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Inheritance terms defined

Being familiar with these terms might help as you transfer the account into your name.

A list of inheritance terms

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Beneficiary

A person or organization designated to receive the proceeds of an investment account (or an insurance policy, a pension, or an annuity contract) after the owner's death.

Brokerage account

An account held with a registered broker-dealer that allows the investor to deposit securities with the firm and place investment orders through the broker, which then carries out the transactions on the investor's behalf. Investors can trade stocks and bonds, options, and exchange-traded funds; place special types of orders (stop and limit orders, for example); and trade on margin.

Capital gains taxes

When investors sell securities—such as mutual funds or stocks—at a profit, they must pay taxes on those gains.

Cost basis

The original cost of an investment (adjusted for commissions or capital distributions). For tax purposes, the cost basis is subtracted from the investment's value at the time of sale, minus fees and commissions, to determine capital gains or losses.

Date-of-death value

The value of the investments in the account on the day the account owner died.

Decedent

The account owner who has died.

Estate

All of a decedent's liabilities and assets, including property (real and personal).

ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks and bonds. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any time during the trading day, like stocks and bonds.

Executor

The person chosen to carry out the instructions expressed in a will. The executor, who doesn't have to be a member of the decedent's family, administers the estate and distributes the estate's assets.

Fair market value

The price an asset would sell for if the buyer and the seller were equally interested.

IRA (individual retirement account)

A type of account created by the IRS that offers tax benefits when you use it to save for retirement.

Joint account

An account with two or more owners.

Liquidate

To convert investment holdings or assets into cash.

Look-through provision

A provision that allows trusts that meet certain requirements to use the life expectancy of the oldest trust beneficiary (as of the applicable deadline) for calculating required minimum distributions (RMDs).

Medallion guarantee

An imprint or a stamp that provides both the assurance of a signature guarantee and a legal certification. Unlike traditional signature guarantors, Medallion guarantors must post a bond to be issued the Medallion equipment, which provides assurance that the institution can financially cover any potential losses. The Medallion guarantee is traditionally used for the transfer of securities. The guarantee and instruction must be made on the same date and received at Vanguard within 30 days of that date.

Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds typically have lower costs and are more diversified and convenient than investing in individual securities, and they're professionally managed.

Per stirpes

Rather than name beneficiaries, the account owner can use the "to my descendants who survive me, per stirpes" designation to divide assets equally among his or her children (but not stepchildren). All children who survive the account owner will share the assets equally. If any of the children die before the account owner, that child's children—the account owner's grandchildren—would equally share their deceased parent's share of the account.

Power of attorney

A legal document that authorizes an agent to handle certain affairs on behalf of the person granting power of attorney.

Probate

A court procedure that validates a will and settles the decedent's estate. During probate, the estate's executor or administrator collects the estate's assets, pays liabilities and necessary taxes, and distributes property to heirs.

RBD (required beginning date)

April 1 of the year after the year in which the original IRA owner reaches age 70½, generally the date by which the first required minimum distribution (RMD) must be taken.

RMD (required minimum distribution)

Under federal tax law, most owners of IRAs (except Roth IRAs) must withdraw part of their tax-deferred savings each year, starting at age 70½ (or after inheriting an IRA). If you withdraw less than your RMD, you may owe a 50% penalty tax on the difference. RMDs are not required for Roth IRAs during the IRA owner's lifetime, but beneficiaries who inherit Roth IRAs must take RMDs after the IRA owner's death.

Signature guarantee

A form of authentication issued by a financial institution that verifies the legitimacy of a signature and the signatory's request. This type of guarantee is often used when financial instruments are being transferred. In most cases, the guarantor accepts all consequences if the signature is fraudulent. The guarantee and instruction must be made on the same date and received at Vanguard within 30 days of that date.

Small estate affidavit

If someone dies without a will and with a small estate (the dollar amount varies by state) of personal property—that is, no real estate—a beneficiary may file this legal document to receive that property. Small estate affidavits help avoid the time and cost of going through probate.

Trust

A legal arrangement through which a third party holds property, such as investments, on behalf of a beneficiary. Trusts are often used to reduce or eliminate estate taxes.

Trustee

The party named in a trust to hold the trust's assets for the benefit of the beneficiaries.

Will

A legal document in which a person leaves instructions for how to distribute his or her property after death.

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