Some commonly used terms and techniques in financial planning.
ANNUITY -- A contractual agreement in which one party (usually an insurance company) periodically liquidates a given prinicipal and interest until a predetermined poist in time (to make payment to the annuitant).
AMORIZATION -- The liquidation of a financial obligation on an installment basis. Also, the writing off of an asset over a period of time similar to the depreciation write-off on depreciable property.
BUY-SELL AGREEMENT -- A contractual agreement signed before death that provides that sole proprietor, partner or corporation is obligated to sell the decedent's business interest for the agreed upon price to the buyer who is obligated to buy the decedent's business interest at the agreed upon price. There is usually a proviso in the agreement that stipulates that if the business owner wants to sell his business interest before death , he must offer the interest to the buy-sell agreement purchasers at the price arrangement that would be in effect had the business owner died. The living sale price must agree with death sale price to meet IRS rules. Save estate taxes and provides known funding to the surviving spouse of the owner.
CHARITABLE BEQUEST OR CHARITABLE REMAINDER TRUST -- 1) A bequest is merely a gift to a charity designed to reduce one's estate and ultimately reduce the decedent's estate tax liability. 2) The trust property is transferred to a charity with income being reserved for the person making the gift (donor). Provides the donor with a current income tax deduction plus income for a specific purpose (children's education, retirement, etc.) and reduce the donor's estate.
DEFERRED ANNUITY -- A contract under which one person (annuitant) transfers to another person (the obligor) assets in exchange for the obligor's promise to pay a certain income to the annuitant for life or for period certain. The taxes are deferred until annuitant commences receiving income.
FAMILY CORPORATION -- Common and preferred stock can be distributed to family members either by gift, services or by purchases of securities so that accumulation of income and appreciation iun property value will accrue to the stockholders.
GIFT SCHEDULE -- A systematic plan of giving up to $3,000 a year to as many people as the donor desires without incurring a gift tax liability. The donor tries to keep the asset within the family and allows reduction of his estate and resultant estate tax savings.
GIFT OR SALE-LEASEBACK -- Transferor (owner) sells or gives property that is used in his business or practice, a real estate or equipment to a family member and then leases back the use of such real estate equipment. Removal of assets from estate and lease payment is fully tax deductible to the business.
INSTALLMENT SALE -- Owner (transferor) sells property to a member of his family for a small down payment, plus installment obligation. This shifts income, future appreciation, and the new tax base to the buyer. The transferor receives deferred tax payment and provides income payment over a period of years.
LIMITED PARTNERSHIP -- This method of investing provides for the pooling of money for the purpose of sharing in projects like real estate and oil and gas programs professionally managed by others. It consists of two types of investors; general partners who have a voice in management and who are personally liable for the partnership's debts, and limited partners who assume no financal obligation beyond the original investment.
PRIVATE ANNUITY -- A person (transferor) transfers gift property or money to a second poerson (transferee) in exchange for the transferee's unsecured promise to pay a lifefime income to the transferor. Income, estate and inheritance tax savings are realized.
REFINANCING -- A procedure whereby a mortgage increases his existing mortgage for the purpose of unlicking equity gains to be used for a purpose. Disadvantage is that the entire mortgage starts with the new interest rates (usually higher) and new settlement fees.
SALARY CONTINUATION AGREEMENTS -- Employer is committed to make continued payments to the surviving spouse. These payments can shift substantial value to the survivor or children; these values will be supported by payments that your employer can deduct; and the estate tax will be based on the actuarially computed vaslue of the future payments at the time of your death.
SHORT TERM (CLIFFORD) TRUST -- Property transferred to a trust for at least 10 years and one day with the income being taxed to the beneficiary (person in a lower tax bracket). Upon serving its purpose during this period it reverts back to the donor without any taxes until he makes another disposition of the property. Save income taxes and allows principal to revert and at the same time appreciatre in value without a tax.
SPLIT-DOLLAR INSURANCE -- Employer advances part of the money needed to carry insurance policies premium (at a small tax cost to you) or, any member of your family can advance part of the money needed to carry an insurance policy for another member of the family, with the result that the windfall profit of the insurance would accrue to the benefit of the beneficiary named in the policy.
UNIFORM GIFTS TO MINORS ACT -- Income from the gift is taxable to the minor unless it is used to satisfy someone else's legal obligatons. The monor has a personal ememption and a $100 dividend exclusion, but cannot take a standard deduction to reduce taxable income. Parents can still claim the child as a dependent as long as the age and support requirements of the law are met. Reduces the donor's estate, however, control of asset is lost upon minor reaching maturity.