GLOSSARY OF IMPORTANT DOCUMENTS
There are many options for planning your financial and medical future. Below are basic definitions of some of the important financial, legal and medical terms, documents or strategies in common use.
Financial Issues
A certificate of deposit (CD): A CD is an instrument evidencing a relationship between a depositor and the depositing institution. The individual depositor agrees to keep money deposited in the financial institution for a certain period of time. In return the depositor is given a higher rate of interest than that of the usual savings account.
Estate planning: The process of planning for the disposal of your property, rather than the process of acquiring it, is known as estate planning. The goal is to plan ahead to protect the estate for heirs, and assure that individual wishes are carried out regarding health care and the distribution of your assets. Estate planning includes:
| » | Health care planning such as writing a living will or naming a health care surrogate |
| » | Provision of a durable power of attorney |
| » | Tax considerations |
| » | The considerations of life insurance and/or long-term care insurance needs |
| The preparation of a will or living trust |
Government securities: U.S. Treasury Bonds, U.S. Savings Bonds, U.S. Treasury Bills and U.S. Treasury Notes are called government securities. These investments are considered risk- free because the US Government backs them. Treasury bond interest is free of state and local taxes, while interest gained from Treasury Bills is exempt from local taxes.
Individual Retirement Accounts (IRAs): The federal government allows wage earners younger than 701&Mac218;2 years old to deposit $2,000 in a special account known as an IRA. IRA's can be invested in instruments such as stocks, CDs, mutual funds, bonds, or government securities. These monies may be eligible (there are restrictions based on wage and marital status) for deduction from gross income for income tax purposes. The primary advantage of IRA's is that contributions, interest, dividends, and capital gains are tax-deferred until money is withdrawn on retirement. The recently introduced Roth IRA is not tax deferred, however, withdrawals are considered non-taxable income.
Municipal and Corporate Bonds: These bonds are long-term promissory notes. Most bonds pay a fixed rate of interest that is received at regular intervals. When the bond matures (the date the note is due to be paid) it is cashed in for its face value. Interest monies gained from municipal bonds are free of federal taxes.
Mutual Funds: A professionally managed group of investment accounts are called mutual funds. These funds provide the opportunity to diversify investments toward the goal of long- term financial gain. Fund companies may have different plans that allow the investor to emphasize investment returns such as growth, growth and income, or income only. Funds may also be directed at a particular type or area for investment such as bonds, money market funds, or overseas investments; some may be tax-free.
Pension Payment Options: There are generally several choices as to how a pension is to be paid. The final decision is usually made at the time of retirement. Options include:
| » | Lifetime maximum, which ends with the death of the pensioner |
| » | Lump sum payment on retirement |
| » | Payment over a set time period, such as 15 years, after which no more payments are received |
| » | Spouse is guaranteed of a percentage of the retirement benefit at the time of death (usually 50%) |
Legal Documents
Deferred Payment Loans: A long-term, secured loan under which repayment is deferred until the sale of the property.
Durable Power of Attorney: A legal authorization for a designated second party to manage financial assets. The document details the exact responsibilities and limits for management, such as check writing and selling property. It can be effective upon signing or at some future time if an individual becomes incapacitated and unable to manage his or her own affairs. ERISA: The Employee Retirement and Income Security Act of 1974 set minimum standards for private pension plans. This law established the right of a spouse to have part of the working spouse's pension after death.
Guardian or Conservator: A court-appointed individual who assumes most of a disabled person's civil and legal rights for that person's benefit. The powers are granted for that person's protection, and are subject to the direction of the court. This is generally due to a chronic health condition or disease in which the individual is no longer able to manage their financial resources, physical health or personal safety.
Home Equity Conversion: Home equity conversions allow the elderly to receive additional income while they remain in their home. There are several options available:
Home Equity Loans and Credit Lines: Banks and brokerage houses make loans or extend credit on the basis of a second mortgage against the property. Be advised that the options mentioned above should be thoroughly discussed with family members, financial advisors and/or attorneys. There may be tax consequences that impact on the estate and heirs, or have an effect on eligibility for other federal and state assistance.
Living Trust: This is the transfer of the ownership of financial assets from an individual's name to the name of a trust. A living trust is what is known as a revocable trust. Because it is revocable it may be changed or canceled and the ownership can be returned to the individual. The individual who is named as trustee and beneficiary maintains control of the trust. Distribution of assets is named in the trust documents, therefore: trust assets do not go through probate upon death.
1996 Pension Law: This newly enacted legislation took effect in January 1997. The stipulations it included broadened the number of workers able to save for retirement by expanding eligibility for participation in pension plans and lowering vesting requirements. The new law also allows non-working spouses to set aside $2,000 in an IRA each year, and creates a system to provide mini-pension plans for employees of small businesses.
REA and TRA: The Retirement Equity Act (1984) and The Tax Reform Act (1986) expanded the protections of ERISA. These acts include provisions that protect the rights of spouses, require informing employees and beneficiaries of their rights, mandate that money must be available to pay pension benefits, and provide for insurance to protect employees in the event that the pension plan is terminated.
Reverse Mortgages: Monthly payments are made to the homeowner based on the amount of equity in the home and its value. The loan amount is repaid at a future date when the homeowner no longer resides in or sells the home. The property may be sold at any time. Proceeds are retained that exceed the amount needed to pay off the mortgage. Homeowners cannot be forced to move or to sell their homes.
Sale/Leaseback Conversions: The owner sells the home to an investor while retaining the right to live in the property for life. In this type of arrangement, one becomes a renter in his or her own home. The purchase price is paid as a lump sum plus fixed monthly amounts, based on the seller's life expectancy. If the seller dies before the full loan is repaid, the loan balance is paid to the estate. Payments to the seller should be from a secured source of funds.
Viatical Settlements: The term "Viatical settlement" comes from the Latin word viaticum meaning "provisions for a journey." Viaticum were supplies Roman soldiers were given in preparation for journeys into battle, ostensibly, journeys from which they might not return. Similarly, a viatical settlement provides an individual with resources for the final months of life. A viatical settlement allows individuals facing life-threatening illnesses, such as cancer, severe heart disease, AIDS, Alzheimer's disease or other conditions, to sell their life insurance policy to a third party for cash, while they are still able to use the money. There are no restrictions on how funds from a viatical settlement can be used. The purchaser of the life insurance policy then becomes the beneficiary, and is responsible for making all future premium payments to keep the policy in force. Another insurance related financial option is accelerated death benefit (ADB). This is included as a rider in some life insurance policies. At this time there is no government regulation on viatical settlements. For more specific information contact the Viatical Association of America (800-842-9811).
Will: A document that directs the transfer of ownership of assets after death. These assets are transferred under the supervision of the probate court. Probate is a legal procedure for settling an estate. A will can also be used to direct assets into a trust for management by a trustee. The trustee is obligated to manage the trust and its proceeds for the benefit of the beneficiaries. When death occurs without a will, most states have laws regarding the distribution of property among surviving relatives.
Medical Documents
Advance Directives: Everyone has the right to accept or refuse medical treatment. An individual's wishes can be followed in legally binding documents known as advance directives in the event that individual is incapacitated. The federal government in 1991 mandated these documents. An advance directive is a statement of an individual's health care treatment choices. They are called advance directives because they are issued in advance of the time that the decisions must be made. These directives become effective when individuals can no longer make decisions for themselves. For example, when a person is taken to a hospital in a coma, the presence of the advance directive will make his or her treatment wishes known. There are two forms of advance directives: the health care durable power of attorney and the living will. Keep the original documents in a safe place where family members can get to them. Also, copies should be given to one's health care professionals, lawyers, clergy, and family members. If these documents should be canceled or revoked, it is important to notify the people who have received copies. Advance directives are:
Healthcare
Durable Power of Attorney: This document authorizes a designated person (agent or surrogate) to make decisions about medical care when an individual is unable or does not want to make those decisions for him or herself. The person named will act on the individual's behalf during all planning and treatment meetings of the team of healthcare providers. This document may be revoked at any time by the individual who initiated it as long
Living Will: A living will is a document stating a person's wishes concerning life- sustaining treatment. It instructs his or her doctor concerning treatment acceptance or rejection. Examples of life-sustaining treatments are cardiopulmonary resuscitation (CPR), mechanical respirators, renal dialysis, experimental medication and procedures, and artificial feeding. A living will also provides directions about donating organs and tissues in the event that death occurs. States vary in their regulations for living wills.