Glossary
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The investments a variable annuity's separate account fund, a mutual fund, or other fund makes are considered the fund's underlying investments. The value of a single share or unit of the fund is based on the combined value of all of its underlying investments, minus fees and expenses, divided by the number of outstanding shares or units.
In some cases, when the item underlying a derivative investment is a security, such as the individual stock underlying an equity options contract, it is also called an underlying investment. However, when the underlying item is a consumable commodity, such as corn, or a financial product, such as an equity index, it is called the underlying product, the underlying instrument, or sometimes simply the underlying. For annuity separate accounts, the underlying investments are very often mutual funds that are available to participants in the separate accounts. -
Under the UGMA, an adult (a person older than the age of majority in a state or country) can set up a custodial account for a minor (a person under the applicable age of majority) and put assets such as cash, securities, and mutual funds into it. There is no limit on the amount you can put into the account. To avoid owing potential gift tax, however, limiting amounts placed in the account each year to an amount that qualifies for the annual gift tax exclusion is recommended by many experts.
One advantage of an UGMA custodial account is that assets that may increase in value can be deposited into it, so that any capital gains are retained in the account, and potential estate taxes that might have been due on the asset possibly can be avoided. See your tax professional for information on the taxation of gains in the account, because the rates of taxation may vary depending on the age of the beneficiary .
One potential disadvantage of a custodial account is that any gift to the account is irrevocable, and the assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. Upon reaching the age of majority, which occurs at 18, 19, or 21 depending on the state, the beneficiary may take control of the assets and may use the assets as he or she wishes.
In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate under current rules, which could make your estate's value large enough to incur estate taxes. -
The UTMA allows an adult (a person older than the age of majority in a state or country) to set up a custodial account for a minor, (a person under the applicable age of majority), who owns any assets placed in the account, although he or she can't legally control the account until reaching the age of majority. The UTMA is similar to the Uniform Gifts to Minors Act (UGMA) in many respects, but can be used to hold assets in addition to cash and securities, including real estate, fine art, antiques, patents, and royalties.
You may choose to transfer assets that you expect to increase in value into the UTMA account, so that any capital gains are retained in the account, and potential estate taxes that might have been due on the asset possibly can be avoided. See your tax professional for information on the taxation of gains in the account, because the rates of taxation may vary depending on the age of the beneficiary.
One potential disadvantage of a custodial account is that any gift to the account is irrevocable, and the assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. Upon reaching the age of majority, which occurs at 18, 19, or 21 depending on the state, the beneficiary may use the assets as he or she wishes.
To avoid owing potential gift tax, however, limiting amounts placed in the account each year to an amount that qualifies for the annual gift tax exclusion is recommended by many experts. In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate under current rules, which could make your estate's value large enough to incur estate taxes. -
If you own an investment that has increased in value, the increase in value is your gain, which is unrealized until you sell and take your profit. In most cases, the value continues to change as long as you own the investment, either increasing your unrealized gain or creating an unrealized loss. You owe no income or capital gains tax on unrealized gains, sometimes known as paper profits, though you typically compute the value of your investment portfolio based on current - and unrealized - values. Where the value of an investment has gone down, and it has not been sold for the lower value, there will be an unrealized loss.
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The US government issues two types of savings bonds: Series EE and Series I. You buy electronic Series EE bonds through a Treasury Direct account for face value and paper Series EE for half their face value. You earn a fixed rate of interest for the 30-year term of these bonds, and they are guaranteed to double in value in 20 years. Series EE bonds issued before May 2005 earn interest at variable rates set twice a year.
Series I bonds are sold at face value and earn a real rate of return that's guaranteed to exceed the rate of inflation during the term of the bond. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued.
The biggest difference between savings bonds and US Treasury issues is that there's no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them by turning them back to the government, usually through a bank or other financial intermediary.
The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your adjusted gross income (AGI) falls in the range set by federal guidelines and you meet the other conditions to qualify. -
US Treasury bonds are long-term government debt securities, typically issued with 30-year terms. New bonds are sold at par value of $100, and existing bonds trade in the secondary market at prices that fluctuate to reflect changing demand. These bonds, sometimes referred to as long bonds, are often used as a benchmark for market interest rates.
While interest on US Treasury bonds is federally taxable, it is exempt from state and local taxes. Treasury bonds are considered among the world's most secure investments, since they are backed by the full faith and credit of the US federal government.
