The Glossary - Estate Planning Simplified

Investment and Estate Planning Terms

10-Year Rule: Certain beneficiaries of an IRA are required to liquidate the account by the end of the 10th year following the year of the death of the IRA owner. There are exceptions for minor children, disabled or chronically ill, and spousal beneficiaries. 

Actuary: is a highly educated, certified professional who applies large amounts of complex mathematical and statistical methods to collect and analyze data that will be used to create an actuarial table. 

Actuarial Tables: Statistical tables, created by an Actuary, that help insurance companies calculate mortality rates for different age groups, genders, and populations with the goal of predicting how long an individual is likely to live. Among other things, these tables are used to price individual life insurance policies.

Adjusted basis: The material change to the recorded initial cost of an asset or security after it has already been owned. 

Adjusted Gross Income (AGI): An individual’s total annual income, minus deductions, used to calculate their income tax rate. Deductions, including charitable gifts and educational and medical expenses are used to calculate how much income tax is owed.

Advance Healthcare Directive: A legal document that outlines an individual's preferences regarding medical treatment and life-sustaining measures if they become incapacitated and unable to communicate.

Annuity: A financial product that pays out a fixed sum of money at regular intervals, typically for the rest of a person's life, in exchange for an initial lump sum payment. The person is taxed on the income received. A Charitable Gift Annuity is a type of annuity in which a donor gives money or assets to a nonprofit in exchange for a guaranteed fixed income stream for life. People receive a tax-deduction based on the original lumpsum gift. 

Appreciated stock:  Stock that has increased in value since it was purchased.

Cost Basis: The basis of an asset is used to calculate the potential profit on the sale of the asset that may be subject to capital gains taxes. The basis is usually the amount of the stock, plus any commission, as of the date it was acquired.

Beneficiaries: People or organizations designated to receive assets or funds from an estate or Trust after the owner's death. Nonprofits are considered beneficiaries. Individuals can be heirs or beneficiaries. 

Bequest: Gift of personal property or assets made in a Will.

Brokerage Firm: A company that acts as an intermediary between buyers and sellers of securities, such as stocks and bonds.

Capital Gains: The profit made from selling an asset, such as stocks or real estate, at a higher price than it was purchased for. The difference between long-term and short-term capital gains is how long the asset was held before it was sold. 

Long-Term Capital Gains: The tax rate on profits generated from the sale of an asset owned for longer than one year. 

Short-Term Capital Gains: The tax rate on profits generated from the sale of an asset owned for less than one year typically align with the individual’s regular income tax rate. 

Cash value: Regarding whole life insurance policy, cash value is established by calculating your total payments and subtracting the surrender fees. 

Codicil: A legal document that modifies, adds, or revokes specific provisions in an existing will without rewriting the entire will.

Community Property: Property owned jointly by a married couple, typically split evenly in the event of a divorce or death.

Depository Trust Company (DTC) and DTC Account Numbers: The Depository Trust Company is a clearing house that facilitates the settlement of securities trades. DTC numbers are used in the securities industry to identify individual brokerage firms and financial institutions, and to facilitate the transfer of securities between participants. DTC numbers are assigned by the DTC to participants in the system.

Durable Power of Attorney (DPOA): A legal document that provides an individual   the authority to act on behalf of another person. A DPOA for finance acts as your “Attorney in Fact” and has the authority to make financial decision. A DPOA for medical acts as your “Attorney in Fact” and has the authority to make medical and mental health decisions for you. There are two types of Power of Attorney, durable and general. Remember, a General Power of Attorney is different that a Durable Power of Attorney as it expires if you become mentally incompetent or upon a date or event stated in your document. A DPOA does not. 

Endowment: A donation of money or property to a nonprofit, with the stipulation that the principal be preserved and only the investment earnings used for a specific purpose.

Executor: A person named in a Will or appointed by a court to carry out the wishes of the deceased, including distributing assets and paying off debts.

Fiduciary: A person or institution that is legally obligated to act in the best interests of another person or entity, such as a Trustee managing a Trust.

Guardian: A person appointed to take care of and make decisions on behalf of a minor or incapacitated person. 

Guardianship: A legal arrangement where a person (the guardian) is appointed to make decisions and care for another person, typically a minor or someone unable to make decisions independently.

Grantor: The person who establishes and funds a Trust and determines if the Trust is revocable or irrevocable, as the specific Trust structure allows.

Heir: A person who is set to inherit the property, typically a close living relative whereas a beneficiary can be anyone. Nonprofits are considered beneficiaries. Individuals can be heirs or beneficiaries. 

Letter of Instruction: A non-legal document that provides guidance to your executor or family on various matters such as the location of important documents, passwords, and specific funeral wishes.

Living Trust: A type of Trust that is active and operational while the grantor is alive.

Long term vs. short term investments: Long-term investments are typically held for more than a year and aimed at achieving long-term growth, whereas short-term investments are typically held for a year or less and aimed at generating quick returns. These gains are taxed differently. 

Notary: A public official authorized to certify legal documents and administer oaths.

Ordinary Income: Ordinary income is also referred to as earned income. It's any money that's earned or received from your employer, through business activities, or short-term capital gains. Ordinary income earnings are subject to various tax rates to calculate your income tax.

Overall Estate: All a person's assets, liabilities, and debts at the time of their death. Including those assets that pass through the probate process and those assets that transfer directly to the beneficiary at the time of death. 

Pre-Tax Retirement Fund: A retirement account, such as a traditional IRA or 401(k), where contributions are made with pre-tax dollars, but are taxed when they are withdrawn.

Perpetuity: In the context of an endowment fund, the term perpetuity means the fund will continue to provide financial support to a nonprofit organization for an indefinite period. 

Probate: A legal procedure that oversees the estate settlement process for a person who has a Will. During probate, a judge appoints and authorizes the executor to sell assets, pay debts, and distribute gifts to the heirs as documented in the Will.

Portable Estate Tax Exemption: A provision in federal estate tax law that allows a surviving spouse to inherit their deceased spouse’s unused federal estate exemption. 

Qualified Charitable Distribution: A direct transfer of funds from an IRA to a qualified nonprofit. This transfer of funds applies towards the required minimum distribution and is not subject to income tax.

Remainder Interest: A remainder interest is a future interest a person has in an asset.

Required Minimum Distribution: The minimum amount that must be withdrawn annually from a retirement account, such as a traditional IRA or 401(k), once the account owner reaches a certain age.

Surrender Value: The amount of money an insurance policyholder receives if they surrender their policy before its maturity date.

Step-up in Basis: A tax provision that adjusts the value of an inherited asset to the fair market value at the time of the owner’s death as opposed to the original purchase price. Only certain assets receive this value adjustment. They include real estate, stocks, bonds and mutual funds, and some tangible personal property. 

Testamentary Trust: A type of Trust where the assets are placed into the Trust, and the terms of the Trust become active only upon the grantor’s death. 

Transfer on Death (TOD): A beneficiary designation that allows certain assets, such as bank accounts or real estate, to be transferred directly to a named beneficiary upon the owner's death, bypassing probate. Assets that can transfer on death include bank accounts, investment accounts, retirement funds, real estate, and vehicles. 

Unlimited Marital Deduction: A provision that allows an individual to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the transferor, free from estate tax liabilities. 

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