Glossary

Glossary of Planning Terms

B C D E F G H I J K L M N P Q R S T U V W Y Z

Adjusted Gross Income (AGI) - An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.

Administrator - See "Personal Representative."

After-Tax Return - The return from an investment after the effects of taxes have been taken into account.

Aggressive Growth Fund - A mutual fund whose primary investment objective is substantial capital gains.

Alternative Minimum Tax - A method of calculating income tax that disallows certain deductions, credits, and exclusions. This was intended to ensure that individuals, trusts, and estates that benefit from tax preferences do not escape all federal income tax liability. People must calculate their taxes both ways and pay the greater of the two.

Annuity - An insurance-based contract that provides future payments at regular intervals in exchange for current premiums. Annuity contracts are usually purchased from banks, credit unions, brokerage firms, or insurance companies.

Asset - Anything owned that has monetary value.

Asset Allocation - The process of repositioning assets within a portfolio to maximize return for a given level of risk. This process is usually done using the historical performance of the asset classes within sophisticated mathematical models.

Asset Class - A category of investments with similar characteristics.

Audit - The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records' accuracy, consistency, and conformity to legal and accounting principles.

Balanced Mutual Fund - A mutual fund whose objective is a balance of stocks and bonds. Such funds tend to be less volatile than stock-only funds.

Bear Market - When the stock market appears to be declining overall, it is said to be a bear market.

Beneficiary - A person named in a life insurance policy, annuity, will, trust, or other agreement to receive a financial benefit upon the death of the owner. A beneficiary can be an individual, company, organization, and so on.

Blue Chip Stock - The common stock of a company with a long history of profitability and consistent dividend payments.

Bond - A bond is evidence of a debt in which the issuer promises to pay the bondholders a specified amount of interest and to repay the principal at maturity. Bonds are usually issued in multiples of $1,000.

Book Value - The net value of a company's assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock's market value.

Bull Market - When the stock market appears to be advancing overall, it is said to be a bull market.

Buy-Sell Agreement - A buy-sell agreement is an arrangement between two or more co-owners that, in many cases, sets forth how an owner's interest in the business will be treated upon his or her death, disability, or retirement.

Capital Gain or Loss - The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.

Cash Equivalents - Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, that can be readily converted into cash.

Cash Surrender Value - The amount that an insurance policyholder is entitled to receive when he or she discontinues coverage. Policyholders are usually able to borrow against the surrender value of a policy from the insurance company. Loans that are not repaid will reduce the policy's death benefit.

Certified Public Accountant (CPA) - A professional license granted by a state board of accountancy to an individual who has passed the Uniform CPA Examination (administered by the American Institute of Certified Public Accountants) and has fulfilled that state's educational and professional experience requirements for certification.

Charitable Lead Trust - A trust established for the benefit of a charitable organization under which the charitable organization receives income from an asset for a set number of years or for the trustor's lifetime. Upon the termination of the trust, the asset reverts to the trustor or to his or her designated heirs. This type of trust can reduce estate taxes and allows the trustor's heirs to retain control of the assets.

Charitable Remainder Trust - A trust established for the benefit of a charitable organization under which the trustor receives income from an asset for a set number of years or for the trustor's lifetime. Upon the termination of the trust, the asset reverts to the charitable organization. The trustor receives a charitable contribution deduction in the year in which the trust is established, and the assets placed in the trust are exempt from capital gains tax.

Common Stock - A unit of ownership in a corporation. Common stockholders participate in the corporation's profits or losses by receiving dividends and by capital gains or losses in the stock's share price.

Community Property - Pursuant to state law, property and debt acquired during a marriage (excluding, for example, property one spouse receives from a will, inheritance, or gift) to which each spouse is entitled to an undivided one-half interest. This includes debt accumulated. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Compound Interest - Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually.

Consumer Price Index - The U.S. Department of Labor's main indicator of inflation. The Consumer Price Index is calculated each month from the cost of some 400 retail items in urban areas throughout the United States.

Deduction - An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.

Defined Benefit Plan - A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.

Defined Contribution Plan - A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee's compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee's account.

Dividend - A pro rata portion of earnings distributed in cash by a corporation to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the fortunes of the company.

Dollar Cost Averaging - A system of investing in which the investor buys a fixed dollar amount of securities at regular intervals. The investor thus buys more shares when the price is low and fewer shares when it rises, and the average cost per share is lower than the average price per share. This strategy does not protect against loss in declining markets and involves continuous investments, regardless of fluctuating price levels.

Employer-Sponsored Retirement Plan - A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.

Equity - The value of a person's ownership in real property or securities; the market value of a property or business, less all claims and liens upon it.

ERISA - The Employee Retirement Income Security Act is a federal law covering all aspects of employee retirement plans. If employers provide plans, they must be adequately funded and provide for vesting, survivor's rights, and disclosures.

ESOP (employee stock ownership plan) - A defined contribution retirement plan in which company contributions must be invested primarily in qualifying employer securities.

Estate Tax - Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations).

Executor - See "Personal Representative"

401(k) Plan - A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

403(b) Plan - A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

Gift Taxes - A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. The first $10,000 a year from a donor to each recipient is exempt from tax. Most states also impose a gift tax. The gift tax exemption is indexed annually for inflation.

Holographic Will - A will entirely in the handwriting of the testator.

Individual Retirement Account (IRA) - Contributions to a traditional IRA - up to $2,000 per year - are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred.

Intestate - The condition of an estate left by a decedent without a valid will. State law then determines who inherits the property or serves as guardian for any minor children.

Irrevocable Trust - A trust that may not be modified or terminated by the trustor after its creation.

Joint and Survivor Annuity - Most pension plans must offer this form of pension plan payout that pays over the life of the retiree and his or her spouse after the retiree dies. The retiree and his or her spouse must specifically choose not to accept this payment form.

Joint Tenancy - Co-ownership of property by two or more people in which the survivor(s) automatically assumes ownership of a decedent's interest.

Jointly Held Property - Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property.

Keogh Plan - This retirement plan, named for Eugene Keogh, is designed for self-employed individuals. Up to $30,000 or 25 percent of self-employed income (whichever is less) may be deducted from compensation and set aside into the plan.

Liability - Any claim against the assets of a person or corporation: accounts payable, wages, and salaries payable, dividends declared payable, accrued taxes payable, and fixed or long-term obligations such as mortgages, debentures, and bank loans.

Limited Liability Company - A form of business entity that offers the liability protection of a corporation and the tax advantages of a partnership.

Limited Partnership - Limited partnerships pool the money of investors to develop or purchase income-producing properties. When the partnership subsequently receives income from these properties, it distributes the income to its investors as dividend payments.

Liquidity - The ease with which an asset or security can be converted into cash without loss of principal.

Living Trust - A trust created by a person during his or her lifetime.

Lump-Sum Distribution - The disbursement of the entire value of a profit-sharing plan, pension plan, annuity, or similar account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account.

Marginal Tax Bracket - The range of taxable income that is taxable at a certain rate.

Marital Deduction - A provision of the tax codes that allows all assets of a deceased spouse to pass to the surviving spouse free of estate taxes. This provision is also referred to as the unlimited marital deduction.

Money Market Fund - A mutual fund that specializes in investing in short-term securities and that tries to maintain a constant net asset value of $1.

Municipal Bond - A debt security issued by municipalities. The income from municipal bonds is usually exempt from federal income taxes. In many states, it is also exempt from state income taxes in the state in which the municipal bond is issued.

Mutual Fund - A collection of stocks, bonds, or other securities purchased and managed by an investment company with funds from a group of investors.

Net Asset Value - The price at which a mutual fund sells or redeems its shares. The net asset value is calculated by dividing the net market value of the fund's assets by the number of outstanding shares.

Personal Representative - In Arizona and some other states, a person named in a will or by the court to carry out the will's provisions.

Pooled Income Fund - A trust created by a charitable organization that combines the contributions of several donors and distributes income to those donors based on the earnings of the trust. The trust is managed by the charitable organization, and contributions are partially deductible for income tax purposes.

Portfolio - All the investments held by an individual or a mutual fund.

Preferred Stock - A class of stock with claim to a company's earnings, before payment can be made on the common stock, and that is usually entitled to priority over common stock if the company liquidates. Generally, preferred stocks pay dividends at a fixed rate.

Prenuptial Agreement - A legal agreement arranged before marriage stating who owns property acquired before marriage and during marriage and how property will be divided in the event of divorce. ERISA benefits are not affected by prenuptial agreements.

Price/Earnings Ratio (P/E Ratio) - The market price of a stock divided by the company's annual earnings per share. Because the P/E ratio is a widely regarded yardstick for investors, it often appears with stock price quotations.

Principal - In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount.

Probate - The court-supervised process in which a decedent's estate is settled and distributed.

Profit-Sharing Plan - An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees' accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company.

Prospectus - A document provided by mutual fund companies to prospective investors. The prospectus gives information needed by investors to make informed decisions prior to investing in a specific mutual fund. The prospectus includes information on the minimum investment amount, the fund's objectives, past performance, risk level, sales charges, management fees, and any other expense information about the fund, as well as a description of the services provided to investors in the fund.

Qualified Domestic Relations Order (QDRO) - At the time of divorce, this order would be issued by a state domestic relations court and would require that an employee's ERISA retirement plan accrued benefits be divided between the employee and the spouse.

Qualified Retirement Plan - A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense.

Revocable Trust - A trust in which the creator reserves the right to modify or terminate the trust.

Risk-Averse - Refers to the assumption that rational investors will choose the security with the least risk if they can maintain the same return. As the level of risk goes up, so must the expected return on the investment.

Rollover - A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.

Roth IRA - A nondeductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply.

Security - Evidence of an investment, either in direct ownership (as with stocks), creditorship (as with bonds), or indirect ownership (as with options).

Simplified Employee Pension Plan (SEP) - A type of plan under which the employer contributes to an employee's IRA. Contributions may be made up to a certain limit and are immediately vested.

Single-Life Annuity - An insurance-based contract that provides future payments at regular intervals in exchange for current premiums. Generally used as a supplement to retirement income and pays over the life of one individual, usually the retiree, with no rights of payment to any survivor.

Split-Dollar Plan - An arrangement under which two parties (usually a corporation and employee) share the cost of a life insurance policy and split the proceeds.

Spousal IRA - An IRA designed for a couple when one spouse has no earned income. The maximum combined contribution that can be made each year to an IRA and a spousal IRA is $4,000 or 100 percent of earned income, whichever is less. This total may be split between the two IRAs as the couple wishes, provided the contribution to either IRA does not exceed $2,000.

Tax Deferred - Interest, dividends, or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.

Tax-Exempt Bonds - Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes.

Taxable Income - The amount of income used to compute tax liability. It is determined by subtracting adjustments, itemized deductions or the standard deduction, and personal exemptions from gross income.

Tenancy in Common - A form of co-ownership. Upon the death of a co-owner, his or her interest passes to his or her chosen beneficiaries and not to the surviving owner or owners.

Term Insurance - Term life insurance provides a death benefit if the insured dies. Term insurance does not accumulate cash value and ends after a certain number of years or at a certain age.

Testamentary Trust - A trust established by a will that takes effect upon death.

Testator - One who has made a will or who dies having left a will.

Trust - A legal entity created by an individual in which one person or institution holds the right to manage property or assets for the benefit of someone else. Types of trusts include: Testamentary Trust – A trust established by a will that takes effect upon death; Living Trust – A trust created by a person during his or her lifetime; Revocable Trust – A trust in which the creator reserves the right to modify or terminate the trust; Irrevocable Trust – A trust that may not be modified or terminated by the trustor after its creation.

Trustee - An individual or institution appointed to administer a trust for its beneficiaries.

Trustor - One who conveys ownership of assets to a trust.

Unified Credit - A credit that may be applied against an individual's gift or estate taxes.

Universal Life Insurance - A type of life insurance that combines a death benefit with a savings element which accumulates tax deferred at current interest rates. Under a universal life insurance policy, the policyholder can increase or decrease his or her coverage, with limitations, without purchasing a new policy.

Variable Universal Life Insurance - A type of life insurance that combines a death benefit with a savings element that accumulates tax deferred at current interest rates. Under a variable universal life insurance policy, the cash value in the policy can be placed in a variety of subaccounts with different investment objectives. The policyholder can transfer funds among the subaccounts as he or she wishes. Fees are charged after a certain number of transfers.

Volatility - The range of price swings of a security or market over time.

Welfare Benefit Plan - An employee benefit plan that provides such benefits as medical, sickness, accident, disability, death, or unemployment benefits.

Whole Life Insurance - A type of life insurance that offers a death benefit and also accumulates cash value, tax deferred at fixed interest rates. Whole life insurance policies generally have a fixed annual premium that does not rise over the duration of the policy. Whole life insurance is also referred to as "ordinary" or "straight" life insurance.

Will - A legal document that declares a person's wishes concerning the disposition of property, the guardianship of his or her children, and the administration of the estate after his or her death.

Yield - In general, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation.

Zero-Coupon Bond - This type of bond makes no periodic interest payments but instead is sold at a steep discount from its face value. Bondholders receive the face value of their bonds when they mature.

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