum tax exposure.
Stock Option, Regular (RSO): Also known as Statutory Stock Options, these are granted to key individuals as a right to purchase company stock at a predetermined price. When the option is exercised, the difference between the option price and the exercise price is taxed as compensation.
Stock Split: A division of outstanding shares into a greater number of shares. The shareholder retains the same percentage of ownership with a different number of shares.
Student Loans: Special loans designed to help students and families fund the high costs of education. Examples include extra-credit loans, Stafford loans, Sallie Mae loans, and Educational Resources Institute loans. For information regarding these and other loan programs, contact the specific school you are interested in or a specific financial institution that markets such loans.
Tax, Alternative Minimum (AMT): A complicated income tax that is activated when there are excessive deductions and tax benefits.
Tax, Capital Gains: Capital gains are the profits realized when certain capital investments, such as stocks, bonds, mutual funds, and real estate, are sold. The federal capital gains tax ranges from 0% to 35%, depending on how long the asset has been held, the taxpayer’s taxable income, and the type of investment class. States may impose an additional state tax.
Tax, Excise: The manufacture, sale, or purchase of tobacco, alcohol, telephone services, and airline tickets are subject to federal excise tax.
Tax, Generation-Skipping: The tax generally applies after application of exemptions and deductions, when the beneficiary belonging to a generation younger than that of the party who is making a gift is skipped to an even younger generation (for example, from a grandparent to a grandchild). This tax is at a flat rate, equal to the highest estate and gift-tax rate.
Tax, Gift & Estate: The federal tax imposed on transfers (gifts) either during one’s lifetime or at death (estate). As of this printing there is no estate tax for 2010. For gifts there is a $1 million exemption, followed by gift taxes at a rate of 35%. (Caution: Congress is considering revising estate tax laws; if it does not, estate taxes will return in 2011.) Gift Taxes: Lifetime gifts made in excess of the annual gift tax exclusion per donee ($13,000 subject to an inflation adjusted in 2012) in 2010 receive an applicable exclusion amount if $1 million. Gifts made in 2010, in excess of the applicable exclusion are subject to a maximum 35% tax rate. Gifts made after 2010 receive an exclusion amount of $5 million, with additional gifts taxed at a top tax rate of 35%. Estate Tax: There is an estate exclusion of $5 million per person, and a top estate tax rate set at 35%; the $5 million exemption is indexed for inflation for decedents dying after 2011. For a decedent who died during 2010, the executor may elect the modified carryover basis rules established by the Economic Growth and Tax Relief Reconcilliation Act (EGTRRA) and also prevent the estate from being subjected to an estate tax.
Tax, Income: Federal income taxes are indexed up to 35% for 2011. State and local income taxes can average another 5–11%.
Tax, Inheritance: The state tax paid on the value of property and money received from another person after their death.
Tax, Property: Some cities, counties, and states collect tax on property such as real estate, automobiles, and business property.
Tax Risk: The risk that the IRS will change the tax laws or disallow a tax deduction and you will owe penalties and back interest.
Tax, Sales: Some states, counties, and cities tax retail sales. Only Alaska, Delaware, Montana, New Hampshire, and Oregon have no sales tax.
Tax, Self-Employment: Self-employed individuals must pay Social Security and Medicare taxes of 13.3% on the first $106,800 earned, and 2.9% on the balance of their income for 2011.
Tax-Sheltered Annuity (TSA) or 403(b) Plan: Similar to a 401(k) plan, but set up for public employees and employees of nonprofit organizations.
Taxable Accounts: Savings and investment accounts in which the interest, dividends, or gains earned on the accounts must be declared on your tax return.
Tenancy-in-Common (TIC): Two or more holders of equal or unequal shares of property which cannot be sold without the consent of the others, and which carry no rights of survivorship, as in joint tenancy.
Term Life: Provides a cash benefit if death occurs while the policy is in force. The insurance protection is for a specific limited period of time. Once the period ends there are no death benefits or cash values. This type of life insurance is usually the least expensive on a year-by-year basis, with premiums gradually increasing each year.
Term Loan (Credit): A loan that is repaid over a specified period of time.
Testamentary Trust: A trust that is created by will upon the death of the person who made the will (the testator).
Treasury Bill: (T-Bill) A money-market security that represents liquid short-term government financing with maturities ranging from a few days to 52 weeks. Treasury Bills may be purchased free from the Federal Reserve Bank or for a small fee through financial institutions.
Treasury Bond: A negotiable debt issued by the federal government with a minimum face value of $1,000 and a maturity of 10 years or longer. Bonds and notes are purchased at auction or from the Federal Reserve Bank, commercial banks, or brokerage firms.
Treasury Note: Purchased the same way as treasury bonds, except they mature in two to 10 years. The minimum denomination for a treasury note is $5,000 for two or three year maturities, and $10,000 for maturities longer than three years.
Trust Accounts: Accounts that contain the assets of the trust.
Trust, Charitable (Immortality): A trust that is set up in your name to provide an ongoing benefit, such as a scholarship or to grant funds for future generations.
Trust, Charitable Remainder (CRT): A trust into which assets are contributed that provide a donor with an income-tax deduction and a beneficiary with income over a period of time, with the remaining principal going to charity.
Trust Fund: A fund held by one person (trustee) for the benefit of another, according to the provisions of a formal trust agreement.
Trust, Irrevocable: A trust in which the trustor does not retain the right to revoke or amend the trust.
Trust, Life Insurance (Wealth Replacement): A trust that is usually set up as an irrevocable trust for the purpose of receiving life insurance proceeds estate tax free.
Trust, Living (Intervivos): A trust that is created while the grantor is alive.
Trust Officers: Officers in a trust company, such as a commercial bank.
Trustor/Grantor/Settlor: The individual who provides the assets used in setting up a trust.
Trust, Qualified Terminal Interest Property (Q-Tip): A trust created at death by a will or living trust which provides all of the income to the surviving spouse for life. Upon that survivor’s death, assets go to beneficiaries previously designated by the first spouse who died. Properly set up, this trust will avoid any taxes on the estate of the first spouse, but will be included in and may be taxed as part of the estate of the surviving spouse.
Trust: A legal agreement designed to manage and control certain assets, held by the trustee for the benefit of others.
Trustee: The person, persons, or organization appointed by the trustor to manage the assets and distributions of the trust.
Trustor / Grantor / Settlor: The individual who provides the assets used in setting up a trust.
Unified Credit: The estate and gift tax system in the United States is “unified.” When computing the estate tax that may be due upon a person’s death, the IRS takes into consideration taxable gift transfers by the decedent during his/her lifetime.
Unified Credit (By-Pass) Trust: A trust created either through one’s will or a living trust that allows the unused portion of the unified credit to be placed in trust for a surviving spouse or other beneficiaries.
U.S. Government Savings Bonds: Savings certificates issued by the government. They are sold at less than their face value but may be cashed in for their full value after a specified length of time.
Value Stocks: An investment style of selecting companies that are considered currently to be undervalued.
Variable Annuity: A regular monthly payment that varies in amount based on the performance of the securities held in the insurance company’s portfolio. These annuities are covered by insurance company laws that shelter gains from current taxation. They carry more stock market risk than fixed annuities, but have a greater potential for appreciation.
Variable Life: Also a combination of term and whole life. It has a death benefit and cash values. Like universal life, this policy is flexible and allows you to adjust the allocation of premium payments between the death benefit and the cash values. Variable life policies offer additional flexibility by allowing you to invest cash values in various combinations of money market, stock or bond funds.
Venture Capital: Pre-publicly traded equity investment that has a limited market for trading.
Will: A legal document through which a person directs the disposition of his or her estate upon death.
