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FINANCIAL DICTIONARY/GLOSSARY
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A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
T
U
V
W
X
Y
Z
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Letter "A"
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Action on decision - Administrative notice published by the Internal Revenue Service in response to a court case that the IRS lost. The action on decision document will indicate whether the IRS agrees or disagrees with the court decision and why. If the IRS disagrees with the position, it puts taxpayers on notice that the IRS will litigate the issue if it comes up again in the future. Action on decisions are published in the Internal Revenue Bulletin.
Acillary probate - Probate proceeding held in a state other than the state in which a person died for purposes of clearning title to property located in that state or to address other rights or issues that arise out of the decedent's property in that state.
Annual exclusion - The maximum amount of property that a person can gift to another person during a calendar year before a gift tax is assessed and/or a gift tax return must be filed. The amount is adjusted periodically (it is $12,000 for 2006). There is no limit to the number of people to whom you can give this type of gift to qualify for the annual exclusion. The gift must be one that a recipient can enjoy immediately and have full control over to qualify for the annual exclusion.
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Letter "B"
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Basis - A tax term that refers to the original or acquisition value of a property, used to determine the amount of tax that will be assessed upon the sale of the capital asset or property. The basis is deducted from the sales price of the property when it is sold to determine the profit or loss. For example, if you were to buy one share of Microsoft stock for $100 you would have a tax basis of $100. If you sold the stock for $110, you would have $10 of gain (which is the $110 sales price minus your $100 tax basis). You would have to pay a federal income tax on the $10 capital gain.
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Letter "C"
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Charitable remainder trust - A trust used to make donations of property or money to a charity so the person making the gift or donation can obtain an income tax deduction and help a charity(ies). With a CRT, the donor reserves the right to use the trust property during his lifetime (i.e., the donor retains an income interest) or some other specified time period, and when the agreed period is over the property passes to the charity. The CRT's assets are not excluded from the grantor's taxable estate for estate tax purposes.
Community property - A form of property ownership in some states that specifies that all assets acquired during a marriage belong equally to both spouses, except for gifts and inheritances given specifically to one spouse. Their are eight states with such laws, known as community property states. They include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Puerto Rico also uses the community property system, and Wisconsin has a modified community property system. Alaska has both a common law and a community property system, whereby people can elect which regime they want to apply to specific property (See Separate Property).
Credit shelter trust - A type of trust used by married couples to utilize both spouses' unified credit exemption (or applicable exclusion amount). With this type of trust, two trusts (trust A and trust B) are created at the time the first spouse dies. By dividing the couple's estate into two trusts at the first death, each spouse can pass the maximum amount of property allowed to avoid federal estate taxes. One trust, usually trust A, is often referred to as the marital deduction trust and the other trust, usually trust B, is often referred to as the credit shelter trust.
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Letter "D"
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Disclaimer - The refusal of a beneficiary to accept property bequeathed to him. When a disclaimer is made, the property is generally transferred to the person next in line under the will or trust (and absent a will or provision in the will, according to state law). A disclaimer is also called a renunciation.
Durable power of attorney for property - A legal document established by an individual (the principal) granting another person (the agent) the right and authority to handle financial and other matters for the principal. The Durable Power of Attorney survives through the period of incompetency of the principal.
Durable power of attorney for health care - A legal document established by an individual (the principal) granting another person (the agent) the right and authority to handle matters related to the health of the principal. The Durable Power of Attorney survives through the period of incompetency of the principal.
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Letter "E"
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Estate tax - Taxes imposed on the "privilege" of transferring property by reason of death. Estate tax is most commonly used in reference to the tax imposed by the federal government rather than the state government (although a few states also impose a state estate tax). At the federal level, gift, estate, and GST taxes have been "merged" into a single tax called the "unified tax."
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Letter "F"
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Fiduciary - A person or institution that stands in a special relation of trust, confidence, or responsibility in certain obligations to others. The law imposes a higher standard on fiduciaries than on non-fiduciaries; therefore, it is easier to hold fiduciaries accountable for their actions or inactions. Attorneys, trustees, and SEC Registered Investment Advisors are examples of fiduciaries. Trustees are fiduciaries for trust beneficiaries with regard to trust administration issues. SEC Registered Investment Advisors are fiduciaries to their clients with regard to investment-related decisions.
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Letter "G"
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Generation skipping transfer tax - Taxes levied by the federal government on certain transfers to "skip persons," who are persons more than one generation below the transferor (a few states also impose state GST taxes). Generally a person is more than one generation below the transferor if: (1) a lineal descendant, at least two generations below the transferor (i.e., grandchild); (2) a non-relative, at least 37 1/2 years younger than the transferor; or (3) a trust, if all interests in the trust are held by "skip persons." At the federal level, gift, estate, and GST taxes have been "merged" into a single tax called the "unified tax." The GST tax rate is onerous (a tax imposed in additional to the estate and gift tax).
Generation skipping transfer (GST) tax exemption amount - The amount that one individual can transfer to a "skip person" free of GST transfer taxes. The GST tax exemption amount is $1,000,000 in 2006 for lifetime gifts to "skip persons" and $2,000,000 for transfers to "skip persons" that are made upon the individual's demise. So, if grandmother gives $3,000,000 to her two grandchildren, $1,000,000 would be exempted from GST tax. If the grandmother also leaves $3,000,000 to one of her grandchildren (or children) via her will, an additional $1,000,000 will be exempt from tax (because the lifetime gift exclusion amount is subtracted from the exclusion amount available for transfers made upon the grandmother's demise).
Gift tax - Taxes levied by the federal government on gifts (a few states also impose state gift taxes). At the federal level, gift, estate, and GST taxes have been "merged" into a single tax called the "unified tax."
Grantor trust - A trust in which the person establishing the trust retains enough "ownership rights" or "incidents of ownership" that the person is treated, for tax purposes, as the owner of the trust assets. The right to revoke the trust is sufficient to make the trust a grantor trust.
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Letter "H"
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Letter "I"
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Independent trustee - A trustee who is unrelated to the person who establishes a trust (the grantor) and the beneficiaries of the trust. Unrelated attorneys, banks, corporations, etc., are usually chosen to act as independent trustees. The IRS requires a trust to have an independent trustee if the trust is to achieve certain estate tax and income tax benefits available to irrevocable trusts (not living trusts).
Intentionally defective grantor trust - An irrevocable trust designed to remove assets from a grantor's taxable estate while intentionally subjecting the grantor to income tax on the trust's earnings (i.e., the "defective" part).
Irrevocable life insurance trust - A type of irrevocable trust used to hold life insurance. When a life insurance policy is held in an insurance trust, it can be protected from estate taxes when the insured dies; provided the trust is established properly, managed properly, and the insured does not retain any impermissibly "incidents of ownership."
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Letter "J"
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Joint ownership - Where two or more people own the same property together. The property can be "owned" by as joint tenants, tenants in common, tenants by the entirety and other legally defined relationships.
Joint tenancy - When two or more people take title to the same property and simultaneously each owns 100% of the property, or has full rights to the property. At the death of one joint tenant, his or her share immediately transfers to the ownership of the survivor(s) (Compare Tenant in common).
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Letter "K"
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Letter "L"
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Life estate - A form of property ownership that entitles the owner to presently benefit from property during their lifetime, but the person does not possess the right to dispose of the property upon his or her demise. The person with the right doesn't own the property, and when he or she dies, the property is not included in his or her estate.
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Letter "M"
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Marital deduction - An unlimited deduction allowed under federal estate tax law for all qualifying property passing from the estate of the deceased spouse to the surviving spouse (The surviving spouse must be a US citizen to qualify). The value of the property passing to the surviving spouse under the marital deduction is "deducted" from the deceased spouse's estate before federal estate taxes are calculated on the estate.
Marital deduction trust - The trust which "receives" property passed from the deceased spouse's estate to the surviving spouse. Property in the marital deduction trust will be included as part of the surviving spouse's estate (for estate tax purposes) when he or she dies.
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Letter "N"
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Letter "O"
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Letter "P"
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Pour over trust - A trust designed to receive property that is "poured over" into it. The property is usually "poured over" or received from a pour-over will through the probate process.
Probate - court process for settling an estate upon one's death. Probate typically involves the filing of a last will and testament with the court, selection and appointment of a personal representative, preparing an estate inventory, and paying the decedent's creditors. Probate typically ends when the court issues an order directing that the probate estate is closed.
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Letter "Q"
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Qualified personal residence trust - A trust arrangement where a homeowner transferrs title of their real property to the trust during their lifetime, but the owner retains the right to reside in the residence for a term of years. After the term, title to the real estate passes to the trust beneficiary. If the homeowner survives the term and they or thier spouse are not the trust beneficiary, then the value of the house will be exculded from their taxable estate for estate tax purposes.
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Letter "R"
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Reverse mortgage - A financial arrangement where a homeowner borrows money against the equity in his or her home and in exchange for regular payments from the lender. Typically the borrower will retain the right to live on the property for their lifetime or for a specified period.
Revocable living trust - A trust where one person, the trust settlor, gives property to himself as trustee or to another person or entity as trustee, to hold for the benefit of the settlor and/or for the benefit of other third parties. The term “living” specifies that the trust is created during the settlor’s lifetime. The term "revocable" specifies that the settlor retains the ability to alter, amend or terminate the trust prior to the settlor's demise or incapacity. Once created, the settlor – who is also typically the trustee – simply manages the trust assets as he or she would absent a revocable living trust. The settlor continues to report the taxable income, deductions and losses on his or her own personal tax returns as if the trust did not exist.
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Letter "S"
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Self-settled trust - A trust created by one person for his or her own benefit. Usually referrs to a trust that contains a spend thrift trust provision. A few states uphold self-settled trusts against the beneficiary's creditors claims.
Separate property - In community property states, all property which is not considered community property of a married couple is considered separate property. Typically this property is property acquried by one spouse prior to marriage or property acquired during marriage by way of gift, devise or inheritance. In non-community property states, all property that is not marital property is considered separate property. This property is typically property acquired by one spouse prior to marriage or property acquired during marriage in one spouse's name or with the proceeds of one spouse's other separate property.
Spendthrift trust - A trust that contains a spendthrift trust provision. The spendthrift trust provision typicially provides that the trust assets are not to be used to pay for the trust beneficiary's creditors. Most states uphold spendthrift trust provisions in trusts created by third parties for the benefit of the trust beneficiary.
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Letter "T"
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Letter "U"
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Letter "V"
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Letter "W"
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Letter "X"
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Letter "Y"
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Letter "Z"
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