A
- Accrual Equivalent Return
- The single annualized after-tax return that, if earned tax-free, would grow an investment to the same ending value produced under an actual regime of interim and terminal taxes. It converts a complex mix of interest, dividend, and capital gains taxation into one comparable rate.
- After-Tax Return
- After-tax return is the portfolio return that remains after accounting for taxes on income, dividends, and realized gains. It is the relevant return for taxable investors and the basis for tax-aware portfolio construction decisions.
- Asset Location
- Asset location is the tax-aware decision about which account type (taxable, tax-deferred, or tax-exempt) to hold each asset class in. Tax-inefficient assets generally belong in tax-advantaged accounts to maximize after-tax wealth.
B
- Bypass Trust
- A bypass trust uses a deceased spouse's estate-tax exemption to shelter assets from estate tax at the surviving spouse's later death. It preserves the deceased spouse's exemption that would otherwise have been wasted if everything passed outright to the surviving spouse.
C
- Charitable Remainder Trust (CRT)
- A charitable remainder trust pays an annual amount to the donor (or other non-charitable beneficiary) for life or a term, then distributes the remainder to charity. It provides income, an immediate income-tax charitable deduction, and removal of the asset from the donor's taxable estate.
- Cognitive Errors versus Emotional Biases
- Cognitive errors are reasoning or information-processing mistakes (such as anchoring or availability) that education and better data can often correct, while emotional biases stem from feelings and impulses (such as regret aversion or overconfidence) that are harder to correct and are more often accommodated in portfolio design.
- Concentrated Position Management
- Concentrated position management addresses the risks of an oversized single-stock holding (typically founder stock or inherited stock). Tools include diversification, derivative-based hedging, monetization via exchange funds, charitable transfer, and prepaid forward sales.
- Core Capital
- The amount of assets a client must retain to fund lifetime spending needs with a high degree of confidence, typically estimated as the mortality-weighted present value of future expenditures plus a reserve. Assets above core capital are treated as excess capital available for gifting, bequests, or higher-risk goals.
D
- Decumulation
- Decumulation is the phase of an individual's financial life where withdrawals from accumulated wealth fund consumption. It introduces sequence-of-returns risk because adverse early-period returns can permanently deplete the portfolio.
E
- Effective Capital Gains Tax Rate
- An adjusted capital gains rate that accounts for the portion of return already taxed annually as interest, dividends, and realized gains, so it applies only to the untaxed deferred appreciation at the end of the horizon. It prevents double counting of taxes when projecting after-tax accumulation.
- Estate Planning
- Estate planning structures the transfer of wealth to minimize transfer taxes, achieve donor intent, and provide for heirs. Core tools are wills, trusts, lifetime gifts, beneficiary designations, and life insurance.
F
- Financial Capital
- Financial capital is the present value of an individual's accumulated investments, real estate, and savings. It is one component of total wealth alongside human capital and grows through saving and investment returns.
G
- Generation-Skipping Transfer (GST) Tax
- The GST tax is a federal transfer tax on gifts and bequests to grandchildren or more remote descendants. It is imposed on top of the estate or gift tax to prevent multi-generation tax avoidance through generation-skipping bequests.
- Goals-Based Wealth Management
- Goals-based wealth management organizes a client's portfolio into sub-portfolios mapped to specific goals (retirement, education, philanthropy). Each goal has its own time horizon and risk budget, and progress is measured against goal funding rather than benchmark-relative performance.
- Grantor Retained Annuity Trust (GRAT)
- An irrevocable trust into which a grantor transfers assets while retaining the right to a fixed annuity for a set term, after which the remainder passes to beneficiaries. Appreciation above the assumed hurdle rate transfers to heirs with little or no gift tax, making it effective for assets expected to grow quickly.
H
- Human Capital
- Human capital is the present value of the individual's expected future labor earnings. It typically dominates total wealth for young workers, declines with age, and is treated as a bond-like or equity-like asset depending on income volatility and correlation with markets.
I
- Inter Vivos Transfer
- An inter vivos transfer is a gift made during the donor's lifetime. It is commonly used to remove appreciating assets from the taxable estate and to leverage the annual gift-tax exclusion and the lifetime exemption.
- Investment Policy Statement (IPS) for Individuals
- An individual IPS specifies the client's return objective, risk tolerance, time horizon, tax status, liquidity needs, legal constraints, and unique circumstances. It is the written contract that governs portfolio decisions and frames performance evaluation.
L
- Liquidity Reserve
- A liquidity reserve is cash or near-cash holdings sized to fund near-term spending without forcing untimely sales of risky assets. It dampens sequence-of-returns risk during the decumulation phase.
- Longevity Risk
- The risk that a client outlives their accumulated assets because actual lifespan exceeds planning assumptions. It is commonly managed through mortality-weighted planning, sustainable spending rules, and longevity insurance or annuities that pool this risk.
- Loss Aversion
- Loss aversion is the behavioral finding that investors experience the pain of a loss roughly twice as strongly as the pleasure of an equal-sized gain. It explains reluctance to realize losses, irrational holding of underwater positions, and demand for downside protection.
M
- Mortality-Weighted Cash Flows
- Mortality-weighted cash flows weight each future period in a retirement or insurance projection by the probability the individual is still alive at that point. The result is a more accurate present value of contingent cash flows than ignoring survival probabilities.
R
- Relative After-Tax Value of a Lifetime Gift versus Bequest
- A ratio comparing the future after-tax value of assets transferred today as a lifetime gift against the value of the same assets transferred later as a bequest. A ratio above one favors gifting now, driven by removing future growth from the taxable estate.
- Required Return
- Required return is the rate of return needed to meet a client's stated goals given the client's savings rate and time horizon. If the required return is infeasible at the client's risk tolerance, the IPS process must revisit either the goals, the savings rate, or the timeline.
- Risk Capacity
- Risk capacity is the objective measure of how much loss a client can absorb without compromising goals. It is driven by time horizon, financial reserves, and human capital, and can be larger or smaller than the client's subjective willingness to take risk.
- Risk Tolerance
- Risk tolerance is the subjective measure of how much loss a client is willing to bear without changing investment behavior. When tolerance is lower than capacity, the binding constraint on the portfolio is the client's emotional comfort, not the math.
S
- Stages of Wealth
- Stages-of-wealth frameworks distinguish accumulation (working years), maintenance, and decumulation (retirement) phases of an individual's financial life. Each stage has different objectives, cash-flow profiles, and risk priorities.
- Step-Up in Basis
- An adjustment that resets the cost basis of an inherited asset to its fair market value at the owner's death, eliminating the tax on gains that accrued during the decedent's lifetime. This favors holding low-basis appreciated assets until death rather than gifting them during life.
T
- Tax-Loss Harvesting
- Tax-loss harvesting realizes investment losses to offset gains and reduce current-year tax liability. It is subject to the wash-sale rule, which disallows the loss if a substantially identical security is purchased within 30 days.
- Total Wealth
- Total wealth is the sum of an individual's human capital and financial capital. It is the appropriate base for diversification and risk decisions: financial-asset allocation should consider the implicit exposures already embedded in human capital.
