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Estate Planning
Estate planning is much more than reducing your estate taxes; it's about ensuring your family's future, your business can continue, and your charitable goals are achieved. But if you delay, much of your estate could go to Uncle Sam - and this could be difficult for your family.   

Who Should Inherit Your Assets?
If you are married, you must consider marital rights before deciding who should inherit your assets. States have different laws designed to protect surviving spouses. If you die without a will or living trust, state law dictates how much passes to your spouse. Even with a will or living trust, if you provide less for your spouse than state law deems appropriate, the law will allow the survivor to receive the greater amount.

Once you've considered your spouse's rights, ask yourself these questions:

  • Should your children share equally in your estate?
  • Do you wish to include grandchildren or others as beneficiaries?
  • Would you like to leave any assets to charity? 

Which Assets Should Your Survivors Inherit?
You may want to consider special questions when transferring certain types of assets. For example:

  • If you own a business, should the stock pass only to your children who are active in the business?
  • Should you compensate the others with assets of comparable value?
  • If you own rental properties, should all beneficiaries inherit them?
  • Do they all have the ability to manage property?
  • What are each beneficiary's cash needs?

When and How Should They Inherit the Assets?
To determine when and how your beneficiaries should inherit your assets, you need to focus on three factors:

  • The potential age and maturity of the beneficiaries,
  • The size of your estate versus your and your spouse's need for income during your lifetimes, and
  • The tax implications of your estate plan.

Outright bequests offer simplicity, flexibility and some tax advantages, but you have no control over what the recipient does with the assets once they are transferred. Trusts can be useful when the beneficiaries are young or immature, when your estate is large, and for tax planning reasons. They also can provide the professional asset management capabilities an individual beneficiary lacks. 

Strategies for Special Situations

Standard estate planning strategies don't fit every situation. Single people, unmarried couples, noncitizen spouses, individuals planning a second marriage, and grandparents are among those who might benefit from less common techniques. In this section, we look at several special situations and estate planning ideas that may apply to them.

Singles - the potential repeal of the estate tax is especially helpful to this group because it eliminates the disadvantage of not having the unlimited marital deduction, which allows a spouse to leave assets to a surviving spouse's estate tax free. But a will or a living trust can ensure that your loved ones receive your legacy in the manner you desire. In addition, with the use of trusts, you can provide financial management assistance to your heirs who are not prepared for this responsibility.

Second Marriages - estate planning for the second marriage can be complicated, especially when children from a prior marriage are involved. Finding the right planning technique for your situation can not only ease family tensions but also help you pass more assets to the children at a lower tax cost.

A Qualified Terminal Interest Property (QTIP) marital trust can maximize estate tax deferral while benefiting the surviving spouse for his or her lifetime and the children after the spouse's death. Combining a QTIP with life insurance benefiting the children or creatively using joint gifts or GST tax exemptions can further leverage your gifting ability.

A prenuptial agreement can also help you achieve your estate planning goals. But any of these strategies must be tailored to your particular situation, and the help of qualified financial, tax and legal advisors is essential.

Unmarried Couples - because unmarried couples are not automatically granted rights by law, they need to create a legal relationship with a domestic partnership agreement. Such a contract can solidify the couple's handling of estate planning issues. In addition, without the benefit of the marital deduction, unmarried couples face a potentially overwhelming estate tax burden as long as the estate tax is in effect.

There are solutions, however. One partner can reduce his or her estate and ultimate tax burden through a traditional annual gifting program or by creating an irrevocable life insurance trust or a charitable remainder trust benefiting the other partner. Again, these strategies are complex and require the advice of financial, tax and legal professionals.

Noncitizen Spouses - the marital deduction differs for a surviving spouse who is a non-U.S. citizen. The government is concerned that on your death, your spouse could take the marital bequest tax-free and then leave U.S. jurisdiction without the property ever being taxed.

Thus, the marital deduction is allowed only if the assets are transferred to a qualified domestic trust (QDOT) that meets special requirements. The impact of the marital deduction is dramatically different because any principal distributions from a QDOT to the noncitizen spouse and assets remaining in the QDOT at his or her death will be taxed as if they were in the citizen spouse's estate. Also note that the gift tax marital deduction is limited to a set amount annually.

Estate Settlement Issues

You also should be aware of the other procedures involved in estate settlement. Here is a quick review of some of them. Your attorney, as well as the organizations mentioned, can provide more details.

Transferring Property
When thinking about transferring your property, what probably first comes to mind are large assets, such as stock, real estate and business interests. But you also need to consider more basic assets, including:

  • Safe deposit box contents. In most states, the bank seals the box as soon as it learns of the death and opens it only in the presence of the estate's personal representative.
  • Savings bonds. The surviving spouse can immediately cash in jointly owned E bonds. To cash in H and E bonds registered in the deceased's name but payable on death to the surviving spouse, they must be sent to the Federal Reserve.

Receiving Benefits
The surviving spouse or other beneficiaries may be eligible for any of the following:

  • Social Security benefits. For the surviving spouse to qualify, the deceased must have been age 60 or older or their children must be under age 16. Disabled spouses can usually collect at an earlier age. Surviving children can also get benefits.
  • Employee benefits. The deceased may have insurance, back pay, unused vacation pay, and pension funds to which the surviving spouse or beneficiaries are entitled. The employer will have the specifics.
  • Insurance they may not know about. Many organizations provide life insurance as part of the membership fee. They should be able to provide information.

Keep It All in the Family with FLPs

The Family Limited Partnership, or FLP - pronounced "flip" - is designed to reduce the value of your estate for estate tax purposes while allowing you to maintain full control of the investments and assets inside the partnership.

FLPs are established much like traditional limited partnerships. There are two parties involved: the general partners, who control the trust, and limited partners who have a share in the profits (but no control). The general partners (often, you and/or a spouse) design the partnership to give limited partnership shares to family members. General partners control the operations of the FLP and make day-to-day investment decisions. They can also receive a percentage of the FLP's income in the form of a management fee.

Limited partners (your heirs) have an ownership interest in the FLP, but they have very limited control. They share in the income generated by the FLP, depending on how many shares they own. When the FLP is dissolved, a proportionate amount of FLP property will pass to each limited partner.

Setting Up a FLP
FLPs have come under increased IRS scrutiny in recent years, so you should work with a reputable estate planning attorney. With the attorney's assistance, you can place your assets within the FLP using your estate tax credit. For instance, a husband and wife can each transfer up to $2,000,000 ($4 million total) into the FLP and allocate those assets to the limited partnership side. They can then place a smaller amount (e.g. $12,000) in the FLP for the general partnership side. There are usually no taxes incurred when funding a FLP with your assets.

In the beginning, you and your spouse own both General Partner and Limited Partner shares. Over time, you gift to your heirs Limited Partner shares using your annual $12,000 gift exclusion. Don't worry about giving away too much of the shares. Based on current tax law, the General Partners may own as little as 1% of the FLP's assets and still retain control. That means you can still buy and sell assets, dispose of property, and declare any distributions of FLP shares.

Leverage Your Estate Tax Credit
FLPs allow you to pass on more than the maximum $2 million (in 2006; $4 million per couple) Unified Estate Tax Credit. A gift of $2 million in limited partnership assets often may appraised at a substantially lower dollar amount. That's because there is no "market" for LP shares - they lack control and cannot be sold to others. This lower appraisal is called "discounting" the value of LP shares. Avoid discounting the shares too aggressively, however - the IRS could take exception and invalidate your FLP.

Protection Against Creditors
Because of their lack of control, LP shares are most undesirable to creditors. Creditors will find it difficult to seize limited partner shares, since they are not publicly traded.

Creditors also don't want to pay tax on income they don't receive. If the partnership has earned income, but the general partner does not declare a distribution, each general and limited partner is required to report a proportionate share of the earned income on his or her personal tax return, without actually receiving any dollars with which to pay the tax.

Two More Advantages of FLPs
FLPs are considered an "intangible asset" - most likely, only the state of your domicile will be able to impose any inheritance tax on Partnership units. This is ideal for real estate investors owners who own property in several states.

FLPs can provide additional retirement income - as mentioned previously, FLPs can provide general partners with management fees. This fee reflects the work you do as the general partner to maintain the FLP as a working business, and is considered earned income.

Family Limited Partnerships involve significant costs and risks involved, and are not ideal for highly appreciated assets. FLPs must also be drafted by an experienced estate planning attorney, and have a tangible business intent. For this reason, we strongly urge you to consult with a professional with specific expertise in this area.

Without a Will, There's No Way

A will is a legal document that transfers what you own to your beneficiaries upon your death. It also names an executor to carry out the terms of your will and a guardian for your minor children, if you have any.

Your signature and those of two witnesses make your will authentic. Witnesses don't have to know what the will says, but they must watch you sign it and you must watch them witness it.

Hand-written wills -- called holographs -- are legal in about half the states, but most wills are typed and follow a standard format.

Who Needs a Will?
The short answer is everyone! However, it's imperative to make a will as soon as you have any real assets, or get married, and certainly by the time you have children.

What If You Don't Have a Will?
Without a will, you die intestate. The law of your state then determines what happens to your estate and your minor children. This process, called administration, is governed by the probate court and is notoriously slow, often expensive, and subject to some surprising state laws. It's estimated than more than two-thirds of Americans die intestate. Do you really want a court deciding vital family matters such as how to divide your estate and custody of your children?

What Should Your Will Include?
Your will should contain several key points in order to be valid. The following list is a start; check with a local estate attorney for a more comprehensive list:

  • Your name and address.
  • A statement that you intend the document to serve as your will.
  • The names of the people and organizations -- your beneficiaries -- who will share in your estate.
  • The amounts of your estate to go to each beneficiary (usually in percentages rather than dollar amounts.)
  • An executor to oversee the disposition of your estate and trustee(s) to manage any trust(s) you establish.
  • Alternates to provide both executor responsibilities and trustee(s).
  • A guardian to take responsibility for your minor children and possibly a trustee to manage the children's assets in cooperation with the guardian.
  • Which assets should be used to pay estate taxes, probate fees and final expenses.

What Is A Living Will?

A living will expresses your wishes about being kept alive if you're terminally ill or seriously injured.

In the aftermath of the tragic case involving Terri Schiavo, interest in living wills has increased markedly. A living will expresses your wishes about being kept alive if you're terminally ill or seriously injured.

Other famous Americans have used living wills to retain control over their final medical care through use of a living will and a health care power of attorney. During the final weeks of his life, former President Richard Nixon refused "heroic measures" and received only palliative (comfort-easing) care at his home. Similarly, former First Lady Jacqueline Kennedy Onassis refused life-prolonging medical intervention before her passing.

Perhaps you've reflected on your own wishes if you were to face a similar situation. Although no one likes to imagine the possibility of being in such a helpless state, the statistical possibility of such an event remains significant. This is why it's wise to ensure that your wishes will be respected if you become incapacitated.

Just as a will becomes the governing entity for your estate after you die, a living will can make your wishes clear and legally binding in the event of a devastating illness or injury. A living will is often referred to as a health care power of attorney. In it you state how you should be treated in the event of a terminal disease, severe illness, or tragic accident. By giving such directions when you are healthy, your relatives won't have to make difficult decisions on your behalf, and you'll receive the type of care you desire.

Issues you might want to consider addressing include:

  • Organ donation
  • Religious and faith issues
  • Hospital, nursing home, and hospice arrangements
  • Funeral arrangements

To carry out your living will, you'll need a health care directive, a written statement that expresses how you wish to be treated in advance of any incapacity. Make sure you give precise, comprehensive directions.

You'll also need a health care proxy, designating a representative to make your health care decisions based on the guidelines you provide in the directive if you are incapacitated or unable to communicate your desires.

Wills: The Cornerstone of Your Estate Plan

If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn't have to be drafted by an attorney to be valid, seeking an attorney's help can ensure that your will accomplishes what you intend.

Wills avoid intestacy
Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state's distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes
Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.

Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other gifts.

Wills allow you to nominate a guardian for your minor children
In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills allow you to nominate an executor
A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses
The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

Wills can create a testamentary trust
You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

Wills can fund a living trust
A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will "pours over" your estate to your living trust.

Wills can help minimize taxes
Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate
Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court
Although it doesn't happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:

· You lacked testamentary capacity when you signed the will
· You were unduly influenced by another individual when you drew up the will
· The will was forged or was otherwise improperly executed
· The will was revoked

Updated 12/7/2011

Living Trusts: A Tool for the Living

One of the most popular estate planning instruments today is the revocable living trust.

Trusts are used to maintain control and disposition of assets after death, and some can be used to minimize the estate tax impact of property transfers.

The difference between a revocable and irrevocable trust is whether the trust creator can change or terminate the trust. In the revocable trust, the creator can change the terms and conditions of the trust, or even eliminate the trust altogether. An irrevocable trust, on the other hand, cannot be altered once established.

When used and implemented correctly, an irrevocable living trust offers many benefits.

Using a Living Trust for Financial Protection
A revocable living trust provides financial protection in the event you are no longer able to manage your financial affairs yourself. You can be trustee while you are healthy, but if you have a stroke or become otherwise incapacitated, your successor trustee would manage your assets in the trust.

Using a Living Trust for Privacy
Another benefit of revocable living trusts is continued privacy because the instrument will bypass probate. The trust can function like a will, dictating at what age children are to receive trust assets and the percentage shares of the distribution. The trust can be linked to a pour-over will, a short document that names the executor and that determines how taxes, creditors, and final expenses will be paid. The pour-over will directs the executor to gather all assets not included in the trust and pour them over into the trust. Once that happens, the trustee will follow the directions included in the trust. The pour-over will must be filed with the probate court, but because it doesn't say much, it doesn't reveal much.

Using a Living Trust to Reduce Probate
Regarding probate, living trusts offer another useful feature -- if you own property in a state other than your state of residence, when you die, that property must go through what's known as an ancillary probate. Many people think it's worth setting up the trust just to avoid the out-of-state probate hassle, which necessitates hiring a lawyer in that other state.

Using a Living Trust as a Management Tool
The living trust can be used as a tool to manage your property, and can be especially helpful if you become incapacitated because the successor trustee can manage your property, rather than a court-appointed trustee, which takes time. The benefit of having an immediate successor can be especially important if you own a business or other assets that need to be managed seamlessly.

Other Benefits of a Living Trust
Finally, you can include provisions in the trust that preserve the use of your estate and use the gift tax exclusion to set up other trusts that will help reduce estate taxes.

Disadvantages of a Living Trust
There are disadvantages to using a revocable living trust as well. You must re-title assets into the trust name, which entails a lot of paperwork. And although creditors only have a limited time after your death to make claims against your estate while it's being probated, there is no time limit within which creditors may go after assets in a living trust.

If your goal in using a revocable living trust is only to avoid probate, there are easier ways to accomplish this task. However, the revocable living trust can provide a wide variety of estate planning benefits that are difficult to achieve with any other estate-planning tool.

Trusts can be extremely complex and generally require the aid of an experienced estate-planning attorney. Please contact us for more information on charitable trusts.

Selecting an Executor or Trustee

Whether you choose a will or a living trust, you also need to select someone to administer the disposition of your estate - an executor or personal representative and, if you have a living trust, a trustee. An individual (such as a family member, a friend or a professional advisor) or an institution (such as a bank or trust company) can serve in these capacities. Many people name an individual and an institution to leverage their collective expertise.

What does the executor or personal representative do? He or she serves after your death and has several major responsibilities, including:

  • Administering your estate and distributing the assets to your beneficiaries.
  • Making certain tax decisions.
  • Paying any estate debts or expenses.
  • Ensuring all life insurance and retirement plan benefits are received.
  • Filing the necessary tax returns and paying the appropriate federal and state taxes.

Whatever your choice, make sure the executor, personal representative or trustee is willing to serve, and consider paying a reasonable fee for the services. The job isn't easy, and not everyone will want or accept the responsibility. Designate an alternate in case your first choice is unable or unwilling to perform. Naming a spouse, child, or other relative to act as executor is common, and he or she certainly can hire any professional assistance that might be needed.

Finally, make sure the executor, personal representative, or trustee doesn't have a conflict of interest. For example, think twice about choosing an individual who owns part of your business, a second spouse or children from a prior marriage. A co-owner's personal goals regarding the business may differ from those of your family, and the desires of a stepparent and stepchildren may conflict.

Selecting a Guardian for Your Children
If you have minor children, perhaps the most important element of your estate plan doesn't involve your assets. Rather, it involves your children's guardianship. Of course, the well being of your children is your priority, but there are some financial issues to consider:

  • Will the guardian be capable of managing your children's assets?
  • Will the guardian be financially strong? If not, consider compensation.
  • Will the guardian's home accommodate your children?
  • How will the guardian determine your children's living costs?

If you prefer, you can name separate guardians for your child and his or her assets. Taking the time to name a guardian or guardians now ensures your children will be cared for as you wish if you die while they are still minors.

The Role of Life Insurance in an Estate Plan

Life insurance can play an important role in your estate plan. It is often necessary to support your family after your death or to provide liquidity. Not only do you need to determine the type and amount of coverage you need, but also who should own insurance on your life to best meet your estate planning goals.

Avoid Liquidity Problems
Estates are often cash poor, and your estate may be composed primarily of illiquid assets such as closely held business interests, real estate or collectibles. If your heirs need cash to pay estate taxes or to support themselves, these assets can be hard to sell. For that matter, you may not want these assets sold. Insurance can be the best solution for liquidity problems.

Even if your estate is of substantial value, you may want to purchase insurance simply to avoid the unnecessary sale of assets to pay expenses or taxes. Sometimes second-to-die insurance makes the most sense. Of course, your situation is unique, so please get professional advice before purchasing life insurance.

Choose the Best Owner
If you own life insurance policies at your death and you die while the estate tax is in effect, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds. The way around this problem? Don't own the policies when you die. But don't automatically rule out your ownership either.

Determining who should own insurance on your life is a complex task because there are many possible owners: you or your spouse, your children, your business, an irrevocable life insurance trust (ILIT), a family limited partnership (FLP) or limited liability company (LLC). Generally, to reap maximum tax benefits, you must sacrifice some control and flexibility as well as some ease and cost of administration.

To choose the best owner, you must consider why you want the insurance: to replace income, to provide liquidity, or to transfer wealth to your heirs. You must also determine the importance to you of tax implications, control, flexibility, and ease and cost of administration. Let's take a closer look at each type of owner:

You or your spouse. Ownership by you or your spouse generally works best when your combined assets, including insurance, do not place either of your estates into a taxable situation. There are several non-tax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback to ownership by you or your spouse is that on the death of the surviving spouse (assuming the proceeds were initially paid to the spouse), the insurance proceeds could be subject to federal estate taxes, depending on when the surviving spouse dies.

Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds are not subject to estate tax on your or your spouse's death, and your children receive all of the proceeds tax free. There also are disadvantages. The policy proceeds are paid to your children outright. This may not be in accordance with your general estate plan objectives and may be especially problematic if a child is not financially responsible or has creditor problems.

Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the company under a split-dollar arrangement. But if you are the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the company, the proceeds could be included in your estate for estate tax purposes.

An ILIT. A properly structured ILIT could save you estate taxes on any insurance proceeds. Thus, a $2 million life insurance policy owned by an ILIT could reduce your estate taxes by hundreds of thousands of dollars in 2006. How does this work? The trust owns the policies and pays the premiums. When you die, the proceeds pass into the trust and are not included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries. ILITs have some inherent disadvantages as well, foremost among them that you lose control over the insurance policy after the ILIT has been set up.

Second-to-die life insurance can be a useful tool for providing liquidity to pay estate taxes. This type of policy pays off when the surviving spouse dies. Because a properly structured estate plan can defer all estate taxes on the first spouse's death, some families find they don't need any life insurance then. But significant estate taxes may be due on the second spouse's death, and a second-to-die policy can be the perfect vehicle for offsetting the taxes. It also has other advantages over insurance on a single life. First, premiums and estate administrative costs are lower. Second, uninsurable parties can be covered. But a second-to-die policy might not fit in your current irrevocable life insurance trust (ILIT), which is probably designed for a single life policy. Make sure the proceeds are not taxed in either your estate or your spouse's by setting up a new ILIT as policy owner and beneficiary. 

Asset Protection in Estate Planning

You're beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is for your personal assets or your business, various tools exist to keep your property safe from tax collectors, accident victims, health-care providers, credit card issuers, business creditors, and creditors of others.

To insulate your property from such claims, you'll have to evaluate each tool in terms of your own situation. You may decide that insurance and a Declaration of Homestead may be sufficient protection for your home because your exposure to a claim is low. For high exposure, you may want to create a business entity or an offshore trust to shield your assets. Remember, no asset protection tool is guaranteed to work, and you may have to adjust your asset protection strategies as your situation or the laws change.

Liability insurance is your first and best line of defense
Liability insurance is at the top of any plan for asset protection. You should consider purchasing or increasing umbrella coverage on your homeowners policy. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, the cost of the premiums for this type of coverage is minimal compared to what you might be required to pay under a court judgment should you ever be sued.

A Declaration of Homestead protects the family residence
Your primary residence may be your most significant asset. State law determines the creditor and judgment protection afforded a residence by way of a Declaration of Homestead, which varies greatly from state to state. For example, a state may provide a complete exemption for a residence (i.e., its entire value), a limited exemption (e.g., up to $100,000), or an exemption under certain circumstances (e.g., a judgment for medical bills). A Declaration of Homestead is easy to file. You pay a small fee, fill out a simple form, and file it at the registry where your deed is recorded.

Dividing assets between spouses can limit exposure to potential liability
Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse's job does. If so, it may be a good idea to divide assets between you so that you keep only the income and assets from your job, while your spouse takes sole ownership of your investments and other valuable assets. Generally, your creditors can reach only those assets that are in your name.

Business entities can provide two types of protection--shielding your personal assets from your business creditors and shielding business assets from your personal creditors

Consider using a corporation, limited partnership, or limited liability company (LLC) to operate the business. Such business entities shield the personal assets of the shareholders, limited partners, or LLC members from liabilities that arise from the business. The liability of these owners will be limited to the assets of the business.

Conversely, corporations, limited partnerships, and LLCs provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner is able to place a lien on, and eventually acquire, the shares of the debtor/shareholder, but would not have any rights greater than the rights conferred by the shares. In limited partnerships or LLCs, under most state laws, a creditor of a partner or member is entitled to obtain only a charging order with respect to the partner or member's interest. The charging order gives the creditor the right to receive any distributions with respect to the interest. In all respects, the creditor is treated as a mere assignee and is not entitled to exercise any voting rights or other rights that the partner or member possessed.

Certain trusts can preserve trust assets from claims
People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you. To properly establish an asset protection trust, you must not keep any interest in the trust assets or control over the trust.

Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary's creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary's creditors will have. Thus, the terms of the trust are critical.

There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include:

· Spendthrift trusts
· Discretionary trusts
· Support trusts
· Blend trusts
· Personal trusts
· Self-settled trusts

Since certain claims can pierce domestic protective trusts (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein, and the Cook Islands) that does not generally honor judgments made in the United States.

A word about fraudulent transfers: The court will ignore transfers to an asset protection trust if:

· A creditor's claim arose before you made the transfer
· You made the transfer with the intent to defraud a creditor
· You incurred debts without a reasonable expectation of paying them

Updated 12/7/2011

Determining the Tax

The next step is to understand some estate tax basics. First, you need to get an idea of what your estate is worth and whether you need to worry about estate taxes, both under today's rates and as exemptions increase under the Economic Growth and Tax Relief Reconciliation Act of 2001.

How Much Is Your Estate Worth?
The first step is to add up all of your assets and include cash, stocks and bonds, notes and mortgages, annuities, retirement benefits, your personal residence, other real estate, partnership interests, automobiles, artwork, jewelry, and collectibles. If you are married, also include your spouse's assets. If you own an insurance policy at the time of your death, the proceeds on that policy usually will be includable in your estate. Remember: That's proceeds. Your $1 million term insurance policy that isn't worth much while you're alive is suddenly worth $1 million on your death. If your estate is large enough, a significant share of those proceeds may go to the government as taxes, not to your chosen beneficiaries, though the estate tax impact will decrease gradually under EGTRRA.

How the Estate Tax System Works
Here's a simplified way to compute your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death -- such transfers are deductions for your estate. Then if you are married and your spouse is a U.S. citizen, subtract any assets you will pass to him or her. Those assets qualify for the marital deduction and avoid estate taxes until the surviving spouse dies. The net number represents your taxable estate.

You can pass up to the exemption amount during your life or at death free of gift and estate taxes.

If your taxable estate is equal to or less than the exemption and you haven't already used any of the exemption on lifetime gifts, no federal estate tax will be due when you die. But if your estate exceeds this amount, it will be subject to estate tax.

Updated 6/3/2011 

Tips for Reducing Estate Taxes

Here's a look at some of the most important estate planning tools and how you can use them to minimize taxes and maximize your estate's value as the tax rules change over the decade. You'll learn how these estate planning techniques can help you achieve specific financial goals. You will also see why it will be helpful to seek professional financial, tax and legal advice about ways to use these techniques effectively. Please let us know if you have any questions about how they might apply to your situation.

The Marital Deduction
The marital deduction is one of the most powerful estate planning tools available to you. Any assets passing to a surviving spouse pass tax-free at the time the first spouse dies, as long as the surviving spouse is a U.S. citizen. Therefore, if you and your spouse are willing to pass all your assets to the survivor, no federal estate tax will be due on the first spouse's death - even before the estate tax is scheduled to be repealed completely in 2010.

This doesn't solve your estate tax problem, however. First, if the surviving spouse does not remarry, that spouse will not be able to take advantage of the marital deduction when he or she dies. Thus, the assets transferred from the first spouse could be subject to tax in the survivor's estate, depending on when the surviving spouse dies. Second, from a personal perspective, you may not want your spouse to pass all assets to a second spouse even if it would save estate taxes.

How to Preserve Both Exemptions
Since assets in an estate equal to the exemption amount are exempt from estate taxes, a married couple can use their exemptions to avoid tax on up to double the exemption amount. And this amount will gradually increase until it reaches $7 million in 2009 -- the year before the estate tax repeal. An effective way to maximize the advantages of the exemption is to use a credit shelter trust, sometimes referred to as a bypass trust.

Let's look at an example: Mr. and Mrs. Jones have a combined estate of $4 million. At Mr. Jones' death in 2006, all of his assets pass to Mrs. Jones tax-free because of the marital deduction. Mr. Jones' taxable estate is zero. Shortly thereafter, and still in 2006, Mrs. Jones dies, leaving a $4 million estate. The first $2 million is exempt from estate tax (in 2006), but the remaining $2 million is subject to taxation, leaving the Jones' survivors with far less.

The problem? Mr. and Mrs. Jones took advantage of the exemption in only one estate.

Let's look at an alternative: Mr. Jones' will provides that assets equal to the exemption go into a separate trust on his death. This "credit shelter trust" provides income to Mrs. Jones during her lifetime. She also can receive principal payments if she needs them to maintain her lifestyle. Because of the trust language, Mr. Jones may allocate his $1.5 million exemption amount to the trust to protect it from estate taxes. If there were remaining assets (assets over $2 million), they would pass directly to Mrs. Jones.

Because the $2 million trust is not included in Mrs. Jones' estate, her estate drops from $4 million to $2 million. Thus, no tax is due on her estate because it does not exceed the exemption amount. By using the credit shelter trust in Mr. Jones' estate, the Joneses save hundreds of thousands of dollars in federal estate taxes.

The Joneses do give up something for this tax advantage. Mrs. Jones doesn't have unlimited access to the funds in the credit shelter trust because if she did, the trust would be includable in her estate. Still, Mr. Jones can give her all of the trust income and any principal she needs to maintain her lifestyle. However, the outcome would be quite different if both spouses didn't hold enough assets in their own names.

Control Assets with a QTIP Trust
A common estate planning concern is that assets left to a spouse will eventually be distributed in a manner against the original owner's wishes. For instance, you may want stock in your business to pass only to the child active in the business, but your spouse may feel it should be distributed to all the children. Or you may want to ensure that after your spouse's death the assets will go to your children from a prior marriage.

You can avoid such concerns by structuring your estate plan so your assets pass into a qualified terminable interest property (QTIP) trust. The QTIP trust allows you to provide your surviving spouse with income from the trust for the remainder of his or her lifetime. You also can provide your spouse with as little or as much access to the trust's principal as you choose. On your spouse's death, the remaining QTIP trust assets pass as the trust indicates.

Thus, you can provide support for your spouse during his or her lifetime but retain control of the estate after your spouse's death. Because of the marital deduction, no estate taxes are paid on your death. But if your spouse dies while the estate tax is in effect, the entire value of the QTIP trust will be subject to estate tax

Of course, as with all estate planning strategies, these trusts are complex. Consider enlisting the advice of a qualified estate planning professional before proceeding further. 

How the Generation-Skipping Tax Works

Perhaps you're one of the lucky people who are not only financially well off yourself, but whose children are also financially set for life. The down side of this is that they also face the prospect of high taxes on their estates. You may also want to ensure that future generations of your heirs benefit from your prosperity. To reduce taxes and maximize your gifting abilities, consider skipping a generation with some of your bequests and gifts.

But your use of this strategy is limited. The law assesses a generation-skipping transfer (GST) tax equal to the top estate tax rate on transfers to a "skip person," over and above the gift or estate tax, though this tax is being repealed along with the estate tax. A skip person is anyone more than one generation below you, such as a grandchild or an unrelated person more than 37-1/2 years younger than you are.

Fortunately, there is a GST tax exemption. Beginning in 2004, this exemption was equal to the estate tax exemption for that calendar year. Each spouse has this exemption, so a married couple can use double the exemption. If you exceed the limit, an extra tax equal to the top estate tax rate is applied to the transfer -- over and above the normal gift or estate tax.

Outright gifts to skip persons that qualify for the annual exclusion are also exempt from GST tax. A gift or bequest to a grandchild whose parent has died before the transfer is not treated as a GST.

Taking advantage of the GST tax exemption can keep more of your assets in the family. By skipping your children, the family may save substantial estate taxes on assets up to double the exemption amount (if you are married), plus the future income and appreciation on the assets transferred. Even greater savings can accumulate if you use the exemption during your life in the form of gifts.

If maximizing tax savings is your goal, consider a "dynasty trust." The trust is an extension of this GST concept. But whereas the previous strategy would result in the assets being included in the grandchildren's taxable estates, the dynasty trust allows assets to skip several generations of taxation.

Simply put, you create the trust, either during your lifetime by making gifts, or at death in the form of bequests. The trust remains in existence from generation to generation. Because the heirs have restrictions on their access to the trust funds, the trust is sheltered from estate taxes. If any of the heirs have a real need for funds, however, the trust can make distributions to them.

Special Strategies for Family-Owned Businesses

Few people have more estate-planning issues to deal with than the family-business owner. The business may be the most valuable asset in the owner's estate. Yet, two out of three family-owned businesses don't survive the second generation. If you are a business owner, you should address the following concerns as you plan your estate:

Who will take over the business when you die? Owners often neglect to develop a management succession plan. It is vital to the survival of the business that a successor, whether within the family or out, be ready to take over the reins.

Who should inherit your business? Splitting this asset equally among your children may not be a good idea. For those active in the business, inheriting the stock may be critical to their future motivation. To those not involved in the business, the stock may not seem as valuable. Perhaps your entire family feels entitled to equal shares in the business. Resolve this issue now to avoid discord and possible disaster later.

How will the IRS value your company? Because family-owned businesses are not publicly traded, determining the exact value of the business is difficult without a professional valuation. The value placed on the business for estate tax purposes is often determined only after a long battle with the IRS. Plan ahead and ensure your estate has enough liquidity to pay estate taxes and support your heirs.

The law currently provides two types of tax relief for business owners:

1) Section 303 redemptions -- your company can buy back stock from your estate without the risk of the distribution being treated as a dividend for income tax purposes. Such a distribution must, in general, not exceed the estate taxes, funeral and administration expenses of the estate. One caveat: The value of your holdings must exceed 35% of the value of your adjusted gross estate. If the redemption qualifies under Section 303, this is an excellent way to pay estate taxes.

2) Estate tax deferral -- normally, your estate taxes are due within nine months of your death. But if closely held business interests exceed 35% of your adjusted gross estate, the estate may qualify for a deferral of tax payments. No payment other than interest is due until five years after the normal due date for taxes owed on the value of the business. The tax related to the closely held business interest then can be paid over 10 equal annual installments. Thus, a portion of your tax can be deferred for as long as 14 years from the original due date. Interest will be charged on the deferred payments.

Estate Planning and 529 Plans

When you contribute to a 529 plan, you'll not only help your child, grandchild, or other loved one pay for college, but you'll also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you're thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.

Overview of gift and estate tax rules
If you give away money or property during your life, you may be subject to federal gift tax (and, in certain states, state gift tax). The money and property you own when you die may also be subject to federal estate tax and some form of state death tax.

Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount, currently $13,000, during the tax year. (There are several exceptions, though, including gifts you make to your spouse.) That means you can give up to $13,000 each year, to as many individuals as you like, gift tax free. In addition, you're allowed a gift tax credit, which effectively exempts from gift tax up to $5 million in gifts that you make during your lifetime which would otherwise be subject to tax.

When you die, your estate will be entitled to a tax credit for federal estate tax purposes. In 2011, the credit is effectively equal to a $5 million exemption. However, the estate tax credit will be reduced by the amount of any gift tax credit used during your lifetime. Because the credit works this way, it is often referred to as the "unified credit," but the amount effectively exempted from tax is more properly known as the "applicable exclusion amount."

Note: Since state tax treatment may differ from federal tax treatment, look to the laws of your state to find out how your state will treat a 529 plan gift.

Contributions to a 529 plan are treated as (federal) gifts to the beneficiary
A contribution to a 529 plan is treated under the federal gift tax rules as a completed gift from the donor to the designated beneficiary of the account. Such contributions are considered present interest gifts (as opposed to future or conditional gifts) and qualify for the annual federal gift tax exclusion. This means that you can contribute up to $13,000 per year to the 529 account of any beneficiary without incurring federal gift tax.

So, if you contribute $15,000 to your daughter's 529 plan in a given year, for example, you'd ordinarily apply this gift against your $13,000 annual gift tax exclusion. This means that although you'd need to report the entire $15,000 gift on a federal gift tax return, you'd show that only $2,000 is taxable. Bear in mind, though, that you must use up your applicable exclusion amount of $5 million (in 2011) before you'd actually have to write a check for the gift tax.

Special rule if you contribute over $13,000 in a year
Section 529 plans offer a special gifting feature. Specifically, you can make a lump-sum contribution to a 529 plan of up to $65,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $130,000.

For example, if you contribute $65,000 to your son's 529 account in one year and make the election, your contribution will be treated as if you'd made a $13,000 gift for each year of a five-year period. That way, your $65,000 gift would be nontaxable (assuming you didn't make any additional gifts to your son in any of those five years). A married couple can make a joint gift of up to $130,000.

If you contribute more than $65,000 ($130,000 for joint gifts) to a particular beneficiary's 529 plan in one year, the averaging election applies only to the first $65,000 ($130,000 for joint gifts); the remainder is treated as a gift in the year the contribution is made.

What about gifts from a grandparent?
Grandparents need to keep the federal generation-skipping transfer tax (GSTT) in mind when contributing to a grandchild's 529 account. The GSTT is a tax on transfers made during your life and at your death to someone who is more than one generation below you, such as a grandchild. The GSTT is imposed in addition to (not instead of) federal gift and estate taxes. Like the basic exclusion amount, though, there is a GSTT exemption ($5 million for 2011). No GSTT will be due until you've used up your GSTT exemption, and no gift tax will be due until you've used up your basic exclusion amount.

If you contribute no more than $13,000 to your grandchild's 529 account during the tax year (and have made no other gifts to your grandchild that year), there will be no federal tax consequences--your gift qualifies for the annual federal gift tax exclusion, and it is also excluded for purposes of the GSTT.

If you contribute more than $13,000, you can elect to treat your contribution as if made evenly over a five-year period (as discussed previously). Only the portion that causes a federal gift tax will also result in a GSTT.

Note: Contributions to a 529 account may affect your eligibility for Medicaid. Contact an experienced elder law attorney for more information.

What if the owner of a 529 account dies?
If the owner of a 529 account dies, the value of the 529 account will not usually be included in his or her estate. Instead, the value of the account will be included in the estate of the designated beneficiary of the 529 account.

There is an exception, though, if you made the five-year election (as described previously) and died before the five-year period ended. In this case, the portion of the contribution allocated to the years after your death would be included in your federal gross estate. For example, assume you made a $50,000 contribution to a college savings plan in Year 1 and elected to treat the gift as if made evenly over five years. You die in Year 2. Your Year 1 and Year 2 contributions of $10,000 each ($50,000 divided by 5 years) are not part of your federal gross estate. The remaining $30,000 would be included in your gross estate.

Some states have an estate tax like the federal estate tax; many states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death.

When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner, who'd assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner's probate estate and may pass according to a will (or through the state's intestacy laws if there is no will).

What if the beneficiary of a 529 account dies?
If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you won't be charged a penalty for terminating an account upon the death of your beneficiary.

Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary's taxable estate.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in the issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Updated 12/7/2011

Gifting Strategies for Estate Planning 

The federal government imposes a substantial tax on gifts of money or property that exceed certain levels. Without such a tax, someone with a sizable estate could give away a large portion of his or her property before death and escape death taxes altogether. For this reason, the gift tax acts more or less as a backstop to the estate tax. And yet, few people actually pay a gift tax during their lifetime. A gift program can substantially reduce overall transfer taxes; however, it requires good planning and a commitment to proceed with the gifts.

Advantages of Gift Giving
You may have many reasons for making gifts -- for some gift giving has personal motives, for others, tax planning is what motivated them. Most often, you will want your gift-giving program to accomplish both personal and tax motives. A few reasons for considering a gift-giving plan include:

  • Assisting someone in immediate financial need
  • Providing financial security for the recipient
  • Giving the recipient experience in handling money
  • Seeing the recipient enjoy the property
  • Taking advantage of annual exclusion allowance
  • Paying gift tax now to reduce overall taxes later
  • Giving tax advantaged gifts to minors

Gift and Estate Taxes
If you give away money or property during your life, those transfers may be subject to federal gift tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal estate taxes and some form of state death tax. You should understand these taxes, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act). The 2001 and 2010 Acts contain several changes that are complicated and uncertain, making estate planning all the more difficult.

Federal gift tax and federal estate tax--background
Under pre-2001 Tax Act law, no gift tax or estate taxes were imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one--that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift).

The 2001 Tax Act and the 2010 Tax Acts substantially changed this tax regime.

Federal gift tax
The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million. The 2010 Act increased the applicable exclusion amount for gift tax purposes to $5 million in 2011 and 2012 (plus indexing in 2012). The top gift tax rate is 35 percent in 2010 to 2012 (the top marginal income tax rate in 2010 to 2012 under the 2001 Tax Act and the 2010 Tax Act). In 2013, the gift tax rates are scheduled to revert to pre-2001 Tax Act levels, with a top gift tax rate of 55 percent. In 2013, the applicable exclusion amount is scheduled to be $1 million. The carryover basis rules remain in effect.

However, many gifts can still be made tax free, including:

· Gifts to your U.S. citizen spouse (you may give up to $136,000 (in 2011, $134,000 in 2010) tax free to your noncitizen spouse)
· Gifts to qualified charities
· Gifts totaling up to $13,000 (this figure is indexed for inflation so it may change in future years) to any one person or entity during the tax year, or $26,000 if the gift is made by both you and your spouse (and you are both U.S. citizens)
· Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual

A small number of states also impose their own gift tax.

Federal estate tax
Under the 2010 Tax Act, the applicable exclusion amount is $5 million in 2011 and 2012 (plus indexing in 2012), and the top estate tax rate is 35 percent. In 2011 and 2012, the unused basic exclusion amount of a deceased spouse is portable and can be used by the surviving spouse. In 2013, the applicable exclusion amount is scheduled to be $1 million and the top estate tax rate is scheduled to be 55 percent.

Note: Under the 2001 Tax Act, the federal estate tax was scheduled for repeal for one year in 2010. The 2010 Act reinstated the tax in 2010 with an applicable exclusion amount of $5 million and a top tax rate of 35 percent. An estate of a decedent dying in 2010 can elect to have the estate tax not apply, but a modified carryover basis would then apply instead of the step-up in basis.

Federal generation-skipping transfer tax
The federal generation-skipping transfer tax (GSTT) taxes transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GSTT is imposed in addition to, not instead of, federal gift tax or federal estate tax. You need to be aware of the GSTT if you make cumulative generation-skipping transfers in excess of the GSTT exemption, $5 million in 2011 and 2012 (plus indexing in 2012), scheduled to be $1 million as indexed in 2013. A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer (35 percent in 2011 and 2012, scheduled to be 55 percent in 2013) is imposed on every transfer you make after your exemption has been exhausted.

Note: Under the 2001 Act, the GSTT was scheduled for repeal for one year in 2010. The 2010 Tax Act reinstated the GSTT for 2010 with a GSTT exemption of $5 million, but applied a zero percent tax rate to GSTs in 2010. GSTT exemption should generally be allocated to generation-skipping trusts created in 2010 if the trust will have GSTs in years after 2010.

Note: The GSTT exemption is the same amount as the applicable exclusion amount for estate tax purposes in 2011 and 2012.

Some states also impose their own GSTT.

State death taxes
The three types of state death taxes are estate tax, inheritance tax, and credit estate tax, which is also known as a sponge tax or pickup tax.

Updated 12/7/2011

Charitable Remainder Trusts

A Charitable Remainder Trust normally is used as a strategy for converting highly appreciated assets into income producing assets, without income tax liability. The Charitable Remainder Trust is an irrevocable trust with both charitable and non-charitable beneficiaries.

The donor transfers highly appreciated assets into the trust and retains an income interest. Upon expiration of the income interest, the remainder in the trust passes to a qualified charity of the donor’s choice.

If properly structured, the CRT permits the donor to receive income, estate, and/or gift tax advantages. These advantages often provide for a much greater income stream to the income beneficiary than would be available outside the trust.

Unitrust vs. Annuity Trust

There are two types of CRT the Unitrust and the Annuity Trust.  The main difference between the two is the way your annual income, paid to you by the trust, is calculated. 

Under the provisions of a Unitrust, the annual payment to you must be a fixed percentage of the market value of a trust's assets as determined each year or, alternatively, the lesser of 5 percent of such value or the trust's income. You can see that there are no guarantees of the specific amount you will receive. Your payments will depend upon the changing values of the trust property or income from year to year.

Using an Annuity trust, the trust specifies an annual amount to be paid to you.  This guarantees that you will receive a specific amount which you can depend upon every year.

Charitable Remainder Trust - Potential Benefits

  • Eliminate Capital Gains Tax
  • Tax deductible transfers to trust
  • Trust income can be significantly greater than income generated outside trust
  • You choose duration of income from trust
  • Increased retirement income
  • Eliminate estate tax on trust assets
  • Preserve estate for family & heirs through survivorship policy funded with added income
  • Provide charitable bequests to the causes of your choice

Those Who Would Benefit Most From a CRT May Have Some of the Following Characteristics

  • Own highly appreciated assets
  • Would like to reposition such assets
  • Are in a high income tax bracket
  • Are subject to estate tax at death
  • Have philanthropic desires 

Gifting Stock
One key to reducing estate taxes is to limit the amount of appreciation in your estate. We talked earlier about giving away assets today so that the future appreciation on those assets will be outside of your taxable estate. There may be no better gift than your company stock - it could be the most rapidly appreciating asset you own.

For example, assume your business is worth $500,000 today, but is likely to be worth $1 million in three years. By giving away the stock today, you will keep the future appreciation of $500,000 out of your taxable estate.

A flexible strategy for the business owner was reinstated in late 1990 when Congress retroactively repealed the estate freeze provisions that became law in 1987. Before 1987, business owners commonly recapitalized their businesses, retained preferred stock interests and gave some or all of the common stock to their beneficiaries. This way, they retained control of their companies and froze the value of their stock for estate tax purposes. All future appreciation affected only the common shares, not the owners' preferred stock.

Congress saw the loophole and created Section 2036(c) in an attempt to prevent future estate freezes. The section had been under constant attack since its creation and was finally repealed retroactively in 1990. In its place, Congress passed legislation that once again permits estate freezes, but only if certain requirements are met.

Gifting family business stock can be a very effective estate tax saving strategy. Beware of some of the problems involved, however. The gift's value determines both the gift and estate tax ramifications. The IRS may challenge the value you place on the gift and try to increase it substantially. Seek professional assistance before attempting to transfer portions of your business to family members.

A recent law change requires the IRS to make any challenges to a gift tax return within the normal three-year statute of limitations, even though no tax is payable with the return.

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1035 exchange
Section 1035 sets out provisions for the exchange of similar (insurance related) assets without any tax consequence upon the conversion. If the exchange qualifies for like-kind exchange consideration, income taxes are deferred until the new property or asset is sold. The 1035 exchange provisions are only available for a limited type of asset which includes cash value life insurance policies and annuity contracts.

An annual report filed by corporations each year as required by the SEC. The 10K must be filed within 90 days after the end of the fiscal year and provides a comprehensive overview of a company's business practices and financial stability. 

401(k) plan
A 401(k) plan is a tax-deferred defined contribution retirement plan that gives eligible employees the opportunity to defer a portion of their current compensation into the plan. Amounts that are deferred are excluded from the participant's gross income for the year of the deferral. The plan may provide for employer matching contributions and discretionary profit-sharing contributions.

403(b) plan
Tax deferred annuity retirement plan available to employees of public schools and colleges, and certain non-profit hospitals, charitable, religious, scientific and educational organizations.

457 plan
Non-qualified deferred compensation plans available to employees of state and local governments and tax-exempt organizations.

A a

accelerated death benefits (adb's)
Some life insurance policies make a portion of the death benefit available prior to the death of the insured. Such benefits are usually available only due to terminal illness or for long-term care situations. 

accidental death benefit
An accidental death benefit is a rider added to an insurance policy which provides that an additional death benefit will be paid in the event death is caused by and accident. This rider is often called "double indemnity."

accounts payable
A balance sheet item representing the amount of money a company owes to its creditors.

accounts receivable
A balance sheet item representing the amount of money a company is owed by its customers for goods and services it has provided.

accrual basis
One of several methods of accounting. Requires that all interest and income be included as it is earned and that all expenses are included as incurred.

adjustable rate mortgage (arm)
An adjustable Rate Mortgage offers an initial interest rate that is usually lower than a fixed rate, but that adjusts periodically according to market conditions and financial indices. The rate may go up and/or down, depending on economic conditions. To limit the borrower's risk, the ARM will almost always have a maximum interest rate allowed, called a "rate cap."

The amortization of a debt is its systematic repayment through installments of principal and interest. An amortization schedule is a periodic table illustrating payments, principal, interest, and outstanding balance.

annual percentage rate (apr)
The Annual Percentage Rate is the cost of credit expressed as a yearly rate. The APR is a means of comparing loans offered by various lenders on equal terms, taking into account interest rates, points, and other finance charges. The federal Truth-in-Lending Act requires disclosure of the APR.

An individual who receives payments from an annuity. The person whose life the annuity payments are measured on or determined by.

A contract between an insurance company and an individual which generally guarantees lifetime income to the individual or whose life the contract is based in return for either a lump sum or periodic payment to the insurance company. Interest earned inside an annuity is income tax-deferred until it is paid out or withdrawn.

An appraisal is an estimate of a property's value, usually real estate, at a specific point in time and as determined by a qualified professional appraiser.

Appreciation is the increase in value of an asset. The term "appreciation" may be applied to real estate, stocks, bonds, etc.

arm's length
Acting at arm's length predicates that two parties negotiate with opposing economic interests.

ask price
The price that a seller is willing to sell a security or commodity for.


balance sheet
A balance sheet is a financial statement that is divided into three major parts: assets, liabilities and shareholders' equity.

balloon mortgage
The terms on a balloon mortgage are insufficient to completely amortize the loan. A balloon, or lump sum, payment is required at the maturity of the loan to completely pay off the remaining principal. Balloon mortgages often contain a contractual opportunity to refinance when the balloon payment is due at prevailing rates.

bank reserves
The amounts that banks are required to keep on deposit at a Federal Reserve Bank, as determined by reserve ratios. Funds in excess of these reserves are loaned out or invested by the banks.

A federal court proceeding in which a debtor who is unable to continue to meet his/her financial obligations may be relieved from the payment of certain debts. This action seriously affects the borrower's credit worthiness.

An amount usually representing the actual cost of an investment to the buyer. The basis amount of an investment is important in calculating capital gains and losses, depreciation, and other income tax calculations.

basis points
Basis Points is a term used by investment professionals to describe yields of bonds. One basis point equals one 100th of 1%, or .01%. A bond yield increase from 10.0% to 10.1% represents an increase of 10 basis points.

bear market
A prolonged decline in overall stock prices occurring over a period of months or even years.

The person who is designated to receive the benefits of a contract.

A statistically generated number that is used to measure the volatility of a security or mutual fund in comparison to the market as a whole.

bid price
The price that a buyer is willing to pay for a security or commodity.

blue-chip stocks
The equity issues of financially stable, well-established companies that usually have a history of being able to pay dividends in bear and bull markets.

A certificate of indebtedness issued by a government entity or a corporation, which pays a fixed cash coupon at regular intervals. The coupon payment is normally a fixed percentage of the initial investment. The face value of the bond is repaid to the investor upon maturity.

bonding requirement
The individual(s) that are appointed to run the day-to-day operations of a qualified plan, as well as the trustee(s) and investment managers must be bonded. The bond is required to provide protection to the plan against loss due to fraud, theft, forgery or dishonesty.

book value
The value that belongs to a company's owners or shareholders after total liabilities have been subtracted from total assets. Also called shareholders equity.

bull market
A prolonged increase in overall stock prices usually occurring over a period of months or even years.

A buy-down refers to the payment of additional discount points in return for a below market interest rate (and therefore a lower monthly payment) on a home mortgage.

buy-sell agreement
An agreement between shareholders or business partners to purchase each others' shares in specified circumstances.

C c

capital markets
A general term encompassing all markets for financial instruments with more than one year to maturity. 

capital stock
All ownership shares of a company, both common and preferred listed at par value.

cash equivalents
Assets that can be quickly converted to cash. These include receivables, treasury bills, short-term commercial paper, short-term municipal and corporate bonds and notes.

cash value
Permanent life insurance policies provide both a death benefit and in an investment component called a cash value. The cash value earns interest and often appreciates. The policyholder may accumulate significant cash value over the years and, in some circumstances, "borrow" the appreciated funds without paying taxes on the borrowed gains. As long as the policy stays in force the borrowed funds do not need to be repaid, but interest may be charged to your cash value account.

certificate of deposit (cd)
A Certificate of Deposit is a low risk, often federally guaranteed investment offered by banks. A CD pays interest to investors for as long as five years. The interest rate on a CD is fixed for the duration of the CD term.

charitable remainder trust (crt)
The Charitable Remainder Trust is an irrevocable trust with both charitable and non-charitable beneficiaries. The donor transfers highly appreciated assets into the trust and retains an income interest. Upon expiration of the income interest, the remainder in the trust passes to a qualified charity of the donor's choice. If properly structured, the CRT permits the donor to receive income, estate, and/or gift tax advantages. These advantages often provide for a much greater income stream to the income beneficiary than would be available outside the trust.

closed-end fund
A fund whose value is held within a fixed number of shares. Until the fund is wound up, shares can be bought and sold on the stock exchange or the over-the-counter market.

A co-borrower is individually or jointly obligated to repay a loan entered into with a third party. The co-borrower may or may not share in ownership of loan collateral.

An instrument in writing executed by a testator for adding to, altering, explaining or confirming a will previously made by the testator; executed with the same formalities as a will; and having the effect of bringing the date of the will forward to the date of codicil.

Assets pledged as security for a loan. If the borrower defaults on payment, the lender may dispose of the property pledged as security to raise money to repay the loan.

The fee a broker or insurance agent collects for administering a trade or policy.

A commodity is a physical substance such as a food or a metal which investors buy or sell on a commodities exchange, usually via futures contracts.

common stock
A security that represents ownership in a corporation.

The computation of interest paid using the principal plus the previously earned interest.

conduit IRA
An individual who rolled over a total distribution from a qualified plan into an IRA can later roll over those assets into a new employer's plan. In this case the IRA has been used as a holding account (a conduit).

conforming loan
A mortgage loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Currently, conforming first mortgages are under $275,000 ($413,000 in Alaska and Hawaii).

construction loan
A construction loan is a short term loan applied to the construction of a new home. The builder gradually withdraws the loan proceeds and the home serves as collateral on the loan.

consumer debt
Debt incurred for consumable or depreciating non-investment assets. Items include credit card debt, store-financed consumer purchases, car loans, and family loans that will be repaid.

An individual whose opinion is the opposite of the majority.

conventional mortgage
A conventional mortgage is not insured, guaranteed or funded by the Veterans Administration, the Federal Housing Administration, or Rural Economic Community Development.

convertible mortgage
A convertible mortgage is an adjustable mortgage (ARM) that allows the borrower to convert to a fixed rate mortgage during a specified period of time.

convertible term insurance
Term life insurance that can be converted to a permanent or whole life policy without evidence of insurability, subject to time limitations.

A legal business entity created under state law. Because the corporation is a separate entity from its owners, shareholders have no legal liability for its debts.

A sudden decline in stock or bond prices after a period of market strength.

An individual or party who agrees to assume a debt obligation of a third party in the event the principal borrower defaults on the terms of the loan.

coupon rate
The rate of interest paid on a bond, expressed as a percentage of the bond's par value.

credit cards
Cards such as Visa and MasterCard allow the holder to charge purchases rather than pay cash.

credit bureau repositories
A credit bureau repository is an organization that compiles credit history information directly from lenders and creditors into credit summaries and reports. These reports are made available to lenders and creditors to assist them in gauging an individual's credit worthiness.

critical illness insurance
Insurance protection designed to provide a lump-sum payment equal to the full value of the policy or a percentage of the policy depending upon the product design, to the insured/policy owner upon the diagnosis of a covered critical illness. Typical illnesses covered include heart attack, stroke, cancer, paralysis, renal failure and Alzheimer's disease. Many policies offer a partial payment for certain medical procedures such as coronary bypass surgery or angioplasty. Some policies offer a return of all premiums in the event of death of the insured, others pay the full benefit upon the insured's death.

currency risk
The level of risk when investing in international markets, due to the fluctuations in exchange rates of the various world currencies. Investing in any foreign country should be preceded by a careful estimation of how well its currency is likely to do against the dollar.

A financial institution, usually a bank or trust company, that holds a person or company's cash and or securities in safekeeping.

cyclical companies
Companies that report strong earnings when the overall economy is doing well and weaker earnings when the economy is in recession.

D d

debit cards
Debit cards allow the cost of a purchase to be automatically deducted from the customer's bank account and credited to the merchant.

debt markets
The fixed income sector of the capital markets devoted to trading debt securities issued by corporations and governments.

debt to income ratio
The ratio of a person's total monthly debt obligations compared to their total monthly resources is called their debt to income ratio. This ratio is used to evaluate a borrower's capacity to repay debts.

The term decedent refers to a person who has died.

decreasing term
A term life insurance featuring a decreasing death benefit. Decreasing term is well suited to provide for an obligation that decreases over the years such as a mortgage.

deed of trust
A document used to convey title (ownership) to a property used as collateral for a loan to a trustee pending the repayment of the loan. The equivalent of a mortgage.

A form of tax sheltering in which all earnings are allowed to compound tax-free until they are withdrawn at a future date. Placing funds in a qualified plan, for example, triggers deductions [not all qualified plans provide for tax deductions; contributions may, however, be excluded from gross income, i.e. 401(k) plans] for the current tax year and postpones capital gains or other income taxes until the funds are withdrawn from the plan.

deferred compensation
Income withheld by an employer and paid at some future time, usually upon retirement or termination of employment.

defined benefit plan
A defined benefit plan pays participants a specific retirement benefit that is promised (defined) in the plan document. Under a defined benefit plan benefits must be definitely determinable. For example, a plan that entitles a participant to a monthly pension benefit for life equal to 30 percent of monthly compensation is a defined benefit plan.

defined contribution plan
In a defined contribution plan, contributions are allocated to individual accounts according to a pre-determined contribution allocation. This type of plan does not promise any specific dollar benefit to a participant at retirement. Benefits received are based on amounts contributed, investment performance and vesting. The most common type of defined contribution plan is the 401(k) profit-sharing plan.

A period in which the general price level of goods and services is declining.

Charges made against earnings to write off the cost of a fixed asset over its estimated useful life. Depreciation does not represent a cash outlay. It is a bookkeeping entry representing the decline in value of an asset over time.

direct deposit
A means of authorizing payment made by governments or companies to be deposited directly into a recipient's account. Used mainly for the deposit of salary, pension and interest checks.

disability insurance
Insurance designed to replace a percentage of earned income if accident or illness prevents the beneficiary from pursuing his or her livelihood.

disposable income
After-tax income available for spending, saving or investing.

Spreading investment risk among a number of different securities, properties, companies, industries or geographical locations. Diversification does not assure against market loss.

dividend reinvestment plan (drip)
An investment plan that allows shareholders to receive stock in lieu of cash dividends.

A distribution of the earnings of a company to it's shareholders. Dividends are "declared" by the company based on profitability and can change from time to time. There is a direct relationship between dividends paid and share value growth. The most aggressive growth companies do not pay a dividend, and the highest dividend paying companies may not experience dramatic growth.

dollar cost averaging
Buying a mutual fund or securities using a consistent dollar amount of money each month (or other period). More securities will be bought when prices are low, resulting in lowering the average cost per share.
Dollar cost averaging neither guarantees a profit nor eliminates the risk of losses in declining markets and you should consider your ability to continue investing through periods of market volatility and/or low prices.

down payment
The down payment on a property is the amount of cash applied to the purchase, with the remainder of the purchase accomplished through a mortgage or other debt.

E e

earnest money
Similar to a deposit, earnest money is the money given by the buyer to the seller of a property as an assurance of their intentions to purchase the property.

earnings per share (eps)
Total net profits divided by the number of outstanding common shares of a company.

economic cycle
Economic events are often felt to repeat a regular pattern over a period of anywhere from two to eight years. This pattern of events ends to be slightly different each time, but usually has a large number of similarities to previous cycles.

effective tax rate
The percentage of total income paid in federal and state income taxes.

efficient market
The market in which all the available information has been analyzed and is reflected in the current stock price.

employee stock ownership plans (esops)
An ESOP plan allows employees to purchase stock, usually at a discount, that they can hold or sell. ESOPs offer a tax advantage for both employer and employee. The employer earns a tax deduction for contributions of stock or cash used to purchase stock for the employee. The employee pays no tax on these contributions until they are distributed.

escrow funds
Escrow funds are funds accumulated and held in an account for the periodic payment of property taxes and insurance.

A decedent's estate is equal to the total value of their assets as of the date of death. The estate includes all funds, personal effects, interest in business enterprises, titles to property, real estate, stocks, bonds and notes receivable.

estate planning
The orderly arrangement of one's financial affairs to maximize the value transferred at death to the people and institutions favored by the deceased, with minimum loss of value because of taxes and forced liquidation of assets.

excess distributions
An individual may have to pay a 15% tax on distributions received from qualified plans in excess of $150,000 during a single year. The tax, however, does not apply to distributions due to death, distributions that are rolled over, and distributions of after-tax contributions.

The person named in a will to manage the estate of the deceased according to the terms of the will.

F f

face amount
The face amount stated in a life insurance policy is the amount that will be paid upon death, or policy maturity. The face amount of a permanent insurance policy may change with time as the cash value in the policy increases.

fair market value
The fair market value of a property or other asset is the price that a buyer and seller can establish in an arms-length transaction where neither one is compelled to buy or to sell.

family trust
An inter vivos trust established with family members as beneficiaries.

federal housing administration (fha)
The Federal Housing Administration (FHA) is a government agency that sets standards for underwriting residential mortgage loans made by private lenders and insures such transactions.

federal national mortgage association (fnma or fannie mae)
FNMA is a private corporation that acts as a secondary market investor in buying and selling mortgage loans.

An individual or institution occupying a position of trust. An executor, administrator or trustee.

financial planner
A person who helps you plan and carry out your financial future.

fixed investment
Any investment paying a fixed interest rate such as a money market account, a certificate of deposit, a bond, a note, or a preferred stock. A fixed investment is the opposite of a variable investment.

fixed rate mortgage
With a fixed rate mortgage, your interest rate will remain the same for the entire term of the loan. Although the rate will begin slightly higher than a comparable adjustable rate mortgage (ARM), the interest rate you pay can never go up for as long as you have the mortgage.

A variation in the market price of a security.

A foreclosure is the legal process by which a borrower losses their ownership interest in a collateralized property due to default on the attached loan.

fund manager
A person who manages the assets of a mutual fund.

fundamental analysis
Fundamental analysis is a technique of estimating a stock's future value based on the in-depth study of the stock's underlying financial statements. Fundamental analysis is the opposite of technical analysis.

future value
The future worth of a payment, or stream of payments, projected at a given interest rate for a given period of time.

futures market
A market in which contracts for future delivery of a commodity are bought and sold.

G g

generally accepted accounting principals (gaap)
Conventi ons, rules and procedures that define accepted accounting practices in the U.S.

grace period
A period (usually 31 days) following each premium due date, other than the first due date, during which an overdue premium may be paid, and during which time all policy provisions remain in force and effect.

group insurance
A form of insurance designed to insure classes of persons rather than specific individuals.

growth stock
The common equity of a company that consistently grows significantly faster than the economy.

guaranteed investment certificate (gic)
A type of debt security sold to individuals by banks and trust companies. They usually cannot be cashed before the specified redemption date, and pay interest at a fixed rate.

A third party who agrees to repay any outstanding balance on a loan if you fail to do so. A guarantor is responsible for the debt only if the principal debtor defaults on the loan.

A person or persons named to care for minor children until they reach the age of majority. A will is the best way to ensure that the person or persons whom you wish to have care for your minor children are legally empowered to do so in the event of your death.

H h

hazard insurance
Hazard i nsurance protects the insured from losses arising due to physical property damage associated with catastrophic hazards such as flood, fire, earthquake, tornado, etc. Hazard insurance will often be required by a lender to protect their collateral from such risks.

home equity line of credit (heloc)
A home equity line of credit allows a homeowner to borrow against the equity in their home with specific limits and terms. This is an open end loan which allows the borrower to borrow and repay funds as needed.

home equity loan
A home equity loan is a collateralized mortgage, usually in a subordinate position, entered into by the property owner under specific terms of repayment.

I i

The description of a security for which it is difficult to find a buyer or seller. An illiquid investment is an investment that may be difficult to sell quickly at a price close to its market value. Examples include stock in private unlisted companies, commercial real estate and limited partnerships.

A life insurance illustration, or ledger, is a reference tool used to illustrate how a given life insurance policy underwritten by a specific insurer is expected to perform over a period of years. The insurance illustration assumes that conditions remain unchanged over the period of time that the policy is held.

income averaging
Income averaging allows individuals who were age 50 before January 1, 1986 to pay tax on a lump sum distribution as though it had been received over a five or ten year period, rather than all at once. By using income averaging individuals may be able to pay income tax at a more favorable rate.

income statement
A financial statement that shows the components of profit, such as sales, expenses, taxes and net profit.

income stocks
Stocks that have a consistent, stable, above-average dividend yield.

individual retirement account (ira)
An Individual Retirement Account (IRA) is a personal savings plan that offers tax advantages to those who set aside money for retirement. Depending on the individual's circumstances, contributions to the IRA may be deductible in whole or in part. Generally, amounts in an IRA, including earnings and gains, are not taxed until distributed to the individual.

A term used to describe the economic environment of rising prices and declining purchasing power.

in-force policy
An in-force life insurance policy is simply a valid policy. Generally speaking, a life insurance policy will remain in-force as long as sufficient premiums are paid, and for approximately 31 days thereafter. (See Grace Period)

Insurability refers to the assessment of the applicant's health and is used to gauge the level of risk the insurer would potentially take by underwriting a policy, and therefore the premium it must charge.

A life insurance policy covers the life of one or more insured individuals.

interest rate
The simple interest rate attached to the terms of a mortgage or other loan. This rate is applied to the outstanding principal owed in determining the portion of a payment attributable to interest and to principal in any given payment.

interest rate risk
Is the uncertainty in the direction of interest rates. Changes in interest rates could lead to capital loss, or a yield less than that available to other investors, Putting at risk the earnings capacity of capital.

A term describing the legal status of a person who dies without a will.

investment banker
A firm that engages in the origination, underwriting, and distribution of new issues.

investment company
A corporation or trust whose primary purpose is to invest the funds of its shareholders.

investment considerations
Choosing which investments are right for you will depend on a number of factors, including; your primary objectives, your time horizon and your risk tolerance.

investment portfolio
A term used to describe your total investment holdings.

investment risk
The chance that the actual returns realized on an investment will differ from the expected return.

investment strategy
The method used to select which assets to include in a portfolio and to decide when to buy and when to sell those assets.

ira (individual retirement account)
An Individual Retirement Account (IRA) is a personal savings plan that offers tax advantages to those who set aside money for retirement. Depending on the individual's circumstances, contributions to the IRA may be deductible in whole or in part. Generally, amounts in an IRA, including earnings and gains, are not taxed until distributed to the individual.

ira rollover
An individual may withdraw, tax-free, all or part of the assets from one IRA, and reinvest them within 60 days in another IRA. A rollover of this type can occur only once in any one-year period. The one-year rule applies separately to each IRA the individual owns. An individual must roll over into another IRA the same property he/she received from the old IRA.

J j

jumbo loan
A loan that is larger than the limits set for conventional loans by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corportation (FHLMC). This limit is currently set at $300,700.

junk bonds
A bond that pays an unusually higher rate of return to compensate for a low credit rating.

K k

A Keogh is a tax deferred retirement plan for self-employed individuals and employees of unincorporated businesses. A Keogh plan is similar to an IRA but with significantly higher contribution limits.

L l

Using "leverage" is the process of investing using borrowed funds. Leveraging your investments magnifies your returns, both positive and negative.

leveraged buyout (lbo)
Leveraged buyouts are deals in which a company is bought with mostly borrowed money, money frequently raised through selling high-yield and high-risk junk bonds.

liability risk
The risk that the legal system may assess punitive damages against you if property damage or personal injuries can be attributed to your carelessness or negligence.

A lien represents a claim against a property or asset for the payment of a debt. Examples include a mortgage, a tax lien, a court judgment, etc.

life expectancy
Life expectancy represents the average future time an individual can expect to live. Life expectancies have been increasing steadily over the past century and may continue to increase in the future. As people are living longer the cost of retirement is increasing.

life insurance
A contract between you and a life insurance company that specifies that the insurer will provide either a stated sum or a periodic income to your designated beneficiaries upon your death.

life settlement
Occurs when a person who does not have a terminal or chronic illness sells his/her life insurance policy to a third party for an amount that is less than the full amount of the death benefit. The buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums, and collects the entire death benefit when the the insured dies. Some states regulate the purchase as a security while others may regulate it as insurance.

Liquidity is the measure of your ability to immediately turn assets into cash without penalty or risk of loss. Examples include a savings account, money market account, checking account, etc.

living will
If you become incapacitated this document will preserve your wishes and act as your voice in medical decisions, if you are unable to speak for yourself as a result of medical reasons.

loan-to-value ratio
A loan-to-value ratio represents the relationship between all outstanding and proposed loans on a property and the appraised value of the property. For example, an $80,000 loan on a $100,000 property would represent an 80% loan-to-value ratio. This ratio assists a lender in determining the risk associated with the loan. The higher this ratio, the riskier the loan.

long position
A long position in an investment indicates a current ownership in that investment which would increase in value as the underlying asset(s) increase in value, opposite of a short position.

M m

The amount of money supplied by an investor as a portion of the total funds needed to buy or sell a security, with the balance of required funds loaned to the investor by a broker, dealer, or other lender.

margin account
A special account set up by a broker for a client who wants to buy and sell securities using margin.

margin call
A call from a broker to a client asking for more money to back up a security purchased on margin when such a security has declined in value. If more money is not supplied, the broker usually sells the security.

market order
An order to buy at the lowest price going, or sell at the highest price possible.

market risk
Every investment carries some element of market risk, the risk that the entire market will decline, reducing the investment's value regardless of other factors.

medical power of attorney
This special power of attorney document allows you to designate another person to make medical decisions on your behalf.

minimum distributions
An individual must start receiving distributions from a qualified plan by April 1 of the year following the year in which he/she reaches age 70 � . Subsequent distributions must occur by each December 31st. The minimum distributions can be based on the life expectancy of the individual or the joint life expectancy of the individual and beneficiary.

money purchase plan
A Money Purchase Plan has contributions that are a fixed percentage of compensation and are not based on the employer's profits. For example, if the plan requires that contributions be 10% of the participant's compensation, the plan is a Money Purchase Pension Plan. With this type of plan, the employer is committed to making contributions each year even if the employer has no profits or is experiencing cash flow problems. Employee contributions are limited to 25% of compensation. Employer contributions are limited to the smaller of $30,000 or 25 percent of a participant's compensation.

Mortality is the risk of death of a given person based on factors such as age, health, gender, and lifestyle.

A legal instrument providing a loan to the mortgagee to be used to purchase a real property in exchange for a lien against the property.

mortgage broker
A mortgage broker acts as an intermediary between a borrower and a lender. A broker's expertise is to assist the borrower in identifying mortgage lenders and products that they might not identify otherwise.

mortgage insurance (mi)
Mortgage insurance protects the lender against the default of higher risk loans. Most lenders require mortgage insurance on loans where the loan-to-value ratio is higher than 80% (less than 20% equity).

municipal bonds
A bond offered by a state, county, city or other political entity (such as a school district) to raise public funds for special projects. The interest received from municipal bonds is often exempt from certain income taxes.

mutual funds
A mutual fund is a pooling of investor (shareholder) assets, which is professionally managed by an investment company for the benefit of the fund's shareholders. Each fund has specific investment objectives and associated risk. Mutual funds offer shareholders the advantage of diversification and professional management in exchange for a management fee.

N n

net asset value
The value of all the holdings of a mutual fund, less the fund's liabilities [also describes the price at which fund shares are redeemed].

net worth
Your net worth is the difference between your total assets and total liabilities.

non-conforming loan
A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Such loans include jumbo loan, sub-prime loans and high risk loans.

A note is a legal document that acknowledges a debt and the terms and conditions agreed upon by the borrower.

O o

odd lot
An uneven number of securities that represents less than a board lot.

offer price
The price that a buyer is willing to pay for an investment.

open-end fund
An open-end mutual fund continuously issues and redeems units, so the number of units outstanding varies from day to day. Most mutual funds are open-end funds. The opposite of closed-end fund.

origination fee
The origination fee on a mortgage is usually the amount charged by the lender for originating the loan. Origination fees vary by lender and are expressed in points where one point is equal to 1% of the original loan balance.

over-the-counter (otc) market
Market created by dealer trading as opposed to the auction market, which prevails on most major exchanges.

P p

paper gain (loss)
Unrealized capital gain (loss) on securities held in portfolio, based on a comparison of current market price to original cost.

par bond
A bond selling at par.

payroll deduction
Payments made on your behalf by your employer. They are automatically deducted from your pay check.

Points are charges added to a mortgage loan by the lender and are based on the loan amount. One point is equal to 1% of the original loan balance.

A contractual arrangement between the insurer and the insured describing the terms and conditions of the life insurance contract.

policy loan
The policy owner can borrow from the cash value component of many permanent insurance policies for virtually any purpose. Any policy loans that are outstanding at the time of death of the insured will be deducted from the benefit paid to the beneficiary.

political risk
Political risk is the risk that stock prices may decline dramatically during periods of political unrest or crisis.

power of attorney
A legal document authorizing one person to act on behalf of another.

The payment that the owner of a life insurance policy makes to the insurer. In exchange for the premium payment, the insurer assumes the financial risk (as defined by the insurance policy) associated with the death of the insured.

present value
The current worth of a future payment, or stream of payments, discounted at a given interest rate over a given period of time.

The principal amount of a loan or mortgage is the outstanding balance, excluding interest.

private mortgage insurance
Private mortgage insurance protects the lender against the default of higher risk loans. Most lenders require private mortgage insurance on loans where the loan-to-value ratio is higher than 80% (less than 20% equity).

The process used to make an orderly distribution and transfer of property from the deceased to a group of beneficiaries. The probate process is characterized by court supervision of property transfer, filing of claims against the estate by creditors and publication of a last will and testament.

profit sharing plan
A Profit-Sharing Plan is the most flexible and simplest of the defined contribution plans. It permits discretionary annual contributions that are generally allocated on the basis of compensation. The employer will determine the amount to be contributed each year depending on the cash-flow of the company. The deduction for contributions to a Profit-Sharing Plan cannot be more than 15% of the compensation paid to the employees participating in the plan. Annual employer contributions to the account of a participant cannot exceed the smaller of $30,000 or 25 percent of a participant's compensation.

prohibited ira transactions
Generally, a prohibited transaction is any improper (self-dealing) use of the IRA by the account owner. Some examples include borrowing money from an IRA, using an IRA to secure a loan and selling property to an IRA.

A detailed statement prepared by an issuer and filed with the SEC prior to the sale of a new issue. The prospectus gives detailed information on the issue and on the issuer's condition and prospects.

Q q

qualified retirement plan
A qualified retirement plan is a retirement plan that meets certain specified tax rules contained primarily in section 401(a) of the Internal Revenue Code. These rules are called "plan qualification rules". If the rules are satisfied the plan's trust is exempt from taxes.

R r

To refinance one's mortgage is to retire the existing mortgage using the proceeds of a new mortgage and using the same property as collateral. This is usually done to secure a lower interest rate mortgage or to access equity from the property.

registered representative
A registered representative is licensed with the NASD (National Association of Securities Dealers), through association with an NASD member broker / dealer, to act as an account representative for clients and collect commission income.

revolving debt
A debt or liability that does not have a fixed principal balance or payment. Examples include credit cards, home equity lines of credit, etc.

A life insurance rider is an amendment to the standard policy that expands or restricts the policy's benefits. Common riders include a disability waiver of premium rider and a children's life coverage rider.

Investment risk is the chance that the actual returns realized on an investment will differ from the expected return.

rule of 72
A way to determine the effect of compound interest. Divide 72 by the expected return on your investment. If your expected return is 8%, assuming that all interest is reinvested, you will double your money in 9 years.

S s

safety of principal
Safety of principal is an objective that emphasizes the security of the invested principal.

salary reduction simplified employee pension (sarsep)
A SARSEP is a simplified alternative to a 401(k) plan. It is a SEP that includes a salary reduction arrangement. Under this special arrangement, eligible employees can elect to have the employer contribute part of their before-tax pay to their IRA. This amount is called an "elective deferral".

The main regulatory body regulating the securities industry is called the Securities and Exchange Commission.

second mortgage
A mortgage on real property in a junior position to a primary or first mortgage. The increased risk associated with a second mortgage is often reflected in a higher interest rate and a shorter term of repayment.

Stocks and bonds are traditionally referred to as securities. More specifically, stocks are often referred to as "equities" and bonds as "debt instruments."

Securities and Exchange Commission
The main regulatory body regulating the securities industry is called the Securities and Exchange Commission.

short position
A short position in an investment indicates a position in an investment that would increase in value as the underlying asset(s) decrease in value. Opposite of a long position.

short sale
The sale of stock that you do not yet own in order to take advantage of an expected share price decline. If the stock declines in price, the stock is purchased at the now lower price and the short position is closed.

simplified employee pension (sep)
A SEP provides employers with a "simplified" alternative to a qualified profit-sharing plan. Basically, a SEP is a written arrangement that allows an employer to make contributions towards his or her own and employees' retirement, without becoming involved in a more complex retirement plan. Under a SEP, IRAs are set up for each eligible employee. SEP contributions are made to IRAs of the participants in the plan. The employer has no control over the employee's IRA once the money is contributed.

small cap
A small cap stock is one issued by a company with less than $1.7 billion in market capitalization.

smart card
A card with an embedded computer chip which stores more information, performs more functions and is more secure than a credit card or debit card.

spousal ira
An individual can set up and contribute to an IRA for his/her spouse. This is called a "Spousal IRA" and can be established if certain requirements are met. In the case of a spousal IRA, the individual and spouse must have separate IRAs. A jointly owned IRA is not permitted.

Stock certificates represent an ownership position in a corporation. Stockholders are often entitled to dividends, voting rights, and financial participation in company growth.

stock dividends
The investor's share of the income earned by the company issuing the stock.

stock exchange
A market for trading of equities, a public market for the buying and selling of public stocks.

stop-loss order
This is when you tell your broker to sell the stock if it drops to a certain price.

succession planning
Planning for a business to pass to the next generation of owner/managers.

surrender value
When a policy owner surrenders his/her permanent life insurance policy to the insurance company, he or she will receive the surrender value of that policy in return. The surrender value is the cash value of the policy plus any dividend accumulations, plus the cash value of any paid-up additions minus any policy loans, interest, and applicable surrender charges.

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tax credit
An income tax credit directly reduces the amount of income tax paid by offsetting other income tax liabilities.

tax deduction
A reduction of total income before the amount of income tax payable is calculated.

The term tax deferred refers to the deferral of income taxes on interest earnings until the interest is withdrawn form the investment. Some vehicles or products that enjoy this special tax treatment include permanent life insurance, annuities, and any investment held in IRA's.

technical analysis
Technical analysis is a technique of estimating a stock's future value strictly by examining its prices and volume of trading over time. Technical analysis is the opposite of fundamental analysis.

tenants in common
Two or more people who own the same piece of property, with the inherent condition that if one of the tenants die, his interest automatically passes on to his heirs.

term insurance
Term insurance is life insurance coverage that pays a death benefit only if the insured dies within a specified period of time. Term policies do not have a cash value component and must be renewed periodically as dictated by the insurance contract.

testamentary trust
A trust created under the terms of a will and that takes effect upon the death of the testator.

ticker symbol
A ticker symbol is a combination of letters that identifies a stock-exchange security.

A legal document establishing property ownership.

title search
A detailed examination of legal records to determine the history and legal ownership of a property.

top heavy plans
Each year, a qualified plan must be tested to determine whether it is "top-heavy". Generally, a "top-heavy" plan is one in which more than 60 percent of the benefits under the plan are for key employees (usually owners and officers). Additional requirements apply to a top-heavy plan such as faster vesting and mandatory employer contributions.

total disability
In order to make a disability claim a person must meet the definition of disability set forth in the insurance contract. There are two general definitions of disability used in today's contracts. The first definition is that the insured is unable to perform all of the substantial and material duties of his/her own occupation. The second, and more restrictive, definition is that the insured is unable to perform any occupation for which he/she is reasonably suited by education, training, or experience.

treasury bill
Treasury bills, often referred to as T-bills, are short-term securities (maturities of less than one year) offered and guaranteed by the federal government. They are issued at a discount and pay their full face value at maturity.

treasury bond
Treasury bonds are issued with maturities of more than 10 years and are offered and guaranteed by the U.S. Government. They are issued at a discount and pay their full face value at maturity.

treasury note
Treasury notes are issued with maturities between one and 10 years. These notes are offered and guaranteed by the U.S. Government. They are issued at a discount and pay their full face value at maturity.

TSA (tax-sheltered annuity)
Tax deferred annuity retirement plan available to employees of public schools and colleges, and certain non-profit hospitals, charitable, religious, scientific and educational organizations.

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underwriter (banking)
A person, banker or group that guarantees to furnish a definite sum of money by a definite date in return for an issue of bonds or stock.

underwriter (insurance)
The one assuming a risk in return for the payment of a premium, or the person who assesses the risk and establishes premium rates.

underwriter (investments)
In the bond/stock market means a brokerage firm or group of firms that has promised to buy a new issue of bonds/shares from a government or company at a fixed discounted price, then arranges to resell them to investors at full price.

unemployment rate
The number of people unemployed measured as a percentage of the labor force.

universal life insurance
An adjustable Universal Life insurance policy provides both a death benefit and an investment component called a cash value. The cash value earns interest at rates dictated by the insurer. The policyholder may accumulate significant cash value over the years and, in some circumstances, "borrow" the appreciated funds without paying taxes on the borrowed gains (taxes may be required if policy is surrendered). As long as the policy stays in force the borrowed funds do not need to be repaid, but interest may be charged to your cash value account. Premiums are adjustable by the policy owner.

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variable investment
A variable investment is any investment whose value, and therefore returns, fluctuates with market conditions such as a common stock, a plot of raw land, and a hard asset.

variable universal life insurance
A Variable Life insurance policy provides both a death benefit and an investment component called a cash value. The owner of the policy invests the cash value in subaccounts selected by the insurer. The policyholder may accumulate significant cash value over the years and "borrow" the appreciated funds without paying taxes on the borrowed gains (taxes may be required if policy is surrendered). As long as the policy stays in force the borrowed funds do not need to be repaid, but interest may be charged to your cash value account.

variable rate mortgage (VRM)
A Variable Rate Mortgage offers an initial interest rate that is usually lower than a fixed rate, but that adjusts periodically according to market conditions and financial indices. The rate may go up and/or down, depending on economic conditions. To limit the borrower's risk, the VRM will almost always have a maximum interest rate allowed, called a "rate cap."

venture capital
A common term for funds that are invested by a third party in a business either as equity or as a form of secondary debt. In the event of failure or business wind-up, these funds rank behind all other secured creditors.

The law requires that a qualified plan have a schedule under which a participant earns an ownership interest in employer provided contributions based on his or her years of service with the employer. Amounts contributed by the participant are always 100% vested.

viatical settlement
Occurs when a person with terminal or chronic illness sells his/her life insurance policy to a third party for an amount that is less than the full amount of the death benefit. The buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums, and collects the entire death benefit when the insured dies. Some states regulate the purchase as a security while others may regulate it as insurance.

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waiver of premium
A waiver of premium rider on an insurance policy sets for conditions under which premium payments are not required to be made for a time. The most popular waiver of premium rider is the disability waiver under which the owner of the policy (also called the policyholder) is not required to make premium payments during a period of total disability.

whole life insurance
A traditional Whole Life insurance policy provides both a death benefit and a cash value component. The policy is designed to remain in force for a lifetime. Premiums stay level and the death benefit is guaranteed. Over time, the cash value of the policy grows and helps keep the premium level. Although the premiums start out significantly higher than that of a comparable term life policy, over time the level premium eventually is overtaken by the ever-increasing premium of a term policy.

The most basic and necessary of estate planning tools, a will is a legal document declaring a person's wishes regarding the disposition of their estate. A will ensures that the right people receive the right assets at the right time. If an individual dies without a will they are said to have died intestate.

wrap account
An account offered by investment dealers whereby investors are charged an annual management fee based on the value of invested assets.

Any loan not expected to be recovered and is recorded as a loan loss.

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The yield on an investment is the total proceeds paid from the investment and is calculated as a percentage of the amount invested.

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zero-coupon bond
A zero-coupon bond is a bond sold without interest-paying coupons. Instead of paying periodic interest, the bond is sold at a discount and pays its entire face amount upon maturity, which is usually a one year period or longer.