Trust Law in Wealth Management and Estate Planning

Trust law in wealth management and estate planning
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Contents
Articles
Introduction Entities to consider
Charitable organization 501(c) Non-profit foundations Private foundations Foundations under US law Limited liability company 1 2 2 8 13 17 20 22 33 33 34 38 44 51 56 59 70 73 73 75 76 82 96 98 100 104 104 105 106
Ethics
Account of profits Asset forfeiture Dishonest assistance Fiduciary Fraud Fraudulent conveyance Money laundering Tracing (law)
Forum & jurisdiction

Forum shopping Australian trust law English trusts law United States trust law Domicile (law) Habitual residence Hague Convention on the Law Applicable to Trusts and on their Recognition
Resources
Society of Trust and Estate Practitioners Trusts & Estates monthly magazine
Family issues
Community property Division of property Elective share Marital life estate Affiliation
106 109 110 111 112 114 114 117 119 123 124 124 125 125 126 126 128 132 140 143 143 144 148 149 151 153 154 154 156 157 158 161 162 163 168 169 171
Trusts & estates

Asset Asset protection Assignment Attestation clause Beach bum trust provision Beneficial interest Beneficial owner Beneficial ownership Beneficial use Beneficiary (trust) Capacity Cestui que Characterisation (conflict) Condition precedent Condition subsequent Conveyancing Coroner's jury Credible witness Cy-prs doctrine Disclaimer of interest Doctrine of exoneration of liens Donatio mortis causa Equitable conversion Equitable interest Escheat Estate Planner Estate planning Future interest Gifts Hotchpot Incorporation by reference
Infectious invalidity Insane delusion Intangible asset Intangible property Inter vivos Jus tertii Lapse and anti-lapse Legitime Letter of wishes Life estate Life interest Merger doctrine Pledges Power of appointment Principal-agent problem Private trustee Property Protector (trust) Quasi-property Remainders Settlement (trust) Settlor Tacking (law) Trust instrument Trust law Trustee Trustee de son tort Trusts (conflict) Trusts and estates Vesting
172 173 174 175 176 176 178 179 181 181 183 183 184 185 186 195 195 206 207 208 209 210 211 214 216 226 228 230 234 235 238 238 238 244 245 246 247
Specific trusts
Accumulation and Maintenance trust Asset-protection trust Bare trust Blind trust Bypass trust Charitable trust
Charitable remainder unitrust Child Trust Fund Constructive trust Corporate trust Crummey trust Discounted gift trust Discretionary trust Express trust Fiduciary trust Foreign trust Grantor Retained Annuity Trust Henson trust Honorary trust Incentive trust Interest in possession trust Life insurance trust Massachusetts business trust Offshore trust Percy Sladen Memorial Trust Pet trust Private annuity trust Protective trust Purpose trust Qualified personal residence trust Rabbi trust Real estate investment trust Resulting trust Secret trust Special needs trust Spendthrift trust Supplemental Needs Trust Testamentary trust Totten trust Unit Investment Trust Unit trust Voting trust
249 253 256 258 259 260 262 264 266 266 268 269 270 271 272 273 274 276 278 279 280 282 283 286 288 289 295 297 298 299 301 305 306 307 308 310 311
General statutes & case law
Family Health Care Decisions Act Howe v Earl of Dartmouth Rule in Dearle v Hall Settled Land Acts Statute of Wills Thomas v Times Book Company Trusts of Land and Appointment of Trustees Act 1996 Uniform Gifts to Minors Act Uniform Probate Code Uniform Simultaneous Death Act Wills Acts 1837 & 1918 (Soldiers and Sailors)
311 312 315 317 323 325 326 327 328 329 331 336 336 337 337 338 338 340 348 349 349 350 351 352 355 355 357 357 358 363 366 368 369 370 370 371 373
Probate, wills & intestacy

Abatement of debts and legacies Acts of independent significance Ademption Administrator of an estate Administration of an estate on death Advance health care directive Advancement (inheritance) Ancillary administration Apertura tabularum Bequest Codicils Digital inheritance Exempt property Forced heirship Freedom of testation Holographic will Inheritance Intestacy Joint wills and mutual wills Laughing heir Legatee Letters of Administration Missing heir No-contest clause Oral will
Personal representative Pour-over will Probate Probate court Probate sale Pretermitted heir Residuary estate Satisfaction of legacies Simultaneous death Slayer rule Succession conflicts Swynfen will case Testamentary capacity Testamentary disposition Testator Undue influence Wills Will contest Will contract
373 374 375 379 380 380 381 381 382 383 384 387 388 390 390 391 392 399 401 402 402 404 406 406 410 418 421 422 424 425 426 428 437 443 444 450
Finance
The high net worth individual Uniform Prudent Investor Act
Banking & money

Bank secrecy Banking in Switzerland Barclays Bank Ltd v Quistclose Investments Ltd Bearer bond Deposit account Financial privacy Global assets under management Investor relations Interest Negotiable instrument Numbered bank account Offshore bank Offshore financial centre
Private banking Saving Time deposit
459 463 465 466 466 472 473 474 478 479 480 490 492 497 498 502 507 507 511 517 522 524 530 536 547 550 554 562 562 570 573 575 581 581 585
Portfolios
Financial adviser Financial independence Financial plan Financial services Investment portfolio Investor profile Modern portfolio theory Post-modern portfolio theory Retirement spend down Retirement planning Wealth Wealth management
Risk
Asset allocation Asset diversification Hedge (finance) Interest rate risk Risk assessment Risk aversion Risk management Risk-return spectrum Speculation Value at risk
Ownership
Collective investment scheme Equity sharing Financial accountancy Floating charge Flow-through entity Fractional ownership Security interest
Investing
Financial economics Securities Stock trader Bonds Financial derivatives Futures contract Investment strategy Buy and hold Growth investing Index fund Quality investing Socially responsible investing Value investing
593 593 596 605 609 617 625 637 638 639 640 646 648 655 659 659 660 672 673 674 675 675 676 679 680 683 685 694 710 713 717 719 725 730 730
Returns & profits

Benefit shortfall Capital accumulation Cash flow return on investment Profit accounting Return on capital
Valuation
Appraisal Art valuation Blockage discount Cost of capital Diminution in value Expected value Inflation Net asset value Net present value Opportunity cost Stock valuation Valuation (finance)
Employment-related income & funding sources

Pensions, retirement plans & Superannuation
Cash balance plan Defined benefit pension plan Defined contribution plan Deferred compensation Royalties Severance package
739 742 746 748 750 778 780 780 813 820 820 827 831 853
Government-related income & funding sources

Social Security Supplemental Security Income
Miscellaneous income and funding sources

Annuities Life annuity Insurance
Tax
Capital gains tax Consumption tax Dividend tax Estate tax in the United States Gift tax in the United States Income tax Inheritance tax Inheritance Tax (United Kingdom) Optimal tax Property tax Special assessment tax Stamp duty Tax advantage Tax assessment Tax avoidance and tax evasion Tax deduction Tax exemption Tax haven Tax residence Tax shelter Tax shield
853 865 869 874 885 887 892 894 898 899 902 906 908 908 909 922 929 934 945 948 950
Taxable income Taxation of trusts (United Kingdom)
951 952
References
Article Sources and Contributors Image Sources, Licenses and Contributors 954 973
Article Licenses
License 975
Introduction
Entities to consider
Charitable organization
A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that its focus is centered around goals of a general philanthropic nature (e.g. charitable, educational, religious, or other activities serving the public interest or common good). The legal definition of charitable organization (and of Charity) varies according to the country and in some instances the region of the country in which the charitable organization operates. The regulation, tax treatment, and the way in which charity law affects charitable organizations also varies.
American Cancer Society offices in Washington, D.C.
Australia
Definition of charity
The definition of charity in Australia is derived through English common law, originally from the Charitable Uses Act 1601, and then through several centuries of case law based upon it. In 2002, the Federal Government establish an inquiry into the definition of a charity. That inquiry proposed that the government should legislate a definition of a charity, based on the principles developed through case law. This resulted in the Charities Bill 2003. The Bill incorporated a number of provisions, such as limitations on charities being involved in political campaigning, which many charities saw as an unwelcome departure from the case law. The government then appointed a Board of the Taxation inquiry to consult with charities on the Bill. As a result of widespread criticism from charities, the Government decided to abandon the Bill. As a result, the government then introduced what became the Extension of Charitable Purpose Act 2004. This Bill did not attempt to codify the definition of a charitable purpose; it merely sought to clarify that certain purposes were indeed charitable, whose charitable status had been subject to legal doubts. These purposes were: childcare; self-help groups; closed/contemplative religious orders.[1] To publicly raise money, charities in Australia are required to register under the State jurisdiction within which they intend to raise funds and must be registered in each and any State within which they intend to publicly raise funds. For example, in Queensland charities must register with the QLD Office of Fair Trading.[2] An example of a registered charity in Queensland, Australia is Sunnykids so whilst Sunnykids can publicly raise funds for charitable purposes, and whilst such donations are tax deductible in every Australian State and Territory - the funds themselves may only be raised in QLD as this is the only State within which the charity is registered to raise funds. In order for the charity to raise funds in the remaining seven Australian States and Territories it would need to register in each State or Territory individually. Needless to say, Many Australian charities are calling on Federal, State and Territory governments to unify legislation to allow registration in a single State or Territory to allow charities to raise funds in all 8 Australian States and Territories.
Canada
Charities in Canada must be registered with the Charities Directorate[3] of the Canada Revenue Agency. According to the Canada Revenue Agency:[4] A registered charity is an organization established and operated for charitable purposes, and must devote its resources to charitable activities. The charity must be resident in Canada, and cannot use its income to benefit its members. A charity also has to meet a public benefit test. To qualify under this test, an organization must show that: its activities and purposes provide a tangible benefit to the public those people who are eligible for benefits are either the public as a whole, or a significant section of it, in that they are not a restricted group or one where members share a private connection, such as social clubs or professional associations with specific membership the charity's activities must be legal and must not be contrary to public policy To register as a charity, the organization has to be either incorporated or governed by a legal document called a trust or a constitution. This document has to explain the organization's purposes and structure.
United Kingdom
England and Wales
Definition of charitable organization Section 1 Charities Act 2006 provides the definition in England and Wales: (1)For the purposes of the law of England and Wales, charity means an institution which (a)is established for charitable purposes only, and (b)falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities. The Charities Act 2006 provides the following list of charitable purposes.[5] 1. 2. 3. 4. 5. 6. 7. 8. the prevention or relief of poverty the advancement of education the advancement of religion the advancement of health or the saving of lives the advancement of citizenship or community development the advancement of the arts, culture, heritage or science the advancement of amateur sport the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity 9. the advancement of environmental protection or improvement 10. the relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other disadvantage 11. the advancement of animal welfare 12. the promotion of the efficiency of the armed forces of the Crown or of the police, fire and rescue services or ambulance services 13. other purposes currently recognised as charitable and any new charitable purposes which are similar to another charitable purpose. A charity must also provide a public benefit.[6] Before the Charities Act 2006 the definition of charity arose from a list of charitable purposes in the Charitable Uses Act 1601 (also known as the Statute of Elizabeth), which had been interpreted and expanded into a considerable body of case law. In Commissioners for Special Purposes of Income Tax v Pemsel (1891), Lord McNaughten
Charitable organization identified four categories of charity which could be extracted from the Charitable Uses Act and which were the accepted definition of charity prior to the Charities Act 2006. 1. 2. 3. 4. the relief of poverty, the advancement of education, the advancement of religion, and other purposes considered beneficial to the community.
English charities must comply with the Charities Acts 1992 (Part III), 1993, 2006 which regulate matters such as charity reports and accounts and fundraising. Charitable organization structure In 2008 there are a number of types of legal structure for a charity in England and Wales. 1. 2. 3. 4. Unincorporated association Trust Company limited by guarantee Another incorporation, such as by Royal Charter
The unincorporated association is the most common form of organization within the voluntary sector in England and Wales.[7] An unincorporated association is essentially a contractual arrangement between individuals who have agreed to come together to form an organization for a particular purpose. An unincorporated association will normally have as its governing document, a constitution or set of rules, which will deal with such matters as the appointment of office bearers, and the rules governing membership. The organization is not though a separate legal entity. So it cannot start legal action, it cannot borrow money, and it cannot enter into contracts in its own name. Also the officers can be personally liable if the charity is sued or has debts.[8] A Trust is essentially a relationship between three parties, the donor of some assets, the trustees who hold the assets and the beneficiaries (those people who are eligible to benefit from the charity). When the trust has charitable purposes, and is a charity, the trust is known as a charitable trust. The governing document is the Trust Deed or Declaration of Trust, which comes into operation once it is signed by all the trustees. The main disadvantage of a trust is that, as with an unincorporated association, it does not have a separate legal entity and the trustees must themselves own property and enter into contracts. The trustees are also liable if the charity is sued or incurs liability. A company limited by guarantee is a private limited company where the liability of members is limited. A guarantee company does not have a share capital, but instead has members who are guarantors instead of shareholders. In the event of the company being wound up the members agree to pay a nominal sum which can be as little as 1. A company limited by guarantee is a useful structure for a charity where it is desirable for the Trustees to have the protection of limited liability. Also, the charity has legal personality, and so can enter into contracts, such as employment contracts in its own name.[9] A small number of charities are incorporated by Royal Charter, a document which creates a corporation with legal personality (or, in some instances, transforms a charity incorporated as a company into a charity incorporated by Royal Charter). The Charter must be approved by the Privy Council before receiving Royal Assent. Although the nature of the charity will vary depending on the clauses enacted, generally a Royal Chartered will offer a charity the same limited liability as a company and the ability to enter into contracts. The Charities Act 2006 introduced a new legal form of incorporation designed specifically for charities, the Charitable Incorporated Organisation. This is not yet available for charities to use.[10] The word Foundation is not generally used in England and Wales. Occasionally a charity will use the word Foundation as part of its name e.g. British Heart Foundation, but this has no legal significance and does not provide any information about either the work of the charity or how it is legally structured. The structure of the organization will be one of the types of structure described above.
Charitable organization Charity registration Charitable organizations that have an income of more than 5,000, and for whom the law of England and Wales applies, must register with the Charity Commission for England and Wales. For companies, the law of England and Wales will normally apply if the company itself is registered in England and Wales. In other cases if the governing document does not make it clear, the law which applies will be the country with which the organization is most connected.[11] Where an organization's income does not exceed 5,000 it is not able to register as a charity with the Charity Commission for England and Wales. It can, however, register as a charity with HM Revenue and Customs for Tax purposes only. With the rise in mandatory registration level, to 5,000 by The Charities Act 2006, smaller charities can be reliant upon HMRC recognition to evidence their charitable purpose and confirm their not-for-profit principles.[12] Some charities which are called exempt charities are not required to register with the Charity Commission and are not subject to any of the Charity Commission's supervisory powers. These charities include most universities and national museums and some other educational institutions. Other charities are excepted from the need to register, but are still subject to the supervision of the Charity Commission. The regulations on excepted charities have however been changed by the Charities Act 2006. Many excepted charities are religious charities.[13]
Northern Ireland
Charities in Northern Ireland are registered with the UK HM Revenue and Customs. The Charity Commission for Northern Ireland [14] has now been established and has received the names and details of over 7,000 organisations that have previously been granted charitable status for tax purposes. The entering of these organisations onto a new and temporary list under the heading of Organisations that have previously been known as charities is continuing. This list is not the new register, but will be made publicly available on the CCNI website.
Scotland
The 20,000 or so charities in Scotland are registered with the Office of the Scottish Charity Regulator (OSCR), which also publishes a Register of charities online. Scotland has the highest number of charities per capita in the world.
Taxation of Charities
Charitable organisations, including charitable trusts, are eligible for a complex set of reliefs and exemptions from taxation in the UK. These include reliefs and exemptions in relation to income tax, capital gains tax, inheritance tax, stamp duty land tax and value added tax.
United States
In the United States, a charitable organization is an organization that is organized and operated for purposes that are beneficial to the public interest,[15] however a distinction is made between types of charitable organizations. Every U.S. and foreign charity that qualifies as tax-exempt under Section 501(c)(3) of the Internal Revenue Code is considered a "private foundation" unless it demonstrates to the IRS that it falls into another category. In a general sense, any organization that is not a private foundation (i.e. it qualifies as something else) is usually a public charity as described in Section 509(a) of the Internal Revenue Code.[16] In addition, a private foundation usually derives its principal fund from an individual, family, corporation, or some other single source and is more often than not a grantmaker and does not solicit funds from the public. In contrast, a foundation or public charity generally receives grants from individuals, government, and private foundations and although some public charities engage in grantmaking activities, most conduct direct service or other tax-exempt
Charitable organization activities. This leads to another distinction: Foundations that are generally grantmakers (i.e. they use their endowment to make grants to other organizations, which in turn carry out the goals of the foundation indirectly) are usually referred to as "grantmaker" or "non-operating" foundations. These of course tend to be private foundations. Some private foundations however, (and most public charities) use their received funds to directly engage in service activities themselves and achieve their goals "personally," so-to-speak. Examples of a non-operating private foundation would be the Rockefeller Foundation and the Bill & Melinda Gates Foundation. Examples of operating foundations or public charities include the Elizabeth Glaser Pediatric AIDS Foundation, American Cancer Society, Inc., and the World Wildlife Fund. The requirements and procedures for forming charitable organizations vary from state to state, as do the registration and filing requirements for charitable organizations that conduct charitable activities or solicit charitable contributions.[17] So effectively in practice the detailed definition of charitable organization is determined by the requirements of state law of the state in which the charitable organization operates, and the requirements for federal tax relief set by the IRS.
Federal tax relief

Federal tax law provides tax benefits to non profit organizations recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (IRC). The benefits of 501(c)(3) status include exemption from federal income tax as well as eligibility to receive tax deductible charitable contributions. To qualify for 501(c)(3) status most organizations must apply to the Internal Revenue Service (IRS) for such status.[18] There are several requirements that must be met for a charitable organization to obtain 501(c)(3) status. These include the organization being organized as a corporation, trust, or unincorporated association, and the organizations organizing document (such as the articles of incorporation, trust documents, or articles of association) must limit its purposes to being charitable, and permanently dedicate its assets to charitable purposes. The organization must refrain from undertaking a number of other activities such as participating in the political campaigns of candidates for local, state or federal office, and must ensure that its earnings do not benefit any individual.[15] Most tax exempt organizations are required to file annual financial reports (IRS Form 990) at the state and federal level. A tax exempt organization's 990 and some other forms are required to be made available to public scrutiny. The types of charitable organization that are considered by the IRS to be organized for the public benefit include those that are organized for: 1. 2. 3. 4. 5. 6. 7. 8. 9. Relief of the poor, the distressed, or the underprivileged, Advancement of religion, Advancement of education or science, Erection or maintenance of public buildings, monuments, or works, Lessening the burdens of government, Lessening of neighborhood tensions, Elimination of prejudice and discrimination, Defense of human and civil rights secured by law, and Combating community deterioration and juvenile delinquency.
A number of other organizations, including those organized for religious, scientific, literary and educational purposes, as well as those for testing for public safety and for fostering national or international amateur sports competition, and for the prevention of cruelty to children or animals, may also qualify for exempt status. The IRS, except in rare circumstances, refers to all organizations qualifying for exemption under 501(c)(3) as charities.[19]
List of relevant organizations

Charity regulating bodies
Australian Taxation Office Canada Revenue Agency Inland Revenue Department (Hong Kong) Public Trustee (Ontario) Charity Commission for England and Wales Office of the Scottish Charity Regulator Charity Commission for Northern Ireland [20] United States Internal Revenue Service SHATAC-Pakistan
References
[1] "Extension of Charitable Purpose Bill 2004 (Bills Digest, no. 164, 2003-04)" (http:/ / www. aph. gov. au/ library/ pubs/ bd/ 2003-04/ 04bd164. pdf) (PDF). Australia: Department of Parliamentary Services. . Retrieved 2009-07-25. [2] QLD Office of Fair Trading (http:/ / www. fairtrading. qld. gov. au/ charities. htm) [3] [4] [5] [6] http:/ / www. cra-arc. gc. ca/ chrts-gvng/ menu-eng. html "Registered charity" (http:/ / www. cra-arc. gc. ca/ chrts-gvng/ chrts/ menu-eng. html). Canada Revenue Agency. . Retrieved 2009-07-25. "Charities Act 2006" (http:/ / www. opsi. gov. uk/ acts/ acts2006/ ukpga_20060050_en_1). . Retrieved 2008-08-20. "Charities Commission: Charities and Public Benefit" (http:/ / www. charitycommission. gov. uk/ Charity_requirements_guidance/ Charity_essentials/ Public_benefit/ default. aspx). . Retrieved 2010-08-24. [7] "Seniors Network - Unincorporated Association" (http:/ / www. seniorsnetwork. co. uk/ constitution/ unincorporated. htm/ ). . Retrieved 2008-08-24. [8] "NCVO - Legal structures for voluntary organisations" (http:/ / www. ncvo-vol. org. uk/ askncvo/ index. asp?id=107/ ). . Retrieved 2008-08-24. [9] "Guarantee Company - Not for Profit Companies - Charities" (http:/ / www. sfsgo. com/ guaranteecompany. asp/ ). . Retrieved 2008-08-24. [10] "Charitable Incorporated Organisation (CIO)" (http:/ / www. charitycommission. gov. uk/ registration/ charcio. asp). . Retrieved 2008-08-21. [11] "Registering as a Charity" (http:/ / www. charitycommission. gov. uk/ publications/ cc21. asp). . Retrieved 2008-08-21. [12] Applying to HMRC for recognition as a charity for tax purposes (http:/ / www. hmrc. gov. uk/ charities/ tax/ recognition. htm) [13] "Charity Act 2006" (http:/ / www. llw. co. uk/ charity_act. htm). . Retrieved 2008-08-21. [14] www.charitycommissionni.org.uk [15] "IRS document P557" (http:/ / www. irs. gov/ pub/ irs-pdf/ p557. pdf). . Retrieved 2008-08-27. [16] FoundationCenter.org, What is the difference between a private foundation and a public charity? (http:/ / foundationcenter. org/ getstarted/ faqs/ html/ pfandpc. html), accessed 2009-06-20 [17] "NASCO National Association of State Charity Officials" (http:/ / www. nasconet. org). . Retrieved 2008-08-27. [18] "IRS document P4220" (http:/ / www. irs. gov/ pub/ irs-pdf/ p4220. pdf). . Retrieved 2008-08-27. [19] Governing Nonprofit Organizations, Marion R. Fremont-Smith, Harvard University Press, 2004. [20] http:/ / www. charitycommissionni. org. uk
501(c)
501(c)
Colloquially, a 501(c) organization or simply "a 501(c)" is an American tax-exempt, nonprofit corporation or association. Section 501(c) of the United States Internal Revenue Code (26 U.S.C.501(c) [1]), provides that 28 types of nonprofit organizations are exempt from some federal income taxes. Sections 503 through 505 set out the requirements for attaining such exemptions. Many states refer to Section 501(c) for definitions of organizations exempt from state taxation as well.
Types
According to the IRS Publication 557, in the Organization Reference Chart section, the following is an exact list of 501(c) organization types and their corresponding descriptions.[2] 501(c)(1) Corporations Organized Under Act of Congress (including Federal Credit Unions) 501(c)(2) Title Holding Corporation for Exempt Organization 501(c)(3) Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations 501(c)(4) Civic Leagues, Social Welfare Organizations, and Local Associations of Employees 501(c)(5) Labor, Agricultural, and Horticultural Organizations 501(c)(6) Business Leagues, Chambers of Commerce, Real Estate Boards, etc. 501(c)(7) Social and Recreational Clubs 501(c)(8) Fraternal Beneficiary Societies and Associations 501(c)(9) Voluntary Employee Beneficiary Associations 501(c)(10) Domestic Fraternal Societies and Associations 501(c)(11) Teachers' Retirement Fund Associations 501(c)(12) Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc. 501(c)(13) Cemetery Companies 501(c)(14) State-Chartered Credit Unions, Mutual Reserve Funds 501(c)(15) Mutual Insurance Companies or Associations 501(c)(16) Cooperative Organizations to Finance Crop Operations 501(c)(17) Supplemental Unemployment Benefit Trusts 501(c)(18) Employee Funded Pension Trust (created before June 25, 1959) 501(c)(19) Post or Organization of Past or Present Members of the Armed Forces 501(c)(21) Black lung Benefit Trusts 501(c)(22) Withdrawal Liability Payment Fund 501(c)(23) Veterans Organization (created before 1880) 501(c)(25) Title Holding Corporations or Trusts with Multiple Parents 501(c)(26) State-Sponsored Organization Providing Health Coverage for High-Risk Individuals 501(c)(27) State-Sponsored Workers' Compensation Reinsurance Organization 501(c)(28) National Railroad Retirement Investment Trust
501(c)
General compliance issues

Under Section 511, a 501(c) organization is subject to tax on its "unrelated business income," whether or not the organization actually makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games.[3] Disposal of donated goods valued over $2,500, or acceptance of goods worth over $5,000 may also trigger special filing and record-keeping requirements. Note that "tax exempt" also does not excuse an organization from maintaining proper records and filing any required annual or special-purpose tax returns.[4] Previously, annual returns were not generally required from an exempt organization accruing less than $25,000 in gross income yearly.[5] However, from 2008 onwards, many such organizations must file a yearly "e-Postcard" known as Form 990-N, or risk losing their exemption.[6] Failure to file required returns such as Form 990 (Return of Organization Exempt From Income Tax) may result in monetary fines of up to $250,000 per year. Exempt or political organizations (excluding churches or similar religious entities) must make their returns, reports, notices, and exempt applications available for public inspection. The organization's Form 990 (or similar such public record as the Form 990-EZ or Form 990-PF) is generally available for public inspection and photocopying at the offices of the exempt organization, through a written request and payment for photocopies by mail from the exempt organization, or through a direct Form 4506-A Request for Public Inspection or Copy or Political Organization IRS Form request to the IRS of the exempt organization filing of Form 990 for the past three tax years. The Form 4506-A also allows the public inspection and/or photocopying access to Form 1023 Application for Recognition of Exemption or Form 1024, Form 8871 Political Organization Notice of Section 527 Status, and Form 8872 Political Organization Report of Contribution and Expenditures. Internet access to an organization's 990 and some other forms is available through information services such as GuideStar. Failure to file such timely returns and to make other specific information available to the public also is prohibited.[7]
501(c)(3)
501(c)(3) exemptions apply to corporations, and any community chest, fund, cooperating association or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals.[8] [9] . These bodies are often referred to in shorthand form as "Friends of" organizations[10] [11] [12] [13] [14] . Another provision, 26 U.S.C.170 [15], provides a deduction, for federal income tax purposes, for some donors who make charitable contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be verifiable to be allowed (e.g., receipts for donations over $250). Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging to a charity's continued operation, as many foundations and corporate matching programs do not grant funds to a charity without such status, and individual donors often do not donate to such a charity due to the unavailability of the deduction. Testing for public safety is described under section 509(a)(4) of the code, which makes the organization a public charity and not a private foundation,[16] but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes. The two exempt classifications of 501(c)(3) organizations are as follows:[17] A public charity, identified by the Internal Revenue Service (IRS) as "not a private foundation," normally receives a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections 509(a)(1) through 509(a)(4). A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations, rather than being dispersed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3)
501(c) organizations, which do not qualify as public charities. Before donating to a 501(c)(3) organization, a donor may wish to review IRS Publication 78, which lists organizations currently exempt under 501(c)(3).[18] Donors may also verify 501(c)(3) organizations on the web-based, searchable IRS list of charitable organizations[19] as well as on lists maintained by the states, typically on states' Departments of Justice websites. Churches, however, have specific requirements to obtain and maintain tax exempt status; these are outlined in IRS Publication 1828: Tax guide for churches and religious organizations. [20] This guide clearly outlines activities allowed and not allowed by churches under the 501(c)(3) designation. A private, nonprofit organization, GuideStar, also provides reputable and detailed results for web-based searching to verify information on 501(c)(3) organizations.[21] . Consumers may file IRS Form 13909 with documentation to complain about inappropriate or fradulent (i.e., fundraising, political campaigning, lobbying) activities by any 501(c)(3) tax-exempt organization.[22] .
10
Obtaining status
Most organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023 [23]. The form must be accompanied by a $850 filing fee if the yearly gross receipts for the organization are expected to average $10,000 or more.[24] [25] If yearly gross receipts are expected to average less than $10,000, the filing fee is reduced to $400.[24] [25] There are some classes of organizations that automatically are treated as tax exempt under 501(c)(3), without the need to file Form 1023: Churches, their integrated auxiliaries, and conventions or associations of churches[26] Organizations that are not private foundations and that have gross receipts that normally are not more than $5,000[27] The IRS also expects to release a software tool called Cyber Assistant, which will assist with preparation of the application for tax exemption.
Political activity
Section 501(c)(3) organizations are subject to limits or absolute prohibitions on engaging in political activities. Elections Organizations described in section 501(c)(3) are prohibited from conducting political campaign activities to intervene in elections to public office.[28] The Internal Revenue Service website elaborates upon this prohibition as follows: Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes. Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner. On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate
501(c) or group of candidates, will constitute prohibited participation or intervention. The Internal Revenue Service provides resources to exempt organizations and the public to help them understand the prohibition. As part of its examination program, the IRS also monitors whether organizations are complying with the prohibition. Lobbying In contrast to the absolute prohibition on political campaign interventions by all section 501(c)(3) organizations, public charities (but not private foundations) may conduct a limited amount of lobbying to influence legislation. Although the law states that "No substantial part..." of a public charity's activities can go to lobbying, charities with large budgets may lawfully expend a million dollars (under the "expenditure" test), or more (under the "substantial part" test) per year on lobbying.[29] To clarify the standard of the "substantial part" test, Congress enacted 501 (h) (called the Conable election after its author Representative Barber Conable). The section establishes limits based on operating budget that a charity can use to determine if it meets the substantial test. This changes the prohibition against direct intervention in partisan contests only for lobbying. The organization is now presumed in compliance with the substantiality test if they work within the limits. The Conable Election requires a charity to file a declaration with the IRS and file a functional distribution of funds spreadsheet with their Form 990. IRS form 5768[30] is required to make the Conable election.
11
501(c)(4)
501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of social welfare, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes.[31] 501(c)(4) organizations may lobby for legislation, and unlike 501(c)(3) organizations they may also participate in political campaigns and elections, as long as campaigning is not the organization's primary purpose.[32] The tax exemption for 501(c)(4) organizations applies to most of their operations, but contributions may be subject to gift tax, and income spent on political activities - generally the advocacy of a particular candidate in an election - is taxable.[33] Contributions to 501(c)(4) organizations are not deductible as charitable contributions for the U.S. income tax. 501(c)(4) organizations are not required to disclose their donors publicly.[34] This aspect of the law has led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial.[35] [36] In 2010, a bill (the DISCLOSE Act) was passed by the U.S. House of Representatives that addressed identification of donors to organizations involved in political advocacy,[37] but the bill failed to pass in the Senate.[38]
501(c)(6)
501(c)(6) organizations include Business Leagues, Home Builders Association, Chambers of Commerce, Real Estate Boards, etc. such as the U.S. Chamber of Commerce political action committee and the National Football League.
References
[1] http:/ / www. law. cornell. edu/ uscode/ 26/ 501(c). html [2] IRS, Publication 557 "Tax-Exempt Status For Your Organization", pp. 65-66, (Rev. June 2008), Cat. No 46573C. IRS.gov (http:/ / www. irs. gov/ pub/ irs-pdf/ p557. pdf), Retrieved 1/27/2009. [3] 26 U.S.C. 513(f) (http:/ / www. law. cornell. edu/ uscode/ 26/ 513(f). html). [4] E.g., 26 U.S.C. 6033 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6033. html) and 26 U.S.C. 6050L (http:/ / www. law. cornell. edu/ uscode/ 26/ 6050L. html). [5] Internal Revenue Bulletin 23, 1982, exercising 26 U.S.C. 6033(a)(2)(B) (http:/ / www. law. cornell. edu/ uscode/ 26/ 6033(a)(2)(B). html).
501(c)
[6] "Annual Electronic Filing Requirement for Small Exempt Organizations Form 990-N (e-Postcard)" (http:/ / www. irs. gov/ charities/ article/ 0,,id=169250,00. html). Irs.gov. . Retrieved 2009-05-28. [7] 26 U.S.C. 6652 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6652. html) and 26 U.S.C. 6104 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6104. html). [8] Exempt Purposes - Internal Revenue Code Section 501(c)(3) (http:/ / www. irs. gov/ charities/ charitable/ article/ 0,,id=175418,00. html). [9] IRS Public ation 557 "Tax-Exempt Status For Your Organization", Page 19, (Rev. June 2008), Cat. No 46573C. (http:/ / www. irs. gov/ pub/ irs-pdf/ p557. pdf), Retrieved 2009-03-09. [10] Hopkins, Bruce R. (2011), The Law of Tax-Exempt Organizations (10 ed.), John Wiley and Sons, p.879, ISBN9780470602171 [11] Judith S. Ballan, "How To Aid a Foreign Charity Through an 'American Friends of Organization," in Proceedings of the Twenty-Third New York University Conference on Tax Planning. [12] "Legal Dimensions of International Grantmaking: How a Private Foundation Can Use "Friends of" Organizations" (http:/ / www. usig. org/ legal/ friends_of_organizations. asp). Usig.org. . Retrieved 2011-06-07. [13] "Giving Insights: Meet the expert: Suzanne M. Reisman, Law Offices of Suzanne M. Reisman" (http:/ / gi. philanthropycapital. org/ views/ 33/ meet-the-expert-suzanne-m-reisman-law-offices-of-suzanne-m-reisman). Gi.philanthropycapital.org. 2010-03-03. . Retrieved 2011-06-07. [14] Larkin, Richard F.; DiTommaso, Marie (2011), Wiley Not-for-Profit GAAP 2011: Interpretation and Application of Generally Accepted Accounting Principles, John Wiley and Sons, p.Ch.11, ISBN9780470554456 [15] http:/ / www. law. cornell. edu/ uscode/ 26/ 170. html [16] IRS, Publication 557 "Tax-Exempt Status For Your Organization", p. 43, (Rev. June 2008), Cat. No 46573C. IRS.gov (http:/ / www. irs. gov/ pub/ irs-pdf/ p557. pdf), Retrieved 2009-03-09. [17] IRS, "Life Cycle of a Public Charity/Private Foundation", IRS.gov (http:/ / www. irs. gov/ charities/ charitable/ article/ 0,,id=136459,00. html), Retrieved 2009-03-09. [18] "Publication 78: Seek confirmation from the IRS of whether a 501(c)(3) exemption is in place" (http:/ / www. irs. gov/ app/ pub-78/ ). Internal Revenue Service. . [19] "IRS Search for Charities" (http:/ / www. irs. gov/ charities/ article/ 0,,id=96136,00. html). Internal Revenue Service. . Retrieved 04/24/2011. [20] "Tax guide for churches and religious organizations" (http:/ / www. irs. gov/ pub/ irs-pdf/ p1828. pdf). 26 USC 501(c)(3). Internal Revenue Service. . Retrieved 04/24/2011. [21] "Review a Charity" (http:/ / www2. guidestar. org/ rxg/ give-to-charity/ review-a-charity. aspx). GuideStar. . Retrieved 04/24/2011. [22] "Form 13909: Tax-Exempt Organization Complaint (Referral) Form" (http:/ / www. irs. gov/ pub/ irs-pdf/ f13909. pdf). Internal Revenue Service. . Retrieved 04/24/2011. [23] http:/ / www. irs. gov/ pub/ irs-pdf/ f1023. pdf [24] IRS Form 1023 (http:/ / www. irs. gov/ pub/ irs-pdf/ f1023. pdf) (Rev. 6-2006), p. 12. [25] IRS Exempt Organizations Website (http:/ / www. irs. gov/ charities/ article/ 0,,id=212562,00. html) Retrieved on 2009-09-07. [26] 26 U.S.C. 508(c)(1)(A) (http:/ / www. law. cornell. edu/ uscode/ 26/ 508. html#c_1_A) [27] 26 U.S.C. 508(c)(1)(B) (http:/ / www. law. cornell. edu/ uscode/ 26/ 508. html#c_1_B) [28] "The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations" (http:/ / www. irs. gov/ charities/ charitable/ article/ 0,,id=163395,00. html). Irs.gov. 2009-05-11. . Retrieved 2010-11-23. [29] "Political and Lobbying Activities" (http:/ / www. irs. gov/ charities/ charitable/ article/ 0,,id=120703,00. html). Irs.gov. 2009-05-11. . Retrieved 2009-05-28. [30] "Form 5768" (http:/ / www. irs. gov/ pub/ irs-pdf/ f5768. pdf). . [31] See 26 U.S.C. 501(c)(4)(A) (http:/ / www. law. cornell. edu/ uscode/ 26/ 501(c)(4)(A). html). [32] "Internal Revenue Manual 501(c)(4) Nonprofit Organizations" (http:/ / www. irs. gov/ irm/ part7/ irm_07-025-004. html#d0e332). . [33] "Comparison of 501(c) (3)s, 501(c)(4)s, and political organizations" (http:/ / www. afj. org/ assets/ resources/ resource1/ Comparison-of-501C3S-501C4S. pdf). Alliance for Justice. July, 2007. . [34] "Political activity of environmental groups and their supporting foundations" (http:/ / epw. senate. gov/ public/ index. cfm?FuseAction=Files. View& FileStore_id=142d595f-411a-4057-b495-029a095fe25f). U. S. Senate Committee on Environment and Public Works. September 2008. p. 6. . Retrieved 2010-03-10. [35] Adair, Bill (December 11, 2006). "Groups hide behind tax code" (http:/ / www. sptimes. com/ 2006/ 12/ 11/ Worldandnation/ Groups_hide_behind_ta. shtml). St. Petersburg Times. . [36] Luo, Michael; Strom, Stephanie (September 20, 2010). "Donor Names Remain Secret as Rules Shift" (http:/ / www. nytimes. com/ 2010/ 09/ 21/ us/ politics/ 21money. html). The New York Times. . [37] Huey-Burns, Caitlin (June 25, 2010). "House Passes Campaign Finance Disclose Act" (http:/ / www. usnews. com/ news/ articles/ 2010/ 06/ 25/ house-passes-campaign-finance-disclose-act). U.S. News and World Report. . [38] Memoli, Michael A. (September 24, 2010). "Disclose Act fails to advance in Senate" (http:/ / articles. latimes. com/ 2010/ sep/ 24/ nation/ la-na-disclose-act-20100924). The Los Angeles Times. .
12
501(c)
13
External links
"IRS list of charities eligible to receive deductible contributions search or download" (http://www.irs.gov/ charities/article/0,,id=96136,00.html). Internal Revenue Service. "IRS Publication 557" (http://www.irs.gov/pub/irs-pdf/p557.pdf). Internal Revenue Service. Publication 557 governs 501(c) organizations. "Look up funds in a 501(c)(3) (990 search)" (http://tfcny.fdncenter.org/990s/990search/esearch.php). Foundation Center. "Historical data regarding the number of 501(c) organizations in the U.S." (http://www.data360.org/ graph_group.aspx?Graph_Group_Id=267). Data 360. "Number, Finances and other data on 501(c) organizations" (http://nccs.urban.org). National Center for Charitable Statistics.
Non-profit foundations
A foundation (also a charitable foundation) is a legal categorization of nonprofit organizations that will typically either donate funds and support to other organizations, or provide the source of funding for its own charitable purposes. This type of non-profit organization differs from a private foundation which is typically endowed by an individual or family.
Description
One of the characteristics of the legal entities existing under the status of "Foundations", is a wide diversity of structures and purposes. Nevertheless, there are some common structural elements that are the first observed under legal scrutiny or classification. Legal requirements followed for establishment Purpose of the foundation Economic activity Supervision and management provisions Accountability and Auditing provisions Provisions for the amendment of the statutes or articles of incorporation Provisions for the dissolution of the entity Tax status of corporate and private donors Tax status of the foundation
Some of the above must be, in most jurisdictions, expressed in the document of establishment. Others may be provided by the supervising authority at each particular jurisdiction.
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Foundations in civil law

The term "foundation," in general, is used to describe a distinct legal entity. Foundations as legal structures (legal entities) and/or legal persons (legal personality), may have a diversity of forms and may follow diverse regulations depending on the jurisdiction where they are created. In some jurisdictions, a foundation may acquire its legal personality when it is entered in a public registry, while in other countries a foundation may acquire legal personality by the mere action of creation through a required document. Unlike a company, foundations have no shareholders, though they may have a board, an assembly and voting members. A foundation may hold assets in its own name for the purposes set out in its constitutive documents, and its administration and operation are carried out in accordance with its statutes or articles of association rather than fiduciary principles. The foundation has a distinct patrimony independent of its founder. Foundations are often set up for charitable purposes, family patrimony and collective purposes.
Finland
Foundations in Finland must have state approval and register at the National Board of Patents and Registration within six months from its creation. A minimum capital of 25,000 is obligatory. A foundation can be created with any legal purpose and may have economic activity if this is specified in its Bylaws and the business supports the foundation's purpose.
France
There are not many Foundations in comparison to the rest of Europe. In practice public administration requires at least 1 million is considered necessary. States representatives have a mandatory seat in the Board. [1]
Germany
German regulations allow for the creation of any foundation for public or private purposes in keeping with the concept of a gemeinwohlkonforme Allzweckstiftung. Commercial activities should not be the main purpose of the foundation, but they are permitted if this serves the main purpose of the foundation. There is no minimum starting capital, although in practice at least 50,000 is considered necessary. A German foundation can either be charitable or serving private interest. Charitable foundations enjoy tax shelter and can at the same time be engaged in commercial activities, if so only the commercially active part of the entity is taxed. A family foundation (serving private interest) is taxed like any other legal entity. There is no central register for German foundations. Only charitable foundations are subject to supervision of state authorities. Family foundations are not supervised after establishment. All forms of foundations can however be eliminated if they pursue anti-constitutional aims. Foundations are supervised by local authorities within each state (Bundesland) due to the fact that each Bundesland has exclusive legislative power over the laws governing foundation. In contrast to many other countries, German law allows a tax sheltered charitable foundation to distribute up to one third of its profit to the founder and the next of his kin, if they are needy, or for maintenance of the founder's grave. These benefits are subject to taxation. As of 2008, there are about 15,000 foundations in Germany, about 85% of them are charitable foundations. It is notable that more than 250 charitable German foundations have existed for more than 500 years, the oldest dates back to 1509. Although there are so many charitable foundations, there are also large German corporations owned by foundations, e.g. Bertelsmann, Carl Zeiss AG or Lidl. Foundations are the main providers of private scholarships (Stipendien) to German students.
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Italy
In Italy, a foundation is a private non profit and autonomous organisation, its assets must be dedicated to a purpose established by the founder. The founder cannot receive any benefits from the foundation or have reverted the initial assets. The private foundations or civil code foundations are under the section about non commercial entities of the first book (Libro Primo) of the Civil Code of Law (Codice Civile) from 1942. The Art. 16 CC establishes that the statutes of the foundation must contain its name, purpose, assets, domicile, administrative organs and regulations, and how the grants will be distributed. The founder must write a declaration of intention including a purpose and endow assets for such purpose. This document can be in the form of a notarised deed or a will. To obtain legal personality, the foundation must enroll in the legal register of each Prefettura (local authority) or some cases the regional authority. There are several nuances in requirements according to each foundation's purpose and area of activity.
Netherlands
See private foundation in the Netherlands.
Spain
Foundations in Spain are organizations founded with the purpose of not seeking profit and serving the general needs of the public. Such foundation may be founded by private individuals or by the public. These foundations have an independent legal personality separate from their founders. Foundations serve the general needs of the public with a patrimony that funds public services and which may not be distributed to the founders' benefit.
Sweden
A foundation in Sweden (Stiftelse) is a legal entity without an owner. It is formed by a letter of donation from a founder donating funds or assets to be administered for a specific purpose. When the purpose is for the public benefit, a foundation may enjoy favourable tax treatment. A foundation may have diverse purposes, including but not limited to public benefit, humanitarian or cultural purposes, religious, collective, familiar, or the simple passive administration of funds. Normally, the supervision of a foundation is done by the county government where the foundation has its domicile, however, large foundations must be registered by the County Administrative Board (CAB), which must also supervise the administration of the foundation. The main legal instruments governing foundations in Sweden are the Foundation Act (1994:1220) and the Regulation for Foundations (1995:1280).
Foundations in common law

Canada
Under Canadian law, foundations may be public or private, but both are charities. They collectively comprise a large asset base for philanthropy
Ireland
The law does not prescribe any particular form for a foundation in Ireland. Most commonly, foundations are companies limited by guarantee or trusts. A foundation can obtain a charity registration number from the Revenue Commissioners for obtaining tax relief as far as they can be considered under the law on charity, however, charitable status does not exist in Ireland. The definition usually applied is that from the Pemsel Case of English jurisprudence (1891) and the Irish Income Tax Act 1967. Trusts have no legal personality and companies acquire their legal status through the Company law and the required documents of incorporation. Foundations are not required to register with any public authority.
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Jersey
The States of Jersey are considering introducing civil law type foundations into its law. A consultation paper presenting a general discussion on foundations was brought forth to the Jersey government concerning this possibility. adopted by the states of Jersey 22 October 2008 - Foundations (Jersey) Law 200-
United Kingdom
In the UK, the word "foundation" is sometimes used in the title of a charity, as in the British Heart Foundation and the Fairtrade Foundation. Despite this, the term is not generally used in English law, and (unlike in civil law systems) the term has no precise meaning. Instead, the concept of Charitable Trust is in use (for example, the Wellcome Trust).
USA
In the United States, many philanthropic and charitable organizations are considered to be foundations. However, the Internal Revenue Code distinguishes between private foundations (usually funded by an individual, family, or corporation) and public charities (community foundations or other nonprofit groups that raise money from the general public). While they offer donors more control over their charitable giving, private foundations have more restrictions and fewer tax benefits than public charities.
References
[1] http:/ / www. law-school. de/ fileadmin/ user_upload/ medien/ BLS-Publikationen/ Stiftungsrecht%20Frankreich. pdf
Further reading
Dwight F. Burlingame, Philanthropy in America: A Comprehensive Historical Encyclopedia, Santa Barbara, Calif. [etc.] : ABC-CLIO, 2004 Mark Dowie, American Foundations: An Investigative History. Cambridge, Massachusetts: The MIT Press, 2001. Lester Salamon et al., "Global Civil Society: Dimensions of the Nonprofit Sector", 1999, Johns Hopkins Center for Civil Society Studies. David C. Hammack, editor, "Making the Nonprofit Sector in the United States", 1998, Indiana University Press. Joan Roelofs, Foundations and Public Policy: The Mask of Pluralism, State University of New York Press, 2003, ISBN 0791456420
Further listening
Joan Roelofs, The Invisible Hand of Corporate Capitalism, Recorded at Hampshire College, April 18, 2007. (http://www.traprockpeace.org/edrussell/JoanRoelofs18April07AImedia.mp3)
Private foundations
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Private foundations
A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets.[1] However, most private foundations are much smaller and approximately two-thirds of more than 84,000 filing with the IRS in 2008 have less than $1 million in assets and 93% have less than $10 million.[1] In aggregate, private foundations in the U.S. control over $628 billion in assets[1] and made more than $44 billion in charitable contributions in 2007.[2] Unlike a charitable foundation, a private foundation does not generally solicit funds from the public.
Description
One of the characteristics of the legal entities existing under the status of "Foundations", is a wide diversity of structures and purposes. Nevertheless, there are some common structural elements that are the first observed under legal scrutiny or classification. Legal requirements followed for establishment Purpose of the foundation Economic activity Supervision and management provisions Accountability and auditing provisions Provisions for the amendment of the statutes or articles of incorporation Provisions for the dissolution of the entity Tax status of corporate and private donors Tax status of the foundation
Some of the above must be, in most jurisdictions, expressed in the document of establishment. Others may be provided by the supervising authority at each particular jurisdiction.
Common law
The following foundations are set up under common law legal systems:
Bahamas
Foundations were first introduced in The Bahamas in December 2004 following the Foundations Act. [3]
USA
A private foundation, in the United States, is a charitable organization described in the Internal Revenue Code by section 509[4] . A private foundation is necessarily a 501(c)(3) exempt organization (or a former such entity). It is defined by a negative definition: by what it is not. A private foundation is not a public charity, as described in section 170(b)(1)(A) (i) through (vi). Neither is it a section 509(a)(2) organization, nor a supporting organization. [5] Private foundations are subject to 2% excise taxes found in section 4940 through 4945 of the internal revenue code. [6] Once a charity becomes a private foundation, it retains that status unless it follows the difficult termination rules of section 507.
Private foundations
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Civil law
The following foundations are set up under civil law legal systems:
Austria
The Austrian Private Foundation (Privatstiftung) was last reformed under the Private Foundation Act in September 1993.
Liechtenstein
The Liechtenstein Family Foundation (Stiftung) was first introduced in 1926.
Netherlands
A foundation in the Netherlands (Stichting) is a legal person created through a legal act. This act is usually either a notarised deed (or a will) that contains the articles of the foundation which must include the first appointed board. No government authority is involved in the creation or authorization of a foundation, it acquires full legal capacity through its sole creation. A foundation has no members and its purpose must be stated in its articles, using capital dedicated to such goal. The foundations are defined in the Dutch Civil Code (Burgerlijk Wetboek), Boek 2 Art 285-304. It is not necessary in the Netherlands that a foundation serves a purpose of general interest, but its official goal cannot include making payments to anybody, except for charitable causes. The foundations are governed and represented by a board that is responsible for its administration, this board has not a requirement for specific number of members. Art. 2:289 of the Civil Code establishes that all foundations must be registered in the Register of Commerce or "Handelsregister". Commercial activities are allowed if they are within the purpose of the foundation and are taxed. Board members can be held liable for the foundation, civilly as well as criminally. The Dutch Tax Service can declare an institution to be an "institution for general benefit" (algemeen nut beogende instelling, ANBI), with tax benefits. Often, but not necessarily, this is a foundation. Conversely, not every foundation qualifies. Examples: Cornelis Kruseman Stichting Stichting Museumjaarkaart - purpose: promote visiting Dutch museums Nederlandse Omroep Stichting - purpose: make news and sports programmes for the three Dutch public television channels and the Dutch public radio services Stichting FERN - purpose: promote greater environmental and social justice, focusing on forests and forest peoples rights Stichting isfth - purpose: supporting individual artists and stimulating artistic audio visual developments. Stichting Talent-aid International - purpose: promote and support artists, composers and performers mainly via the internet. Stichting INGKA Foundation - purpose: promote and support innovation in the field of architectural and interior design Stichting Max Havelaar Stichting Pensioenfonds ABP - pension fund for the government and educational sectors Stichting Pensioenfonds Zorg en Welzijn - pension fund for the healthcare and social work sectors Wiardi Beckman Stichting
Private foundations
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Netherlands Antilles
Foundation legislation was last reformed in 1998, giving rise to the Netherlands Antilles Private Foundation (Stichting Particulier Fonds).
Nevis
The Nevis Multiform Foundation was first introduced in 2005.
Panama
The Panama Private Interest Foundation was first introduced in 1995, modelled on the Liechtenstein Family Foundation.
Saint Kitts
The Saint Kitts Foundation was introduced following the Foundation Act of 2003.
Sweden
A private foundation in Sweden (Stiftelse) is formed by a letter of donation from a founder donating funds or assets to be administered for a specific purpose. A private foundation may have diverse purposes, including but not limited to collective, familiar, or the purpose of passive administration of funds. Normally, the supervision of a private foundation is done by the county government where the foundation has its domicile, however, large foundations must be registered by the County Administrative Board (CAB), which must also supervise the administration of the foundation. The main legal instruments governing private foundations in Sweden are those that regulate foundations in general: the Foundation Act (1994:1220) and the Regulation for Foundations (1995:1280).
References
[1] [2] [3] [4] [5] [6] National Center for Charitable Statistics Foundation Center http:/ / www. bfsb-bahamas. com/ foundations/ index. html 26 U.S.C. 509 (http:/ / www. law. cornell. edu/ uscode/ 26/ 509. html) IRS webpage, which defines private foundations (http:/ / www. irs. gov/ charities/ charitable/ article/ 0,,id=96114,00. html) Excise taxes on private foundations (http:/ / www. irs. gov/ charities/ foundations/ article/ 0,,id=137841,00. html)
Foundations under US law
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Foundations under US law

A foundation in the United States is a type of charitable organization. However, the Internal Revenue Code distinguishes between private foundations (usually funded by an individual, family, or corporation) and public charities (community foundations and other nonprofit groups that raise money from the general public). Private foundations have more restrictions and fewer tax benefits than public charities like community foundations.
History
The two most famous philanthropists of the Gilded Age pioneered the sort of large-scale private philanthropy of which foundations are a modern pillar: John D. Rockefeller and Andrew Carnegie. The businessmen each accumulated private wealth at a scale previously unknown outside of royalty, and each in their later years decided to give much of it away. Carnegie gave away the bulk of his fortune in the form of one-time gifts to build libraries and museums. Rockefeller followed suit (notably building the University of Chicago), but then gave nearly half of his fortune to create the Rockefeller Foundation. By far the largest private permanent endowment for charitable giving created at that time, the Rockefeller Foundation was the first to became a widely understood example of the species: a standing charitable grant-making entity outside of direct control by any level of government. Meanwhile in 1914, Fredrick Goff, a well-known banker at the Cleveland Trust Company, sought to eliminate the "dead hand" of organized philanthropy and so created the first community foundation in Cleveland. He created a corporately structured foundation that could utilize community gifts in a responsive and need-appropriate manner. Scrutiny and control resided in the "live hand" of the public as opposed to the "dead hand" of the founders of private foundations. Starting at the end of World War II, the United States's high top income tax rates spurred a burst of foundations and trusts being created, of which many were simply tax shelters. President Harry S. Truman publicly raised this issue in 1950, resulting in the passage later that year of a federal law that established new rigor and definition to the practice. The law did not go very far in regulating tax-exempt foundations, however, a fact which was made obvious throughout the rest of that decade as the foundation-as-tax-refuge model continued to be propagated by financial advisors to wealthy families and individuals. Several attempts at passing a more complete type of reform during the 1960s culminated in the Tax Reform Act of 1969, which remains the controlling legislation in the United States. For more details on that legislative history, see [1].
Types
In the United States, "foundation" has no special legal status under Federal law (unlike "incorporated"), so an organization may have the word "foundation" in its name and not be a charitable foundation of any sort however, state law may impose restrictions; for example, Michigan permits its use only for nonprofits with "the purpose of receiving and administering funds for perpetuation of the memory of persons, preservation of objects of historical or natural interest, educational, charitable, or religious purposes, or public welfare."[2] The distinction between charitable organizations and non-profit organizations elaborates on this point. The Internal Revenue Code defines many kinds of non-profit organizations which do not pay income tax. However, only charitable organizations can receive tax-deductible contributions and avoid paying property and sales tax. For instance, a donor would receive a tax deduction for money given to a local soup kitchen if the organization was classified as a 501(c)(3) organization, but not for giving money to the National Basketball Association, even though the NBA is a non-profit association.[3] Neither a public charity nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.
Foundations under US law Tax-exempt charitable organizations fall into two categories: public charities and private foundations. A community foundation is a public charity. The US Tax Code in 26 USCA 509 [4] governs private foundations. Meanwhile 26 USCA 501(c)(3) governs public charities.
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Community foundation
Community foundations are instruments of civil society designed to pool donations into a coordinated investment and grant-making facility dedicated primarily to the social improvement of a given place. In other words, a community foundation is like a public foundation. This type of foundation requires community representation in the governing board and grants made to improve the community. Often there will be a city that has a community foundation where the governing board comprises many leaders of the business, religious, and local interests. Such grants that the community foundation would then make would have to benefit the people of that city. For an example see the Cleveland Foundation. Express public involvement and oversight in community foundations allow their classficiation as public charities rather than private foundations.[5]
Private foundation
Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. When a person or a corporation founds a private foundation frequently family members of that person or agents of the corporation are members of the governing board. This limits public scrutiny over the private foundation, which entails unfavorable treatment compared to community foundations. The differing treatment of private foundations compared to public charities including community foundations is as follows: (a) foundation must pay out 5% of its assets each year while a public charity does not; (b) donors to a public charity receive greater tax benefits than donors to a foundation; (c) a public charity must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not. Operating and non-operating For tax purposes, there are a few variants of private foundation. The material difference is between "operating" foundations and "grant-making" foundations. Operating foundations, like Wikimedia Foundation, Inc., use their endowment to achieve their goals directly. Grant-making foundations, like the Rockefeller Foundation, use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. Operating foundations have preferential tax treatment in a few areas, including allowing individual donors to contribute more of their income and allowing grant-making foundation contributions to count towards the 5% minimum distribution requirement.[6]
Legal requirements
Private foundation
The Tax Reform Act of 1969 defined the fundamental social contract offered to private foundations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a private foundation must (a) pay out at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.
Foundations under US law Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones. Congressional proposals to exclude those costs from the payout requirement typically receive much attention during boom periods when foundation endowments are earning investment returns much greater than 5% (such as the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (such as 2001-2003).
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References
[1] http:/ / www. law. nyu. edu/ ncpl/ library/ proceedings/ Conf1999TroyerPaper. pdf [2] MCL 450.2212(3) (http:/ / www. legislature. mi. gov/ (S(mwvi4i3o2hojhpvrtxlsoa45))/ mileg. aspx?page=getObject& objectName=mcl-450-2212) [3] Council on Foundations Guide to Tax Treatment of Charities (pdf) (http:/ / www. cof. org/ files/ Documents/ Legal/ tax& charity. pdf) [4] http:/ / www. law. cornell. edu/ uscode/ uscode26/ usc_sec_26_00000509----000-. html [5] Council on Foundations overview of Foundation Basics (http:/ / www. cof. org/ learn/ content. cfm?ItemNumber=578& navItemNumber=1978) [6] IRS Overview of Types of Foundations (http:/ / www. irs. gov/ charities/ foundations/ article/ 0,,id=136403,00. html)
External links
IRS Guide for Charitable Organizations (http://www.irs.gov/charities/charitable/index.html)
Limited liability company

A limited liability company (LLC) is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions. LLCs do not need to be organized for profit. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner. It is important to understand that limited liability does not imply that owners are always fully protected from personal liabilities. Courts can and sometimes will pierce the corporate veil of corporations (or LLCs) when some type of fraud or misrepresentation is involved.[1]
Flexibility and default rules

The phrase "unless otherwise provided for in the operating agreement" (or its equivalent) is found throughout all existing LLC statutes and is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed (provided it does not go outside legal bounds). State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise. Similarly, the phrase "unless otherwise provided for in the bylaws" is also found in all corporation law statutes but often refers only to a narrower range of matters....
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Income taxation
For U.S. Federal income tax purposes, LLCs are treated by default as a pass-through entity.[2] If there is only one member in the company, the LLC is treated as a "disregarded entity" for tax purposes, and an individual owner would report the LLC's income on his or her individual tax return. For LLCs with multiple members, the LLC is treated as a partnership and must file the IRS Form 1065. The members of the LLC would be treated as partners and each would receive a K-1 reporting the share of the LLC's income or loss to be reported on that member's tax return. As an option, LLCs may also elect to be taxed as a corporation by filing IRS Form 8832.[3] They can be treated as a regular C corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members), or an LLC can elect to be treated as an S corporation. Some commentators have recommended an LLC taxed as an S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings).[4]
Advantages
Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility. Limited liability, meaning that the owners of the LLC, called "members," are protected from some or all liability for acts and debts of the LLC depending on state shield laws. Much less administrative paperwork and record keeping than a corporation. Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation. Using default tax classification, profits are taxed personally at the member level, not at the LLC level. LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate legal standing from their members (see recent D.C. decisions). LLCs in some states can be set up with just one natural person involved. Less risky to be "stolen" by fire-sale acquisitions (More protection against "hungry" investors). For Real Estate companies, each separate property can be owned by its own, individual LLC, thereby shielding not only the owners, but their other properties from cross-liability.[5]
Disadvantages
Although there is no statutory requirement for an operating agreement in most states, members of a multiple member LLC who operate without one may run into problems. Unlike state laws regarding stock corporations, which are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. Thus, in the absence of such statutory provisions, the members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document. It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation. Many states, including Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a "margin tax".) In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of
Limited liability company those factors, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as: tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations. The District of Columbia considers LLCs to be taxable entities, thus eliminating the benefit of flow-through taxes by subjecting members to double taxation.[6] Typically, LLCs will choose to be taxed as a partnership to avoid double taxation, which occurs in corporations. This allows companies to distribute their income among members who then report it on their personal tax returns. Renewal fees may also be higher. Maryland, for example, charges a stock or nonstock corporation $120 for the initial charter, and $100 for an LLC. The fee for filing the annual report the following year is $300 for stock corporations and LLC, and zero for non-stock corporations. In addition, certain states, such as New York, impose a publication requirement upon formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region that the LLC will be located that it is being formed. For LLC's located in major metropolitan areas (e.g. New York City), the cost of publication can be significant. The management structure of an LLC may be unfamiliar to many. Unlike corporations, they are not required to have a board of directors or officers. (This could also be seen as an advantage to some.) Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes, for example if a US LLC does business outside the US or a resident of a foreign jurisdiction is a member of a US LLC.[7] The principals of LLCs use many different titlese.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.
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Variations
A Professional Limited Liability Company (PLLC, P.L.L.C., or P.L.) is a limited liability company organized for the purpose of providing professional services. Usually, professions where the state requires a license to provide services, such as a doctor, chiropractor, lawyer, accountant, architect, landscape architect, or engineer, require the formation of a PLLC.[8] However, some states, such as California, do not permit LLCs to engage in the practice of a licensed profession. Exact requirements of PLLCs vary from state to state. Typically, a PLLC's members must all be professionals practicing the same profession. In addition, the limitation of personal liability of members does not extend to professional malpractice claims. A Series LLC is a special form of a Limited liability company that allows a single LLC to segregate its assets into separate series. For example, a series LLC that purchases separate pieces of real estate may put each in a separate series so if the lender forecloses on one piece of property, the others are not affected.
History by country
Companies with limited liability exist in business law worldwide. However, the limited liability company is a specific legal structure defined by the laws of U.S. states, with quite distinct characteristics. Many other countries have similar structures.
Argentina
"Sociedad de Responsabilidad Limitada" (S.R.L.) (Ley de sociedades comerciales 19.550 [9]) The capital is divided into "quotas" (unlike the "Sociedades Anonimas (S.A.)" which capital is divided in "shares"); members limit their responsibility to the nominal value of the quotas subscribed or later acquired. The number of members shall not exceed fifty. The administration and representation of the company corresponds to one or more managers, members of the company or not, designated for a specified or unspecified period of time. Alternates may be selected in case of
Limited liability company vacancy.
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Belgium
In Belgium, there are several forms of corporation which provide limited liability. The Besloten Vennootschap met Beperkte Aansprakelijkheid (BVBA) in Dutch, or Socit prive responsabilit limite (SPRL) in French, is the smallest, with minimum required startup capital of EUR 18,550, and is mostly used by smaller business owners to protect themselves in case of bankruptcy. Profits are not taxed personally at the member level but always at the BVBA level.
Bosnia and Herzegovina

Bosnian and Herzegovinian legislation, similarly to that in Croatia, contemplates LLCs as drutvo s ogranienom odgovornou (d.o.o.). Companies using this structure append the abbreviation d.o.o. to their company name. A shareholder or member in a d.o.o. is only personally liable up to the value of the member's investment in the company.[10]
Brazil
The corporate structure in Brazilian law most similar to the United States LLC is the Sociedade Limitada ("Ltda."), under the new Brazilian Civil Code of 2002. The "sociedade limitada" is the new name of the "sociedade por quotas de responsabilidade limitada", and it can be organized as "empresria" or "simples", under this new code, roughly corresponding to the form types of "comercial" [commercial] and "civil" [non commercial] of the Commercial Code.
Bulgaria
Bulgarian legislation contemplates LLCs as (Druzhestvo s ogranichena otgovornost; Partnership with limited liability). Companies working under this structure append the abbreviation (OOD) to their name. In case of an LLC with individual owner it is contemplated as (Ednolichno druzhestvo s ogranichena otgovornost; One-man/ Single-member partnership with limited liability) and abbreviated as (EOOD).[11]
Chile
Chilean legislation contemplates LLCs as Sociedad Comercial de Responsabilidad Limitada (Limited Liability Commercial Association). Companies working under this structure append the abbreviation Ltda. to their name. Therefore, a company which in the United States is called SomeCompany LLC would be called SomeCompany Ltda. in Chile. However, in the case of an LLC with one individual owner, the equivalent in Chile would be an Empresa Individual de Responsabilidad Limitada which uses the EIRL abbreviation.
Colombia
Colombian legislation contemplates a very similar structure as mentioned above in the Chilean case. The Ltda. abbreviation is also used in Colombia. However, in the case of an LLC with one individual owner, the equivalent in Colombia would be an Empresa Unipersonal which uses the EU abbreviation.
Croatia
Croatian legislation contemplates LLCs as drutvo s ogranienom odgovornou. Companies working under this structure append the abbreviation d.o.o. to their name.
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Czech Republic
Czech legislation contemplates LLCs as spolenost s ruenm omezenm (s.r.o. or spol. s r.o.). An s.r.o. is not technically comparable to an LLC because the profits are still subject to double taxation. Czech law does not offer a possibility to start up a limited company without the possibility of avoiding double taxation. The minimum start-up capital for an s.r.o. is CZK 200,000 (approximately USD 11,000).
Denmark
The Danish form of the LLC is the anpartsselskab (see ApS). The minimum capital is required by law to be at least DKK 80,000 (approximately US$ 16,000) [Before 1 March 2010 DKK 125,000].[12]
Dominican Republic
Dominican Republic legislation contemplates LLCs as Sociedad de Responsabilidad Limitada, also known for their abbreviation "S.R.L.". S.R.L.'s award limited liability to its members up to their contribution in the company (i.e. contribution of capital). This type of company began after the law number 479 of the year 2008.
Estonia
In Estonia, a limited liability company is referred to as osahing (O). The type of entity is also required to be identified in the name.
Finland
Although not an exact equivalent, the Finnish version of the LLC is the Oy (osakeyhti) or in Swedish Ab (aktiebolag). An Oy is taxed as a corporation. The minimum capital required by law is EUR 2,500.[13]
France
S.A.R.L. or Socit Responsabilit Limite is close to German GmbH. It was in law since 1925. See also the full article : Socit responsabilit limite
Germany
Because of its hybrid characteristics it is very difficult to determine the German equivalent. On one hand it is possible to consider it as a kind of Gesellschaft mit beschrnkter Haftung (GmbH) because it has aspects of a corporation; on the other hand it could be considered as a kind of Kommanditgesellschaft (KG), which is the German equivalent of a limited partnership. Based on the literal translation of the word "company" an LLC should be considered as a kind of KG without any liable partner. For the purpose of taxation the Bundesfinanzministerium (German Federal Ministry of Finance) gives detailed guidelines of the circumstances under which a LLC is to be considered as a "corporation" or as a "limited partnership"; see: Steuerliche Einordnung der nach dem Recht der Bundesstaaten der USA gegrndeten Limited Liability Company [14].
Hungary
Hungarian legislation contemplates LLCs as Korltolt felelssg trsasg. Companies working under this structure append the abbreviation Kft. to their name. Hungarian LLCs were previously required to have a 3million HUF (Hungarian Forint) (approx. 16k USD) starting capital. This amount has been recently reduced and currently (in 2009) the minimum starting capital is 500k HUF (approx. 2.7k USD). The time of formation by the new electronic formation option has been reduced from 2 weeks to 2 hours, additional cost of formation is around 100k HUF (approx. 540 USD). Kft.s can be formed by the cooperation of lawyers. The Hungarian Kft. is the most common form of doing business in Hungary. As being part of the European Union (EU), Hungarian Kft.s can now obtain an
Limited liability company EU VAT registration number for doing business across the EU. The Hungarian EU-VAT reg.number starts with "HU". This way the existence of the subject company, VAT issues and the cross-check is available on the common EU website for companies.
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Iceland
According to the Icelandic legislation there are two types of LLC forms, private and public held limited liability forms. Private LLC is abbreviated "Ehf." with the minimum capital of 500.000 Icelandic krnas (kr.). Public LLC is abbreviated "Hf." with minimum capital of 2.000.000 kr.
India
In India LLCs are known as Limited Liability Partnership (LLP). There is no minimum capital. In India Companies are governed and registered under the Companies Act, 1956. New enactment Limited Liability Partnership Act, 2008 is passed for taking care of smaller firms. Under the CA1956, every state has one office of Registrar of Companies under this act. The group of people as prescribed by the act sign together the document Memorandum & Articles of Association and submit to the registrar along with the fees. The Registrar after checking the documents, registers the Company and allocates the Corporate ID number. Since 2007, the registration is done online and payment of fees is accepted online. Institute of Company Secretaries of India, a statutory body appointed under this act, registers charter member for rendering the services under this act, to the corporate. Then Company can apply for PAN card (registration under Income Tax Act, 1961), bank account, apply for issue of shares (for public Companies), of apply for loan to the banks and FIs. The Company must include Limited (for public Companies) or Private Limited (for Private Companies). The Companies registered under section 25 of this act are non-profit Companies..
Italy
The Italian Civil Code, approved in 1942 and as amended by the Government Act 6/2003 and furthers modifications, mainly provides three forms of limited liability company: Societ per azioni (S.p.A.): the minimum required starting capital for an SpA is EUR 120,000. The capital is divided into shares (azioni) that can be transferred by endorsment or bought and sold on stock exchange. Only SpAs can be quoted in stock exchange market, issue corporate bonds and other financial instruments. SpA form and a higher capital are required by law to operate in protected businesses (i.e. banks, leasing companies, etc.) Societ a responsabilit limitata (Srl). The minimum required starting capital for an Srl is EUR 10,000. Its capital is divided into stakes (quote) whom can be bought or sold just by notarial act. SRLs can issue corporate bonds but are subject to many limitations. Similar to SRL is Societ Cooperativa a Responsabilit Limitata whose scope is not making profit but give benefits to stakes' holders. Societ in accomandita per azioni (Sapa). The minimum required starting capital for a Sapa is EUR 120,000 divided into shares. Sapas have a mixed liability scheme, where standard shareholders have limited liability while managing shareholders have full liability. Except this, SAPAs are exactly like SPAs even if uncommon. Companies append the corresponding abbreviation to their company names.
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Japan
Japan passed legislation in 2006 creating a new type of business organization, godo kaisha(J-LLC), a close variant of the American LLC. Japanese Tax authority does not consider J-LLC (Godo-Kaisha) pass-through entity, but as taxable entity.
Latvia
In Latvia, a limited liability company is referred to as Sabiedrba ar Ierobeotu Atbildbu. Abbreviation SIA is usually added before the company name. SIAs are recorded in a public register called Register of Enterprises (UR) [15] .
Lithuania
In Lithuania, a limited liability company is referred to as udaroji akcin bendrov. Abbreviation UAB is usually added before the company name. The minimum required starting capital is currently 10,000 LTL (approximately 3000 EUR).[16] The sum can be immediately invested.
Mexico
Mexican legislation contemplates LLCs as Sociedades de Responsabilidad Limitada, also known for their abbreviation "S. de R.L.". S. de R.L.'s award limited liability to its members up to their contribution in the company (i.e. contribution of capital) and also act as pass-through or flow-through entities whereby profits are "passed-through" to its members, avoiding double taxation. This type of company is widely used by foreign investors in Mexico because of its "pass-through" modality and its "check the box" capability under the IRC (Internal Revenue Code of the U.S.).
Moldova
Moldovan legislation contemplates LLCs as Societate cu Rspundere Limitat, abbreviated "S.R.L.", and are regulated member(s)-founder(s), and other non-founder members, minimum one member-founder and maximum total of 50 members, at least one of them must be the founder of the company, but all of the 50 could be also founders.
Netherlands
In the Netherlands the equivalent to an LLC is a Besloten Vennootschap. Its name always starts or ends with the letters BV. Minimum capital of a BV is 18,000, normally deposited in a Dutch bank. BV's are taxed on profits, but not on royalty income, nor on capital. Audits are only required if two out of three conditions exist: 1. revenue greater than 8.8M, 2. assets are greater than 4.4M, 3. more than 50 employees in the Netherlands.[17]
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Norway
In Norway the equivalent to an LLC is a Aksjeselskap. Its name always starts or ends with the letters AS or ASA. Minimum capital of a AS is 100 000 NOK.
Pakistan
In Pakistan LLCs are known as private companies that end with Pvt. Ltd.. They should have at least Rs. 100,000 as their minimum paid up capital.
Peru
There is no direct equivalent of an LLC in Peru, but some similar corporate forms include: Sociedad annima cerrada (SAC), a corporation which must have at least two and not more than twenty shareholders ; its shares may not be offered to the public and cannot be traded on the stock exchange. Sociedad comercial de responsabilidad limitada (SRL), a commercial partnerhip divided in equal participations which may not be called "shares". It must have at least two and not more than twenty partners. Sociedad civil de responsabilidad limitada (S civil de RL), a professional partnership of at least two and not more than thirty individuals, with co-owner participation in the form of capital, of professional contribution, or of any combination of both. Empresa individual de responsabilidad limitada (EIRL), a legal entity with one single owner. The capital for any of the above entities is freely determined by its statutes. There is no minimum requirement except for entities with certain types of activities, mainly in the financial markets, and then irrespective of their type.[18]
Poland
In Poland, a limited liability company is referred to as Spka z ograniczon odpowiedzialnoci (abbreviated as Sp. z o.o.). The minimum start capital is 5,000 PLN (since 2009; until then, 50,000 PLN).
Portugal
In Portugal, LLCs are called "Sociedades de Responsabilidade Limitada", that is, Company of limited responsibility, usually abbreviated "Lda.". They are tax subject, and company shares cannot be sold in a public market, the transference of them having to be done compulsorily in the presence of a civil law notary, in the same way other major properties have to be sold. Nonetheless, the responsibility of the partners is limited to the capital share they hold, and the minimum capital required by law for a "Lda.". is at least 5000 euro.
Romania
Romania recognizes the limited liability company since 1990 under the name of "societate cu rspundere limitat" (S.R.L.) in which the owners are personally liable for the company obligations within the limit of their contribution to social capital. The minimum start capital is 200 RON which currently amounts to less than 50 Euro[19]
Russia
"" (with Cyrillic letters) redirects here. For other uses, see OOO (Latin letters). In Russia and certain other former Soviet countries, an entity with a somewhat similar structure is known as (lit., 'Society with Limited Liability'), usually abbreviated OOO, or in some CIS countries as OOO.
Limited liability company Although a Russian limited liability company shares the same name with a USA LLC, it is different in many ways. Most importantly, Russian LLC is not tax transparent: the company is taxed at the corporate level, and then, upon distribution of dividends, shareholders pay income tax (personal or corporate). A limited liability company is the most popular form of legal undertaking in Russia for simple shareholding structures.[20]
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Serbia
Serbian legislation contemplates LLCs as drutvo sa ogranienom odgovornou. Companies working under this structure append the abbreviation d.o.o. or DOO to their name same as in Croatia.
Slovakia
In Slovakia, the law contemplates spolonos s ruenm obmedzenm (abbr. spol. s r. o.) or as the rough equivalent of a limited liability company. One to 50 associates can found it through a founding agreement with minimum capital of 5000, minimum 750 per person, in money or other property. ( 105 and following of Act. No 513/1991 Coll. Commercial Code as amended)
Slovenia
Slovenian legislation contemplates LLCs as druba z omejeno odgovornostjo. Companies working under this structure append the abbreviation d.o.o. to their name. The minimum required starting capital for a d.o.o. is 7.500 EUR. Due to high cost and complicated bookkeeping of a real Corporation, this is a more widespread form.
Spain
In Spain, LLCs are called "Sociedad de responsabilidad limitada", that is, Company of limited responsibility, usually abbreviated S.L. They are tax subject, and company shares cannot be sold in a public market, the transference of them having to be done compulsorily in the presence of a civil law notary, in the same way other major properties have to be sold. Nonetheless, the responsibility of the partners is limited to the capital share they hold, and the minimum capital required by law for a S.L. is at least 3000 euro.
Sweden
Sweden has no equivalent of an LLC. The closest is the Swedish AB (aktiebolag), though a Swedish AB is a tax subject and is more similar to a US C Corporation than an LLC. The minimum capital required by law for a minimum at SEK 50,000.[21] for a private AB and SEK 500,000 for a public AB.[22]
Switzerland
The Swiss Code of Obligations[23] provides for different kinds of companies with limited liability, the two most commonly used are: Swiss Limited Liability Company:[24] [25] The terms for this kind of company used in the three official languages of the Swiss Confederation are as follows: In German Gesellschaft mit beschrnkter Haftung (abbreviation: GmbH), in French Socit responsabilit limite (abbreviation: S. r.l. or SARL) and in Italian Societ a Garanzia Limitata (abbreviation: SaGL). A Swiss LLC is similar to a LLC with respect to various matters, including the following: Members may also be natural persons, corporations, partnerships or other LLCs,[26] the liability of a member of a Swiss LLC to pay for the LLC's obligations is limited to its capital contribution,[27] a Swiss LLC may be either member-managed or manager-managed,[28] and, unless otherwise provided for in the operating agreement, the members right to control or manage a Swiss LLC is proportionate to their individual membership interest.[29] The membership interests in a Swiss LLC have to be registered[30] and, thus, they may only be issued in the name of a
Limited liability company member but not to the bearer. Swiss Corporation[25] [31] (in English common law context usually translated as company limited by shares): The terms for this kind of company used in the three official languages of the Swiss Confederation are as follows: In German Aktiengesellschaft (abbreviation: AG), in French Socit Anonyme (abbreviation: SA) and in Italian Societ Anonima (abbreviation: SA). A Swiss corporation is with respect to various matters different to a LLC (including a Swiss LLC): Most important is that a Swiss corporation may, neither by default nor by exercising any respective option provided by the Swiss law, be member-managed like a LLC, as the respective mandatory provisions of Swiss law provide that the board of directors has certain non-transferable duties.[32] Furthermore, the shares of a Swiss corporation may also be issued to the bearer (bearer shares)[33] and, thus, not only in the name of a holder (registered shares), which, however, applies to the membership interests in a Swiss LLC, which may only be registered.
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Turkey
In Turkey, "Limited irket (Ltd. ti.)" corresponds to Limited Liability Company.
United Kingdom
The new form of limited liability partnership (LLP), created in 2000, is similar to a US LLC in being tax neutral: member partners are taxed at the partner level, but the LLP itself pays no tax. It is treated as a body corporate for all other purposes including VAT. Otherwise, all companies, including limited companies and US LLCs, are treated as bodies corporate subject to United Kingdom corporation tax if the profits of the entity belong to the entity and not to its members.
Ukraine
This type of entity exists in this country since the 1990s. In Ukrainian it is spelled " " (abbreviated T, T), in transliteration "Tovarystvo z Obmezhenoyu Vidpovidalnistyu," that is, "Company of limited liability."
U.A.E.
This type of entity exists in the U.A.E. states as a widely accepted way to do business and is referred as L.L.C..
United States
A Limited Liability Company (LLC) is a relatively new business structure authorized by state statute.[34] The LLC is chiefly inspired by the GmbH, a type of business organization in Germany, and by limitadas, a type of business organization available in many Latin American countries.[35] In the United States, the first limited liability company act appeared in Wyoming in 1977 as special interest legislation for an oil company.[36] In 1980, the Internal Revenue Service issued a private letter ruling to an LLC formed under Wyoming LLC Act indicating that the IRS would treat the LLC as a partnership for federal tax purposes.[37] However, later that year, the IRS proposed regulations that would deny partnership classification to any business entity in which no member bore personal responsibility for the entitys liabilities.[38] In 1982, Florida adopted an LLC act modeled on Wyomings LLC Act.[39] Due to uncertainty over the tax treatment of LLCs, no other states introduced LLC legislation until after 1988.[40] In 1988, the IRS issued a revenue ruling stating that it would treat a Wyoming-style LLC as a partnership for tax purposes.[41] By 1996, nearly every state had enacted an LLC statute.[42] The National Conference of Commissioners on Uniform State Laws adopted the Uniform Limited Liability Company Act in 1996 and revised it in 2006.[43] AOL was setup as a LLC during its ownership by Time Warner from 2001 to 2008. There is a similar setup for BMW's American subsidiary, BMW of North America, LLC.
32
References
[1] Bernstein Law Firm, Limited Liability Companies: Could your personal assets be at risk? (http:/ / www. bernsteinlaw. com/ pdfs/ tricias_article_with_letter. pdf) [2] http:/ / www. irs. gov/ pub/ irs-pdf/ iss4. pdf [3] http:/ / www. irs. gov/ pub/ irs-pdf/ f8832. pdf [4] http:/ / www. legalzoom. com/ incorporation-guide/ corporate-tax-advantage. html [5] http:/ / incplan. net/ index. php/ incplan-special-reports/ 64-real-estate-investors-are-forming-llcs. html [6] http:/ / www. incfile. com/ WashingtonDC-LLC-Corporation/ #content [7] For example, HMRC in the United Kingdom, see HMRC Tax Manuals, DT19853A (http:/ / www. hmrc. gov. uk/ manuals/ dtmanual/ DT19853A. htm) [8] Who Can Own an LLC (http:/ / the-llc-company. com/ form-llc/ who-can-own-an-llc/ ) [9] http:/ / www. infoleg. gov. ar/ infolegInternet/ anexos/ 25000-29999/ 25553/ texact. htm [10] [Types of Companies in BiH http:/ / fipa. gov. ba/ local_v2/ default. asp] [11] Commerce Law of Bulgaria, English translation, Chapter 13, Section I, Article 116 (http:/ / www. fifoost. org/ bulgarien/ recht/ en/ commerce_law/ Commerce-Law. pdf) [12] Synopsis Article 1, Paragraph 2 (http:/ / translate. google. com/ translate?prev=hp& hl=en& js=n& u=http:/ / www. themis. dk/ synopsis/ index. asp?hovedramme=/ synopsis/ docs/ lovsamling/ anpartsselskabsloven. html& sl=da& tl=en& history_state0=) [13] Limited Liability Companies Act 2006 (English translation) http:/ / www. finlex. fi/ en/ laki/ kaannokset/ 2006/ en20060624. pdf [14] http:/ / www. usag24. com/ doc/ BMF_Richtlinie_LLC_2004. pdf [15] http:/ / www. baltic-legal. com/ latvia/ [16] Republic of Lithuania, Law on Companies (http:/ / www3. lrs. lt/ pls/ inter3/ dokpaieska. showdoc_l?p_id=302415) [17] http:/ / www. ocra. com/ jurisdictions/ netherlands. asp, retrieved 8 December 2010 [18] http:/ / www. sunarp. gob. pe/ Aten24h/ pdf/ Anexo02. pdf [19] http:/ / www. cdep. ro/ pls/ legis/ legis_pck. htp_act_text?idt=59637 [20] Limited Liability Company: Encyclopedia of Russian Law (http:/ / www. russianlawonline. com/ content/ russia-form-doing-business-limited-liability-company) [21] Swedish Companies Registration Office about Aktiebolag http:/ / bolagsverket. se/ foretag/ aktiebolag/ [22] http:/ / www. bolagsverket. se/ foretag/ aktiebolag/ starta_aktiebolag/ privat_eller_publikt/ publika_aktiebolag/ [23] official German text: http:/ / www. admin. ch/ ch/ d/ sr/ 220/ index3. html, official French text: http:/ / www. admin. ch/ ch/ f/ rs/ 220/ index3. html, official Italian text: http:/ / www. admin. ch/ ch/ i/ rs/ 220/ index3. html [24] Swiss Code of Obligations, articles 772ss [25] Unofficial translation of term pursuant to: Swiss Code of Obligations, Volume II, Company Law, Articles 552 964, English Translation of the Official Text, Swiss-American Chamber of Commerce, Zurich 1992 [26] Swiss Code of Obligations, article 722 paragraph 1 [27] Swiss Code of Obligations, article 802 [28] Swiss Code of Obligations, article 811 [29] Swiss Code of Obligations, article 808 paragraph 4 [30] Swiss Code of Obligations, article 790 [31] Swiss Code of Obligations, articles 620ss [32] Swiss Code of Obligations, article 716a [33] Swiss Code of Obligations, article 622 paragraph 1 [34] Limited Liability Company (LLC) (http:/ / www. irs. gov/ businesses/ small/ article/ 0,,id=98277,00. html) [35] Historical Background of the Limited Liability Company (http:/ / www. llc-reporter. com/ 16. htm) [36] Keatinge et al.,The Limited Liability Company: A Study of the Emerging Entity, 47 Business Lawyer 375, 383-384 (Feb. 1992) (citing Act of March 4, 1977, ch. 155, 1977 Wyo.Sess.Laws 512). [37] Priv. Ltr. Rul. 81-06-082, 1980 WL 137231 (Nov. 18, 1980) [38] Prop. Treas. Reg. 301.7701-2, 45 Fed. Reg. 75,709 (1980) [39] Fla.Stat.Ann. 608.401-471 [40] Keatinge et al.,The Limited Liability Company: A Study of the Emerging Entity, 47 Bus. Law. 375, 383-384 (Feb. 1992) [41] Rev.Rul. 88-76, 1988-2 C.B. 360. [42] Larry E. Ribstein, A Critique of the Uniform Limited Liability Company Act, 25 Stetson Law Review 312, 322 (1995). [43] Limited Liability Company (Revised) (http:/ / www. nccusl. org/ Act. aspx?title=Limited Liability Company (Revised)). Uniform Law Commission.
33
Ethics
Account of profits
An account of profits (sometimes referred to as an accounting for profits or simply an accounting) is a type of equitable remedy most commonly used in cases of breach of fiduciary duty.[1] It is an action taken against a defendant to recover the profits taken as a result of the breach of duty, in order to prevent unjust enrichment. In conducting an account of profits, the plaintiff is treated as if they were conducting the business of the defendant, and made those profits which were attributable to the defendant's wrongful actions. This can be rather complex in practice, because the defendant's accounting records must be examined (sometimes by a forensic accountant) to determine what portion of his gross profits were derived to the wrongful act in question.[2] Historically an account was not an equitable remedy, but was an action at common law, and is therefore technically an instrument of law, though it arose at a time before the distinction between law and equity was marked.[3] Co-owners in concurrent estates also have the right to an accounting of profits, in order to properly apportion income from the use or leasing of the property. Case law has shown roughly two approaches to assessing the extent of an account of profits[4] : 1. To account not of the entire business but of the particular benefits which flowed to him in breach of his duty; 2. To account for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution of the fiduciary (the approach in Boardman v Phipps)
References
[1] Black's Law Dictionary, 7th ed. 1999 [2] Leigh Ellis, Theory into Action: Calculating Damages Payments and Accounts of Profits in Patent Cases (http:/ / www. mondaq. com/ article. asp?articleid=44776) [3] National Trust Co. v. H & R Block Canada Inc., 2003 SCC 66. [4] Hospital Products Ltd. v United States Surgical Corporation
External links
Leigh Ellis, Theory into Action: Calculating Damages Payments and Accounts of Profits in Patent Cases (http:// www.thefreelibrary.com/Theory+Into+Action+-+Calculating+Damages+Payments+And+Accounts+Of... -a0155672840) Article discussing accounts of profits in the context of patent infringement under United Kingdom law. (mirror of referenced article)
Asset forfeiture
34
Asset forfeiture
Asset forfeiture is confiscation, by the State, of assets which are either (a) the alleged proceeds of crime or (b) the alleged instrumentalities of crime, and more recently, alleged terrorism. Instrumentalities of crime are property that was allegedly used to facilitate crime, for example cars allegedly used to transport illegal narcotics. The terminology used in different jurisdictions varies. Some jurisdictions use the term "confiscation" instead of forfeiture. In recent years there has been a growing trend for countries to introduce civil forfeiture and such proceedings may be brought in the USA, Australia, the UK, Ireland, Italy, South Africa, various Canadian Provinces and Antigua.
Issues
Proponents of seizure suggest that it is a necessary tool to prevent drug trafficking or other crimes. "Asset forfeiture is a law enforcement success story" [1]. Statistics indicate that asset forfeiture has failed to prevent methamphetamine drug crime in South Africa [2]. Former United States president George H. W. Bush said, "[Asset forfeiture laws allow [the government] to take the alleged ill-gotten gains of drug kingpins and use them to put more cops on the streets."
Legal
The civil law/criminal law distinction
Most legal systems distinguish between the criminal and the civil, generally using separate courts, different procedures and different evidential rules. The traditional view is that crimes are public wrongs and that the criminal law addresses those who harm society through morally culpable acts in order that punishment may be imposed and potential offenders may thereby be deterred from committing similar offenses. Criminal proceedings are therefore officially designated ceremonies of guilt designation and the label criminal carries with it a social stigma, which is not imposed on the losing party in a civil action. Because of this stigma and the potential punishment, which may be imposed by a criminal court, legal systems provide procedural protections above those available to a respondent in a civil case. For example, criminal proceedings require a standard of proof. In the civil proceedings against Simon Prophet [2] no evidence was presented by the state to the courts. The court's decision to deprive Prophet of his home was based solely on affidavits. Generally it is the state that brings criminal proceedings. However, this is not an absolute rule since many jurisdictions also allow private individuals to initiate criminal prosecutions. The bringing of civil proceedings is, by comparison, primarily the forum for a wronged private individual. Nevertheless this too is not an absolute position, as the state also may sue in the civil courts as a wronged individual, for example, in respect of a contractual dispute with a multinational company. Civil law does not aim to punish, but rather is designed to provide two types of remedy. Firstly, it provides a remedy requiring a return to the way things were, the status quo ante, so as to restore the position of an injured party. Secondly, it provides a remedy to compensate an injured party for harm done to him. While the traditional view of civil and criminal proceedings might be described as neighboring countries divided by a common border, this dichotomy is not as distinct as that metaphor might suggest. In recent years there has been a growing homogeneity between criminal and civil procedures. Criminal cases now often involve civil, or quasi-civil, procedures and some civil litigation has become quasi-criminal. Indeed it has been said that almost every attribute associated with the criminal law also appears in civil law and vice versa. This significant disintegration of the wall between criminal and civil proceedings has occurred on a number of fronts and is due, at least in part, to the fact that multiple strategies are now used to deal with crime. An early example was the use of injunctions to protect victims of domestic violence, even though, to obtain such an injunction, the plaintiff may be alleging the commission of a criminal assault. Rather than the traditional dichotomize perspective therefore, legal proceedings might be better
Asset forfeiture seen as a continuum, with distinctly civil proceedings at one end and clearly criminal proceedings at the other. Between the two ends of the continuum are a range of possibilities, each of which may be more or less criminal or civil.
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The trend towards civil forfeiture

The traditional approach to serious criminality has been arrest, followed by the institution of criminal proceedings with a view to conviction and imprisonment. In recent years a confiscation or forfeiture element has been added to the criminal process in many jurisdictions. The US Presidents Commission on Organized Crime argued for a broader response than a solely criminal one in 1986: "To be successful, an attack on organized crime in our mainstream economy cannot rely solely on the enforcement of federal criminal lawsThe Commission believes that a strategy aimed at the legitimate economic base of organized crime must build upon the recent successes of law enforcement, and must be based upon intervention measures as broad-based as the nature of the threat posed by organized crime. A strategy in this area should also rely upon civil and regulatory measures tailored to the specific problems confronted..." Although most prevalent in the USA, jurisdictions that have introduced civil forfeiture legislation include Italy, South Africa, Ireland, the United Kingdom, Fiji, the Canadian Provinces of Ontario, Alberta, Manitoba, Saskatchewan and British Columbia, Australia and its individual States, and Antigua and Barbuda. In addition, the Commonwealth has produced model provisions to serve as a template for jurisdictions that wish to introduce such legislation. Advocates justify this trend towards civil forfeiture by citing the nature of organized crime. Organized crime heads use their resources to keep themselves distant from the crime that they are controlling and to mask the criminal origin of their assets. Thus it is thought to be too difficult to carry out successful criminal investigations leading to the prosecution and conviction of such individuals, so that finances derived from crime are often effectively out of the reach of the law and are available to be used to finance more crime. Criminal confiscation regimes may be seen as inadequate and ineffective in these cases. Civil asset forfeiture has been harshly criticized by liberals and civil libertarians for its greatly reduced standards for conviction, reverse onus, and financial conflicts of interests arising when the law enforcement agencies who decide whether or not to seize assets stand to keep those assets for themselves.[3] [4] [5] [6]
Asset forfeiture in the United States

There are two types of forfeiture cases, criminal and civil. Almost all forfeiture cases practiced today are civil. In civil forfeiture cases, the US Government sues the item of property, not the person; the owner is effectively a third party claimant. Once the government establishes probable cause that the property is subject to forfeiture, the owner must prove on a "preponderance of the evidence" that it is not. The owner need not be judged guilty of any crime. In contrast, criminal forfeiture is usually carried out in a sentence following a conviction and is a punitive act against the offender. Since the government can choose the type of case, a civil case is almost always chosen. The costs of such cases is high for the owner, usually totaling around $10,000 and can take up to three years. The United States Marshals Service is responsible for managing and disposing of properties seized and forfeited by Department of Justice agencies. It currently manages around $1 billion worth of property. The United States Treasury Department is responsible for managing and disposing of properties seized by Treasury agencies. The goal of both programs is to maximize the net return from seized property by selling at auctions and to the private sector and then using the property and proceeds for law enforcement purposes. A form of asset forfeiture is roadside forfeiture during a vehicle stop. Usually enforcing State policies by Highway police, local law enforcement have built up seized funds and spent them with oversight only from local judges who sometimes benefit from the expenditures of such funds. The presumption is that travelers hiding large amounts of
Asset forfeiture cash are transporting drug money. Often, the vehicle occupants are required to simply sign a waiver that they will leave the State and not return, thus also not attempt to retrieve their funds. Some complain that this is law enforcement action requires more oversight in order to minimize the impact on travelers who are not involved in drug money but who simply wish to avoid further involvement with law enforcement agents and sign the waiver anyway. Sen. John Whitmire, D-Houston, chair of the Senate Criminal Justice Committee is investigating the Tenaha, Texas Police seizures scandal. The number of federal statutes giving the government the right to confiscate citizens assets has nearly doubled since the 1990s, by one count [7]. More than 400 federal statutes allow for forfeiture for a wide range of reasons, including violations of the Northern Pacific Halibut Act.
36
Asset forfeiture in the United Kingdom

In the UK asset forfeiture proceedings are initiated under the Proceeds of Crime Act 2002. These fall into various types. Firstly there are confiscation proceedings, which may follow a criminal conviction. Secondly, there are cash forfeiture proceedings, which take place (in England and Wales) in the Magistrates Court with a right of appeal to the Crown Court, having been brought by either the police or Customs. Thirdly, there are civil recovery proceedings that at the moment are brought by the Assets Recovery Agency "ARA". Under the Serious Crime Act 2007 ARA's functions will be transferred to the Serious Organized Crime Agency and the National Policing Improvement Agency.[8] Neither cash proceedings nor proceedings for a civil recovery order require a prior criminal conviction. In Scotland, confiscation proceedings are initiated by the procurator fiscal or Lord Advocate through the Sheriff Court or High Court of Justiciary. Cash forfeiture and civil recovery are brought by the Civil Recovery Unit of the Scottish Government in the Sheriff court, with appeals to the Court of Session.
Asset forfeiture in Ireland

Ireland was one of the first countries to introduce Asset Forefeiture in the form of the Criminal Assets Bureau which initiates civil forfeiture proceedings and the Director of Public Prosecutions who initiates confiscation proceedings. It was set up under the Criminal Assets Bureau Act,1996 by the Irish Government in response to the murder of investigative journalist Veronica Guerin who was actively digging up dirt on the Irish Criminal Underworld.
Abuses and controversy

The widespread use of such proceedings, which usually involve assertion of in rem jurisdiction, has also brought many complaints about their misuse to deprive innocent persons of their lawful property. Without a requirement to prove that a crime had been committed, much less committed by the party in possession of the property, it has become too easy for law enforcement personnel to seize and prosecutors to forfeit properties worth as much as $20,000 because it will likely cost the person that much in legal fees to recover them. This is because in such cases the courts no longer abide by the old common law rule that the party in possession is to be presumed the lawful owner unless it is proved otherwise. Thus, a person carrying $6,000 in cash to a vehicle auction where the auctioneer will only take cash may be stopped and his cash seized because it is presumed only a drug dealer would have or carry that much cash. The problem is exacerbated by the laws and rules that allow the agencies seizing the assets to keep the money for their operations, including the funding of salaries and promotions, the purchase of vehicles and equipment, and discretionary spending. In addition, there are often not strict controls on how the assets are liquidated, and law enforcement agents are discovered to have acquired forfeited assets, such as vehicles, boats, and other luxury items, without having paid full market value for them, or even anything at all. There have even been complaints about law enforcement officers seizing cash and other assets under the pretext of forfeiture and then just keeping them without reporting the seizure.
Asset forfeiture Another potential abuse involves the timing of police seizures. The police cannot auction seized illegal drugs, but using asset forfeiture they can keep or auction lawful goods purchased with money from the sale of illegal drugs. If the police wait to arrest a suspect they believe to be in possession of illegal drugs until after he or she has sold them, they stand to gain more from asset forfeiture than if they effect an immediate arrest while the suspect is still in possession of the illegal drugs. In this way, police forces are perversely discouraged to stop the sale of illegal drugs, so that the value of these drugs may be converted through unlawful sales into property the police can make use of. The opportunity of forfeiture also gives the police an incentive to exert political influence, in their official capacity and through their unions, against liberalization of drug laws. In South Africa the Prevention of Organized Crime Act of 1998 is inconsistent with section 25(1) of the South African Bill of Rights. Even before a person has committed a crime, the right of every person to own property is severely derogated by civil forfeiture. According to section 36(1), civil rights may be derogated only to the extent that the derogation is reasonable and justifiable.
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Notable United States forfeitures

After the Madoff investment scandal had surfaced, Bernard Madoff was ordered to forfeit $170 billion, although it is believed that he did not have anywhere close to that amount. His wife, Ruth, although not charged, agreed to forfeit about $80 million in assets.[9] In 2009 Lloyds Bank forfeited $350 million in connection with violations of the International Emergency Economic Powers Act (IEEPA) (falsified outgoing wire transfers to persons on U.S. sanctions lists).[10] In 2009 Credit Suisse, a Swiss corporation, forfeited $536 million in connection with violations of IEEPA.[11] In 2010 Barclays Bank forfeited $298 million in connection with violations of the IEEPA and the Trading with the Enemy Act.[12] In 2010 ABN Amro Bank forfeited $500 million in connection with violations of the IEEPA and the Trading with the Enemy Act.[13]
References
[1] [2] [3] [4] [5] [6] [7] [8] [9] http:/ / www. usmarshals. gov/ duties/ asset. htm http:/ / www. simonprophet. com http:/ / reason. com/ archives/ 2010/ 01/ 26/ the-forfeiture-racket http:/ / www. economist. com/ node/ 16219747 http:/ / motherjones. com/ kevin-drum/ 2010/ 04/ civil-asset-forfeiture http:/ / www. fear. org/ http:/ / online. wsj. com/ article/ SB10001424053111903480904576512253265073870. html? Serious Crime Act 2007, section 74 "Report: Ruth Madoff Agrees To Forfeit $80M" (http:/ / www. cbsnews. com/ stories/ 2009/ 06/ 28/ business/ main5119673. shtml). CBS News. June 28, 2009. . [10] Justice.gov (http:/ / www. justice. gov/ opa/ pr/ 2009/ January/ 09-crm-023. html) [11] Justice.gov (http:/ / www. justice. gov/ opa/ pr/ 2009/ December/ 09-ag-1358. html) [12] Newyork.fbi.gov (http:/ / newyork. fbi. gov/ dojpressrel/ pressrel10/ nyfo081810. htm) [13] Financialtaskforce.org (http:/ / www. financialtaskforce. org/ 2010/ 05/ 10/ former-abn-amro-bank-n-v-agrees-to-forfeit-500-million-in-connection-with-conspiracy-to-defraud-the-u-s-with-violation-of-bank-secrecy-act/ )
Asset forfeiture
38
Further reading
Levy, Leonard Williams (1996). A License to Steal: The Forfeiture of Property. Chapel Hill: University of North Carolina Press. ISBN0-8078-2242-6.
External links
The Looting of America (http://www.isil.org/resources/lit/looting-of-america.html), leaflet published by International Society for Individual Liberty Simon Prophet (http://www.simonprophet.com/), victim of forfeiture in South Africa Introduction to forfeiture laws (http://www.law.cornell.edu/background/forfeiture/), by Legal Information Institute, Cornell University List of offenses that trigger federal forfeiture (http://www.fear.org/fedstat2a.html) More (http://www.fear. org/fedstat2b.html) Judge David Demers - Search & Seizure Outline (http://www.countyjudges.com/Demers/index.html) South Africa's Constitutional Safeguards are in Tatters (http://www.freemarketfoundation.com/ShowArticle. asp?ArticleType=Publication&ArticleID=1217)
Dishonest assistance
Dishonest assistance, or knowing assistance, is a type of third party liability under trust law. It is usually seen as one of two liabilities established in Barnes v Addy,[1] the other one being knowing receipt. To be liable for dishonest assistance, there must be a breach of trust or fiduciary duty by someone other than the defendant, the defendant must have helped that person in the breach, and the defendant must have a dishonest state of mind. The liability itself is well established, but the mental element of dishonesty is subject to considerable controversy which sprang from the House of Lords case Twinsectra Ltd v Yardley.[2]
History
It is a common belief that dishonest or knowing assistance originates from Lord Selbourne's judgment in Barnes v Addy[1] : [S]trangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions, unless those agents received and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. As can be seen, the judgment laid down two heads of liability: one based on receipt of trust property (knowing receipt) and the other on assisting with knowledge in a dishonest and fraudulent design (knowing assistance). Lord Selbourne's statement has been heavily criticized, particularly on the requirement that the defaulting fiduciary / trustee has to be dishonest or fraudulent. A commentator noted that Fyler v Fyler and AG v The Corporation of Leicester, two decisions on knowing assistance in the 1840s which predated Barnes v Addy, did not mention the moral quality of the breach induced or assisted at all.[3] Another debate was regarding the type of knowledge that would suffice to impose liability. Peter Gibson J in Baden v Socit Gnrale identified 5 categories of knowledge which was subject to much debate and led the courts into "tortuous convolutions".[4]
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Nature
Secondary
The prevalent view is that liability for dishonest assistance is secondary. Therefore, the liability of the assistant is premised on that of the defaulting fiduciary / trustee and he/she will be jointly and severally liable with the fiduciary / trustee whom he/she assisted. However, Charles Mitchell recognized possible difficulties with this categorization: firstly, secondary liability means that the dishonest assistant will be liable for the disgorgement gains of the defaulting fiduciary / trustee, while the fiduciary / trustee will not be liable for secret profits of the dishonest assistant; secondly, the assessment of exemplary damages against the dishonest assistant will be based on that of the fiduciary / trustee which can be undesirable.[5] There are also views that liability for dishonest assistance should be primary. However, such views have yet to receive judicial endorsement.[6]
Constructive trusteeship
Dishonest assistants have been frequently described by courts as constructive trustees. However, such classification is not without difficulty: dishonest assistance is often imposed even if there is no obviously identifiable property subject to the trust; also, in many cases of dishonest assistance property has reached the hands of innocent third parties who may not be under any obligation to restore it.[7] Some commentators have sought to explain this on the basis that there is a type of constructive trust which can arise even if there is no identifiable trust property.[8] However, the prevalent view is that dishonest assistance is a personal liability that does not result in an imposition of constructive trust.[7] This view has the support of Lord Millett who remarked in Dubai Aluminium Co v Salaam[9] :
Equity gives relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally (and I have suggested unfortunately) described as a 'constructive trustee' and is said to be 'liable to account as a constructive trustee'. But he is not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property... In this second class of case the expressions 'constructive trust' and 'constructive trustee' create a trap... The expressions are nothing more than a formula for equitable relief'... I think we should now discard the words 'accountable as constructive trustee' in this context and substitute the words 'accountable in equity'.
Elements
Breach of trust
The trustee or fiduciary of the claimant must be liable for a breach of trust or fiduciary duty. It is sufficient if the trust in question is a resulting trust[10] or constructive trust[11] . Previously, it was thought that the dishonest assistant would not be liable unless the defaulting trustee was also dishonest or fraudulent[1] , but Royal Brunei Airlines v Tan confirmed that there is no such requirement in English law. However, the requirement of dishonest or fraudulent design on the part of the defaulting fiduciary / trustee is still part of the law in Australia.[12] [13] Whether a breach of trust should be required at all has been queried by a commentator, since no breach is required for the analogous tort of interference with contractual relations and if the fiduciary reasonably relies on the probity and competence of the dishonest assistant, the claimant would be left with no remedy.[14]
40
Assistance by defendant
This element is a question of fact as to whether the defendant has been accessory to the misfeasance or breach of trust in question.
Dishonesty
The test Historically in England, liability would be imposed on persons who assisted in a breach of trust or fiduciary duty "with knowledge"[1] . Hence its previous name of "knowing assistance". It should be noted that knowledge is still the cornerstone of the liability in Australia[12] [13] and Canada.[15] The modern English terminology emerged in Royal Brunei Airlines v Tan[16] in which the Privy Council rejected knowledge as an element of the liability and replaced it with a requirement for dishonesty. After opting for the imposition of fault-based liability, Lord Nicholls said,
In the seminal case Royal Brunei Airlines v Tan, Royal Brunei Airlines appointed Borneo Leisure Travel (BLT) to act in Sabah and Sarawak as its general travel agent. The arrangement constituted BLT a trustee for the airline of the money it received from the sale of passenger and cargo transportation. The money received by BLT on behalf of the airline was paid into BLTs ordinary current account. Any balance in its current account in excess of a stated amount was transferred at times to a fixed deposit account of Mr. Tan, who was BLT's managing director and principal shareholder. BLT was required to pay the airline within 30 days, but at times from 1988 onwards, it was in arrears. In August 1992, the airline terminated the agreement and subsequently claimed against Mr. Tan in respect of the unpaid money.
Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly...'Knowingly' is better avoided as a defining ingredient of the principle...
His Lordship went on to articulate a test for dishonesty, which is generally perceived to be an objective test with some subjective characteristics:
Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh [17]
41
), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates anothers property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
Hence, the conduct of the defendant is to be assessed according to an objective standard of dishonesty in light of the actual knowledge of the defendant. When undertaking such exercise, the court will also have regard to personal attributes of the defendant, such as his experience and intelligence, and the reason why he acted as he did. His Lordship then gave a few examples of dishonesty, such as deception, knowingly taking the property of others, participation in a transaction in light of knowledge that it involves a misapplication of trust assets, willful blindness etc. The issue was later reconsidered in Twinsectra Ltd v Yardley in the House of Lords, which unfortunately returned a different answer. The majority in that case held that Lord Nicholls in Royal Brunei meant to say that, for a person to be held liable as an accessory to a breach of trust, he had to have acted dishonestly by the ordinary standards of reasonable and honest people and have been himself aware that by those standards he was acting dishonestly. This became known as the "combined test", namely a standard which requires both subjective and objective states of mind. Lord Hutton's reason for adopting the combined test is that a finding by a judge that a defendant has been dishonest is a grave finding, and it is particularly grave against a professional man. Therefore, in his view, a higher level of blameworthiness is required to impose liability in dishonest assistance. Lord Millett delivered a dissenting judgment, maintaining that Royal Brunei decided that the test of dishonesty is objective, although account must be taken of subjective considerations such as the defendants experience and intelligence and his actual state of knowledge at the relevant time. But it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was. The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this. His Lordship gave 3 reasons for this: 1. Consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability. 2. The objective test is in accordance with Barnes v Addy and the traditional doctrine. 3. The claim for knowing assistance is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract. What Lord Hutton said in Twinsectra has now been reinterpreted and restated by the Privy Council in Barlow Clowes International v Eurotrust International.[18] In that case, Lord Hoffmann reaffirmed the objective test, i.e. the one maintained by Lord Millett in Twinsectra, as the correct test for dishonesty. His Lordship interpreted Lord Hutton's reference to 'what he knows would offend normally acceptable standards of honest conduct' as meaning only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. His Lordship said that it is no necessary for the defendant to have reflections what those normally acceptable standards of honest conduct were. Subsequently, the lower English courts have adopted the test laid down in Barlow Clowes, although theoretically it is not open to them to refuse to follow the House of Lords decision in Twinsectra. In Abou-Rahmah v Abacha[19] before the English Court of Appeal, Arden LJ endorsed Barlow Clowes as representing the current English law for 4
Dishonest assistance reasons: 1. Barlow Clowes did not require a departure from Twinsectra, but merely give guidance as to the proper interpretation to be given to Twinsectra as a matter of English law. 2. Barlow Clowes drew no distinction between the law of Isle of Man and English law 3. Members of the Privy Council in Barlow Clowes were all member of House of Lords, and included 2 members of the majority from Twinsectra. The House of Lords is unlikely to come to a different view as to the proper interpretation of Twinsectra. 4. There are no overriding reasons why in the context of civil liability (as opposed to criminal liability) the law should take account of the defendants subjective views of the morality of his actions. However, the other two judges, Pill LJ and Rix LJ, refused to get drawn into the controversy as it was unnecessary to decide on the proper test for dishonesty to dispose of the appeal. In fact, some commentators have suggested that Pill LJ seems to support the combined test in Twinsectra, although he did not make it explicit.[20] In AG of Zambia v Meer Care & Desai[21] , Peter Smith J at the Chancery Division opined that the question of objective/subjective test is an over elaboration and endorsed the test set out in Royal Brunei, which he regards as another way of posing the jury question "was the defendant dishonest". He disagreed with Lord Hutton's view in Twinsectra that Lord Millett was articulating a purely objective test. He also regarded Lord Hutton's justification for the combined test, that dishonesty is a grave finding against professionals, as erroneous since it is no less grave for a non profession to be accused of dishonesty and there had been plenty of dishonest professionals. The test in Royal Brunei and Barlow Clowes has been accepted as the law in New Zealand in the New Zealand Court of Appeal case US International Marketing Ltd v National Bank of NZ Ltd. However, one of the three judges (Tipping J) applied a reasonable person test as opposed to the honest person test in determining the question of dishonesty. What knowledge constitutes dishonesty In Agip (Africa) Ltd v Jackson[22] and Twinsectra v Yardley, Lord Millett remarked that it is not necessary the dishonest assistant should be aware of the identity of the victim or nature of the breach and knowledge that the money is not at the free disposal of the assisted person suffices to impose liability. Similarly, in Barlow Clowes, Lord Hoffmann said it is unnecessary for the dishonest assistant to know of the existence of breach or the facts; it is enough if he /she knows or suspects he is assisting in misappropriation of money without knowing money is held on trust. What level of suspicion suffice to trigger the liability continues to trouble the courts. In Abou-Rahmah, Arden LJ opined that the dishonest assistant is not dishonest if he only has general suspicions about impropriety as opposed to particular suspicions regarding specific transactions. However, Rix LJ thought otherwise and said that general suspicion is enough to trigger the liability.
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Relationship with knowing receipt

Traditionally, dishonest assistance and knowing receipt are seen as two distinct heads of liability: one is fault based, while the other is receipt based. However, there has been academic discussion as to whether they can be grouped together. Charles Mitchell proposes that if we adopt Peter Birks view regarding knowing receipt (that knowing receipt can be based on unjust enrichment as well as fault), there is a strong case for treating liability for dishonest assistance and fault-based knowing receipt as aspects of a single equitable wrong of interfering with anothers equitable rights a wrong he called equitable conversion.[23] Furthermore, Lord Nicholls has proposed extra-judicially that dishonesty is one of the bases for the liability for knowing receipt and that dishonest receipt can be grouped with dishonest assistance into dishonest participation in breach of trust.[24]
43
Notes
[1] Barnes v Addy (1874) 9 Ch App 214 [2] [2002] UKHL 12 (http:/ / www. bailii. org/ uk/ cases/ UKHL/ 2002/ 12. html) [3] Harpum, Charles (1994). "Chapter 1: The Basis of Equitable Liability". In Birks, Peter. The Frontiers of Liability Volume 1. OUP. pp.913. ISBN9780198259022. [4] Royal Brunei Airlines v Tan [5] S Elliot and C Mitchell, 'Remedies for Dishonest Assistance' (2004) 67 MLR 16 [6] P Ridge, 'Justifying the Remedies for Dishonest Assistance' (2008) 124 LQR 445-468 [7] AJ Oakley, Parker and Mellows: The Modern Law of Trusts (9th edn Sweet & Maxwell 2008) ISBN 9780421945906, 408-409 [8] DJ Hayton, OR Marshall and JA Nathan Hayton & Marshall Commentary & Cases on the Law of Trusts and Equitable Remedies (9th edn 1991) ISBN 9780420482402, 440-441 [9] [2002] UKHL 48 [10] Twinsectra v Yardley [2002] UKHL 12 [11] Competitive Insurance Company v Davies Investments [1975] 1 WLR 1240 [12] Consul Development v DPC Estates Pty Ltd [1975] HCA 8 [13] Farah Constructions Pty v Say-Dee Pty Ltd [2004] NSWSC 800 [14] S Gardner 'Knowing Assistance and Knowing Receipt: Taking Stock' (1996) 112 LQR 56,58 [15] Gold v Rosenberg [1997] 3 SCR 767 [16] [1995] 2 AC 378 [17] [1982] QB 1053 [18] [2006] 1 WLR 1476 [19] [2005] EWHC 2662; [2006] 1 All ER 247 [20] K Nikunj, 'Dishonest Assistance: The Latest Perspective From the Court of Appeal' (2007) 22(6) Journal of Banking Law and Regulation 305-317 [21] [2007] EWHC 952 [22] [1992] 4 All ER 385 [23] Mitchell, Charles (2002). "Chapter 6: Assistance". In Birks, Peter. Breach of Trust. Hart Publishing. pp.209211. ISBN9781841131740. [24] Lord Nicholls (1 July 1998). "Knowing Receipt: The Need for a New Landmark". In Cornish, WR. Restitution Past, Present and Future. Hart Publishing. pp.231. ISBN9781901362428.
References
Books DJ Hayton, OR Marshall and JA Nathan Hayton & Marshall Commentary & Cases on the Law of Trusts and Equitable Remedies (9th edn 1991) ISBN 9780420482402 C Mitchell and D Hayton, Hayton and Marshall's Commentary and Cases on the Law of Trusts and Equitable Remedies (12th edn Sweet & Maxwell 2005) C Mitchell, D Hayton and P Matthews, Underhill and Hayton's Law Relating to Trusts and Trustees (17th edn Butterworths, 2006) AJ Oakley, Parker and Mellows: The Modern Law of Trusts (9th edn Sweet & Maxwell 2008) ISBN 9780421945906 C Webb and T Akkouh, Trusts Law (Palgrave 2008) Articles S Elliot and C Mitchell, 'Remedies for Dishonest Assistance' (2004) 67 MLR 16 S Gardner 'Knowing Assistance and Knowing Receipt: Taking Stock' (1996) 112 Law Quarterly Review 56 C Mitchell, 'Assistance' in P Birks, Breach of Trust (Hart Publishing 2002) ch 6, 209-211 Lord Nicholls, 'Knowing Receipt: The Need for a New Landmark' in WR Cornish (ed), Restitution Past, Present and Future (Hart Publishing 1998) 231 K Nikunj, 'Dishonest Assistance: The Latest Perspective From the Court of Appeal' (2007) 22(6) Journal of Banking Law and Regulation 305-317 P Ridge, 'Justifying the Remedies for Dishonest Assistance' (2008) 124 LQR 445-468
Fiduciary
44
Fiduciary
A fiduciary duty (from Latin fiduciarius, meaning "(holding) in trust"; from fides, meaning "faith", and fiducia, meaning "trust") is a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties, most commonly a fiduciary and a principal. One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment. In a fiduciary relation one person, in a position The court of chancery, which governed fiduciary relations prior to the Judicature of vulnerability, justifiably reposes Acts confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests. A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. Bristol & West Building Society v Mothew [1998] Ch 1 at 18 per Lord Millett A fiduciary duty[1] is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. In English common law the fiduciary relation is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of equity (historically based in England's Court of Chancery) with the courts of common law, and as a result the concept of fiduciary duty also became usable in common law courts. When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent. A fiduciary ideally would not have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd"[2] and that "[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty."[3]
Duty in different jurisdictions

Different jurisdictions regard fiduciary duties in different lights. Canadian law, for example, has developed a more expansive view of fiduciary obligation, more so than American law, while Australian law and British law have developed more conservative approaches than either the USA or Canada. The law expressed here follows the general body of elementary fiduciary law found in most common law jurisdictions; for in-depth analysis of particular jurisdictional idiosyncrasies please consult primary authorities within the relevant jurisdiction. This is especially true
Fiduciary in the area of Labor and Employment law. In Canada a fiduciary has obligations to the employer even after the employment relationship is terminated, whereas in the U.S. the employment and fiduciary relationships terminate together. In SEC v. Chenery Corporation 318 U.S. 80 (1943), Frankfurter J said,
45
To say that a man is a fiduciary only begins the analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from his duty?
Relationships
The most common circumstance where a fiduciary duty will arise is between a trustee, whether real or juristic, and a beneficiary. The trustee to whom property is legally committed is the legali.e., common lawowner of all such property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress his own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the use of property without being its technical owner. Others, such as corporate directors, may be held to a fiduciary duty similar in some respects to that of a trustee. This happens when, for example, the directors of a bank are trustees for the depositors, the directors of a corporation are trustees for the stockholders or a guardian is trustee of his ward's property. A person in a sensitive position sometimes protects himself from possible conflict of interest charges by setting up a blind trust, placing his financial affairs in the hands of a fiduciary and giving up all right to know about or intervene in their handling. The fiduciary functions of trusts and agencies are commonly performed by a trust company, such as a commercial bank, organized for that purpose. In the United States, the Office of Thrift Supervision (OTS), an agency of the United States Department of the Treasury, is the primary regulator of the fiduciary activities of federal savings associations. When a court desires to hold the offending party to a transaction responsible so as to prevent unjust enrichment, the judge can declare that a fiduciary relation exists between the parties, as though the offender were in fact a trustee for the partner. Relationships which routinely attract by law a fiduciary duty between certain classes of persons include these: Trustee/beneficiary: Keech v Sandford[4] Conservators and legal guardians / wards Agents, brokers and factors / principals: McKenzie v McDonald[5] Buyer agent (real estate broker) / buyer client Confidential advisor including financial adviser and investment advisor / advisee or client Lawyer/client: Sims v Craig Bell & Bond[6] Executors and administrators / legatees and heirs Corporate partners, joint venturers, directors and officers / company and stockholders: Guth v. Loft Inc., In Plus Group Ltd v. Pyke, Peoples Department Stores Inc. (Trustee of) v. Wise, Regal (Hastings) v Gulliver Board of directors / company: Re Saul D Harrison & Sons plc, Woolworths Ltd v Kelly[7] Partner/partner: Chan v Zacharia,[8] Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd,[9] Meinhard v Salmon Stockbroker/client: Hodgkinson v Simms[10] Senior employee / company: Green & Clara Pty Ltd v Bestobell Industries Pty Ltd[11] Retirement plan administrators (including 401(k) plans) / retirees and workers: Vivien v. Worldcom Promoters / stock subscribers Liquidator/company: Re Pantmaenog[12] Mutual savings banks and investment corporations / their depositors and investors Receivers, trustees in bankruptcy and assignees in insolvency / creditors
Fiduciary Governments / indigenous peoples: R. v. Sparrow, Seminole Nation v. United States Doctor/patient (Canada[13] : McInerney v. MacDonald,[14] Norberg v Wynrib) Guardian/ward: Paramasivam v Flynn[15] Teacher/student: Glover v Porter-Gaud[16] Priest / parishioner seeking counseling: Doe v Evans, 814 So.2d 370 (Fla. 2002)
46
Roman and civil law recognized a type of contract called fiducia (also contractus fiduciae or fiduciary contract), involving essentially a sale to a person coupled with an agreement that the purchaser should sell the property back upon the fulfillment of certain conditions.[17] Such contracts were used in the emancipation of children, in connection with testamentary gifts and in pledges. Under Roman law a woman could arrange a fictitious sale called a fiduciary coemption in order to change her guardian or gain legal capacity to make a will.[18] In Roman Dutch law, a fiduciary heir may receive property subject to passing it to another on fulfillment of certain conditions; the gift is called a fideicommissum. The fiduciary of a fideicommissum is a fideicommissioner and one that receives property from a fiduciary heir is a fideicommissary heir.[19] Fiduciary principles may be applied in a variety of legal contexts.[20]
Possible relationships
Joint ventures, as opposed to business partnerships, are not presumed to carry a fiduciary duty; however, this is a matter of degree.[21] If a joint venture is conducted at commercial arm's length and both parties are on an equal footing then the courts will be reluctant to find a fiduciary duty, but if the joint venture is carried out more in the manner of a partnership then fiduciary relationships can and often will arise. Arklow vs. MacLean Privy Council 1999 Husbands and wives are not presumed to be in a fiduciary relationship; however, this may be easily established. Similarly, ordinary commercial transactions in themselves are not presumed to but can give rise to fiduciary duties, should the appropriate circumstances arise. These are usually circumstances where the contract specifies a degree of trust and loyalty or it can be inferred by the court.[22] Recently, in an insider trading case, the U.S. Securities and Exchange Commission brought charges against a boyfriend of a Disney intern, alleging he had a fiduciary duty to his girlfriend and breached it. The boyfriend, Toby Scammell, allegedly received and used insider information on Disney's takeover of Marvel Comic. [23] [24] Generally, the employment relationship is not regarded as fiduciary, but may be so if "within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Although terminologies like duty of good faith, or loyalty, or the mutual duty of trust and confidence are frequently used to describe employment relationships, such concepts usually denote situations where "a party merely has to take into consideration the interests of another, but does not have to act in the interests of that other". If fiduciary relationships are to arise between employers and employees, it is necessary to ascertain that the employee has placed himself in a position where he must act solely in the interests of his employer.[25] In the Canadian case of Canadian Aero Service ltd v O'Malley,[26] it was held that a senior employee is much more likely to be found to owe fiduciary duties towards his employer. A protector of a trust may owe fiduciary duties to the beneficiaries, although there is no case law establishing this to be the case.[27]
Fiduciary
47
Example
For example, two members of a band currently under contract with one another (or with some other tangible, existing relationship that creates a legal duty), X and Y, record songs together. Let us imagine it is a serious, successful band and that a court would declare that the two members are equal partners in a business. One day, X takes some demos made cooperatively by the duo to a recording label, where an executive expresses interest. X pretends it is all his work and receives an exclusive contract and $50,000. Y is unaware of the encounter until reading it in the paper the next week. This situation represents a conflict of interest and duty. Both X and Y hold fiduciary duties to each other, which means they must subdue their own interests in favor of the duo's collective interest. By signing an individual contract and taking all the money, X has put personal interest above the fiduciary duty. Therefore, a court will find that X has breached his fiduciary duty. The judicial remedy here will be that X holds both the contract and the money in a constructive trust for the duo. Note, X will not be punished or totally denied of the benefit; both X and Y will receive a half share in the contract and the money.
Elements of duty
A fiduciary, such as the administrator, executor or guardian of an estate, may be legally required to file with a probate court or judge a surety bond, called a fiduciary bond or probate bond, to guarantee faithful performance of his duties.[28] One of those duties may be to prepare, generally under oath, an inventory of the tangible or intangible property of the estate, describing the items or classes of property and usually placing a valuation on them.[29] A bank or other fiduciary having legal title to a mortgage may sell fractional shares to investors, thereby creating a participating mortgage.
Accountability
A fiduciary will be liable to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means:chan2 In circumstances of conflict of duty and interest In circumstances of conflict of duty to one person and duty to another person By taking advantage of the fiduciary position. Therefore, it is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.
Conflict of duties
A fiduciary's duty must not conflict with another fiduciary duty.[30] Stewart v Layton (1992) 111 ALR 687 Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent, such as a real estate agent, represent more than one client, and the interests of those clients conflict. This would occur when a lawyer attempts to represent both the plaintiff and the defendant in the same matter, for example. The rule comes from the logical conclusion that a fiduciary cannot make the principal's interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.
Fiduciary
48
No-profit rule
A fiduciary must not profit from the fiduciary position.keech2 This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. It is unnecessary that the principal would have been unable to make the profit; if the fiduciary makes a profit, by virtue of his role as fiduciary for the principal, then the fiduciary must report the profit to the principal. If the principal consents then the fiduciary may keep the benefit. If this requirement is not met then the property is deemed by the court to be held by the fiduciary on constructive trust for the principal. Secret commissions, or bribes, also come under the no profit rule. The bribe shall be held in constructive trust for the principal. The person who made the bribe cannot recover it, since he has committed a crime. Similarly, the fiduciary, who received the bribe, has committed a crime. Fiduciary duties are an aspect of equity and, in accordance with the equitable principles, or maxims, equity serves those with clean hands. Therefore, the bribe is held on constructive trust for the principal, the only innocent party. Bribes were initially considered not to be held on constructive trust, but were considered to be held as a debt by the fiduciary to the principal.[31] This approach has been overruled; the bribe is now classified as a constructive trust.[32] The change is due to pragmatic reasons, especially in regard to a bankrupt fiduciary. If a fiduciary takes a bribe and that bribe is considered a debt then if the fiduciary goes bankrupt the debt will be left in his pool of assets to be paid to creditors and the principal may miss out on recovery because other creditors were more secured. If the bribe is treated as held on a constructive trust then it will remain in the possession of the fiduciary, despite bankruptcy, until such time as the principal recovers it.
Breaches of duty and remedies

Conduct by a fiduciary may be deemed constructive fraud when it is based on acts, omissions or concealments considered fraudulent and that gives one an advantage against the other because such conductthough not actually fraudulent, dishonest or deceitfuldemands redress for reasons of public policy.[33] Breach of fiduciary duty may occur in insider trading, when an insider or a related party makes trades in a corporation's securities based on material non-public information obtained during the performance of the insider's duties at the corporation. Breach of fiduciary duty by a lawyer with regard to a client, if negligent, may be a form of legal malpractice; if intentional, it may be remedied in equity. Clark v Rowe, 428 Mass. 339, 345 (1998) (dicta). Where a principal can establish both a fiduciary duty and a breach of that duty, through violation of the above rules, the court will find that the benefit gained by the fiduciary should be returned to the principal because it would be unconscionable to allow the fiduciary to retain the benefit by employing his strict common law legal rights. This will be the case, unless the fiduciary can show there was full disclosure of the conflict of interest or profit and that the principal fully accepted and freely consented to the fiduciary's course of action. Remedies will differ according to the type of damage or benefit. They are usually distinguished between proprietary remedies, dealing with property, and personal remedies, dealing with pecuniary (monetary) compensation.
Constructive trusts
Where the unconscionable gain by the fiduciary is in an easily identifiable form, such as the recording contract discussed above, the usual remedy will be the already discussed constructive trust.[34] Constructive trusts pop up in many aspects of equity, not just in a remedial sense,[35] but, in this sense, what is meant by a constructive trust is that the court has created and imposed a duty on the fiduciary to hold the money in safekeeping until it can be rightfully transferred to the principal.
Fiduciary
49
Account of profits
An account of profits is another potential remedy.[36] It is usually used where the breach of duty was ongoing or when the gain is hard to identify. The idea of an account of profits is that the fiduciary profited unconscionably by virtue of the fiduciary position, so any profit made should be transferred to the principal. It may sound like a constructive trust at first, but it is not. An account for profits is the appropriate remedy when, for example, a senior employee has taken advantage of his fiduciary position by conducting his own company on the side and has run up quite a lot of profits over a period of time, profits which he wouldn't have been able to make without his fiduciary position in the original company. The calculation of profits in this sense can be extremely difficult, because profit due to fiduciary position must be separated from profit due to the fiduciary's own effort and ingenuity.
Compensatory damages
Compensatory damages are also available.[37] Accounts of profits can be hard remedies to establish, therefore, a plaintiff will often seek compensation (damages) instead. Courts of equity initially had no power to award compensatory damages, which traditionally were a remedy at common law, but legislation and case law has changed the situation so compensatory damages may now be awarded for a purely equitable action.
Notes
[1] Breach of Fiduciary Duty Law & Legal Definition. (http:/ / definitions. uslegal. com/ b/ breach-of-fiduciary-duty) Legal Definitions Legal Terms Dictionary. [2] Meinhard v Salmon (1928) 164 NE 545 at 546 [3] ASIC v Citigroup [2007] 62 ACSR 427 at 289 [4] Keech v Sanford [1558-1774] All ER Rep 230 [5] [1927] VLR 134 [6] [1991] 3 NZLR 535 [7] (1991) 22 NSWLR 189 [8] Kak Loui Chan v John Zacharia (1984) 58 ALJR 353 [9] [1988] 2 Qd R 1 [10] [1994] 3 SCR 377 [11] [1982] WAR 1 [12] Re Pantmaenog [2004] 1 AC 158 [13] Note that Canada is the only common law jurisdiction in the world that recognises the doctor/patient relationship as a fiduciary one. [14] McInerney v MacDonald [1992] 2 SCR 138, (1992) 126 N.B.R. (2d) 271, (1992) 126 N.B.R. (2e) 271, (1992) 93 D.L.R. (4th) 415, 1992 CanLII 57 (S.C.C.) [15] [1998] 1711 FCA [16] Glover v Porter-Gaud (2000) 98-CP-10-613 [17] C. P. Sherman, Roman law in the modern world. (http:/ / books. google. com/ books?id=sFcMAAAAYAAJ& pg=PA183& lpg=PA183& dq="contractus+ fiduciae"+ fiducia& source=web& ots=ts7id-xDKG& sig=UJ71DpyeW-yJaXzJqCw2sb9CEZE& hl=en& sa=X& oi=book_result& resnum=1& ct=result#PPA182,M1) New Haven, Conn., U.S.A.: New Haven Law Book (1922), pp.182-83. Google Book Search. [18] Gai Institutiones or Institutes of Roman Law by Gaius, with a Translation and Commentary by Edward Poste. Oxford: Clarendon Press, 1904. (http:/ / oll. libertyfund. org/ ?option=com_staticxt& staticfile=show. php?title=1154& chapter=88600& layout=html& Itemid=27) Online Library of Liberty - DE MANV. - Institutes of Roman Law. World Wide Web Consortium. [19] What is a fideicommissum? (http:/ / www. ghostdigest. co. za/ code/ A_337. html) Ghostdigest. [20] Kenneth M. Rosen, Fiduciaries, 58 Alabama Law Review 1041(2007). (http:/ / www. law. ua. edu/ lawreview/ articles/ Volume 58/ Issue 5/ RosenUpdated. pdf) The University of Alabama School of Law. [21] United Dominions Corporation v Brian Pty Ltd (1985) 59 ALJR 676 [22] United States Surgical Corporation v Hospital Products International Pty Ltd (1984) 58 ALJR 587 [23] "SEC charges Disney interns boyfriend" (http:/ / www. ft. com/ intl/ cms/ s/ 0/ 984f9ba8-c469-11e0-ad9a-00144feabdc0. html#axzz1UpmrJYCS). The Financial Times. 12 August 2011. . Retrieved 12 August 2011. [24] "SEC Charges Former Investment Fund Associate With Insider Trading" (http:/ / sec. gov/ litigation/ litreleases/ 2011/ lr22066. htm). The U.S. SEC. 11 August 2011. . Retrieved 12 August 2011. [25] Nottingham University v Fishel [2001] RPC 22
Fiduciary
[26] [1973] 40 DLR (3d) 371 [27] Although under the laws of Idaho it seems to be assumed that a protector is a fiduciary.http:/ / www3. state. id. us/ cgi-bin/ newidst?sctid=150070501. K Murray Gleeson (October 2007) Speaking to the Judicial Conference of Australia's annual meeting in Sydney [28] Fiduciary Bond Law & Legal Definition. (http:/ / definitions. uslegal. com/ f/ fiduciary-bond) Legal Definitions Legal Terms Dictionary. [29] Guertin & Guertin, LLC - Choosing the Right Fiduciary - www.guertinandguertin.com. (http:/ / www. guertinandguertin. com/ choosing_right_fiduciary. php) [30] stewart [31] [32] [33] [34] [35] [36] [37] Lister v Stubbs (1890) 45 Ch D 1 Attorney General (Hong Kong) v Reid [1993] 3 WLR 1143 Brief on fiduciary duty. (http:/ / www. wolframlawfirm. com/ WLFfiduc. html) Wolfram Law Firm, P.C. Giumelli v Giumelli (1999) 73 ALJR 54 Muchinski v Dodds (1986) 60 ALJR 52 Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 Nocton v Lord Ashburton [1914] AC 932
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References
P Birks, The Content of Fiduciary Obligation (2000) 34 Israel Law Journal 3; (2002) 16 Trust Law International 34 M Conaglen, The Nature and Function of Fiduciary Loyalty (2005) 121 Law Quarterly Review 452 - 480. JH Langbein Questioning the Trust Law Duty of Loyalty (2005) 114 Yale Law Journal 929 - 990. A Hicks, The Trustee Act 2000 and the Modern Meaning of 'Investment (2001) 15 (4) Trust Law International 203 DR Paling Trustees Duties of Skill and Care (1973) 37 Conveyancer 48 - 59 EJ Weinrib, The Fiduciary Obligation (1975) 25(1) University of Toronto Law Journal 1 - 22
External links
Fiduciary and Non-Fiduciary Responsibilities (http://www.paragonwealth.com/about_paragon/ fiduciary_advisor.php) Dictionary.com/Word of the Day Archive/fiduciary. (http://dictionary.reference.com/wordoftheday/archive/ 2005/02/17.html) "Fiduciary / F. Duty" Defined & Explained. (http://www.lectlaw.com/def/f026.htm) The 'Lectric Law Library - legal resources and definitions. Fiduciary Law & Legal Definition. (http://definitions.uslegal.com/f/fiduciary) Legal Definitions Legal Terms Dictionary. law.com Law Dictionary: Fiduciary. (http://dictionary.law.com/default2.asp?selected=744&bold=) Iman Anabtawi and Lynn A. Stout, "Fiduciary Duties for Activist Shareholders". UCLA School of Law, Law-Econ Research Paper No. 08-02. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1089606) Social Science Research Network (SSRN) Electronic Library. Meeting Your Fiduciary Responsibilities. (http://www.dol.gov/ebsa/publications/fiduciaryresponsibility. html) The U.S. Department of Labor: Employee Benefits Security Administration. Jerry Sais Jr. & Melissa W. Sais, Meeting Your Fiduciary Responsibility. (http://www.investopedia.com/ articles/08/fiduciary-responsiblity.asp) Investopedia.com - Your Source For Investing Education. Excerpts from texts on fiduciary duties. (http://cyber.law.harvard.edu/trusting/unit5all.html) The New Palgrave Dictionary of Economics and the Law, Definition of "fiduciary duties", by Tamar Frankel; "Fiduciary Law", by Tamar Frankel, California Law Review, May, 1983, 71 Ca. L. Rev. 795; "Fiduciary Duties as Default Rules", by Tamar Frankel, Oregon Law Review, Winter 1995, 74 Or. L. Rev. 1209; "Contract and Fiduciary Duty", by Frank H. Easterbrook and Daniel R. Fischel, The Journal of Law and Economics, 1993, 36 J.L. & Econ. 425; etc. Berkman Center, Harvard Law School: Trust and Non-Trust in Law, Business, and Behavioral Science. Chisholm, Hugh, ed (1911). Encyclopdia Britannica (11th ed.). Cambridge University Press.
Fiduciary Swiss Fiduciary (http://www.evco.ch/)
51
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g., in science, to gain prestige rather than immediate monetary gain. A hoax also involves deception, but without the intention of gain or of damaging or depriving the victim.
Cost of fraud
The typical organization loses five percent of its annual revenue to fraud, with a median loss of $160,000. Frauds committed by owners and executives were more than nine times as costly as employee fraud. The industries most commonly affected are banking, manufacturing, and government.[1]
Types of fraudulent acts

Fraud can be committed through many media, including mail, wire, phone, and the Internet (computer crime and Internet fraud). The international dimensions of the web and ease with which users can hide their location, the difficulty of checking identity and legitimacy online, and the simplicity with which crackers can divert browsers to dishonest sites and steal credit card details have all contributed to the very rapid growth of Internet fraud. Types of criminal fraud include: Advance-fee fraud Bait and switch Bankruptcy fraud Benefit fraud, committing fraud to get government benefits Counterfeiting of currency, documents or valuable goods Charlatanism Confidence tricks such as the 419 fraud and Spanish Prisoner creation of false companies or "long firms" Embezzlement, taking money which one has been entrusted with on behalf of another party False advertising False billing False insurance claims Forgery of documents or signatures, Franchise fraud where the real profit is earned, not by the sale of the product, but by the sale of new franchise licenses. Fraud upon the court Health fraud, for example selling of products known not to be effective, such as quack medicines, Identity theft Insurance fraud Investment frauds, such as Ponzi schemes and Pyramid schemes Marriage fraud to obtain immigration rights without entitlement
Moving scam Religious fraud Rigged gambling games such as the shell game
Fraud Securities frauds such as pump and dump Tax fraud, not reporting revenue or illegally avoiding taxes. In some countries, tax fraud is also prosecuted under false billing or tax forgery[2] There are also types of fraud which do not necessarily entail criminal activity, such as: Unconscious fraud, such as fraud committed by a hypnotised person or perhaps a medium in a trance[3]
52
United Kingdom
England and Wales and Northern Ireland
The offence of fraud is created by the Fraud Act 2006. The government's 2006 Fraud Review concluded that fraud is a significantly under-reported crime, and while various agencies and organisations were attempting to tackle the issue, greater co-operation was needed to achieve a real impact in the public sector. The scale of the problem pointed to the need for a small but high-powered body to bring together the numerous counter-fraud initiatives that existed. The National Fraud Authority was established as a result of this recommendation.
Serious Fraud Office

See Serious Fraud Office (United Kingdom) is an arm of the Government of the United Kingdom, accountable to the Attorney-General.
National Fraud Authority

The National Fraud Authority (NFA) is the government agency co-ordinating the counter-fraud response in the UK.
CIFAS - The UK's Fraud Prevention Service

CIFAS - The UK's Fraud Prevention Service, is a not-for-profit membership association representing the private and public sectors. CIFAS is dedicated to the prevention of fraud, including staff fraud, and the identification of financial and related crime.
United States
Common law fraud has nine elements:[4] [5] 1. 2. 3. 4. 5. 6. 7. 8. 9. a representation of an existing fact; its materiality; its falsity; the speaker's knowledge of its falsity; the speaker's intent that it shall be acted upon by the plaintiff; plaintiff's ignorance of its falsity; plaintiff's reliance on the truth of the representation; plaintiff's right to rely upon it; and consequent damages suffered by plaintiff.
Most jurisdictions in the United States require that each element be pled with particularity and be proved with clear, cogent, and convincing evidence (very probable evidence) to establish a claim of fraud. The measure of damages in fraud cases is to be computed by the "benefit of bargain" rule, which is the difference between the value of the property had it been as represented, and its actual value. Special damages may be allowed if shown proximately caused by defendant's fraud and the damage amounts are proved with specificity.
Fraud
53
Notable fraudsters
Frank Abagnale Jr., US impostor who wrote bad checks and falsely represented himself as a qualified member of professions such as airline pilot, doctor, and attorney. The film Catch Me If You Can is based on his life. John Bodkin Adams, British doctor and suspected serial killer, but only found guilty of forging wills and prescriptions Eddie Antar, founder of Crazy Eddie, who has about $1 billion worth of judgments against him stemming from fraudulent accounting practices at that company. Cassie Chadwick, who pretended to be Andrew Carnegie's illegitimate daughter to get loans. Columbia/HCA Medicare fraud. Columbia/HCA pleaded guilty to 14 felony counts and paid out more than $2 billion to settle lawsuits arising from the fraud.[6] The company's board of directors forced thenChairman and CEO Rick Scott to resign at the beginning of the federal investigation; Scott was subsequently elected Governor of Florida in 2010. Salim Damji is a convicted fraud artist who defrauded millions of dollars in an affinity fraud. The money came mostly from relatives and members of the closely-knit Ismaili community. His $78 million scam was among the largest in Canadian history.[7] Charles Dawson, an amateur British archeologist who claimed to have found the Piltdown man. Marc Dreier, Managing founder of Attorney firm Dreir LLP. Prosecutors allege that from 2004 through December 2008, He sold approximately $700 million worth of fictitious promissory notes.[8] Bernard Ebbers, founder of WorldCom, which inflated its asset statements by about $11 billion. Ramn Bez Figueroa, banker from the Dominican Republic and former President of Banco Intercontinental. Sentenced on October 21, 2007 to ten years in prison for a US $2.2 billion fraud case that drove the Caribbean nation into an economic crisis in 2003. Martin Frankel is a former U.S. financier, convicted in 2002 of insurance fraud worth $208 million, racketeering and money laundering. Pearlasia Gamboa, president of the micronation of Melchizedek, hundreds of aliases; in 2002, one of Gamboas banking and investor fraud schemes was described by the Italian newspaper La Republica as "one of the most diabolical international scams ever devised in recent years",[9] and in 2000, the Asia Times described Gamboas operations as "an astonishing series of worldwide swindles".[10] Robert Douglas Hartmann, an American con man and felon implicated in a real estate mortgage investment Ponzi scheme which defrauded both private lenders and banks in excess of $34 million. Samuel Israel III, former hedge fund manager that ran the former fraudulent Bayou Hedge Fund Group. He faked suicide. Ashok Jadeja has been accused of cheating people from across India of scores of rupees on the pretext of having divine blessings. Konrad Kujau, German fraudster and forger responsible for the "Hitler Diaries". Kenneth Lay, the American businessman who built energy company Enron. He was one of the highest paid CEOs in America until he was ousted as Chairman and was convicted of fraud and conspiracy, although as a result of his death, his conviction was vacated.[11] Nick Leeson, English trader whose unsupervised speculative trading caused the collapse of Barings Bank. James Paul Lewis, Jr., ran one of the biggest ($311 million) and longest running Ponzi Schemes (20 years) in US history. Gregor MacGregor, Scottish conman who tried to attract investment and settlers for the non-existent country of Poyais. Bernard Madoff, creator of a $65 billion Ponzi scheme the largest investor fraud ever attributed to a single individual. Colleen McCabe, British headmistress who stole million from her school. Gaston Means, a professional conman during U.S. President Warren G. Harding's administration.
Fraud Matt the Knife, American born con artist, card cheat and pickpocket who, from the ages of approximately 14 through 21, bilked dozens of casinos, corporations and at least one Mafia crime family out of untold sums. Barry Minkow and the ZZZZ Best scam. Michael Monus, founder of Phar-Mor, which ultimately cost its investors more than $1 billion. F. Bam Morrison, who conned the town of Wetumka, Oklahoma by promoting a circus that never came. Lou Pearlman, former boy-band manager indicted by a federal grand jury in Orlando on charges that he schemed to bilk banks out of more than $100 million. Frederick Emerson Peters, US impersonator who wrote bad checks. Thomas Petters is an American masquerading as a business man who turned out to be a con man and was the former CEO and chairman of Petters Group Worldwide.[12] Petters resigned his position as CEO on September 29, 2008, amid mounting criminal investigations.[13] He later was convicted for turning Petters Group Worldwide into a $3.65 billion Ponzi scheme[14] and was sentenced to 50 years in federal prison. Charles Ponzi and the Ponzi scheme. Alves Reis, who forged documents to print 100,000,000 PTE in official escudo banknotes (adjusted for inflation, it would be worth about US$150 million today). John Rigas, cable television entrepreneur, cofounder of Adelphia Communications Corporation and owner of the Buffalo Sabres hockey team. Defrauded investors of over $2 billion and was sentenced to a 12 year term in federal prison. Christopher Rocancourt, a Rockefeller impersonator who defrauded Hollywood celebrities. Joseph Rothe, of Fonthill, Ontario, ordered to pay $500,000 in restitution, received a four-year prison sentence, along with Ewaryst Prokofiew, of Mississauga, Ontario, in the biggest GST fraud in Canadian history. Code named Project Phantom for the lengthy police investigation,[15] the organizers lined up a steady supply of vehicles that were to be sold at the auctions. The cars never materialized and were never purchased. But the operators of the fraud claimed that they had been sold, and because of the natives' tax-exempt status were able to claim the GST exemption. Authorities could only guess at the full loss sustained by the Canada Revenue Agency. Madam Justice Lynda Templeton of Superior Court said the scheme siphoned at least $11-million from Ottawa, possibly a great deal more.[16] Scott W. Rothstein, a disbarred lawyer from Ft. Lauderdale, Florida, who perpetrated a Ponzi scheme which defrauded investors of over $1 billion. Michael Sabo, best known as a check, stocks and bonds forger. He became notorious in the 1960s throughout the 1990s as a "Great Impostor" over 100 aliases, and earned millions from such. John Spano, a struggling businessman who faked massive success in an attempt to buy out the New York Islanders of the NHL. John Stonehouse, the last Postmaster-General of the UK and MP who faked his death to marry his mistress. Kevin Trudeau, US writer and billiards promoter, convicted of fraud and larceny in 1991, known for a series of late-night infomercials and his series of books about "Natural Cures "They" Don't Want You to Know About". Andrew Wakefield, UK physician who claimed links between the MMR vaccine, autism and inflammatory bowel disease. He was found guilty of dishonesty in his research and banned from medicine by the UK General Medical Council following an investigation by Brian Deer of the London Sunday Times. Richard Whitney, who stole from the New York Stock Exchange Gratuity Fund in the 1930s.
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Fraud
55
Related
Apart from fraud, there are several related categories of intentional deceptions that may or may not include the elements of personal gain or damage to another individual: obstruction of justice 18 U.S.C.704 [17] which criminalizes false representation of being been awarded any decoration or medal authorized by Congress for the Armed Forces of the United States
Notes
[1] Report to the Nations on Occupational Fraud and Abuse (http:/ / www. acfe. com/ rttn/ 2010-highlights. asp). Association of Certified Fraud Examiners. 2010. p. 4. . [2] Tax Fraud and the Problem of a Constitutionality Acceptable Definition of Religion. BJ Casino American Criminal Law. Rev., 1987 [3] Gale Encyclopedia of Occultism & Parapsychology: Fraud (http:/ / www. answers. com/ topic/ fraud), published on Answers.com [4] Morlan v. Kelly, No. 2009-UP-002, SC Supreme Court, 2009 (http:/ / www. judicial. state. sc. us/ opinions/ displayUnPubOpinion. cfm?caseNo=2009-UP-002) [5] Schnellmann v. Roettger, 373 S.C. 379, 382, 645 S.E.2d 239, 241 (2007) (http:/ / www. judicial. state. sc. us/ opinions/ displayOpinion. cfm?caseNo=4074) [6] "Largest Health Care Fraud Case in U.S. History Settled; HCA Investigation Nets Record Total of $1.7 Billion" (http:/ / www. justice. gov/ opa/ pr/ 2003/ June/ 03_civ_386. htm) (Press release), U.S. Department of Justice, June 26, 2003, , retrieved April 11, 2011 [7] Farberfinancial.com (http:/ / www. farberfinancial. com/ news-events/ case-studies/ whitewashed/ ) [8] Kokenes, Chris (March 19, 2009), "N.Y. lawyer arraigned in alleged $700M fraud" (http:/ / money. cnn. com/ 2009/ 03/ 19/ news/ hedge_fund_fraud/ index. htm?postversion=2009031914), CNNMoney.com, retrieved April 10, 2011 [9] Lugli, Massimo (March 15, 2002), "'Dominio di Melchizedek' Stato Fantasma Sull" (http:/ / ricerca. repubblica. it/ repubblica/ archivio/ repubblica/ 2002/ 05/ 15/ dominio-di-melchizedek-stato-fantasma-sull-appia. html) ("'Dominion of Melchizedek' Ghost State"), La Republica, Rome Section: p. 5, "una trappola di lusso per le vittime di una delle piu diaboliche truffe internazionali mai escogitate negli ultimo anni" ("a trap of luxury for the victims of one of the most diabolical international scams ever devised in recent years") [10] Knight, James (February 17, 2000), "Cyber Nations with Real Repercussions" (http:/ / www. atimes. com/ oceania/ BB17Ah01. html), Asia Times Online [11] Lozano, Juan A. (17 October 2006). "Judge vacates conviction of Ken Lay" (http:/ / www. cbsnews. com/ stories/ 2006/ 10/ 17/ ap/ business/ mainD8KQMS5O0. shtml). CBS News. Associated Press. . [12] Nicole Muehlhausen, BIO: Tom Petters (http:/ / kstp. com/ article/ stories/ s592708. shtml?cat=63), KSTP.com, September 24, 2008. Retrieved October 8, 2008. [13] Tom Petters Resigns As Petters Group CEO (http:/ / wcco. com/ business/ tom. petters. ceo. 2. 828534. html), WCCO.com, September 29, 2008. Retrieved October 8, 2008. [14] Hughes, Art (December 2, 2009). "UPDATE 2-Tom Petters found guilty of Ponzi scheme fraud" (http:/ / www. reuters. com/ article/ idUSN024978920091202). Reuters (Thomson Reuters). . Retrieved December 10, 2009. [15] CBC.ca (http:/ / www. cbc. ca/ canada/ story/ 2004/ 07/ 12/ gst_ont040712. html) [16] Wikidfranchise.org (http:/ / www. wikidfranchise. org/ 20040714-two-get) [17] http:/ / www. law. cornell. edu/ uscode/ 18/ 704. html
References
Fred Cohen Frauds, Spies, and Lies and How to Defeat Them. ISBN 1-878109-36-7 (2006). ASP Press. Review Fraud Alex Copola (http://www.wcl.american.edu/journal/lawrev/48/48-4.cfm) Podgor, Ellen S. Criminal Fraud, (1999) Vol, 48, No. 4 American Law Review 1. The Nature, Extent and Economic Impact of Fraud in the UK. February, 2007. (http://www.acpo.police.uk/ asp/policies/Data/Fraud in the UK.pdf) The Fraudsters How Con Artists Steal Your Money (http://www.dilloninvestigates.com/index_files/ Page390.htm)(ISBN 978-1-903582-82-4) by Eamon Dillon, published September 2008 by Merlin Publishing
Fraud
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External links
Association of Certified Fraud Examiners (http://www.acfe.com/) Immigration Marriage Fraud Amendments of 1986 (http://www.uscis.gov/propub/ProPubVAP. jsp?dockey=e95bc8f7591b3c6caa51b7cc51f8d255) FBI Home page for fraud (http://www.fbi.gov/majcases/fraud/fraudschemes.htm) U.S. Department of Justice Fraud Section (http://justice.gov/criminal/fraud)
Fraudulent conveyance
A fraudulent conveyance, or fraudulent transfer, is a civil cause of action. It arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees. There are two kinds of fraudulent transfer--"actual fraud" and "constructive fraud."[1] "Actual fraud" typically involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. "Constructive fraud" does not relate to fraudulent intent, but rather to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition. For example, where the debtor has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to avoid giving certain business creditors an unfair preference (see generally, wrongful trading). In a successful suit, the plaintiff is entitled to recover the property transferred or its value from the transferee who has received a gift of the debtor's assets. [2] Although fraudulent transfer law originally evolved in the context of a relatively simple agrarian economy, it is now widely used to challenge complex modern financial transactions such as leveraged buyouts. [3] The most factually complex aspect of fraudulent transfer law is often evaluating the financial condition of the debtor at a particular point in the past. Courts and scholars have recently developed market-based approaches to try to make this analysis simpler, more consistent across cases, and more predictable. [4]
Individual jurisdictions
United Kingdom
Fraudulent Conveyances Act 1571 Insolvency Act 1986 section 423
United States
In Anglo-American law, the doctrine of Fraudulent Conveyance traces its origins back to Twyne's Case, in which an English farmer attempted to defraud his creditors by selling his sheep to a man named Twyne, while remaining in possession of the sheep, marking and shearing them.[5] In the United States, fraudulent conveyances or transfers[6] are governed by two sets of laws that are generally consistent. The first is the Uniform Fraudulent Transfer Act[7] ("UFTA") that has been adopted by all but a handful of the states.[8] The second is found in the federal Bankruptcy Code.[9] The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the "actual intention to hinder, delay or defraud" any creditor of the debtor. Regarding the modifier "any" (creditor), Jacob Stein, author of textbooks on asset protection, divides the creditors into three classes: present, future and future potential creditors. While UFTA applies clearly to present creditors, the distinction between a future creditor and a future potential creditor is not as clear. The UFTA is commonly held to apply only to
Fraudulent conveyance future creditors and not to future potential creditors (those whose claim arises after the transfer, but there was no foreseeable connection between the creditor and the debtor at the time of the transfer).[10] There are two kinds of fraudulent transfer. The archetypal example is the intentional fraudulent transfer. This is a transfer of property made by a debtor with intent to defraud, hinder, or delay his or her creditors.[11] The second is a constructive fraudulent transfer. Generally, this occurs when a debtor transfers property without receiving "reasonably equivalent value" in exchange for the transfer if the debtor is insolvent[12] at the time of the transfer or becomes insolvent or is left with unreasonably small capital to continue in business as a result of the transfer.[13] Unlike the intentional fraudulent transfer, no intention to defraud is necessary. The Bankruptcy Code authorizes a bankruptcy trustee to recover the property transferred fraudulently[14] for the benefit of all of the creditors of the debtor[15] if the transfer took place within the relevant time frame.[16] The transfer may also be recovered by a bankruptcy trustee under the UFTA too, if the state in which the transfer took place has adopted it and the transfer took place within its relevant time period.[17] Creditors may also pursue remedies under the UFTA without the necessity of a bankruptcy.[18] Because this second type of transfer does not necessarily involve any actual wrongdoing, it is a common trap into which honest, but unwary debtors fall when filing a bankruptcy petition without an attorney. Particularly devastating and not uncommon is the situation in which an adult child takes title to the parents' home as a self-help probate measure (in order to avoid any confusion about who owns the home when the parents die and to avoid losing the home to a perceived threat from the state). Later, when the parents file a bankruptcy petition without recognizing the problem, they are unable to exempt the home from administration by the trustee. Unless they are able to pay the trustee an amount equal to the greater of the equity in the home or the sum of their debts (either directly to the Chapter 7 trustee or in payments to a Chapter 13 trustee,) the trustee will sell their home to pay the creditors. Ironically, in many cases, the parents would have been able to exempt the home and carry it safely through a bankruptcy if they had retained title or had recovered title before filing. Even good faith purchasers of property who are the recipients of fraudulent transfers are only partially protected by the law in the U.S. Under the Bankruptcy Code, they get to keep the transfer to the extent of the value they gave for it, which means that they may lose much of the benefit of their bargain even though they have no knowledge that the transfer to them is fraudulent.[19] Often fraudulent transfers occur in connection with leveraged buyouts (LBOs), where the management/owners of a failing corporation will cause the corporation to borrow on its assets and use the loan proceeds to purchase the management/owner's stock at highly inflated prices. The creditors of the corporation will then often have little or no unencumbered assets left upon which to collect their debts. LBOs can be either intentional or constructive fraudulent transfers, or both, depending on how obviously the corporation is financially impaired when the transaction is completed. [20] Although not all LBOs are fraudulent transfers, a red flag is raised when, after an LBO, the company then cannot pay its creditors.[21] U.S. courts and scholars have recently developed market-based approaches to try to streamline the analysis of constructive fraud.[22]
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Fraudulent conveyance
58
Switzerland
Under Swiss law, creditors who hold a certificate of unpaid debts against the debtor, or creditors in a bankruptcy, may file suit against third parties who have benefited from unfair preferences or fraudulent transfers by the debtor prior to a seizure of assets or a bankruptcy.
Notes
[1] Michael Simkovic, Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution (http:/ / ssrn. com/ abstract=1632084) Columbia Business Law Review, Vol. 2011, No. 1, p. 118, 2011 [2] Michael Simkovic, Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution (http:/ / ssrn. com/ abstract=1632084) Columbia Business Law Review, Vol. 2011, No. 1, p. 118, 2011 [3] Michael Simkovic, Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution (http:/ / ssrn. com/ abstract=1632084) Columbia Business Law Review, Vol. 2011, No. 1, p. 118, 2011 [4] Michael Simkovic, Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution (http:/ / ssrn. com/ abstract=1632084) Columbia Business Law Review, Vol. 2011, No. 1, p. 118, 2011 [5] Chestofbooks.com (http:/ / chestofbooks. com/ business/ law/ Law-Of-Contracts-Treatise/ Fraud-Upon-Third-Persons-Part-4. html) [6] The term fraudulent conveyance is included within the more general term fraudulent transfer, as a conveyance is more descriptive of the transfer of title to real property. Fraudulent transfer, however, includes all types of property and in the U.S., both are generally all governed by the same law. Therefore, the transfer will be used for the remainder of this section. [7] Promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1984 [8] As of June, 2005, 43 states and the District of Columbia had adopted it. See NCCUSL website, NCCUSL.org (http:/ / www. nccusl. org) A complete copy can be found there or at South Texas College of Law, STCL.edu (http:/ / www. stcl. edu/ rosin/ ufta84. pdf) [9] 11 USC 548. Much of the language of this section was adopted from the Uniform Fraudulent Conveyance Act, which is the predecessor of the UFTA. [10] Jacob Stein (August 2010). "Asset Protection May Risk Fraudulent Transfer Violations" (http:/ / www. maximumassetprotection. com/ publications/ articles. html). Estate Planning. . Retrieved September 27, 2010. [11] 11 USC 548(1); UFTA 4(a)(1). [12] Under the Bankruptcy Code, insolvency exists when the sum of the debtor's debts exceeds the fair value of the debtor's property, with some exceptions. It is a balance sheet test. 11 USC 101(32) [13] 11 USC 548(2); UFTA 4(a)(2). [14] This is done through the mechanism of avoidance of the transfer. 11 USC 548. [15] 11 USC 551 [16] Within two years prior to the filing of bankruptcy - 11 USC 548(a) [17] 11 USC 544(b) allows trustees to employ applicable state law to recover fraudulent transfers. The time period under the UFTA is in most cases four years before action is brought to recover. - UFTA 9. [18] UFTA 7. [19] See, Gill v. Maddalena, 176 B.R. 551, 555, 558 (Bankr.C.D.Cal. 1994) (citing 11 USC 548(c)) [20] Michael Simkovic, Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution (http:/ / ssrn. com/ abstract=1632084) Columbia Business Law Review, Vol. 2011, No. 1, p. 118, 2011 [21] See, for example, Murphy v. Meritor Savings Bank, 126 B.R. 370, 393, 413 (Bankr. D. Mass. 1991), in which an LBO left the corporation with insufficient cash to operate for longer than 10 days. [22] Michael Simkovic, Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution (http:/ / ssrn. com/ abstract=1632084) Columbia Business Law Review, Vol. 2011, No. 1, p. 118, 2011
External links
Fraudulent conveyance (Actio Pauliana) under Dutch and Belgium law (Article in Dutch language Wikipedia)
Money laundering
59
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources.[1] The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the FATF, an intergovernmental body set up to combat money laundering, admitted that "overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard."[2] Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.[3] Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions (US dollars) and poses a significant policy concern for governments.[3] As a result, governments and international bodies have undertaken efforts to deter, prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved.
Methods
Money laundering often occurs in three steps: first, cash is introduced into the financial system by some means (placement), the second involves carrying out complex financial transactions in order to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration). Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement.[3] Money laundering takes several different forms although most methods can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing."[4] Structuring: Often known as "smurfing," it is a method of placement by which cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.[5] Bulk cash smuggling: Physically smuggling cash to another jurisdiction, where it will be deposited in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.[6] Cash-intensive businesses: A business typically involved in receiving cash will use its accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Often, the business will have no legitimate activity.[7] Trade-based laundering: Under- or over-valuing invoices in order to disguise the movement of money.[8] Shell companies and trusts: Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true, beneficial, owner.[7] Bank capture: Money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny. Casinos: An individual will walk in to a casino or a horse race track with cash and buy chips, play for a while and then cash in his chips, for which he will be issued a cheque. The money launderer will then be able to deposit the cheque into his bank account, and claim it as gambling winnings.[6] If the casino is controlled by organized crime and the money launderer works for them, the launderer will lose the illegally obtained money on purpose in the casino and be paid with other funds by the criminal organization.
Money laundering Real estate: Real estate may be purchased with illegal proceeds, then sold. The proceeds from the sale appear to outsiders to be legitimate income. Alternatively, the price of the property is manipulated; the seller will agree to a contract that under-represents the value of the property, and will receive criminal proceeds to make up the difference.[7] Black salaries: Companies might have unregistered employees without a written contract who are given cash salaries. Black cash might be used to pay them.
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Enforcement
Anti-money laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent, detect and report money laundering activities. Anti-money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti-money laundering standards.[9] These standards began to have more relevance in 2001 and 2001 after FATF began a process to publicly identify countries that were deficient in their anti-money laundering laws and international cooperation, a process colloquially known as "name and shame."[10] An effective AML program requires a jurisdiction to have criminalized money laundering, given the relevant regulators and police the powers and tools to investigate; be able to share information with other countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.[11]
Criminalizing money laundering

The elements of the crime of money laundering are are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. It is knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property.
The role of financial institutions

Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must verify a customer's identity and, if necessary, monitor transactions for suspicious activity. This is often termed as KYC -- "know your customer." This means, to begin with, knowing the identity of the customers, and further, understanding the kinds of transactions in which the customer is likely to engage. By knowing one's customers, financial institutions will often be able to identify unusual or suspicious behavior, termed anomalies, which may be an indication of money laundering. [12] Bank employees, such as tellers and customer account representatives, are trained in anti-money laundering and are instructed to report activities that they deem suspicious. Additionally, anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may be also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software will also flag names that have been placed on government "blacklists" and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then determine whether to file a report with the government.
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Value of enforcement costs

The financial services industry has become more vocal about the rising costs of anti-money laundering regulation, and the limited benefits that they claim it appears to bring.[13] One commentator wrote that "[w]ithout facts, [anti-money laundering] legislation has been driven on rhetoric, driving by ill-guided activism responding to the need to be "seen to be doing something" rather than by an objective understanding of its impact on predicate crime. The social panic approach is justified by the language used - we talk of the battle against terrorism or the war on drugs..."[14] The Economist newspaper has become increasingly vocal in its criticism of such regulation, particularly with reference to countering terrorist financing, referring to it as a "costly failure," although concedes that the rules to combat money laundering are more effective.[15] However, no precise measurement of the costs of regulation balanced against the harms associated with money laundering, [16] and, given the evaluation problems involved in assessing such an issue, it is unlikely we could know the effectiveness of terror finance and money laundering laws with any degree of accuracy.[17] Economists have noted the significant negative effects of money laundering on economic development, including undermining domestic capital formation, depressing growth, and diverting capital away from development.[18] In any event, many countries are obligated by various international instruments and standards, such as the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the Convention against Transnational Organized Crime, and the United Nations Convention against Corruption, and the recommendations of the Financial Action Task Force on Money Laundering to enact and enforce money laundering laws in an effort to stop narcotics trafficking, international organized crime, and corruption. Other countries, such as Mexico, which are faced with significant crime problems believe that anti-money laundering controls could help curb the underlying crime issue.[19]
FATF: Financial Action Task Force against Money Laundering and other Organizations
Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. The FATF Secretariat is housed at the headquarters of the OECD in Paris. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body, which brings together legal, financial and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. Currently, its membership consists of 34 countries and territories and two regional organizations. In addition, FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits full participation in plenary sessions and working groups.[20] FATF has developed 40 Recommendations on money laundering and 9 Special Recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.[21] FATFs three primary functions with regard to money laundering are: Monitoring members progress in implementing anti-money laundering measures. Reviewing and reporting on laundering trends, techniques and countermeasures. Promoting the adoption and implementation of FATF anti-money laundering standards globally. The FATF currently comprises 34 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe: Argentina Australia Austria Belgium
Money laundering Brazil Canada China Denmark European Commission Finland France Germany Greece Gulf Co-operation Council Hong Kong, China Iceland India Ireland Italy Japan Kingdom of the Netherlands Luxembourg Mexico New Zealand Norway Portugal Republic of Korea Russian Federation Singapore South Africa Spain Sweden Switzerland Turkey United Kingdom United States
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The United Nations Office on Drugs and Crime maintains the International Money Laundering Information Network, a website that provides information and software for anti-money laundering data collection and analysis.[22] The World Bank has a website in which it provides policy advice and best practices to governments and the private sector on anti-money laundering issues.[23]
Laws and enforcement by region

Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions, while others criminalize the proceeds of any serious crime.
Afghanistan
The Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA) was established as a Financial Intelligence Unit (FIU) under the Anti Money Laundering and Proceeds of Crime Law passed by decree late in 2004. The main purpose of this law is to protect the integrity of the Afghan financial system and to gain compliance with international treaties and conventions. The Financial Intelligence Unit is a semi-independent body that is
Money laundering administratively housed within the Central Bank of Afghanistan (Da Afghanistan Bank).The main objective of FinTRACA is to deny the use of the Afghan financial system to those who obtained funds as the result of illegal activity, and to those who would use it to support terrorist activities. http:/ / fintraca. gov. af/ In order to meet its objectives, the FinTRACA collects and analyzes information from a variety of sources. These sources include entities with legal obligations to submit reports to the FinTRACA when a suspicious activity is detected, as well as reports of cash transactions above a threshold amount specified by regulation. Also, FinTRACA has access to all related Afghani government information and databases. When the analysis of this information supports the supposition of illegal use of the financial system, the FinTRACA works closely with law enforcement to investigate and prosecute the illegal activity. FinTRACA also cooperates internationally in support of its own analyses and investigations and to support the analyses and investigations of foreign counterparts, to the extent allowed by law. Other functions include training of those entities with legal obligations to report information, development of laws and regulations to support national-level AML objectives, and international and regional cooperation in the development of AML typologies and countermeasures.
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Bangladesh
In Bangladesh, this issue has been dealt with by the Prevention of Money Laundering Act, 2002 (Act No. VII of 2002). In terms of section 2, "Money Laundering means (a) Properties acquired or earned directly or indirectly through illegal means; (b) Illegal transfer, conversion, concealment of location or assistance in the above act of the properties acquired or earned directly of indirectly through legal or illegal means." In this Act, Properties means movable or immovable properties of any nature and description. To prevent these Illegal uses of money Bangladesh Govt. has introduced the Money Laundering Prevention Act. The Act was last amended in the year 2009 and all the Financial Institutes are following this act. Till today there are 26 Circulars issued by Bangladesh Bank under this act. To prevent Money laundering a banker must do the following: While opening a new account, the account opening form should be duly filled up by all the information of the Customer. The KYC has to be properly filled up The TP (Transaction Profile) is mandatory for a client to understand his/her transactions. If needed, the TP has to be updated at the Clients consent. All other necessary papers should be properly collected along with the Voter ID card. If there is any suspicious transaction is notified, the BAMLCO (Branch Anti Money Laundering Compliance Officer) has to be notified and accordingly the STR (Suspicious Transaction Report) reporting has to be done. The Cash department should be aware of the Transactions. It has to be noted if suddenly a big amount of money is deposited in any account. Proper documents will be required if any Client does this type of transaction. Structuring, over/ under Invoicing is another way to do Money Laundering. The Foreign Exchange Department should look into this matter cautiously. If in any account there is a transaction exceeding 7.00 lac in a single day that has to be reported as CTR (cash Transaction report) All the Bank Officials must go through all the 26 Circulars and must use in doing the Banking.
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Canada
FINTRAC (Financial Transaction and Reports Analysis Centre of Canada) is responsible for investigation of money laundering and terrorist financing cases that are originating or destined for Canada. The financial intelligence unit was created by the amendment of the Proceeds of Crime (Money Laundering) Act in December 2001 (via Bill C-25) and created the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Financial institutions in Canada are required to track large cash transactions (daily total greater than CAD$10,000.00 or equivalent value in other currencies) that can be used to finance terrorist activities in and beyond Canada's borders and report them to FINTRAC.
European Union
The EU directive 2005/60/EC[24] "on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing" tries to prevent such crime by requiring banks, real estate agents and many more companies to investigate and report usage of cash in excess of 15,000. The earlier EU directives 91/308/EEC and 2001/97/EC also relate to money laundering.
India
The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and t records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished. It is handled by the Indian Income Tax Department. The provisions of the Act are frequently reviewed and various amendments have been passed from time to time. The recent activity in money laundering in India is through political parties, corporate companies and share market. It is investigated by the Indian Income Tax Department. Bank accountant must record all the transactions whose amount will be more than Rs. 10 Lakhs. Bank accountant must maintain this records for 10 years. Banks will also make cash transaction report (CTR) and Suspicious transactions report whose amount is more than RS. 10 Lakhs with in 7 days of doubt. This report will be submitted to enforcement directorate and income tax department.[25]
United Kingdom
Money laundering and terrorist funding legislation in the UK is governed by four Acts of primary legislation: Terrorism Act 2000[26] Anti-terrorism, Crime and Security Act 2001[27] Proceeds of Crime Act 2002[28] Serious Organised Crime and Police Act 2005[29]
The Proceeds of Crime Act 2002 contains the primary UK anti-money laundering legislation,[30] including provisions requiring businesses within the 'regulated sector' (banking, investment, money transmission, certain professions, etc.) to report to the authorities suspicions of money laundering by customers or others.[31] Money laundering is widely defined in the UK.[32] In effect any handling or involvement with any proceeds of any crime (or monies or assets representing the proceeds of crime) can be a money laundering offence. An offender's possession of the proceeds of his own crime falls within the UK definition of money laundering.[33] The definition also covers activities which would fall within the traditional definition of money laundering as a process by which
Money laundering proceeds of crime are concealed or disguised so that they may be made to appear to be of legitimate origin.[34] Unlike certain other jurisdictions (notably the USA and much of Europe), UK money laundering offences are not limited to the proceeds of serious crimes, nor are there any monetary limits, nor is there any necessity for there to be a money laundering design or purpose to an action for it to amount to a money laundering offence. A money laundering offence under UK legislation need not involve money, since the money laundering legislation covers assets of any description. In consequence any person who commits an acquisitive crime (i.e. one from which he obtains some benefit in the form of money or an asset of any description) in the UK will inevitably also commit a money laundering offence under UK legislation. This applies also to a person who, by criminal conduct, evades a liability (such as a taxation liability) referred to by lawyers as "obtaining a pecuniary advantage" as he is deemed thereby to obtain a sum of money equal in value to the liability evaded.[32] The principal money laundering offences carry a maximum penalty of 14 years imprisonment.[35] Secondary regulation is provided by the Money Laundering Regulations 2003[36] and 2007.[37] They are directly based on the EU directives 91/308/EEC, 2001/97/EC and 2005/60/EC. One consequence of the Act is that solicitors, accountants, and insolvency practitioners who suspect (as a consequence of information received in the course of their work) that their clients (or others) have engaged in tax evasion or other criminal conduct from which a benefit has been obtained, are now required to report their suspicions to the authorities (since these entail suspicions of money laundering). In most circumstances it would be an offence, 'tipping-off', for the reporter to inform the subject of his report that a report has been made.[38] These provisions do not however require disclosure to the authorities of information received by certain professionals in privileged circumstances or where the information is subject to legal professional privilege. Professional guidance (which is submitted to and approved by the UK Treasury) is provided by industry groups including the Joint Money Laundering Steering Group[39] and the Law Society.[40] However there is no obligation on banking institutions to routinely report monetary deposits or transfers above a specified value. Instead reports have to be made of all suspicious deposits or transfers, irrespective of their value. The reporting obligations include reporting suspicions relating to gains from conduct carried out in other countries which would be criminal if it took place in the UK.[41] Exceptions were later added to exempt certain activities which were legal in the location where they took place, such as bullfighting in Spain.[42] There are more than 200,000 reports of suspected money laundering submitted annually to the authorities in the UK (there were 240,582 reports in the year ended 30 September 2010 an increase from the 228,834 reports submitted in the previous year[43] ). Most of these reports are submitted by banks and similar financial institutions (there were 186,897 reports from the banking sector in the year ended 30 September 2010[44] ). Although 5,108 different organisations submitted suspicious activity reports to the authorities in the year ended 30 September 2010 just four organisations submitted approximately half of all reports, and the top 20 reporting organisations accounted for three-quarters of all reports.[45] The offence of failing to report a suspicion of money laundering by another person carries a maximum penalty of 5 years imprisonment.[35]
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Money laundering Bureaux de change All UK Bureaux de change are registered with Her Majesty's Revenue and Customs which issues a trading licence for each location. Bureaux de change and money transmitters, such as Western Union outlets, in the UK fall within the 'regulated sector' and are required to comply with the Money Laundering Regulations 2007.[37] Checks can be carried out by HMRC on all Money Service Businesses.
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United States
The approach in the United States to stopping money laundering is usefully broken into two areas: preventive (regulatory) measures and criminal measures. Preventive In an attempt to prevent dirty money from entering the US financial system in the first place, the United States Congress passed a series of laws, starting in 1970, collectively known as the Bank Secrecy Act. These laws, contained in sections 5311 through 5332 of Title 31 of the United States Code, require financial institutions, which under the current definition include a broad array of entities, including banks, credit card companies, life insurers, money service businesses and broker-dealers in securities, to report certain transactions to the United States Treasury. Cash transactions in excess of $10,000 must be reported on a Currency Transaction Report (CTR), identifying the individual making the transaction as well as the source of the cash. The US is one of the few countries in the world to require reporting of all cash transactions over a certain limit, although certain businesses can be exempt from the requirement. Additionally, financial institutions must report transaction on a Suspicious Activity Report (SAR) that they deem suspicious, defined as a knowing or suspecting that the funds come from illegal activity or disguise funds from illegal activity, that it is structured to evade BSA requirements or appears to serve no known business or apparent lawful purpose; or that the institution is being used to facilitate criminal activity. Attempts by customers to circumvent the BSA, generally by structuring cash deposits to amounts lower than $10,000 by breaking them up and depositing them on different days or at different locations also violates the law.[46] The financial database created by these reports is administered by the U.S.s Financial Intelligence Unit (FIU), called the Financial Crimes Enforcement Network (FinCEN), which is located in Vienna, Virginia. These reports are made available to US criminal investigators, as well as other FIUs around the globe, and FinCEN will conduct computer assisted analyses of these reports to determine trends and refer investigations.[47] The BSA requires financial institutions to engage in customer due diligence, which is sometimes known in the parlance as know your customer. This includes obtaining satisfactory identification to give assurance that the account is in the customers true name, and having an understanding of the expected nature and source of the money that will flow through the customer's accounts. Other classes of customers, such as those with private banking accounts and those of foreign government officials, are subjected to enhanced due diligence because the law deems that those types of accounts are a higher risk for money laundering. All accounts are subject to ongoing monitoring, in which internal bank software scrutinizes transactions and flags for manual inspection those that fall outside certain parameters. If a manual inspection reveals that the transaction is suspicious, the institution should file a Suspicious Activity Report.[48] The regulators of the industries involved are responsible to ensure that the financial institutions comply with the BSA. For example, the Federal Reserve and the Office of the Comptroller of the Currency regularly inspect banks, and may impose civil fines or refer matters for criminal prosecution for non-compliance. A number of banks have been fined and prosecuted for failure to comply with the BSA. Most famously, Riggs Bank, in Washington D.C., was prosecuted and functionally driven out of business as a result of its failure to apply proper money laundering controls, particularly as it related to foreign political figures.[49] In addition to the BSA, the U.S. imposes controls on the movement of currency across its borders, requiring individuals to report the transportation of cash in excess of $10,000 on a form called Report of International
Money laundering Transportation of Currency or Monetary Instruments (known as a CMIR).[50] Likewise, businesses, such as automobile dealerships, that receive cash in excess of $10,000 must likewise file a Form 8300 with the Internal Revenue Service, identifying the source of the cash.[51] On September 1, 2010, the Financial Crimes Enforcement Network issued an advisory on "Informal Value Transfer Systems" referencing United States v. Banki.[52] Criminal sanctions Money laundering has been criminalized in the United States since the Money Laundering Control Act of 1986. That legislation, contained at section 1956 of Title 18 of the United States Code, prohibits individuals from engaging in a financial transaction with proceeds that were generated from certain specific crimes, known as specified unlawful activities (SUAs). Additionally, the law requires that an individual specifically intend in making the transaction to conceal the source, ownership or control of the funds. There is no minimum threshold of money, nor is there the requirement that the transaction succeed in actually disguising the money. Moreover, a financial transaction has been broadly defined, and need not involve a financial institution, or even a business. Merely passing money from one person to another, so long as it is done with the intent to disguise the source, ownership, location or control of the money, has been deemed a financial transaction under the law. However, the lone possession of money without either a financial transaction or an intent to conceal is not a crime in the United States.[53] In addition to money laundering, the law, contained in section 1957 of Title 18 of the United States Code, prohibits spending in excess of $10,000 derived from an SUA, regardless of whether the individual wishes to disguise it. This carries a lesser penalty than money laundering, and unlike the money laundering statute, requires that the money pass through a financial institution.[53] According to the records compiled by the United States Sentencing Commission, in 2009, the United States Department of Justice typically convicted a little over 81,000 people; of this, approximately 800 are convicted of money laundering as the primary or most serious charge.[54]
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Notable cases
Bank of New York: $7 billion of Russian capital flight laundered through accounts controlled by bank executives, late 1990s [55] Nauru: $70 billion of Russian capital flight laundered through unregulated Nauru offshore shell banks, late 1990s[56] Sani Abacha: $25 billion of government assets laundered through banks in the U.K.,Luxembourg, Jersey (Channel Islands), and Switzerland, by president of Nigeria.[57] Bank of Credit and Commerce International: Unknown amount, estimated in billions, of criminal proceeds, including drug trafficking money, laundered during the mid-1980s.[58]
Popular culture
The Shawshank Redemption Andy Dufresne laundered kickback money for Prison Warden Samuel Norton, then obtained it from a few Portland, ME banks after his escape. Office Space Peter and his co-workers attempt to gradually steal money from the company they work for with a computer virus, but when the virus goes wrong, they believe money laundering to be the only solution. Mickey Blue Eyes Michael is given paintings to sell by a crime family which was later revealed to be money laundering by the FBI when they spoke to him. Wall Street: Money Never Sleeps Jake is asked by Gordon Gekko, his future father-in-law, to help him obtain his daughter Winnie's signature in order to transport over $100 million which Jake stated was laundering.
Money laundering Breaking Bad Skyler White helps her husband, Walter, launder his meth money, doing research using this very page. [59]
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Money laundering in its literal sense

At Westin St. Francis' Hotel in San Francisco all coins are cleaned since 1938 in a special machine. This practice was introduced in order to avoid dirt on white gloves of the ladies [60].
References
[1] "Article 6, UN Convention against Transnational Organized Crime" (http:/ / www. unodc. org/ pdf/ crime/ a_res_55/ res5525e. pdf). United Nations. January 8, 2001. . Retrieved September 01, 2011. [2] Financial Action Task Force. "Money Laundering FAQ" (http:/ / www. fatf-gafi. org/ document/ 29/ 0,3746,en_32250379_32235720_33659613_1_1_1_1,00. html). . Retrieved 2 March 2011. [3] Reuter, Peter (2004). Chasing Dirty Money (http:/ / bookstore. piie. com/ book-store/ / 381. html). Peterson. ISBN978-0-88132-370-2. . [4] Lawrence M. Salinger, Encyclopedia of white-collar & corporate crime: A I, Volume 1, page 78, ISBN 0761930043, 2005. [5] National Drug Intelligence Center (August 2011). "National Drug Threat Assessment" (http:/ / www. justice. gov/ ndic/ pubs44/ 44849/ 44849p. pdf). pp. 40. . Retrieved 20 September 2011. [6] "National Money Laundering Threat Assessment" (http:/ / www. justice. gov/ dea/ pubs/ pressrel/ 011106. pdf). December, 2005. pp. 33. . Retrieved March 3, 2011. [7] Financial Action Task Force. "Global Money Laundering and Terrorist Financing Threat Assessment" (http:/ / www. fatf-gafi. org/ dataoecd/ 48/ 10/ 45724350. pdf). . Retrieved 3 March 2011. [8] Baker, Raymond (2005). Capitalism's Achilles Heel. Wiley. [9] Financial Action Task Force. "About the FATF" (http:/ / www. fatf-gafi. org/ pages/ 0,3417,en_32250379_32236836_1_1_1_1_1,00. html). . Retrieved 20 September 2011. [10] Financial Action Task Force. "About the Non-Cooperative Countries and Territories (NCCT) Initiative" (http:/ / www. fatf-gafi. org/ document/ 51/ 0,3746,en_32250379_32236992_33916403_1_1_1_1,00. html). . Retrieved 20 September 2011. [11] Financial Action Task Force. "Money Laundering FAQ" (http:/ / www. fatf-gafi. org/ document/ 29/ 0,3746,en_32250379_32235720_33659613_1_1_1_1,00. html). . Retrieved 20 September 2011. [12] Roth, John, et al. (August 20, 2004). "Monograph on Terrorist Financing" (http:/ / govinfo. library. unt. edu/ 911/ staff_statements/ 911_TerrFin_Ch4. pdf). National Commission on Terrorist Attacks Upon the United States. pp. 54-56. . Retrieved 20 September 2011. [13] Ball, Deborah, et al., (March 22, 2011). "U.S. Banks Oppose Tighter Money Rules" (http:/ / online. wsj. com/ article/ SB10001424052748704355304576214852895407540. html). Wall Street Journal. . Retrieved September 19, 2011. [14] Money Laundering Bulletin, Issue 154, June 2008, Dr Jackie Harvey (Newcastle Business School [15] "The Lost Trail" (http:/ / www. economist. com/ node/ 5056338?story_id=E1_VDVGPPR). The Economist. October 20, 2005. . Retrieved September 19, 2011. [16] Levi, Michael and William Gilmore (2002). "Terrorist Finance, Money Laundering and the Ris of Mutual Evaluation: A New Paradigm for Crime Control?". European Journal of Law Reform 4 (2): 337-364. [17] Levi, Michael (May 2010). "Combating the Financing of Terrorism: A History and Assessment of the Control of 'Threat Finance'". British Journal of Criminology 50 (4): 650-669. [18] Bartlett, Brent (May 2002). "The Negative Effects of Money Laundering on Economic Development" (http:/ / www. adb. org/ documents/ others/ ogc-toolkits/ anti-money-laundering/ documents/ money_laundering_neg_effects. pdf). Asian Development Bank. . Retrieved September 19, 2011. [19] Booth, William (August 26, 2010). "Mexico targets money laundering with plan to limit cash transactions" (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2010/ 08/ 26/ AR2010082605355. html). Washington Post. . Retrieved September 19, 2011. [20] Financial Action Task Force. "Member Country and Observers FAQ" (http:/ / www. fatf-gafi. org/ document/ 5/ 0,3746,en_32250379_32236869_34310917_1_1_1_1,00. html). . [21] Financial Action Task Force. "Mission" (http:/ / www. fatf-gafi. org/ pages/ 0,3417,en_32250379_32236846_1_1_1_1_1,00. html). . Retrieved 1 March 2011. [22] International Money Laundering Information Network (http:/ / www. imolin. org/ imolin/ index. html) [23] World Bank Financial Market Integrity (http:/ / www. amlcft. org/ ) [24] Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (http:/ / eur-lex. europa. eu/ LexUriServ/ LexUriServ. do?uri=CELEX:32005L0060:EN:HTML) [25] http:/ / www. svtuition. org/ 2011/ 09/ money-laundering. html [26] "OPSI: Terrorism Act" (http:/ / www. opsi. gov. uk/ acts/ acts2000/ ukpga_20000011_en_1). . Retrieved 2009-02-14. [27] "OPSI: Anti-Terrorist Crime & Security Act" (http:/ / www. opsi. gov. uk/ Acts/ acts2001/ ukpga_20010024_en_1). . Retrieved 2009-02-14. [28] "OPSI: Proceeds of Crime Act" (http:/ / www. opsi. gov. uk/ acts/ acts2002/ ukpga_20020029_en_1). . Retrieved 2009-02-14.
Money laundering
[29] "OPSI: Serious Organised Crime and Police Act 2005" (http:/ / www. opsi. gov. uk/ acts/ acts2005/ ukpga_20050015_en_1). . Retrieved 2009-02-14. [30] Sections 327 340, Proceeds of Crime Act 2002 [31] Section 330, Proceeds of Crime Act 2002 [32] Section 340, Proceeds of Crime Act 2002 [33] Section 329, Proceeds of Crime Act 2002 [34] Section 327, Proceeds of Crime Act 2002 [35] Section 334, Proceeds of Crime Act 2002 [36] "OPSI: Money Laundering Regulations 2003" (http:/ / www. opsi. gov. uk/ si/ si2003/ 20033075. htm). . Retrieved 2009-02-14. [37] "OPSI: Money Laundering Regulations 2007" (http:/ / www. opsi. gov. uk/ si/ si2007/ uksi_20072157_en_1). . Retrieved 2009-02-14. [38] Section 333A, Proceeds of Crime Act 2002 [39] "Joint Money Laundering Steering Group" (http:/ / www. jmlsg. org. uk/ bba/ jsp/ polopoly. jsp;jsessionid=aH1DPtXgUly-?d=749). . Retrieved 2009-02-14. [40] "Law Society AML Guidance" (http:/ / www. lawsociety. org. uk/ newsandevents/ news/ majorcampaigns/ view=newsarticle. law?CAMPAIGNSID=217590). . Retrieved 2009-02-14. [41] Section 340(2), Proceeds of Crime Act 2002 [42] David Winch, "Money Laundering Law Changes" (http:/ / www. accountingevidence. com/ documents/ articles/ Money laundering law changes. pdf) (2006) [43] 'The Suspicious Activity Reports Regime Annual Report 2010 published by SOCA [44] 'The Suspicious Activity Reports Regime Annual Report 2010 published by SOCA [45] 'The Suspicious Activity Reports Regime Annual Report 2010 published by SOCA [46] FinCEN. "Bank Secrecy Act" (http:/ / www. fincen. gov/ statutes_regs/ bsa/ ). . Retrieved 2 March 2011. [47] FinCEN Mission. "FinCEN mission" (http:/ / www. fincen. gov/ about_fincen/ wwd/ mission. html). . Retrieved 2 March 2011. [48] Roth, John; Douglas Greenburg and Serena Willie (2004). Monograph on Terrorist Financing (http:/ / govinfo. library. unt. edu/ 911/ staff_statements/ 911_TerrFin_Monograph. pdf). pp. 5456. . Retrieved 2 March 2011. [49] Joseph, Lester; John Roth (September 2007). "Criminal Prosecution of Banks Under the Bank Secrecy Act" (http:/ / www. justice. gov/ usao/ eousa/ foia_reading_room/ usab5505. pdf). United States Attorneys' Bulletin. . Retrieved 2 March 2011. [50] "SEC resources" (http:/ / www. sec. gov/ about/ offices/ ocie/ amlsourcetool. htm#8). . Retrieved 2 March 2011. [51] "IRS web site regarding Form 8300" (http:/ / www. irs. gov/ businesses/ small/ article/ 0,,id=148857,00. html). . Retrieved 2 March 2011. [52] "Informal Value Transfer Systems", [[Financial Crimes Enforcement Network (http:/ / www. fincen. gov/ statutes_regs/ guidance/ html/ FIN-2010-A011. html)], September 1, 2010] [53] Cassella, Stefan (September 2007). "Money Laundering Laws" (http:/ / www. justice. gov/ usao/ eousa/ foia_reading_room/ usab5505. pdf). United States Attorneys' Bulletin: 2134. . Retrieved 2 March 2011. [54] "US Sentencing Commission Date, 2009" (http:/ / www. ussc. gov/ Data_and_Statistics/ Federal_Sentencing_Statistics/ State_District_Circuit/ 2009/ 1c09. pdf). 2009. . Retrieved 2 March 2011. [55] O'Brien, Timothy L. (9 November 2005). "Bank of New York Settles Money Laundering Case" (http:/ / www. nytimes. com/ 2005/ 11/ 09/ business/ 09bank. html). New York Times. . Retrieved 3 March 2011. [56] Hitt, Jack (December 10, 2000). "The Billion Dollar Shack" (http:/ / www. nytimes. com/ 2000/ 12/ 10/ magazine/ the-billion-dollar-shack. html). New York Times. . Retrieved 3 March 2011. [57] "Sani Abacha" (http:/ / www. assetrecovery. org/ kc/ node/ 52f770df-a33e-11dc-bf1b-335d0754ba85. 0;jsessionid=741FC522C872AFE4D5D201D4EEBB472F). Asset Recovery Knowledge Center. . Retrieved 3 March 2011. [58] "BCCI's Criminality" (http:/ / www. globalsecurity. org/ intell/ library/ congress/ 1992_rpt/ bcci/ 04crime. htm). Globalsecurity.org. . Retrieved 3 March 2011. [59] "Breaking Bad - Half Measures - Yahoo! TV" (http:/ / tv. yahoo. com/ breaking-bad/ show/ half-measures/ episode/ 240414/ recap). June, 2010. . Retrieved August 8, 2011. [60] http:/ / articles. sfgate. com/ 2010-12-27/ news/ 26287701_1_coins-dime-and-quarter-soda-machines
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Anti money laundering software and methods (http://finance.vsoni.com/money-laundering-1)
Money laundering
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External links
Money laundering (http://www.dmoz.org/Society/Crime/Research/Money_Laundering//) at the Open Directory Project UNODC United Nations Office on Drugs and Crime on money-laundering and countering the financing of terrorism (http://www.unodc.org/unodc/en/money-laundering/index.html) Financial Market Integrity Unit, The World Bank (http://www.worldbank.org/amlcft/) US Department of State International Narcotics Control Strategy Report (INCSR), annual report issued in March every year. Essential reading for all compliance officers for evaluating country money laundering risk (http:// www.state.gov/p/inl/rls/nrcrpt/)
Tracing (law)
Tracing is a legal process, not a remedy, by which a claimant demonstrates what has happened to his/her property, identifies its proceeds and those persons who have handled or received them, and asks the court to award a proprietary claim against the property, or an asset substituted for the original property or its proceeds. Tracing allows transmission of legal claims from the original assets to either the proceeds of sale of the assets or new substituted assets. Tracing ordinarily facilitates an equitable remedy, and is subject to the usual limitations and bars on equitable remedies in common law countries. In many common law countries, there are two concurrent processes, tracing at common law and tracing in equity. However, because the right to trace at common law is so circumscribed,[1] the equitable process is almost universally relied upon, as equitable tracing can be performed into a mixed fund.
Illustrations
"Tracing is thus neither a claim nor a remedy. It is merely a process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property." - Foskett v. McKeown For example, if A has money in a solicitors account and the solicitor takes that money to buy a painting, then A may be able to make a claim against the painting. This claim will take priority even if the solicitor is bankrupt and has other unsecured claims against him. Judicially, probably the most famous example of a tracing claim is AG for Hong Kong v Reid [1994] 1 AC 324, [1994] 1 NZLR 1 (PC), where Mr Reid, then the Solicitor General for Hong Kong, received bribes for passing information to organised crime in Hong Kong. Under Hong Kong law, the proceeds of those bribes were held on constructive trusts for the government of Hong Kong. Mr Reid then investing the proceeds of the bribes in land in New Zealand, and the land increased substantially in value. When he was caught, Mr Reid admitted that the money was subject to a constructive trust, but argued that he should only be liable to repay the amount of the bribes, and then any profit attributable to the increase in value of the land in New Zealand was not connected with his wrongdoing. However, the Judicial Committee of the Privy Council held that the government of Hong Kong's claim to the money could be traced into the land, and thus the claimant was entitled to the full value of the land, as without his wrong, Mr Reid would never have made those profits and it would be grossly inequitable for him to keep them.
Tracing (law)
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Advantages
Tracing claims have two key advantages to claimants. Firstly, they are a proprietary remedy (as opposed to a simple personal claim) which means that, if the defendant is insolvent, then the claimant can take title to the goods, rather than just receiving an award of damages which may be of little value against a defendant in bankrupcty. However, in some countries tracing may also lead to the award of a personal remedy where for some reason a proprietary remedy is not appropriate (ie. it would upset pari passu distribution upon insolvency, where it would not be appropriate to do so).[2] Secondly, as demonstrated in AG for Hong Kong v Reid, where the wrongdoer has made a profit, it allows the claimant to recover a greater amount than their original loss. The House of Lords applied the same reasoning in Foskett v McKeown [2001] AC 102 where the claimants sought to enforce their rights against a third party.[3]
Technical aspects
The law of tracing is enormously complex, even to practitioners. Characteristically, tracing claims tend to involve fraud, and as a result most claims (and case law) are against the background of a complex factual matrix. However, the law itself is also complex, and a number of key aspects of the law remain ambiguous in many countries. Equitable tracing requires a fiduciary relationship, while common law tracing does not. However, this relationship does not need to have existed before the misappropriation took place.[4] However, this difference between common law and equity has been criticized by Lord Millett and Lord Steyn in Foskett v McKeown, though they stopped short of deciding that the traditional precondition to equitable tracing should be overruled.[5] The wrongdoer may mix the misappropriated funds with his own money, and then purchase an asset with the mixed fund.[6] Where there are multiple innocent claimants.[7] Where there is mixing of the funds by an innocent volunteer.[8]
Defences
In most jurisdictions, there are several reasonably well establishing defences to tracing claims, although the case law is not entirely consistent. The common defences to an equitable tracing claim are: 1. 2. 3. 4. good faith purchaser for value and without notice dissipation discharge of a debt (such that the proceeds are no longer traceable and there is no substitute asset) innocent change of position (usually, but not always, by an innocent third party[9] )
Importantly, in each case it is only the remedy of tracing that is lost. The claimant may well still enjoy a personal claim against the wrongdoer, even though they may have lost their proprietary right to trace into substituted assets.
Remedies
In common law countries there are a variety of remedies that can be imposed when the court is satisfied that an equitable tracing claim has been made. The principal remedies are: 1. 2. 3. 4. an election to take the property (or a resulting trust) an equitable charge over the property an account of profits, secured by an equitable lien a constructive trust
If an asset appreciates in value, the claimant may be well advised to claim proprietary right in the asset (no.1 and 4). If an asset depreciates in value, the claimant would be better off if he acquires a charge or lien over the asset (no. 2 and 3) as he can still enforce the whole amount of the charge against the asset and recover the balance via a personal
Tracing (law) action.
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Notes
[1] At common law, to trace the property must be identifiable and distinguishable from other property, see Taylor v Plumer (1815) 3 M&S 562 [2] Ordinarily the courts are quite comfortable ordering a proprietary remedy because, if the defendant had no legal claim to the original assets, there is no loss to the defendant's creditors if that asset is removed from the pool available to pay creditors. To order otherwise would be to allow the defendant's creditors to benefit at the claimant's expense. [3] In Foskett, the deceased had paid two annual premiums of a life insurance policy with money misappropriated from a trust fund. The deceased later committed suicide, and the court upheld the claim of the defrauded beneficiaries of the trust against the children of the deceased, even though the children would have been entitled to the same payout even had the two relevant annual premiums had not been paid. [4] The Court of Appeal in "Re Diplock" [1948] 1 Ch 465 saw "Sinclair v Brougham" [1914] AC 398 as requiring a fiduciary relationship before equitable tracing would be allowed. However both "Chase Manhattan Bank v Israel-British Bank (London) Ltd" [1981] Ch 105 and "Westdeutsche Landesbank GiroZentrale v Islington London Borough Council" [1996] AC 669 expanded this by illustrating that a proprietary interest in the form of a constructive trust can arise upon theft or fraud, creating a fiduciary relationship between thief and true owner. [5] Shalson v Russo [2003] EWHC 1637; [2005] Ch 281 [6] The commonly held rule is that the wrongdoer is presumed to spend his own money first, and the misappropriated funds later (Re Hallett's Estates), but this conflicts with other authorities (Re Oatway). [7] Authorities suggest that the innocent claimants should be treated rateably (Keefe v Law Society of NSW (1998) 44 NSWLR 451), but left open the question where the claimants are not equally innocent, or where some claimants have exhibited carelessness in their own affairs. [8] See for example, Re Diplock [1948] 1 Ch 465 and Gertsch v Atsas [1999] NSWSC 898 where charities were the recipient of misappropriated funds. [9] See for example, Gertsch v Atsas [1999] NWSC 898
References
Lionel Smith, The Law of Tracing, 1st ed., OUP
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Forum & jurisdiction

Forum shopping
Forum shopping is the informal name given to the practice adopted by some litigants to get their legal case heard in the court thought most likely to provide a favorable judgment. Some states have, for example, become notorious as plaintiff-friendly jurisdictions and so have become litigation magnets even though there is little or no connection between the legal issues and the jurisdiction in which they are to be litigated. Examples include the attraction of foreign litigants to the United States due to its expansive acceptance of personal jurisdiction and favorable litigation climate, and Great Britain for its stricter defamation laws. The term has become adopted in a wider context for the activity of repeatedly seeking a venue or willing listener for a concern, complaint or action, until one is found.
Related notions
When a case is filed before a court, the court decides whether it has personal and subject matter jurisdiction, and if so, whether it is the most appropriate forum or venue. Under the doctrine of forum non conveniens, Latin for "inappropriate forum", a judge has a discretion to transfer a case if the court selected is not the most convenient one. If the courts in two states would accept civil jurisdiction, the plaintiff must be able to show that justice requires the trial to take place in the forum suggested by the plaintiff. The plaintiff might have selected one forum on the following grounds: The forum is not convenient to the defendant or his witnesses. There may be problems of expense of travel, health, or visa or entry permit. The court, the judge, or the law is most likely to favour the plaintiff's case. The defendant may take the following actions to seek a change of venue: The defendant may petition the forum court that it should reject the jurisdiction and petition to transfer the case to an allegedly more convenient forum; or If a case has been filed in another jurisdiction, the defendant may seek injunctive relief against the plaintiff in a second state, requiring that the plaintiff discontinue the action in the first forum and instead submit the case for hearing in this allegedly more convenient forum. In both instances, the first step is to determine whether the first instance forum is the natural forum, or whether the forum has the closest connection with the action and the parties. The court adjudicates whether there is another forum that is more appropriate under the doctrine of comity. The current forum court must respect the right of a foreign court to assume jurisdiction. A court must balance the interests of the parties, since there is injustice not only when a plaintiff is allowed to pursue the action in a forum inconvenient to the defendant, but also when a plaintiff is not allowed a timely trial. Generally, the court will not grant a petition to transfer or an injunction, if the grant will unjustly deprive the plaintiff of advantages in the first instance forum. Nevertheless, there should be a real and substantial connection between the venue and the cause(s) of action to provide some protection against defendants from being pursued in jurisdictions having little or no connection with the transaction or the parties. If the alternative court concludes that another court has assumed jurisdiction either without considering whether there was an alternative forum or reached an obviously unreasonable conclusion on the merits, an injunction would sometimes be a reasonable response. If, on the other hand, the alternative court has reasonably concluded that there
Forum shopping was no more convenient forum, comity requires it to respect the decision of the court that has already assumed jurisdiction and dismiss the application for an injunction and transfer. In cases where there is a sound argument to be made in favour of both courts, the court in the second venue should not arbitrarily claim a better right to decide for both jurisdictions. In most cases it will be obvious whether the foreign court has acted on principles similar to those applied in the second venue court and, if so, the second venue court should refuse relief.
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The rules in the United States

The United States has attracted foreign litigants wishing to take advantage of the more generous awards of damages and alimony, extensive discovery rules, and the contingent fee system. In addition, the Foreign Trade Antitrust Improvements Act, the Alien Tort Claims Act, and many state product liability laws create legal rights that often do not exist in other jurisdictions.
Forum shopping by the plaintiff

A plaintiff frequently has a choice of bringing a case in one of several jurisdictions, by picking a federal rather than a local jurisdiction, or a local rather than federal jurisdiction, or one of several geographic localities. The defendant in a civil case can be sued in a jurisdiction where he lives, or where the cause of action occurred. In the United States, the district court for the eastern district of Texas in Marshall, Texas has become a popular forum for patent lawsuits, since it found in favor of the plaintiff 78% of the time, compared to a national average of 59%.[1]
Forum shopping by the civil defendant

A defendant can resort to various procedures or theories to have a case removed from the court where the plaintiff originally filed it. The defendant may invoke the removal jurisdiction of a federal court to take a claim out of the state court, request for a change of venue because the case was brought in the improper court within the jurisdiction, and move for forum non conveniens on the ground that the case was brought in an inappropriate forum based on the locations of the parties or evidence.
Forum shopping in criminal cases

Forum shopping also happens, albeit less frequently, in U.S. federal criminal trials, especially as certain districts and circuits are widely thought to favor the government in particular issues or trials. It is often claimed that the U.S. federal trials of alleged terrorists were forum shopped. Criminal defendants have much less power to change the forum in which the case against them has been brought. Generally, they can do so only where they can show that localized notoriety or publicity makes it unlikely that an impartial jury can be selected in the district in which charges were brought.
Efforts to dissuade forum shopping

Courts may object to forum shopping for several reasons. It would offend the sense of justice, if the fair resolution of a case should hinge on technical differences from one jurisdiction to the next. More practically, judges feel that their courts are overburdened and fear that having the reputation of a forum favorable to certain types of plaintiffs will increase their work load, thus delaying the timely dispensation of justice in other cases. Under the Erie doctrine, a federal court hearing a case under the diversity jurisdiction must apply the law of the state in which the court is sitting. Under the choice of law, the law of the state which has the closest nexus to the case is applied. Parties to a contract may seek to prevent forum shopping by inserting a forum selection clause or a choice of law clause in their contract. Such clauses are now generally enforced by the courts.
Forum shopping
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In the Philippines
Forum shopping is considered a serious offense which can be made by a complainant. The law in the Philippines explicitly prohibits the filing of more than one case for the same cause of action in any forum or court of law. The prohibition is done so that the courts will not be clogged by complaints of people who may file more than one complaint in an effort to gain a favorable decision in any of the numerous cases filed.
References
[1] So Small a Town, So Many Patent Suits (http:/ / select. nytimes. com/ gst/ abstract. html?res=F60E10FC35550C778EDDA00894DE404482), New York Times Magazine, September 24, 2006
External links
Forum shopping in US Terrorism Cases and the "DC Sniper" Case (http://writ.corporate.findlaw.com/dorf/ 20021127.html) Forum Shopping in Patent and Antitrust Cases (http://articles.corporate.findlaw.com/articles/00984/008917. pdf) (PDF) Rethinking Forum Shopping in Cyberspace (http://www.gmu.edu/departments/law/faculty/papers/docs/ 02-01.pdf) by Kimberly A. Moore Forum Shopping in Patent Cases: Does Geographic Choice Affect Innovation? (http://mason.gmu.edu/ ~kamoore/forumshopping.doc) by Kimberly A. Moore
Australian trust law

Trust law in Australia In Australia, trust law is under the jurisdiction of state governments, and the legislation often interacts with Corporations law and Family tax law. Equity still regulates trust law to a significant extent, and Australian law has often followed English developments. There are a variety of trusts recognised and used in Australia, including Unit trusts, Discretionary trusts and Hybrid trusts. Testamentary trust are also sometimes used. Often referred to as a "family trust" in Australia, is a discretionary trust where the trustee has made a family trust election. Family trusts provide flexibility in relation to distributions of income and assets among members of the family, while at the same time permitting the family to maintain either direct or indirect control over funds or other assets that have become the property of the family members. Streaming a category of trust income to a particular beneficiary provides tax planning opportunities. For example: foreign tax credits can be best utilised by resident individual beneficiaries with high marginal tax rates and net capital gains can be best utilised by beneficiaries with carried forward losses, low income beneficiaries with carried forward revenue losses and minors able to receive excepted trust income. However, discretionary trusts are usually unsuitable for accumulation of profits as the undistributed income will generally be taxed at 45% under s99A of the ITAA36. Family Trusts are often used to distribute income to beneficiaries in an attempt to achieve the most desirable tax outcomes available to the members of the trust. Discretionary or "Family" trusts also protect assets when individual members become insolvent or bankrupt. Asset protection also extends to other types of liabilities. The power of appointment of the trustee of a discretionary trust is held by the Appointor.In some trust deeds the person holding the power of appointment of the trustee is called the Custodian.The only difference is in the name. The Appointor is usually a natural person but can be a company. Generally upon the death of the Appointor, in the absence of an alternate appointment in the trust deed,the personal legal representative (executor) of the Appointor
Australian trust law becomes the Appointor.The real power in relation to the control of the trust rests with the Appointor because of the ability to terminate the appointment of the trustee and appoint a different trustee. This must be kept in mind when considering succession and estate planning involving assets held in a discretionary trust.
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English trusts law

English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person (a "settlor") gives assets (e.g. some land) to another person (a "trustee") to keep safe or to manage on behalf of another person (a "beneficiary"). The law of trusts developed in the Middle Ages from the time of the crusades under the jurisdiction of the King of England. The The Royal Exchange, adjacent to the Bank of England has been the centre of the "common law" regarded property as an City of London's financial activity since 1565, much involving trading of wealth indivisible entity, as it had been done among trust funds. through Roman law and the continental version of civil law. Where it seemed "inequitable" (i.e. unfair) to let someone with legal title hold onto it, the King's representative, the Lord Chancellor who established the Courts of Chancery, had the discretion to declare that the real owner "in equity" (i.e. in all fairness) was another person.
History
fideicommissum Feudalism and crusades Court of Chancery Charity and the British Museum Judicature Acts Indian Trusts Act 1882 Welfare state and retirement UK company law and UK insolvency law Offshore tax haven and tax avoidance
English trusts law
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Formation
Three certainties
For a valid trust, the "three certainties" must be present, see Knight v Knight. In Milroy v Lord, Turner LJ stated that: "...to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property, and render the settlement binding upon himself." He went on to say that the settlor may constitute an express trust by either transferring the property to the trustee or by a self-declaration of trust. In the latter case, no transfer is needed. Depending on what type of property is involved, certain formalities need to be satisfied before the property is validly transferred, and the general principle is that equity will not perfect an imperfect gift.[1] Thus, in the case of land, there needs to be a deed , and in the case of shares, ss 182-183 of the Companies Act 1985 provides that in general, a share transfer form must be executed and delivered with the share certificates followed by entry of the name of the new owner in the company books. Jones v Lock (1865) 1 Ch App 25 Paul v Constance [1977] 1 WLR 527 Hunter v Moss [1994] 1 WLR 452 Re Barlows Will Trusts [1979] 1 WLR 278 McPhail v Doulton [1971] AC 424 Re Badens Deed Trusts (no 2) [1973] Ch 9 Re Tucks Settlement Trusts [1978] Ch 49
Purpose trusts
Morice v Bishop of Durham (1805) 10 Ves 522 Re Bowes [1896] 1 Ch 507 Re Endacott [1960] Ch 232 Re Denleys Trust Deed [1969] 1 Ch 373 Leahy v Attorney-General for New South Wales [1959] AC 457 Re Rechers Will Trusts [1972] Ch 526 Re Lipinskis Will Trusts [1976] Ch 235 Re Grants Will Trusts [1979] All ER 359 Re Bucks Constabulary Widows and Orphans Fund Friendly Society (no 2) [1979] 1 All ER 623
Charitable trusts
Charities Act 2006
Pension trusts
Goode Report (1993) Pensions Act 2004 Pensions Act 2008
Formalities
There are several formality requirements that have been imposed on express trusts by, inter alia, Wills Act 1837 s 9 and the Law of Property Act 1925 s 53.
English trusts law Section 9 of the Wills Act 1837 provides that all testamentary trusts must be in writing, signed by the testator or by someone in his presence and by his direction, and be attested by two witnesses. However, secret trusts and now half secret trusts are recognised exceptions to this requirement. A full secret trust occurs when a testator leaves what appears to be an absolute gift in his will, but has communicated to the legatee that she is to hold the property on trust for purposes communicated to her. A half secret trust occurs when a testator leaves property on trust in his will, but communicates the terms of the will to the trustee privately. The two leading justifications for allowing these exceptions to s 9 are the fraud theory and the modern theoretical approach. The fraud theory was laid down in McCormick v Grogan and is based on the idea that to disregard evidence of an oral testamentary trust and allow the legatee to take the property absolutely would be against the testator's intent and would unjustly enrich the legatee. The modern theoretical approach is based on the analysis that the testator validly declared the trust in his lifetime, and it became constituted by the vesting of the property in the trustee on his death. The Law of Property Act 1925 s 53(1)(b) states that a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will. The declaration itself need not be in writing. The writing required is that of evidence of the declaration and failure to comply with this requirement will render the declaration of trust unenforceable (Leroux v Brown). Dispositions of equitable interests are void unless they are in writing signed by the person disposing of the interests or by an agent authorised by that person (LPA 1925 s 53(1)(c)). By contrast to s 53(1)(b), the requirement here is that the disposition itself must be in writing. The requirement here also applies to dispositions of equitable interests in both land and personalty, as in Grey v IRC.[2] As mentioned above, to constitute a trust, there usually needs to be a transfer of trust assets to the trustees and in the course of doing so, there might be certain formalities that have to be complied with. Otherwise, because equity will not perfect an imperfect gift, the trust will not be constituted . However, since Milroy v Lord, the court have at times appeared to have added the qualification that although legal title to trust property remains vested in the settlor, an attempted transfer by the settlor to the trustee might be effective in equity even though not all the formalities required for a valid transfer have been complied with. This might be the case where the settlor has done everything in his power to divest himself of trust property. In such cases, it is therefore possible for a trust to be constituted even though certain formalities have not been complied with. An illustration of this principle is seen in Re Rose. Here, the settlor had by voluntary deed transferred shares in a private company to be held on certain trusts. Under the company constitution, however, the directors of the company have the right to refuse to register transfers. Accordingly, they delayed registration by some two months after the deed had been executed. The question faced by the court was when were the shares transferred? Section 182 and s.183 of the Companies Act 1985 would suggest that the shares were only transferred when the directors registered the transfer. However, the court held that the shares were transferred when then the settlor executed the deed and the trust was constituted on that date. This is because the settlor had done everything in his power to divest himself of the shares. Re Rose was applied subsequently in a number of cases including Mascall v Mascall which concerned the transfer of registered land. More importantly, the Re Rose principle was reviewed in Pennington v Waine. Here the donor intended for her nephew to take up directorship in a private company. To do so, he needed to own shares in the company. Therefore, she executed a share transfer form concerning shares in the company in favour of her nephew. In contravention of the companies act, she had not delivered the share transfer form to her nephew. Neither had he been registered as a shareholder. The donor had sent the forms to her agent, the company auditor, who then told the nephew the he need not take further steps as regards the shares. The nephew then took up directorship of the company. The court held that the shares did not from part of the donors estate on her death as there was an equitable assignment of those shares. This was so despite the fact that the donor had not done everything in her power to
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English trusts law transfer the shares. The court reached its decision partly on the basis that clearly the donor intended the transfer to have immediate effect and it would have been unconscionable for the donor to retract. Unconscionability would depend on the circumstances in each particular case but in this case, the court felt that it was because the Donor had told the nephew of her intentions and he, in taking up directorship, had acted detrimentally. Secret trusts in English law
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Content
Duties of trustees include: 1. a duty to consider the proper investment of the trust assets 2. a duty to prepare annual accounts except where the assets are held in specie 3. a duty to keep adult beneficiaries informed at least annually Trustees must be unanimous in their decisions and are personally responsible to the beneficiaries for those decisions. In the event of dispute can apply to the Court of Chancery for directions as to the correct course of action.
Administration
Appointment and removal of trustees Delegation Variation of the trust deed Power of maintenance Power of advancement
Saunders v Vautier (1841) 4 Beav 115, the sole beneficiary of a trust of East India Company stock could take the money when he reached adulthood, rather than wait till age 25 as the trust stipulated Re Duke of Norfolks Settlement Trusts [1982] Ch 61, the court had the power to pay a trustee more for unforeseen work, as it had been necessary for the trust's administration
Duty of loyalty
Trustee de son tort Trustee Act 2000 Armitage v Nurse [1998] Ch 241 Bristol and West Building Society v Mothew [1998] 1 Ch 1 Morley v Morley (1678) 22 ER 817, Lord Nottingham LC held that if a trustee performed his duties then he was not liable for loss, as in this case where the trustee was robbed of 40 of the beneficiary's gold. Keech v Sandford [1726] EWHC Ch J76 [3] Meinhard v Salmon, 164 NE 545 (NY 1928) Boardman v Phipps [1967] 2 AC 46 Holder v Holder [1968] Ch 353
English trusts law
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Duty of care
Speight v Gaunt (188384) LR 9 App Cas 1, trustees who employed a dishonest broker that stole 15,000 were not liable to repay the money to the beneficiaries because they acted in the ordinary course of business Learoyd v Whiteley (1887) 12 AC 727, trustees liable for loss of money when investing in a spurious brickfield business because they failed to exercise the care of a prudent person In re Lucking's Will Trusts [1968] 1 WLR 866, trustees with 70% shares in a company should have had representatives in management to stop director thieving company property Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515, corporate trustee with 99% of company should have intervened in management to prevent disastrous speculation Nestl v National Westminster Bank plc [1993] 1 WLR 1260, trustees investing only in tax exempt gilts were not liable for failure to take care because although they should follow modern portfolio theory now, their actions were not to be judged with the benefit of hindsight Cowan v Scargill [1985] Ch 270, trustees of miners' pensions were not allowed to disregard the potentially disastrous financial implications of investing all the trust money in the UK mines, even though this might serve an objective of propping up the industry Harries v Church Commissioners for England [1992] 1 WLR 1241, unless financial performance can be shown to be harmed, a trustee for church clergy retirement could take ethical considerations into account when investing money, and so avoid investments contrary to the religion's principles Re Londonderry's Settlement [1965] Ch 918, a beneficiary of a family trust was not entitled to information about a decision for why small sums were distributed to her Schmidt v Rosewood Trust Ltd [2003] UKPC 26 [4], a discretionary beneficiary could get information about a trust's accounts, set up by his father Sieff v Fox [2005] 1 WLR 3811
Breach and remedies

Breach of trust
Breach of trust is a type of civil wrong.[5] Target Holdings Ltd v Redferns [1996] AC 421 Re Halletts Estate (1880) 13 Ch D 696 Re Oatway [1903] Ch 356 Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22
Tracing
Beneficiaries who feel the trustees are not (properly) fulfilling their obligations have the right to take the trustees to the Court of Chancery for a declaration concerning the proper actions of the trustees. Bishopsgate Investment Management Ltd v Homan [1995] Ch 211 Foskett v McKeown [2001] 1 AC 102 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 Twinsectra Ltd v Yardley [2002] 2 AC 164 Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 All ER 333
English trusts law
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Constructive trusts
Pennington v Waine [2002] 1 WLR 2075 Bannister v Bannister [1948] 2 All ER 133 Lloyds Bank plc v Rosset [1991] AC 107 Boardman v Phipps [1967] 2 AC 46 AttorneyGeneral for Hong Kong v Reid [1993] AC 713 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Resulting trusts
Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 Re Vandervells Trusts (no 2) [1974] Ch 269 Tinsley v Milligan [1994] 1 AC 340 Tribe v Tribe [1996] Ch 107 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Twinsectra Ltd v Yardley [2002] 2 AC 164 Quistclose trusts in English law
Theory
Unjust enrichment and restitution Consent and autonomy Law of obligations and property
Notes
[1] [2] [3] [4] [5] Jones v Lock (1865) 1 Ch App 25 Grey v IRC [1960] AC 1 http:/ / www. bailii. org/ ew/ cases/ EWHC/ Ch/ 1726/ J76. html http:/ / www. bailii. org/ uk/ cases/ UKPC/ 2003/ 26. html Glanville Williams. Learning the Law. Eleventh Edition. Stevens. 1982. p. 10
References
Books JE Martin, Modern Equity (18th edn Thomson Sweet & Maxwell, London 2009) C Mitchell, Hayton and Mitchell's Commentary and Cases on the Law of Trusts and Equitable Remedies (13th edn Sweet & Maxwell 2010) C Mitchell, D Hayton and P Matthews, Underhill and Hayton's Law Relating to Trusts and Trustees (17th edn Butterworths, 2006) G Moffat, Trusts Law: Text and Materials (5th edn Cambridge University Press 2009) C Webb and T Akkouh, Trusts Law (Palgrave 2008) S Worthington, Equity (2nd edn Clarendon 2006) Articles P Birks, The Content of Fiduciary Obligation (2002) 16 Trust Law International 34 M Conaglen, The Nature and Function of Fiduciary Loyalty (2005) 121 Law Quarterly Review 452 EJ Weinrib The Fiduciary Obligation (1975) 25(1) University of Toronto Law Journal 1
English trusts law Reports Law Reform Committee, The Powers and Duties of Trustees (1982) Cmnd 8773
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External links
List of leading trusts cases on bailii.org (http://www.bailii.org/openlaw/trusts.html)
United States trust law

United States trust law is the body of law regulating the legal instrument for holding wealth known as a trust. Most law regulating the creation and administration of trusts in the United States is now statutory at the state level. In August 2004, the National Conference of Commissioners on Uniform State Laws created the first attempt to codify generally accepted common law principles in Anglo-American law regarding trusts into a uniform statutory code for the fifty states, called the Uniform Trust Code (UTC).[1] As of October 2009, 24 states have adopted some substantive form of the UTC with three others having introduced it into the legislature for adoption.[2] The goal of the uniform law is to standardize the law of trusts to a greater extent, given their increased use as a substitute for the "last will and testament" as the primary estate planning mechanism for the affluent.[3] Despite the uniform law, however, differences remain, as states still harbor rich differences in fiduciary law. It has been a common practice of American lawyers for the past 150 years or so to choose the law of Massachusetts to govern the disposition of property conveyed in trust. In the absence of a nationally uniform law, their justification was that the courts of Massachusetts ruled on trust questions with far greater experience and authority than any other State (much like choosing corporate law in Delaware for a new company). Each state adopting the UTC has incorporated changes to their version of the Code, reflecting certain peculiar or long-standing exceptions in their own state's law that legislators intend to preserve.
Overview
Trusts are essentially creatures of contract. Virtually all trusts are made in written form, either through an inter vivos or "living trust" instrument (created while the settlor is living) or in a will (which creates a testamentary trust). Therefore, in understanding certain terms in a trust, general rules of construction regarding interpretation of wills or other testamentary documents will apply.[4] Subject to certain fundamental requirements of trusts,[5] the UTC generally states that the terms of a trust instrument as written by the settlor will control over the "default rules" of the UTC. Where a document does not contain a provision that is otherwise covered by the UTC's default rules, the UTC will control.[6] Where a document contains obnoxious, unworkable, impractical, or outdated language, the beneficiaries and trustees have recourse to local courts having general jurisdiction in equity most commonly for a declaratory judgment, judicial construction or reformation of the trust to bring it into compliance with the original intent of the settlor.[7] Also, the court may be called upon to deal with circumstances not imaginable by the settlor at the time the trust was created to make the trust cy pres or as close as possible to the original intent.[8] Trusts are a special breed of contract in that they often govern the disposition of property in the same way a "last will and testament" does via a probate proceeding. Many states differ as to their procedures concerning the interpretation and administration of trusts created during life (i.e., the inter vivos trust) versus those created in a will which are typically subject to jurisdiction in probate proceedings (the testamentary trust). The UTC attempts to standardize the general composition of both trust forms and their requirements, but does not generally attempt to address the procedural questions as to overall subject-matter jurisdiction and other aspects of proceedings involving trusts.[9] Instead, the vagarities of various state and local procedural rules will generally apply.
United States trust law When titling property or otherwise referring to an existing trust, practitioners persist in referring to trusts as "Tr. u/a" (trusts under agreement, i.e. inter vivos trusts) or "Tr. u/w" (trusts under will, i.e. testamentary trusts). Industry convention is for the settlor's name to appear in the title. In the USA, the name follows a shorthand for the type of instrument. Hence: "Tr. u/a John Smith FBO Alma Smith" or, if appropriate, "Tr. u/a John Smith FBO Alma Smith irrevocable" (FBO means for benefit of). Titles also frequently include more information such as the existence of more than one trustee ("Co-tr. u/a John Smith": "co-tr" means co-trustee) or that one or more of the trustees are not the original trustee (Successor Co-Tr. u/a John Smith). In understanding American trust law, it is helpful to understanding the terminology and definitions of various terms as they relate to trusts. The following section contains a discussion of some of these terms.
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The "three characters" in the play

A trust generally involves three "persons" in its creation and administration: (A) a settlor or grantor who creates the trust;[10] (B) a trustee who administers and manages the trust and its assets; and (C) a beneficiary who receives the benefit of the administered property in the trust. In many instances where a revocable living trust is involved, one person can serve as grantor, trustee and beneficiary simultaneously until they die. In many other instances, especially after the death of the initial grantor, there will be different persons named to be trustee(s) or beneficiary(ies). There can be more than one of any of these "persons" in a trust at any one time.
The settlor/grantor
Strictly speaking, the Grantor of a trust is merely the person creating the trust,[11] usually by executing a trust agreement which details the terms and conditions of the trust. Such a trust can be revocable or irrevocable. A revocable trust is one in which the settlor retains the ability to alter, change or even revoke the trust at any time and remove funds from it at any time. It is sometimes also referred to as a grantor trust. See below. Unlike under older common law rules, the Uniform Trust Code presumes that all trusts are revocable unless the terms of the trust specifically state otherwise.[12] Generally, the Grantor is also the one charged with funding the initial assets into the trust, either through an instrument (i.e., deed, security certificates, accounts retitled into the trust's name) or by a declaration (i.e., for tangible personal property without a formal title). From both a historical and practical perspective, trusts have generally been designed to have only one Settlor or Grantor. This is due to the complications that can arise, particularly in non-community property jurisdictions, in determining the nature of property deposited into the trust and the proportionality of the multiple grantors' contributions within it.[13] However, a growing trend for husbands and wives is to create "joint trusts" where both are "grantors" of the trust, thus mirroring the familiar concept of joint tenancy ownership.[14] For a revocable trust, the grantor retains the power to direct transactions for the trust, even if a third party serves as the trustee.[15] This may even include situations where there may be a conflict in the grantor's direction and the actual terms of the trust.[14] In an irrevocable trust, there has developed a growing use of a so-called trust protector. This is generally an unaffiliated, third party (often a lawyer or an accountant) who is granted the power to amend or change the terms of the trust in order to accommodate unexpected changes in tax or fiduciary law, unexpected changes in the trust's circumstances or other contingencies. The Code permits the use of such third parties to amend or alter even an irrevocable trust.[16] The trustee is to act in accordance with such powers unless "the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust."[17] Furthermore, the Code assumes such trust protectors act in a fiduciary capacity and must act in good faith with respect the trust's purposes and the best interests of the beneficiaries.[18] The term "grantor trust" also has a special meaning in tax law. A grantor trust is defined under the Internal Revenue Code as one in which the federal income tax consequences of the trust's investment activities are entirely the responsibility of the grantor or another individual who has unfettered power to take out all the assets.[19] Unlike other
United States trust law trusts, the grantor trust completely passes through all income tax consequences of transactions inside the trust and the trust itself is a virtual shell. This is generally favorable in the current tax climate since in most cases less income will be taxed when a trust is treated as a "grantor trust."[20]
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The trustee
Trustees are the persons appointed to manage all duties required for the trust to function. In most cases, the acting trustee (and the successor to that trustee in the event the trustee can no longer serve) is named specifically in the trust instrument. A person nominated as a trustee can decline to serve as a trustee[21] or if serving may choose to resign as a trustee upon notice to the trust's beneficiaries.[22] Also, in some instances, the trust instrument can specify that trustees can be removed. Any Grantor of a revocable trust would implicitly hold this power with a third-party trustee, given their power to amend or revoke the trust.[23] In an irrevocable trust, the trust instrument may, in some instances, grant the beneficiaries a power to remove a trustee by a majority vote. Absent this provision, in most UTC jurisdictions, other co-trustees or beneficiaries can remove a trustee only by court action.[24] However, the threshold for removal under the UTC is not substantial. In most cases, all the court must find is that there has been a "substantial change in circumstances" in which removal would "best [serve] the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available."[25] A trust can have one trustee or many. In the event of multiple trustees, the older common law rules required that all trustees act unanimously.[26] The modern rule reflected in the UTC permits co-trustees to act by majority vote.[27] Where a co-trustee is unable to be actively involved in the management of the trust due to age or illness, the remaining co-trustees can generally act on behalf of the trust "to achieve the purposes of the trust or to avoid injury to the trust property."[28] However, it is generally better practice for the co-trustee either to resign or to otherwise delegate his decision-making functions while incapacitated to one or all of the remaining co-trustees.[29] A trustee who dissents from acting in a certain way with his fellow co-trustees is protected under the Code from liability provided the trustee has indicated his dissent and only acts based on the direction of the majority co-trustees.[30] In practical terms, the use of co-trustees can often become unwieldy. The Code generally notes this and advises great care for attorneys who draft documents that use multiple co-trustees.[31] Trustees may be competent individuals or state or federally chartered corporations with trust powers (usually banks or trust companies). Typically corporate trustees will have integrated their fiduciary organization into their investment management or private banking groups. It is not unusual for an individual to serve as trustee alongside a bank trustee. Both individual and corporate trustees may charge fees for their services,[32] although individual trustees typically serve gratis when they are part of the settlor's family or the settlor him/herself. The term "co-trustee" may fool either the bank trust officer or the individual co-trustee into thinking their roles are identical. If the roles are not further defined in the document, then their roles are legally the same.[33] As a practical matter however, the corporate trustee will nearly always do the custody work and keep the books. But many documents will give the individual co-trustee powers that differ from the corporate trustees. For example, the individual co-trustee's rights and duties may be limited to dealing with discretionary distributions of principal and income, sale of a personal residence held in the trust, or sale of a "heartstring asset."[34] All trustees have several fundamental duties and responsibilities imposed by the Code and general principles of long-standing common law. The following is a brief description of these duties as enunciated in the Uniform Trust Code and how they generally apply in the actual administration of a trust by the trustees.
United States trust law Duty of prudent administration It goes without saying that the trustees essentially "run" the trust. They are responsible to collect trust assets, collect receipts from trust investments, pay required expenses of the trust, enforce and defend claims on its behalf, determine what amount (if any) to distribute to beneficiaries as provided under the trust agreement, properly make a record of such receipts and disbursements, and many other tasks.[35] The UTC generally states that trustees must conduct these activities in "good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this [Code]."[36] Trustees cannot act (or omit to act) if the trust's purposes are illegal, impossible to achieve or else against public policy.[37] The standard for a trustee actions under the UTC is that a trustee must act "as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust."[38] In satisfying this standard, the trustee must exercise reasonable care, skill, and caution.[14] One of the most important responsibilities for a trustee is to prudently manage the trust's assets. The Uniform Trust Code presumes that trustees will be held to the same standard as that adopted by the Uniform Law Commissioners in the Prudent Investor Act [UPIA]. A trustee must invest and manage trust assets as a "prudent investor" would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.[39] In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.[14] The UPIA adopts a very holistic approach to the standards of what constitutes "prudent investing." The trustee's conduct is not to be reviewed on the basis of any one decision or one investment holding, but on the portfolio and its management as a whole.[40] No particular investment is considered "off limits" due to some intrinsic risk inherent in it[41] the key is whether such individual investments are part of a trust portfolio that fits an overarching strategy "having risk and return objectives reasonably suited to the trust."[40] Also, the trustee is not expected to have a "crystal ball" to predict outcomes with respects to specific decisions. As the UPIA states, "Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee's decision or action and not by hindsight."[42] Among the factors a trustee may consider in formulating the investment strategy and the asset portfolio are (1) general economic conditions; (2) the possible effect of inflation or deflation; (3) the expected tax consequences of investment decisions or strategies;(4) the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property; (5) the expected total return from income and the appreciation of capital;(6) other resources of the beneficiaries; (7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and (8) an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries."[43] One of the primary guiding forces in the UPIA is the emergence of modern portfolio theory and the concept of correlations in the performance of various asset classes. For example, in most cases, it is established that stocks and bonds have low correlations in terms of performance in a given timeframe. This means that when stocks are better than average in performance, bonds perform lower than average. The converse is also true. This concept of correlation allows for diversification of a portfolio so that a portfolio can perform more consistently in various economic climate by having a variety of asset classes, in specific proportions, in the trust portfolio.[44] The UPIA's default rule mandates to a trustee that he or she diversify a trust portfolio "unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying."[45] The UPIA also states that trustees should invest impartially without favoritism to one class of beneficiaries over another (i.e., beneficiaries receiving current income versus beneficiaries receiving principal from the trust at its termination.)."[46] If a trustee has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, he or she must use them.[47] In many cases, a trustee, particularly an individual, who may not have certain expertise in various areas (i.e., investing, real estate management, ongoing business management, etc.) may wish to use an agent who is an expert and delegate authority to that expert as to certain incidentals of trust administration. The Code permits this, provided that: (a) the task is one a prudent trustee of
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United States trust law comparable skills could properly delegate under the circumstances; (b) the trustee prudently selects the agent, setting the proper scope and function of the agent's task; and (c) periodically monitors the agent's performance and compliance with his or her duties.[48] Once appropriately delegated under Section 807(a), the duty to exercise reasonable care in performing that function then shifts from the trustee to the agent, and the trustee is no longer liable for any act or omission undertaken by the agent.[49] Many trusts provide for trustees to use discretion in the distribution of trust assets to beneficiaries. Often, if the grantor is particularly wary of the spendthrift nature of the beneficiaries, he or she may give the trustee extremely broad powers to distribute or not distribute funds. Notwithstanding such broad terms, however, the UTC generally requires trustees to exercise such discretionary powers in "good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries."[50] Duty of loyalty One of the oldest and most venerated duties of trustees has been to avoid "conflicts of interest."[51] Centuries of English and American common law have detailed the rules for trustees to avoid both direct conflicts and to avoid "appearances of impropriety" that might compromise the fiduciary's standing as an impartial decision-maker for the beneficiaries. The trustees should administer the trust for the sole benefit of the beneficiaries, against all others who might seek to benefit or profit from trust assets.[52] The first cardinal principle is that the trustee should not personally profit form any transactions that occur with respect to trust property. This is generally been referred to in the common law as the "no further inquiry" rule, meaning that transactions entered into by a trustee for a trustee's own account are presumed suspect with "no further inquiry" and are considered voidable upon an action by the beneficiaries.[53] Furthermore, if trustee exercises "significant influence over the beneficiary and from which the trustee obtains an advantage" in a transaction, even if it does not concern trust property, the trustee can be held liable for violating his or her prime duty of loyalty to act solely for the trust and its beneficiaries.[54] This usually involves business transactions outside of the trust relationship but again may have the "appearance of impropriety" due to the trustee's power over assets to which the beneficiary may have a right. The trustee can generally overcome the appearance by fully disclosing the transaction, take no advantage of his trustee position, and show that the objective facts of the transaction appear fair and reasonable to all parties.[55] Trustees also cannot take advantage of their superior knowledge or an opportunity discovered during their tenure as a trustee to profit themselves on their own account in most situations.[56] This prime rule has been gradually moderated over time, based on the law's recognition that in many cases, corporate trustees engage in transactions necessarily because they are in a for-profit business. Thus exceptions have crept increasingly into the general rule. Thus, a trustee can be exonerated from the "self-dealing" rules on property in situations where: (1) the transaction was authorized by the terms of the trust; (2) the transaction was approved by the court;(3) the beneficiary did not commence a judicial proceeding within the time allowed under statutes of limitation; (4) the beneficiary somehow consented to the trustee's conduct, ratified the transaction, or released the trustee; or (5) the transaction involves a contract entered into or claim acquired by the trustee before the person became or contemplated becoming trustee.[57] In addition, for corporate trustees, if the trustee utilizes mutual funds or common trust funds in which they are compensated for managing the fund (as well as a customary trustees fee), such arrangements are not considered conflicts of interest provided there is full disclosure to the beneficiaries of the relationship.[58] Finally, the Code does not consider certain transactions precluded under the Code solely because they involve "others" to the possible detriment of the beneficiaries. These can include a corporate trustee that conducts transactions with other trusts in which the entity may also be a trustee, the executor of an estate or other fiduciary.[59] All that would be required is that the transactions appear fair and reasonable to all parties.[60] As part of the duty of loyalty, trustees also have a duty to act impartially with respect to trust beneficiaries. If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust
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United States trust law property, giving due regard to the beneficiaries respective interests.[61] Duty to keep records and report Trustees are required to keep beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.[62] If a beneficiary asks for information, the trustee is charged to give it (unless the request is somehow unreasonable under the circumstances).[14] This includes providing the beneficiary a copy of the trust agreement, notice of the acceptance or change of trustee and the contact information for the trustee, notice that a trust has become irrevocable due to the grantor's death, and any changes in the trustee's rate of compensation.[63] The trustee must also keep adequate records of the administration of the trust generally.[64] All trust property must stay separate from the trustee's own personal property and must not be "commingled."[65] A trustee can hold certain securities, usually publicly traded ones, in a "street name" or nominee registration for ease of management.[66] However, they are still subject to the rule that such securities must be "earmarked" specifically in records to a specific trust account.[14]
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The beneficiaries
The generic term "beneficiary" under the Uniform Trust Code is defined as a person that (A) has a present or future beneficial interest in a trust, vested or contingent; or (B) in a capacity other than that of trustee, holds a power of appointment over trust property.[67] Beneficiaries are the holders of "equitable title" of trust assets and receive the benefits of trust property, subject to the trustee's "legal title" ownership and control under the terms of the trust agreement as established by the grantor. The Code makes a distinction between certain classes of beneficiaries with respect to the traditional reporting requirements for trustees with respect to the assets and transactions actually held in the trust. Under the older common law, only current beneficiaries (sometimes termed "income beneficiaries") were entitled to receive reports or accountings of trust transactions and that such reports were sufficient to protect the interest of those current beneficiaries.[68] However, the Code has now permitted "qualified beneficiaries" to at least be informed of their right to receive a trustee's periodic report of trust transactions and assets and are entitled to receive it if they do in fact request it.[69] "Qualified beneficiaries" are defined as a beneficiary who, on the date the beneficiary's qualification is determined: (A) is a distributee or permissible distributee of trust income or principal; (B) would become a distributee or permissible distributee of trust income or principal if a present distributees' interest ended on that date without causing the trust to terminate; or (C) would become a distributee or permissible distributee of trust income or principal if the trust did terminate on that date.[70] Essentially, this means that future beneficiaries (i.e., children or grandhcildren) might be exposed to information that the grantor only intended to pass to the current beneficiaries. Although the UTC limited the reporting requirements to trustees accepting duties after the Code's enactment,[71] a number of states have changed the standard UTC language, often in response to concerns from corporate trustees of the unwieldiness of such requirements and the danger that future trust beneficiaries may interfere and create contention concerning the operation of the trust.
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Purposes of a trust
The purposes and uses of trusts historically had to do with management of property in absence of owner, mostly during medieval times when a lord left to fight in battle. Gradually, the device also found usefulness to control property "beyond the grave", although the so-called Rule Against Perpetuities limited this power. See trust law#History. In modern times in the United States, trusts have several principal purposes.
Asset management
Trusts are generally unique in that they can provide comprehensive asset management for multiple family generations over great spans of time, something which other estate planning devices cannot completely replicate. Trusts can hold title to a virtually inifinite number and type of disparate assets, from publicly traded securities, to illiquid closely-held business interests, to real estate, to even collectibles and tangible personal property. Unlike other methods of transferring title, the trust allows continued management of the assets, despite the infirmity or even death of the owner allowing them to specify to successor trustees exactly how to manage the property and use it for the future beneficiaries. This can extend for multiple generations or even, in some jurisdictions, in perpetuity (as some states have permitted in some instances the creation of trusts that can last beyond the Rule Against Perpetuities). The third-party management of property for the benefit of another is especially valuable for persons who have some form of incapacity, infirmity or are simply unwise with the use of money. Many create trusts to protect family members from themselves. It is not unusual to see a will in which four children get funds free of trust or any other encumbrances from their father but a fifth child's funds are all or mostly placed in trust. This is usually for good cause drug abuse, demonstrated inability to hold onto money, fear of divorce, criminal activity, a wish to see the funds go to grandchildren rather than one's own children, etc. Such trusts help to conserve assets for the longer term needs of such individuals and help to slow or eliminate the "wasting" of assets through unwise purchases or losses. In addition, the trustees' powers over the assets can be incredibly broad and flexible and do not require the supervisory eye of a court (and the attendant additional cost such oversight can create). Particularly in cases where a corporate trustee is used, the grantor and subsequent beneficiaries receive the benefits of a vast array of financial services portfolio management, real estate and business management, bill paying, insurance claim processing, tax and legal assistance, and financial planning just to name a few. Revocable living trusts were often touted and marketed as valuable solely because of their ability to "avoid probate" and the costs and complications that surrounded it. Although probate avoidance is certainly a consideration in the use of a "living trust", there are many other estate planning techniques which also "avoid" probate. Typically however, such alternatives do not provide the kind of consolidated asset management that a trust can. Although trusts are certainly not for everyone in the context of estate planning, even persons with modest net worths often find the living trust an ideal planning tool.
Estate tax avoidance

Trusts are often created pursuant to an estate plan for wealthy individuals to avoid the onerous effects of the federal estate tax. Under current federal estate tax law, in 2008, individuals that own interests in any property (individually owned, jointly held, or otherwise) which exceeds a fair market value of $2 million is subject to the estate tax at death; in 2009, the amount is $3.5 million. In 2010 there is no federal estate tax unless Congress acts. An estate that exceeds that value will pay tax on that excess at a rate of 45% under current law.[72] Naturally, this rate is a huge inducement among many with substantial wealth to use various estate planning devices to reduce or eliminate the effect of the tax for their family. Below is a brief summary of certain specific techniques that employ trusts as the vehicle for achieving such savings.
United States trust law The credit shelter trust The credit shelter trust is by far the most common device used to extend the $2 million applicable credit ($3.5 million in 2009) for married couples. In this technique, each spouse creates a trust and divides their assets (usually evenly) between the two trusts. The terms of the credit shelter trust provide that upon the first spouse's death, the other is left an amount in trust for the benefit of the surviving spouse up to the current federal exemption equivalent to the federal estate tax. Thus an individual would leave, say, $2 million in trust for his wife (keep the $2 million out of her estate), give his widow the net income from his trust, and leave the remaining corpus to his children at her death. The Internal Revenue Code does not consider the assets in the first spouse's trust includible in the surviving spouse's estate at death for estate tax purposes, because the spouse's rights to the principal of the "credit shelter" trust do not constitute full ownership of the trust assets. In essence, this allows the couple to now shelter $4 million in assets rather than just $2 million (at the death of the second spouse). The "Credit Shelter Trust" can permit the surviving spouse to also access principal from the trust. However, the IRS generally limits this power to distribute principal only for the "health, education, maintenance or support" of the surviving spouse. This language is relatively broad in its practical application; however, the IRS has agreed it is a sufficient limitation to allow the "credit shelter" trust not to be counted in the estate of the second spouse when she dies. An additional benefit of the "credit shelter" is that future appreciation of trust assets passes on to the future beneficiaries (i.e., children or grandchildren) free of the estate tax. So, for example, if the surviving spouse lived another 10 years and the assets inside the first spouse's "credit shelter" grew to $4 million, the appreciation would pass to the children without estate tax on the increased value, since the estate tax value was "locked in" at the first spouse's death.[73] Unfortunately, the "credit shelter trust" generally only works for married couples since (a) the tax code provides the opportunity to shift assets between married persons for an unlimited amount by means of the unlimited marital deduction; and (b) unmarried persons attempting to do the same would be impacted by the "gift tax" during life. However, the mechanism is often useful in multiple marriage situations to allow for the use of income by the spouse while also conserving principal for the children later after the "stepparent" passes away. Charitable remainder / Lead trusts Trusts are often created as a way to contribute to a charity and retain certain benefits for oneself or another family member. A common technique is to create a charitable remainder unitrust ("CRUT"). Typically, this irrevocable trusts are funded with assets which often are highly appreciated, meaning their cost basis for capital gains tax purposes is very low relative to their current fair market value. This can be real estate, highly appreciated stock or a business interest with a low (or zero) tax basis. Once the trust is funded, typically the asset is sold and invested in a more diversified investment portfolio that can provide income or liquid securities to provide an "annuity" to one or two individual persons, based on a set percentage provided for under the trust instrument and under IRS regulations. The annuity can be set for a certain term of years or can last for the lifetime of individual beneficiary(ies). Then, after the annuity term expires, the principal of the trust goes outright to a charity or charities the grantor named in the trust document. If the trust meets the requirements of the IRS regulations, the grantor of the trust will receive a charitable income tax deduction for the calculated future value of the gift. Moreover, when he transfers the property into the CRUT irrevocably, the value of that property is out of his estate for estate tax purposes as well, even if he himself receive the individual annuity interest in the trust. In many cases, when properly structured, the CRUT can provide enough tax benefits to beneficiaries through the use of the annuity interest to justify the "giving away" of the asset to charity. However, this "giving away" of assets often causes many to forgo this technique, preferring to leave the assets directly to children regardless of the potential tax consequences it may create.
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United States trust law Grantor retained annuity trusts Trusts may be created to get funds to the next generation where there is significant wealth and federal exclusionary gifts have already been used up. A common such vehicle is called the grantor retained annuity trust (GRAT). Federal tax law specifically allows for this vehicle. Here the grantor places an asset in the trust one he expects will grow rapidly during the term of the trust. The document then requires the trustee to pay to the settlor a specific sum of money (the annuity) at certain intervals during the life of the trust. If there are assets in the trust at the end of the term, those assets go without estate or gift tax to the remaindermen. Here's a typical case: settlor owns large block of low cost basis stock in a publicly traded company. He does not wish to sell the stock and pay capital gains tax. He also has estate tax problems since his net worth when he dies is likely to be $10 million or more. His attorney drafts a GRAT in which he places $2 million of the single company's stock. The document calls for the smallest legal interest rate (published monthly by the Federal Government), which is then paid through the term of the trust. Upon the termination of the trust, the annuity has been paid back to the grantor and the remaining corpus is delivered to the remaindermen (typically children) without tax. Money has now passed from the grantor to his/her children without gift or estate tax. There has been no capital gains tax. Irrevocable life insurance trust view section in Wiki http://en.wikipedia.org/wiki/ILIT
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Government benefit protection

Trusts may be created to protect an individual's welfare or other state benefits. These are typically called "special needs trusts." Typically, an individual has Medicaid and Social Security Supplemental Security Income (SSI) coming in. For such individual to then be given access to funds in excess of, usually, $2,000 ("countable" assets), risks immediate termination of his government benefits. To assure the individual a life of some ease beyond what he can afford from Social Security checks, a family member will place several hundred thousand dollars into a special needs trust for the little extras in life: dinner out, a birthday party, some new clothes, et alia. Such trusts require the expertise of a member of the "elder law" bar and must be administered with great care. It is best to have a family member as a co- or sole trustee. Given the small size of these trusts, they are typically not profitable for a corporate trustee.
Creation of a trust
A trust may be created by: (1) transfer of property to another person as trustee during the settlor's lifetime or by will or other disposition taking effect upon the settlor's death; (2) declaration by the owner of property that the owner holds identifiable property as trustee; or (3) exercise of a power of appointment in favor of a trustee.[74] The ancient rule from English common law is that a trust is not established until it has property or a res.[75] However, the actual property interest required to fund and create the trust is nothing substantial.[76] Furthermore, the property interest need not be transferred contemporaneously with the signing of the trust instrument.[14] Many trusts allow for additional deposits (cash, securities, real estate, etc.) at the direction of the settlor or others, provided the trustee is willing to accept those assets. It can even be funded after death by a "pour-over" provision in the grantor's last will, specifying his or her intent to transfer property from the estate to a trust. It can also be created by a court order or statute, imposing certain rights, duties and responsibilities as to particular property.[77]
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Intent
Trusts have certain requirements for creation. First, the grantor must show an intent to create a trust.[78] Concordantly, the grantor must have the mental capacity to form such an intent and to create the trust.[79] Also, if the grantor was "forced" to create the trust due to fraud, duress or undue influence, it is deemed void.[80] Nearly all trusts created by individuals are the subject of some type of writing (either a trust agreement or a will), which provides evidence of not only the intent to create the trust, but the intended operative terms of it. However, abiding by the old common law rules, the Uniform Trust Code does recognize that a trust can be created orally.[81] However, to prove the terms of such a trust can only be established by "clear and convincing evidence."[82] Such oral trusts are extremely rare in modern practice. Occasionally, the intent to create a trust is manifested not by a writing per se but by the circumstances in which the "grantor" has entrusted the care of property to another party. This is often referred to as a constructive trust or a resulting trust.[83] Again, such devices are generally rare and are created as the result of a court-imposed equitable remedy due to litigation between parties as to the "ownership" of certain property.
Definite beneficiary
Second, the trust must have some "definite beneficiary"[84] a person or class of persons whose identity can be determined in some fashion. The persons' specific identities need not be "known" at the time the grantor creates the trust; it will be sufficient if the persons can be "readily ascertainable" within a certain time period.[85] That time period, historically, was determined under the old English common law "Rule Against Perpetuities", which required that an interest must vest, if ever, within twenty-one years after the death of a "life in being." There are a few exceptions to this provision concerning a "definite beneficiary." The most obvious is in the case of a "charitable trust"[86] that is for the benefit of an organization that is usually not-for-profit and is intended "for the relief of poverty, the advancement of education or religion, the promotion of health, governmental or municipal purposes, or other purposes the achievement of which is beneficial to the community."[87] Another exception is the much-publicized (and often ridiculed) trust for the benefit of an animal, usually owned by the grantor prior to death.[88] Finally, a trust may be created for a certain non-charitable purpose without an ascertainable beneficiary for a certain period (21 years, under the default rules of the UTC.)[89] The most common example of a trust for a specific non-charitable purpose is a trust for the care of a cemetery plot.[90]
Active trustee
The third requirement under the UTC is that the trustee must have duties he or she must perform.[91] Otherwise, if the beneficiaries are able to manage the property as they wish, there is no "trust" per se.[92]
No merger of property interests

Finally, the UTC requires that a trust must not have the same person as the sole trustee and sole beneficiary.[93] Under ancient common law principles, a trust could not exist unless there was at least some "title split" that is, the same person cannot generally hold all legal and all equitable title at the same time. If the legal and equitable title merge in the same person, the trust is considered nonexistent under the so-called merger doctrine.[94]
Validity of trust in other jurisdictions

The UTC states that a trust is valid if, under the law of the jurisdiction in which it was created, it was properly created.[95] In most cases, this would be the law of the jurisdiction of the grantor's domicile. Trusts must also, under the Code, have a lawful purpose which is possible to achieve.[96] For example, a trust must not violate public policy by encouraging criminal or tortious conduct, interfering with freedom to marry or encouraging divorce, limiting religious freedom, or is otherwise frivolous or capricious.[97]
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"Oddball" trusts
The UTC also covers a trust created for the purpose of caring for an animal that was alive at the time of a grantor's death[98] or a trust for a non-charitable purpose but does not have an ascertainable beneficiary (such as a cemetery trust.)[99] The Code imposes several limits on such trusts. First, the trust can only last as long as the lifetime of the animal (or the last surviving animal in a group)[100] or in the case of a cemetery trust, no more than 21 years.[101] Also, the trust's corpus can only be applied to the intended use of caring for the animal or the cemetery plot.[102] In essence, then, a court can determine that if the trust has property that exceeds the amount required for the animal's care, the court may intervene and distribute the funds to the grantor's successors in interest.[14]
Termination / reformation of a trust

With the exception of certain charitable trusts that can run perpetually, virtually all trusts with individual beneficiaries must end at a date certain. Of course, if a grantor has the power to do so, a trust terminates when it is revoked.[103] Grantors also may amend the trust as they see fit during their lifetime, so long as they continue to retain the capacity to do so.[104] For irrevocable trusts, the trust terminates when a trust "expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve."[105] Most typically, such events occur when a certain class of beneficiaries receive all trust property outright, free of the restriction of the trust agreement, and trust administration is then "wrapped" up and the trust closed. In some instances, however, it may be desirable to change the trust's terms or even terminate the trust by a method that the original grantor did not contemplate. For example, the trust may be depleted to such an extent that the management of the trust by a professional may be uneconomical. Changes in the law or circumstances surrounding the formation of the trust after the death of the grantor may dictate changes in the terms of the trust (or the termination of the trust itself.) The most infamous example would be beneficiaries who clamor against the trustee to "bust the trust" based on the strict limits the trust (or the trustee) may impose on the trust assets. In many of these cases, the UTC provides beneficiaries (and trustees) relief to provide the flexibility needed to dispose of trust property under certain rules.
Reformation / Termination by consent

The Code permits the modification or termination of a non-charitable irrevocable trust if: (a) the grantor and all beneficiaries consent and (b) a court of proper jurisdiction approves it.[106] The court can approve such change or termination even if such may be inconsistent with the original purposes of the trust.[107] Also, if the grantor does not consent (or is deceased) but if all beneficiaries of a non-charitable irrevocable trust consent, upon a petition to a court, the trust can be terminated "if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust."[108] The court may also reform the trust with all beneficiaries' consent as long as the change is not inconsistent with a material purpose of the trust.[14] The rationale for this difference lies with the grantor. If the grantor is living and consents to a change that radically changes the trust or eliminates it altogether, the UTC permits parties to essentially undo what originally was intended not to be undone.[109] If the grantor is dead or does not consent, the UTC presumes the grantor would not want a "material purpose" of the trust compromised, regardless of the beneficiaries' wishes.[110] The consent of "all" beneficiaries might seem virtually impossible to obtain. Certainly, some such "representatives" for beneficiaries are obvious (i.e., guardians for incapacitated persons, parents for minors, etc.)[111] However, the UTC provides rules to allow certain persons as beneficiaries to represent other far-removed, potential beneficiaries and their interests. The key is whether the beneficiaries that may "stand in" and bind the distant beneficiaries is whether they have a "substantially identical interest with respect to the question...."[112]
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Reformation to "fix the trust"

The Code permits a court to reform (or terminate) non-charitable irrevocable trusts to essentially make them work better, to fix a problem that has developed due to changes in the law or surrounding circumstances, or simply correct mistakes in the trust. If the change is due to "unanticipated consequences", the court's goal under the code is to fix the problem "in accordance with the settlor's probable intention."[113] The terms of the trust can be changed if continuing the trust under its terms would be "impracticable or wasteful, perhaps unneeded"[114] if the settlor's intent and trust terms were the result of a mistake in fact or law,[115] or to achieve the imperfectly completed tax consequences of the settlor.[116]
Termination to close uneconomical trusts

The Code also contains a provision to allow a trustee with a trust that has a marginal sum of assets to terminate it. After notice to the qualified beneficiaries, the trustee of a trust consisting of trust property having a total value less than $50,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration.[117] A court can also (regardless of the dollar amount) modify or terminate a trust or remove the trustee and appoint a different trustee if it determines that the value of the trust property is insufficient to justify the cost of administration.[118] Upon termination under these provisions, the trustee is to distribute the funds "in a manner consistent with the purposes of the trust."[119] Typically, this would mean outright distribution to the qualified beneficiaries of the trust in proportion to the actuarial value of their interests.[120]
Income tax implications

Fiduciary tax law is both federal (see the Internal Revenue Code) and state. For Federal income tax purposes in the United States, there are several kinds of trusts: grantor trusts whose tax consequences flow directly to the settlor's Form 1040 (U.S. Individual Income Tax Return) and state return, simple trusts in which all the income created must be distributed to one or more beneficiaries and is therefore taxed to the non-settlor beneficiary (e.g. the widow of a trust created by the late husband), whether or not the income is actually distributed (it happens), and complex trusts, which are, in general, all trusts that aren't grantor trusts or simple trusts. Some trusts may alternate between simple and complex under certain conditions. Many but not all trust organizations do their own tax work. This can be highly specialized work. All simple and complex trusts are irrevocable and in both cases any capital gains realized in the portfolios are taxed to the trust corpus or principal.
Notes
[1] See http:/ / www. nccusl. org/ Update/ uniformact_summaries/ uniformacts-s-utc2000. asp [2] http:/ / www. nccusl. org/ Update/ uniformact_factsheets/ uniformacts-fs-utc2000. asp [3] Preface, UTC, p.1 [4] UTC Section 112. [5] UTC Section 105(b). [6] UTC Section 105(a). [7] See UTC Sections 411-416. [8] See UTC Section 413; Restatement Third of Trusts Section 67 (for charitable trusts); UTC Section 412 (for non-charitable trusts). [9] See UTC Section 203 (optional section proposed by Committee). [10] the term "settlor" is generally considered the more historic English term for the creator of a trust and "grantor" a more modernized, American convention. In the writer's mind, the terms are interchangeable; however, since this article discussed United States trust law, the term "grantor" is generally employed. [11] This article generally discuss the use of trusts as to individual personal trusts as opposed to institutional trusts created by corporations, typically by or on behalf of foundations, endowments, and defined benefit or other qualified pension plans. Institutions can serve as the settlor of these types of institutional trusts as well, but the focus of this article is on the use of trusts for individuals. [12] UTC Section 602(a) & comment to Section 602. [13] See UTC Section 602, comment, p. 96.

[14] Id. [15] UTC Section 808(a). [16] UTC Section 808, comment, p.135. [17] UTC Section 808(b). [18] UTC Section 808(d). [19] IRC Section 671. [20] S. Donaldson, "The 7 Habits of Highly Effective Grantor Trusts", p. 2 (2007). [21] UTC Section 701(b). [22] UTC Section 705(a). [23] See UTC Section 602(c), comment, p. 97. [24] UTC Section 706(b). [25] UTC Section 706(b)(4). [26] See UTC Section 703, comment p. 110. [27] UTC Section 703(a). [28] UTC Section 703(d). [29] See UTC Section 703(c). [30] UTC Section 703(h). [31] See UTC Section 703, comment, pp. 109-110. [32] See UTC Section 708(a). [33] See UTC Section 703, comment, p. 110 (a co-trustee must participate jointly in all administrative functions unless unable to act or has properly delegated a function to other co-trustees.) [34] See generally UTC Section 105(a)(trust document can supersede general default rules regarding trustee delegation under Code.) [35] See generally UTC Section 801, 809, 810, 811, 812 & 816. The powers of a trustee are often expanded or limited also in accordance with the terms of the trust agreement. UTC Section 815(a). [36] UTC Section 801. [37] See UTC Section 404; Id. Section 801, comment, p. 124. [38] UTC Section 804. [39] UPIA Section 2(a). [40] Id., 2(b). [41] Id., 2(e). [42] UPIA 8. [43] Id., 2(c). [44] See Jonathan R. Macey, An Introduction to Modern Financial Theory 20 (American College of Trust and Estate Counsel Foundation, 1991) ("Diversification reduces risk . . . [because] stock price movements are not uniform. They are imperfectly correlated. This means that if one holds a well diversified portfolio, the gains in one investment will cancel out the losses in another.") [45] UPIA 3. [46] UPIA 6. [47] UTC Section 806. [48] See UTC Section 807(a). [49] UTC Section 807(b),(c). [50] UTC Section 814(a). [51] See generally UTC Section 802, comment, p. 127 ("the duty of loyalty [is] perhaps the most fundamental duty of the trustee.") [52] UTC Section 802(a). [53] UTC Section 802(b) & comment, p. 127. This also includes transactions entered into to benefit a trustee's spouse, family members, agents, or businesses in which a trustee owns an interest. UTC Section 802(c). [54] UTC Section 802(d). [55] UTC Section 802, comment, p. 128, quoting 2A Austin W. Scott & William F. Fratcher Section 170.25 (4th ed. 1987). [56] UTC Section 802(e). [57] UTC Section 802(b)(1)-(5). [58] See UTC Section 802(f). [59] UTC Section 802(h)(3). [60] Id. Section 802(h). [61] UTC Section 803. [62] UTC Section 813(a). [63] UTC Section 813(b). [64] UTC Section 810(a). [65] UTC Section 810(b) & comment, pp. 137-38. [66] Id., Section 810, comment, p. 138 [67] UTC Section 103(3).
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[68] See UTC Section 813, comment, p. 141. [69] UTC Section 813(c). [70] See UTC Section 103(13). [71] UTC Section 813(e). [72] Some states also have a version of a tax imposed on inheritances or estates as well, although in most cases, such taxes are not nearly as substantial as the federal system. [73] However, the beneficiaries may have income tax in the form of capital gains upon the termination and eventual sale of the trust assets upon the second spouse's death. [74] UTC Section 401. [75] Id., comment, p. 50. [76] Id. This rule sometimes gives rise to "one-dollar trusts" trusts holding just one dollar, yet still posted to the books of a corporate trustee. [77] See UTC Section 102 (sometimes referred to as "implied trusts" or "constructive trusts.") [78] UTC Section 402(a)(2). [79] Id., Section 402(a)(1). [80] UTC Section 406. [81] UTC Section 407. [82] Id. This is generally a higher standard of proof than was in effect in many states. Id., comment, p. 58. One should note also that a trust funded with real estate may be required to have a deed evincing transfer into such a trust, even if the trust itself is not subject to a writing, due to the Statute of Frauds. Id. [83] The Uniform Trust Code does not generally deal with such constructive trusts as they are essentially remedial devices imposed under common law. UTC Section 102, comment, p. 9. [84] UTC Section 402(a)(3). [85] UTC Section 402, comment, p. 53. [86] UTC Section 402(a)(3)(A). [87] UTC Section 405(a). [88] UTC Section 402(a)(3)(B). [89] See generally UTC Section 409. [90] UTC Section 409, comment, p. 61. [91] UTC Section 402(a)(4). [92] See UTC Section 402, comment, p. 53. [93] UTC Section 402(a)(5). [94] UTC Section 402, comment, pp. 53-54. [95] UTC Section 403. [96] UTC Section 404. [97] UTC Section 404, comment, p. 55. [98] UTC Section 408(a). [99] UTC Section 409. [100] UTC Section 408(a). [101] UTC Section 409(1). [102] UTC Section 408(c), 409(3). [103] UTC Section 410(a), 602. [104] UTC Section 602(c). In some instances where a settlor is incapacitated, an agent under durable power of attorney or a conservator in a court proceeding may be able to amend or revoke a trust created for an incapacitated grantor. Id., Section 602(e),(f). [105] UTC Section 410(a). [106] UTC Section 411(a)(amended 2004). Prior to the 2004 amendment, the grantor and all trust beneficiaries could make such an amendment without court approval. However, commentary from the American College of Estates and Trust Counsel (ACTEC) concerning the potential estate tax ramifications of granting such power without court approval prompted the Uniform Laws Committee to amend the law and suggest revision to states in 2004. Id., comment, p. 68. [107] Id., Section 411(a). [108] UTC Section 411(b). [109] Id., comment, pp. 64-65. Note that the consent of the trustee in these situations is not required. Id., comment, p. 65. [110] Id., comment, p. 66. [111] See UTC Section 303. [112] UTC Section 304. [113] UTC Section 412(a). [114] Id., Section 412(b). [115] Id., Section 415. [116] Id., Section 416.
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[117] UTC Section 414. This default rule can be changed by the grantor in the trust agreement itself. Id., comment, p. 73. Some states have adopted the UTC and changed this amount in their jurisdiction as well. [118] UTC Section 414(b). [119] Id., Section 414(c). [120] Id., Section 414, comment, p. 73.
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Domicile (law)
In law, domicile is the status or attribution of being a permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave permanently. Traditionally many common law jurisdictions considered a person's domicile to be a determinative factor in the conflict of laws and would, for example, only recognize a divorce conducted in another jurisdiction if at least one of the parties were domiciled there at the time it was conducted.
Outline of the concept

In early societies, there was little mobility but, as travel from one state to another developed, problems emerged: what should happen if different forms of marriage exist, if children become adult at different ages, etc.? One answer is that people must be given a connection to a legal jurisdiction, like a passport, that they carry with them wherever they go. Hence, if according to the laws of their domicile a person has the right to marry multiple spouses, the marriages should not alternate between valid and invalid every time they cross a state boundary where the laws are different. If someone is an infant and therefore has reduced contractual capacity, that will tend to apply wherever they go. Furthermore, when a person dies, it is the law of their domicile that determines how their will is interpreted, or if the person has no valid will, how their property will pass by intestate succession. Domicile should be distinguished from nationality which is the relationship between an individual and a country. Where the state and the country are co-extensive, the two may be the same. However, where the country is federated into separate legal systems, nationality and domicile will be different. For example, one might have American nationality and a domicile in Texas, or British nationality and a domicile in Scotland. Further, one can have dual nationality but not more than one domicile at a time. A person may have a domicile in one state while maintaining nationality in another country. Unlike nationality, no person can be without a domicile even if stateless. Domicile is distinct from habitual residence where there is much less focus on future intent. Domicile is being supplanted by habitual residence in international conventions dealing with Conflict and other private law matters. Domicile has a somewhat technical legal meaning in common law jurisdictions and should not be confused with: (1) Domicile in civil law jurisdictions. (2) Domicile in EU regulations and international treaties (where a definition often overrides the common law sense of domicile). (3) Domicile in ordinary English usage. The rules determining domicile in common law jurisdictions are based on case law in origin. Most jurisdictions have altered some aspects of the common law rules by statute, the details of which vary from one jurisdiction to another. The general framework of the common law rules has however survived in most jurisdictions and is in outline as follows:
Domicile (law)
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Domicile of origin
Dicey states the common law rule thus: Every person receives at birth a domicile of origin: (a) A legitimate child born during the lifetime of his father has his domicile of origin in the country in which his father was domiciled at the time of his birth; (b) A legitimate child not born during the lifetime of his father, or an illegitimate child, has his domicile of origin in the country in which his mother was domiciled at the time of his birth; (c) A foundling has his domicile of origin in the country in which he was found. (2) A domicile of origin may be changed as a result of adoption, but not otherwise.[1] In some jurisdictions the status of illegitimacy has been abolished, and slightly different rules apply where parents have differing domiciles.
Domicile of choice
Dicey states the common law rule thus: Every independent person can acquire a domicile of choice by the nation of residence and intention of permanent or indefinite residence, but not otherwise.[2] A person abandons a domicile of choice in a country by ceasing to reside there and by ceasing to intend to reside there permanently or indefinitely ( not based on the immigration status,but based on the social & moral status ), and not otherwise. When a domicile of choice is abandoned, either (i) a new domicile of choice is acquired; or (ii) the domicile of origin revives.[3] The rule that the domicile of origin revives on abandonment of a domicile of choice has been altered in some jurisdictions.
Domicile of dependency
Dicey states the common law rule thus: The domicile of a dependent person is, in general, the same as, and changes (if at all) with, the domicile of the person on whom he is, as regards his domicile, legally dependent.[4] In particular, during minority, a child's domicile of dependency changes to match that of the adult on whom the child is said to be dependent.
U.S. law
Each state of the United States is considered a separate sovereign within the U.S. federal system, and each therefore has its own laws on questions of marriage, inheritance, and liability for tort and contract actions. Persons who reside in the U.S. must have a state domicile for various purposes. For example, an individual can always be sued in their state of domicile. Furthermore, in order for individual parties (that is, natural persons) to invoke the diversity jurisdiction of a United States district court (a federal trial court), all the plaintiffs must have a different state of domicile from all the defendants (so-called "complete diversity").[5]
Domicile (law)
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United Kingdom Law

The rules are in short as set out above. The Domicile and Matrimonial Proceedings Act 1973 abolished the rule that a married woman had the domicile of her husband (with transitional rules for those married before 1 January 1974). The rules dealing with the domicile of minors differ slightly between England and Wales (governed by the Domicile and Matrimonial Proceedings Act 1973) and Scotland (governed by Section 22 Family Law (Scotland) Act 2006). [6]
References
[1] [2] [3] [4] [5] [6] Conflict of Laws, Dicey Morris & Collins, 14th ed., para 6R-025. Conflict of Laws, Dicey Morris & Collins, 14th ed., para 6R-033. Conflict of Laws, Dicey Morris & Collins, 14th ed., para 6R-033 and 6R-074. Conflict of Laws, Dicey Morris & Collins, 14th ed., para 6R-078. Sun Printing & Publishing Association v. Edwards, 194 U.S. 377 (http:/ / supreme. justia. com/ us/ 194/ 377/ case. html) (1904). Taxation of Non-Residents and Foreign Domiciliaries 10th ed 2011, James Kessler QC (for UK law).
External links
1. Taxation of Non-Residents and Foreign Domiciliaries in UK law (http://www.foreigndomiciliaries.co.uk/ index.php/Main_Page) 2. - HM Revenue and Customs (Official Website) (http://www.hmrc.gov.uk/cnr/hmrc6.pdf)
Habitual residence
In conflict of laws, habitual residence is the standard used to determine the law which should be applied to determine a given legal dispute. It can be contrasted with the law on domicile, traditionally used in common law jurisdictions to do the same thing. Habitual residence is less demanding than domicile and the focus is more on past experience rather than future intention. There is normally only one habitual residence where the individual usually resides and routinely returns to after visiting other places. It is the geographical place considered "home" for a reasonably significant period of time.
Discussion
The concept of habitual residence is used in a number of international conventions beginning with the Hague Convention on Civil Procedure of 14 November, 1896 and a number of international conventions dealing with Conflict to complement or supplant the traditional connecting factor of domicile, e.g. in the Rome Convention 1980, but it was replaced, with respect to legal entities by the new connecting factor of principal office. It is the basis of the Convention relating to the Status of Refugees, the Convention on International Child Abduction[1] , etc. Habitual residence is something less than domicile but more than simple residence. It may also be more discriminating that the test of nationality or lex patriae in that the connection is to a specific location within a state rather than to the country of nationality which may contain several states. Hence, where a country contains more than one legal system, the residence must determine which of the several possible laws might apply (e.g. in the United States which of the laws of the U.S. states is to be applied). A suparanational example of this selection process is contained in Article 19 of the Rome Convention: States with more than one legal system 1. Where a State comprises several territorial units each of which has its own rules of law in respect of contractual obligations, each territorial unit shall be considered as a country for the purposes of identifying the law applicable under this Convention.
Habitual residence 2. A State within which different territorial units have their own rules of law in respect of contractual obligations shall not be bound to apply this Convention to conflicts solely between the laws of such units.
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Comparison with domicile

To establish a domicile of choice, it is necessary to have a clear factual base in one state and that must be accompanied by an animus semper manendi, an intention to reside there indefinitely. Although it is not so difficult to produce evidence that an individual has established a home in a state, it is very difficult to prove that someone has no intention of ever establishing a home in another state. The test for habitual residence is less demanding. The court focuses on the past experience of the individual and not so much on future intention. A person can have only one habitual residence. It is the place where the individual ordinarily resides and routinely returns to after visiting other places. It is the place he or she would consider to be "home" and it is established as a matter of geography over a reasonably significant period of time. Since habitual residence is a test of fact, it cannot be a purely legal concept and there are different views about the factual situations which it is supposed to denote. Some authors believe that the sole criterion that the test of habitual residence should be purely objective, seeking evidence of physical presence over a considerable period of time. Others assert that the test should be both objective and subjective elements: the factum or physical presence in a given place and the animus to continue to stay there. The Hague Conference on Private International Law has deliberately refrained from offering a definition so that the concept may be flexible and adaptable to practical requirements. Thus, habitual residence may be interpreted differently in different Conflict situations. However, the core of the test will tend to be based on evidence of a long-term stay accompanied by other evidence of the individual's personal and professional life to demonstrate the continuity of the connection between that person and the place of residence. To that extent, the intention of the individual may have some weight. But it may be difficult to determine where a person has a habitual residence if constantly on the move and has no real or continuing connection with any of the countries through which psseed. This could be resolved by reference to the individual's intention, but although the test of intention is well-defined in the case law for the purposes of domicile, there is no consensus of the strength of intention that would have to be shown to establish "habit". Similarly, there is no consensus on the length of time a person should have a home for it to become habitual. In some countries, the legislature has produced a test. In Canada, the Domicile and Habitual Residence Act for Manitoba abolished the common law test of domicile and substituted in s8: (1) The domicile and habitual residence of each person is in the state and a subdivision thereof in which that person's principal home is situated and in which that person intends to reside. Presumption of intent to reside (2) For the purposes of subsection (1), unless a contrary intention is shown, a person is presumed to intend to reside indefinitely in the state and subdivision thereof in which that person's principal home is situated.
References
[1] Full text of the Convention (http:/ / hcch. e-vision. nl/ index_en. php?act=conventions. text& cid=24)
External links
[[UNHCR (http://www.unhcr.org/refworld/topic/4565c2258/4565c25fcb.html)] Index of documents on the subject.]
Hague Convention on the Law Applicable to Trusts and on their Recognition
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Hague Trust Convention
Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition Signed Location Effective Condition Parties Depositary Languages 1 July 1985 The Netherlands 1 January 1992 ratification by 3 states 12 Ministry of Foreign Affairs (Netherlands) French and English
The Hague Convention on the Law Applicable to Trusts and on their Recognition, or Hague Trust Convention is a multilateral treaty developed by the Hague Conference on Private International Law on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of March 2011 ratified by 12 countries. The Convention aims to harmonise not only the municipal law definitions of a trust, but also the Conflict rules for resolving problems in the choice of the lex causae. The key provisions of the Convention are: each signatory recognises the existence and validity of trusts. However, the Convention only relates to trusts with a written trust instrument. It would not apply trusts which arise (usually in common law jurisdictions) without a written trust instrument. the Convention sets out the characteristics of a trust (even jurisdictions with considerable legal history relating to trusts find this difficult) the Convention sets out clear rules for determining the governing law of trusts with a cross border element.
Background
Many states do not have a developed law of trusts, or the principles differ significantly between states. It was therefore necessary for the Hague Convention to define a trust to indicate the range of legal transactions regulated by the Convention and, perhaps more significantly, the range of applications not regulated. The definition offered in Article 2 is: ...the legal relationship created, inter vivos or on death, by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. A trust has the following characteristics: (a) the assets constitute a separate fund and are not a part of the trustee's own estate; (b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; (c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.
Hague Convention on the Law Applicable to Trusts and on their Recognition Article 3 provides that the Convention only applies to express trusts created voluntarily and evidenced in writing. It will therefore not cover oral trusts, resulting trusts, constructive trusts, statutory trusts or trusts created by judicial order. But signatory states are free to apply the Convention to any form of trust and the Recognition of Trusts Act 1987 has applied the provisions to all trusts arising under English law, no matter when or how they were created, albeit only applying the provisions to transactions affecting those trusts made after 1 August 1987. There are incidental question problems if the trust is testamentary and, under Article 4, if it is alleged that the testator lacked capacity, or that the will is formally or substantively invalid, or that it had been revoked, these issues must be determined first under the lex fori Conflict rules on characterisation and choice of law before the Convention rules can apply. This will include, for example, a detailed consideration of any marriage settlement or applicable law containing community property provisions which might prevent the testator alienating property from a spouse or child of the family (see succession (conflict)). Obviously, if the will purporting to create the trust is held invalid, there are no trusts to adjudicate upon.
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The applicable law

Article 6 allows the settlor to select the applicable law in the inter vivos or testamentary document. Under normal circumstances, the settlor will be acting on professional advice and will make an express selection or it will be implied from the facts of the case. But, under Actable 6(2), if the settlor selects a law with no relevant provisions or the provisions in the municipal law selected would be inappropriate, or there is no selection, Article 7 applies to select the law which is most closely connected with the transaction. This is judged by reference to four alternative connecting factors which are to be considered as at the time the putative trust is created: 1. the place where the trust is to be administered; 2. the place where the assets are to be found (for immovables, there is no problem the lex situs is easily identified; for movables, the most common form is choses in action such as shares and bonds, and their location does not change (bearer bonds and other instruments where title is determined by mere possession are relatively uncommon), but for tangible assets, this will usually be the place where the assets are located at the time of the hearing given that this represents the place where any Court Order would have to be enforced: see property (conflict)); 3. the place where the trustee is resident or conducts his or her business; 4. the place where the purpose or object of the trust is to be fulfilled. Despite the identification of these four factors, the court must actually perform a rounded evaluation of all the circumstances. Thus, it would be relevant to consider the distribution of the assets if in separate states, the purpose of the trust (which might be the evasion of taxation or other provisions in some of the states where the assets are located), the lex domicilii or lex patriae of the settlor and the beneficiaries (particularly if the legal transaction is a marriage settlement or testamentary), the legal form of the document, and the law of the place where the document was executed (this latter factor may either be accidental and so of marginal value, or contrived to take advantage of a favourable law and so highly significant).
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The scope of the applicable law

Under Article 8, the law specified by Article 6 or 7 shall govern the validity of the trust, its construction, its effects, and the administration of the trust. In particular that law shall govern: (a) the appointment, resignation and removal of trustees, the capacity to act as a trustee, and the devolution of the office of trustee; (b) the rights and duties of trustees among themselves; (c) the right of trustees to delegate in whole or in part the discharge of their duties or the exercise of their powers; (d) the power of trustees to administer or to dispose of trust assets , to create security interests in the trust assets, or to acquire new assets; (e) the powers of investment of trustees; (f) restrictions upon the duration of the trust, and upon the power to accumulate the income of the trust; (g) the relationships between the trustees and the beneficiaries including the personal liability of the trustees to the beneficiaries; (h) the variation of termination of the trust (because variation is expressly within the scope of the Applicable Law, this may be a significant factor in any issue of forum non conveniens raised if an application to vary is made to a forum other than a forum of the Applicable Law); (i) the distribution of the trust assets; (j) the duty of trustees to account for their administration.
Severance
Articles 9 and 10 allow the Applicable Law by which the validity of the trust has been established, to sever aspects of the trust and its administration so that separate laws shall apply to each component. In fact, the settlor may expressly select an Applicable Law for each component and the forum court should respect his or her wishes. But, in general terms, it is desirable that a single law should be applied to the administration and the fact that there may be assets located in separate states should not, per se, justify severing the trust. The relevant lex situs can be applied to micromanage the asset(s) by the trustee(s) without having to apply the situs law to the administration of the trust in that state. Equally, this is not an argument for a judicial approach which favours the law of the place of administration as the Applicable Law. Although the administration must comply with the municipal laws for general purposes, the duty to honour the intentions of the settlor may make the law of the place where the most significant part of that intention is to be realised the most significant single law.
Recognition
Under Article 11, a trust complying with the Applicable Law shall be recognised as a trust which implies, as a minimum, that the trust property constitutes a separate fund, that the trustee may sue and be sued in his capacity as trustee, and that he or she may appear or act in this capacity before a notary or any person acting in an official capacity. In so far as the law applicable to the trust requires or provides, this recognition implies in particular: (a) that personal creditors of the trustee shall have no recourse against the trust assets; (b) that the trust assets shall not form part of the trustee's estate upon his insolvency or bankruptcy; (c) that the trust assets shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee's estate upon his death; (d) that the trust assets may be recovered when the trustee, in breach of trust, has mingled trust assets with his own property or has alienated trust assets.
Hague Convention on the Law Applicable to Trusts and on their Recognition However, the rights and obligations of any third party holder of the assets shall remain subject to the law determined by the choice of law rules of the lex fori. Thus, although the Convention makes provision for the trustee(s) and any third parties, it fails to address the position of the beneficiaries who, for example, might wish to pursue assets intermixed with the trustee's personal property through actions for tracing. One of the problems that beneficiaries might encounter is addressed in Article 12 which considers the problem where the situs law does not have a title registration system which reflects ownership registration in a representative capacity. While recognising that the Convention cannot require states to modify their existing registers, it provides that the trustee shall be entitled, in so far as this is not prohibited by or inconsistent with the law of the State where registration is sought, to do so in his capacity as trustee or in such other way that the existence of the trust is disclosed. This implicitly recognises the desirability of all registration systems distinguishing between beneficial and representative titles. This general difficulty of municipal laws failure to support trusts is addressed in Article 13, which considers the situation of those who wish to create a trust but can only do so by invoking laws entirely outside their own state. As an application of comity, no forum state is bound to recognise a trust the significant elements of which, except for the choice of the applicable law, the place of administration and the habitual residence of the trustee, are more closely connected with States which do not have the institution of the trust or the category of trust involved. But, because this could be interpreted as an invitation not to validate otherwise perfectly appropriate financial arrangements for deserving beneficiaries, Article 14 provides that the Convention shall not prevent the application of rules of law more favourable to the recognition of trusts. This reflects the positive rules of public policy which require that the validity of a transaction (whether commercial or not) be upheld if at all possible where this will give effect to the reasonable expectations of the parties. The only exceptions shall be where this will produce consequences offending against the mandatory policies of the forum court in which case Article 18 empowers the court to deny the Applicable Law, even if it has been expressly selected by the settlor. But Article 15(2) nevertheless requires the forum court to consider adopting an approach that will preserve the overall validity of the trust insofar as that generality does not offend against the mandatory policy.
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States parties
As of March 2012, 12 countries have ratified the convention:[1] Australia, Canada (8 provinces only), China (Hong Kong only), Italy, Luxembourg, Liechtenstein, Malta, Monaco, the Netherlands (European territory only), San Marino, Switzerland and United Kingdom (including 12 dependent territories/crown dependencies).
External links
Text of the Convention [2], Hague Conference on International Private Law Status of ratification and signatories [3], Hague Conference on International Private Law
References
[1] "Status table" (http:/ / www. hcch. net/ index_en. php?act=conventions. status& cid=59). Hague Conference on Private International Law. . Retrieved 6 March 2011. [2] http:/ / www. hcch. net/ index_en. php?act=conventions. text& cid=59 [3] http:/ / www. hcch. net/ index_en. php?act=conventions. status& cid=59
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Resources
Society of Trust and Estate Practitioners
STEP (the Society of Trust and Estate Practitioners) was founded by George Tasker in 1991 and is the international professional body for workers in the trust industry and the (often overlapping) field of estate administration. Its members are mainly solicitors, barristers, attorneys, accountants, trust officers and trust administrators as well as banking and insurance professionals in the trust field. STEP has branches in 33 countries with a current membership in excess of 14,500. The main focus of the organisation is to administer the examination process to ensure the quality of the membership, to provide educational and networking opportunities for STEP members at branch level and to contribute to debate and public policy in its specialist field. The current president of STEP worldwide is Geoffrey Shindler, who was appointed in November 2006. He is a UK qualified solicitor and one of the founder members of the organisation. The current Chairman of STEP is Michael Young a Bath based practitioner elected in November 2009. Former Chairman Rosemary Marr was elected as vice-president in November 2009. The professional staff include CEO David Harvey, and Directors Amanda Seal, Elaine Crehan and Keith Johnston. The designation TEP after a member's name is the only widely recognised mark for professionals in the trust and estate administration industry. The 19 founder members of STEP, ie those who signed its memorandum of association in 1991 were: Timothy Bennett; Richard Citron; Owen Clutton; Jonathan Cooke; Andrew East; Anthony Holmes; Simon Jennings; James Kessler QC; Thomas Mallett; Ralph Ray; Tony Sherring; Geoffrey Shindler; George Tasker; Arthur Thompson; Nigel Trumper; Timothy Vollans; David Ward; Robert Whillis; George Williams.
External links
STEP official website [1]
References
[1] http:/ / www. step. org/
Trusts & Estates monthly magazine
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Trusts & Estates monthly magazine

Trusts & Estates is a wealth management journal published by Penton Media. It was first published in 1904 (as a periodical called Trust Companies) under the direction of Christian A. Luhnow, who was the editor, publisher and owner of the magazine at the time . Today, Trusts & Estates publishes articles contributed by practitioners in the fields of estate planning and taxation, fiduciary professionals, family offices, insurance, investments, philanthropy, retirement benefits and valuations. According to trustsandestates.com, articles are generally peer-reviewed by an editorial advisory board. The journal is published 12 times a year with a Wealth Management Resource Guide bonus issue in December.
History
Christian A. Luhnow founded Trust Companies in March 1904 in response to the rise of the trust banking industry in the United States. Most of the 1,300 United States trust companies then in existence had been formed in the previous 25 years. Yet, according to the magazine back then, "no other financial institutions of comparatively recent growth have made such giant strides and at the same time are so little understood outside of those immediately interested."trusts in the 1800 were used as business techniques during the industrial growth these ways were often used by large companies
References
Edward Ten Broeck Perine, The Story of Trust Companies, at p. 216 (http://books.google.com/ books?id=mGHYkxJBrhcC&pg=PA216&lpg=PA216&dq=Christian+A.+Luhnow&source=web& ots=MAH3a0pdl_&sig=Z1itUoHDEAO-ZNPbZ7WfKIj2nFg#PPA216,M1) Trusts & Estates-About Us (http://trustsandestates.com/about/) Sherman, Rorie, Federal Tax Timeline, at p. 68 (http://subscribers.trustsandestates.com/mag/ estate_federal_tax_timeline/index.html)
External links
Official website [1]
References
[1] http:/ / trustsandestates. com
106
Family issues
Community property
For the Steel Panther song, see Feel the Steel. Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions. The states of the United States that recognize community property are primarily in the West; it was inherited from Mexico's ganancial community system,[1] which itself was inherited from Spanish law (a Roman-derived civil law system) and ultimately from the Visigoths.[2] Even Louisiana, in a rare departure from the Napoleonic Code, was forced to adopt the ganancial community system while under Spanish rule (renamed "community of acquests and gains"), thus ousting the traditional French community of movables and acquests.[3] In a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property.[4] The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit.[5]
Map of the United States highlighting community property states
Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California, a 50/50 division of community property is strictly mandated by statute,[6] meaning that the focus then shifts to whether particular items are to be classified as community or separate property. In other jurisdictions, such as Texas, a divorce court may decree an "equitable distribution" of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property). See division of property. Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided "equally" while community debt is required to be divided "equitably".[7] Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is "transmuted" into community property. The rules for this vary from jurisdiction to jurisdiction.
Community property
107
Jurisdictions
In the United States there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Puerto Rico allows property to be owned as community property also as do several Indian jurisdictions. Alaska is an opt-in community property state; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust. If property is held as community property, each spouse technically owns an undivided one-half interest in the property. This type of ownership applies to most property acquired by the husband or the wife during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage. After a divorce, community property is divided equally in some states and according to the discretion of the court in the other states. It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states (so-called "American Rule" states), income from separate property is also separate. In others (so-called "Civil Law" states), the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state. Community property has certain federal tax implications, which the Internal Revenue Service discusses in its Publication 555 [8]. In general, community property may result in lower federal capital gain taxes after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called "community property with right of survivorship." This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or another form of concurrent ownership) vary from state to state. Because community property law affects the property of all married persons in the states in which it is in effect, it can have catastrophic consequences upon dissolution of the marriage from the perspective of the spouse forced to share a valuable asset which he or she thought was separate property. Indeed, one sign of community property's importance is that the states of Arizona, California, Idaho, Louisiana, and Texas have made it a mandatory subject on their bar examinations, so that all lawyers in those states will be able to educate their clients appropriately. Consumers who are considering how to hold property during marriage should either research reliable legal source materials, or consult with a family lawyer, an estate planning lawyer, a Certified Public Accountant, or an Enrolled Agent.
Issues
Often a new couple acquires a family residence. If the marriage terminates in subsequent years, there can be difficult community property problems to solve. For instance, often there is a contribution of separate property; or legal title may be held in the name of one party and not the other. There may also have been an inheritance or substantial gift from the family of one of the spouses during the marriage, whose proceeds were used to buy a property or pay down a mortgage. Case law and applicable formulas vary among community property jurisdictions to apply to these and many other situations, to determine and divide community and separate property interest in such a residence and other property. Community property issues often arise in divorce proceedings and disputes after the death of one spouse. These disputes can often be avoided by proper estate planning during the spouses' joint lifetime. This may or may not involve probate proceedings. Property acquired before marriage is separate and belongs to the spouse who acquired it. Property acquired during marriage is presumed to belong to the community estate except if acquired by inheritance or gift, or by exchange for other separate property. This definition leads to numerous issues that can be
Community property difficult to ascertain. For instance, where a spouse owns a business when marrying, it is clearly separate at that time. But if the business grows during the marriage, then what of the additional property acquired during marriage? Do they not result from labor of the spouses? Were some of the funds that were used to pay for the property community funds while a portion of the funds were separate property? Community property may consist of property of all types, including real property ("immovable property" in civil law jurisdictions) and personal property ("movable property" in civil law jurisdictions) such as accounts in financial institutes, stocks, bonds, and cash. A pension or annuity may have first been acquired before a marriage. But if contributions are made with community property during marriage, then proceeds are partly separate property and partly community property. Upon divorce or death of a party to the marriage, there are rules for apportionment. Options are also difficult to ascertain. A stock option is a right to purchase shares of a company at a fixed price. Companies with growth potential sometimes award stock options as compensation to employees, during times when there is not enough money to pay a suitable salary. By accepting a stock option for compensation, an employee invests his or her own trust in the belief that he or she will help make the company acquire a higher value. Thereafter, the employee works and contributes value to the company. If the company later acquires a higher share valuation, then the employee may "cash in" his options by selling them at the fair market value. The employee's trust in this future value motivates his work without immediate compensation. That effort has value. If the marriage is terminated before the shares are cashed in, then the parties must decide how to apportion the community property portion of the options. This can be difficult. Case law precedents are not yet available for all situations involving stock options.
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Quasi-community property
Quasi-community property is a concept recognized by some community property states. For example, in California, quasi-community property is defined by statute as "all real or personal property, wherever situated, acquired before or after the operative date of this code in any of the following ways: (a) By either spouse while domiciled elsewhere which would have been community property if the spouse who acquired the property had been domiciled in this state at the time of its acquisition. (b) In exchange for real or personal property, wherever situated, which would have been community property if the spouse who acquired the property so exchanged had been domiciled in this state at the time of its acquisition.[9] Typically, such property is treated as if it were community property at the time of divorce or death of a spouse, but in California, at least, property acquired while married and domiciled in a non-community property jurisdiction does not become community property just because the married parties move to a community property jurisdiction. It is the new event of divorce or death while domiciled in the community property state that allows that state to treat such property as quasi-community property.[10] As of 2007, only Washington, California, New Mexico and Arizona have such laws.[11]
Community property
109
References
[1] The half-borrowed term ganancial (from Sp sociedad de gananciales) was used in some early U.S. community property opinions, such as Stramler v. Coe, 15 Tex. 211, 215 (1855). [2] Jean A. Stuntz, Hers, His, and Theirs: Community Property Law in Spain and Early Texas, (Lubbock, Texas: Texas Tech University Press, 2005), 1-31. This source explains at length the Visigoths' legal protections for the property rights of married women and how later legal systems on the Iberian peninsula continued such rights. [3] The author of the Louisiana Code was Moreau Lislet; see Hans W. Baade, "Transplants of Laws and of Lawyers", [Doc], retrieved 3 Dec. 2010 < (http:/ / www. csmb. unimore. it/ on-line/ Home/ Prova/ documento36005534. html)>. [4] See v. See, 64 Cal. 2d 778 (http:/ / online. ceb. com/ CalCases/ C2/ 64C2d778. htm) (1966). Chief Justice Roger J. Traynor of the Supreme Court of California wrote: "If funds used for acquisitions during marriage cannot otherwise be traced to their source and the husband who has commingled property is unable to establish that there was a deficit in the community accounts when the assets were purchased, the presumption controls that property acquired by purchase during marriage is community property. The husband may protect his separate property by not commingling community and separate assets and income. Once he commingles, he assumes the burden of keeping records adequate to establish the balance of community income and expenditures at the time an asset is acquired with commingled property." The See family, of course, was the family that founded See's Candies, a major manufacturer and retailer of candy on the West Coast of the United States. [5] See Meyer v. Kinzer and Wife, 12 Cal. 247 (1859). Chief Justice Stephen Johnson Field of the Supreme Court of California wrote: "The statute proceeds upon the theory that the marriage, in respect to property acquired during its existence, is a community of which each spouse is a member, equally contributing by his or her industry to its prosperity, and possessing an equal right to succeed to the property after dissolution, in case of surviving the other." [6] See California Family Code section 2550 (http:/ / caselaw. lp. findlaw. com/ cacodes/ fam/ 2550-2556. html). [7] See In re Marriage of Eastis, 47 Cal. App. 3d 459 (http:/ / online. ceb. com/ CalCases/ CA3/ 47CA3d459. htm) (1975). [8] http:/ / www. irs. gov/ pub/ irs-pdf/ p555. pdf [9] California Family Code Section 125 (http:/ / caselaw. lp. findlaw. com/ cacodes/ fam/ 50-155. html) [10] Addison v. Addison (1965) 62 Cal.2d 558, 399 P.2d 897. [11] Divorce Support.com Divorce legal resources (http:/ / www. divorcesupport. com/ divorce/ What-is-quot-quasi-community-property-quot--1298. html)
Division of property
Division of property, also known as equitable distribution, is a judicial division of property rights and obligations between spouses during divorce. It may be done by agreement, through a property settlement, or by judicial decree. Distribution of property is the division, due to a death or the dissolution of a marriage, of property which was owned by the deceased, or acquired during the course of the marriage. In Ferguson v. Ferguson, 639 So.2d 921 (Miss. 1994)[1] , the court described equitable distribution of marital property at divorce as more fair, or equitable, than the separate property system. The court may consider such factors as "substantial contribution to the accumulation of the property, the market and emotional value of the assets, tax and other economic consequences of the distribution, the parties' needs, and any other factor relevant to an equitable outcome." Fairness is the prevailing guideline the court will use. Alimony payments, child support obligations and all other property will be considered. Even non-tangible contributions such as a spouse's domestic contributions to the household will be taken into account, whether that spouse has anything titled in their name or not. A spouse who has made non-tangible contributions may claim an equitable interest in the marital property at divorce. The Uniform Marriage and Divorce Act 307 (UMDA 307)[2] also allows for the equitable distribution of property and lists factors the court should consider, e.g. "the duration of the marriage, and prior marriage of either party, antenuptial agreement of the parties [which is the same as a prenuptial agreement or premarital agreement], the age, health, station, occupation, amount and sources of income, vocational skills, emplyability, estate, liabilities, and needs of each of the parties, custodials provisions..." etc. Marital misconduct is not a factor in the decision-making process. Another form of property distribution at divorce is called "community property distribution".
Division of property Equitable distribution is not the same as equal distribution. For example, in a family with a stay-at-home mother, the husband's share may be less than 50 percent as compensation to the wife for having to return to the work force at a lower wage scale.
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References
[1] http:/ / www. judybarnettpa. com/ FERGUSON_FACTORS_II. pdf [2] http:/ / www. animallaw. info/ statutes/ stus9a_ula_238_39. htm
Elective share
An elective share is a term used in American law relating to inheritance, which describes a proportion of an estate which the surviving spouse of the deceased may claim in place of what they were left in the decedent's will. It may also be called a widow's share, statutory share, election against the will, or forced share.
Function and operation

The elective share is the modern version of the English common law concepts of dower and curtesy, both of which reserved certain portions of a decedent's estate which were reserved for the surviving spouse, in order to prevent them from falling into poverty and becoming a burden on the community. Currently, the amount to be reserved for a spouse is determined by the law of the state where the estate is located. In most states, the elective share is between and of all the property in the estate[1] , although many states require the marriage to have lasted a certain number of years for the elective share to be claimed, or adjust the share based on the length of the marriage, and the presence of minor children. Some states also reduce the elective share if the surviving spouse is independently wealthy. In some jurisdictions, if the spouse claims the elective share, they get that amount, but nothing else from the estate. In other states, claiming an elective share has no effect on gifts under a will or through a trust (though things given by will or trust may fulfill in part the elective share portion). Obviously, there would be no point in seeking an elective share if the surviving spouse has already been willed more than they would receive under the statute. Furthermore, some assets held by the estate may be exempt from becoming part of the elective share, so their value is subtracted from the total value of the estate before the elective share is calculated. Some states also permit children of the deceased to claim an elective share.
Calculation of the augmented estate

The elective share is usually calculated from assets beyond those in the probate estate alone, and the assets that are added together to make this calculation are referred to as an augmented estate. This calculation serves two functions. First, it prevents the decedent from effectively disinheriting the surviving spouse by either gifting away assets before death, or by tying up assets in devices such as trusts or joint accounts that benefit third parties after the decedent's death. Second, it prevents the surviving spouse from taking too large of an elective share, if the decedent had already transferred substantial assets to the spouse. In order to accomplish this, the augmented estate is calculated by combining the value of the probate estate with such things as the value of gifts given by the decedent to third parties, property or accounts held in survivorship estates (such as a joint bank account, the proceeds of which would pass to the survivor among the account holders), the value of life insurance policies over which the decedent had the power to name the beneficiary, as well as gifts to the surviving spouse, and property held jointly with the surviving spouse.
Elective share The elective share in Florida gives a surviving spouse 30% of the elective estate, which includes all property owned by the decedent, property given away within one year of death, property inside a revocable trust (also known as a Living Trust), and pay on death accounts.[2]
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References
[1] How to Disinherit a Spouse: The Elective Share (http:/ / testatewill. com/ wills/ how-to-disinherit-a-spouse/ ) [2] Florida Statutes Sections 732.201-732.228 (http:/ / www. leg. state. fl. us/ Statutes/ index. cfm?App_mode=Display_Statute& URL=0700-0799/ 0732/ 0732. html)
Marital life estate

A marital life estate is, in the common law tradition of the U.S. and Great Britain, a life estate held by the spouse (husband or wife) or widowed spouse, for the duration of that spouse's life.
Creation
The marital life estate may be created by operation of law, agreement, contract, will, deed, or court order, such as a divorce decree or judgment.[1]
Tax avoidance
This may be created as a tax avoidance tool, and in such cases is called an AB trust, a credit shelter trust, or a bypass trust.[2] In such situations, each spouse gives all of their property in trust to his wife and her husband, for life, with a remainder to children or grandchildren. This can be a living trust, also called an inter vivos trust, in combination with a marital life estate.[3] Any person considering this estate planning vehicle should consult a trained professional, such as attorney.[4] The estate tax can be a major consideration for starting such a device. This is not currently an urgent issue, because of the temporary phase-out of the Federal estate tax in 2010.[5] However, in 2011, the estate tax will revert to its previous tax rates.[6]
References
[1] [2] [3] [4] [5] [6] Article from Inc. regarding life estates, including marital (http:/ / www. inc. com/ articles/ 1999/ 10/ 14509. html) Nolo definition (http:/ / www. nolo. com/ definition. cfm/ Term/ A4D1F939-AC2D-4DB8-A973EF085BF76069/ alpha/ M/ ) Grand Times web site (http:/ / www. grandtimes. com/ trust. html) Although the article from Inc., cited below, and the Nolo web cite, also cited, seem to discourage seeking legal advice. LaGrnage law firm web site (http:/ / www. lagrangelaw. com/ lawyer-attorney-2D207FE3-B4EC-4599-BE0A3981C99F0D10. html) Cite needed from U.S.C.A. or other reliable source.
Affiliation
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Affiliation
In law, affiliation (from Latin ad-filiare, to adopt as a son) is the term to describe a partnership between two or more parties.
Affiliation procedures in England

In England a number of statutes on the subject have been passed, the chief being the Bastardy Act of the Parliament of 1845, and the Bastardy Laws Amendment Acts of 1872 and 1873. The mother of a bastard may summon the putative father to petty sessions within 12 months of the birth (or at any later time if he is proved to have contributed to the child's support within 12 months after the birth), and the justices, as after hearing evidence on both sides, may, if the mother's evidence be corroborated in some material particular, adjudge the man to be the putative father] of the child, and order him to pay a sum not exceeding five shillings a week for its maintenance, together with a sum for expenses incidental to the birth, or the funeral expenses, if it has died before the date of order, and the costs of the proceedings. ceases to be valid after the child reaches the age of 13, but the justices (also referred to as Gold writers under these circumstances) may in the order direct the payments to be continued until the child is 16 years of age. An appeal to quarter sessions is open to the defendant, and a further appeal on questions of law to the King's Bench by rule nisi or certiorari. Should the child afterwards become chargeable to the parish, the sum due by the father may be received by the parish officer. When a bastard child, whose mother has not obtained an order, becomes chargeable to the parish, the guardians may proceed against the putative father for a contribution. Any woman who is single, a widow, or a married woman living apart from her husband, may make an application for a summons, and it is immaterial where the child is begotten, provided it is born in England. An application for a summons may be made before the birth of the child, but in this case the statement of the mother must be in the form of a sworn deposition. The defendant must be over 14 years of age. No agreement on the part of the woman to take a sum down in discharge of the liability of the father is a bar to the making of an affiliation order. In the case of twins it is usual to make separate applications and obtain separate summonses. The Summary Jurisdiction Act (1879) makes due provision for the enforcement of an order of affiliation. In the case of soldiers an affiliation order cannot be enforced in the usual way, but by the Army Act (1881), if an order has been made against a soldier of the regular forces, and a copy of such order be sent to the secretary of state, he may order a portion of the soldier's pay to be retained. There is no such special legislation with regard to sailors in the Royal Navy.
Affiliation procedures in other countries

In the British colonies, and in the states of the United States (with the (usually termed filiation) akin to that described above, by means of which a mother can obtain a contribution to the support of her illegitimate child from the putative father. The amount ordered to be paid may subsequently be increased or diminished (1905; 94 N.Y. Supplt. 372). On the continent of Europe, however, the legislation of the various countries differs rather widely. France, Belgium, the Netherlands, Italy, Russia, Serbia and the canton of Geneva provide no means of inquiry into the paternity of an illegitimate child, and consequently all support of the child falls upon the mother; on the other hand, Germany, Austria, Norway, Sweden, Denmark and the majority of the Swiss cantons provide for an inquiry into the paternity of illegitimate children, and the law casts a certain amount of responsibility upon the father.
Affiliation Affiliation, in France, is a term applied to a species of adoption by which the person adopted succeeds equally with other heirs to the acquired, but not to the inherited, property of the deceased. In India, affiliation cases are decided by section 125 of Criminal Procedure Code (Cr.P.C.). According to this section - among other things - if a person having sufficient means neglects or refuses to maintain his illegitimate child, a magistrate of the first class may, upon proof of such neglect or refusal, order such person to make a monthly allowance for the maintenance of such child.
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References
This articleincorporates text from a publication now in the public domain:Chisholm, Hugh, ed (1911). Encyclopdia Britannica (11th ed.). Cambridge University Press.
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Trusts & estates

Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).[1] The balance sheet of a firm records the monetary[2] value of the assets owned by the firm. It is money and other valuables belonging to an individual or business.[1] Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.[3] Current assets include inventory, while fixed assets include such items as buildings and equipment.[4] Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs,[4] and financial assets, including such items as accounts receivable, bonds and stocks.
Formal definition
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity[5] (Framework Par 49).
Asset characteristics
It should be noted that - other than software companies and the like - employees are not considered as assets, like machinery is, even though they are capable of producing value. The probable present benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services; The entity can control access to the benefit; The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred. In the financial accounting sense of the term, it is not necessary to be able to legally enforce the asset's benefit for qualifying a resource as being an asset, provided the entity can control its use by other means. It is important to understand that in an accounting sense an asset is not the same as ownership. Assets are equal to "equity" plus "liabilities." The accounting equation relates assets, liabilities, and owner's equity: Assets = Liabilities + Stockholder's Equity (Owner's Equity) The accounting equation is the mathematical structure of the balance sheet. Assets are listed on the balance sheet. Similarly, in economics an asset is any form in which wealth can be held. Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board .[6] The following is a quotation from the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise."[7]
Asset Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets. In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.[8]
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Current assets
Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets: 1. Cash and cash equivalents it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts). 2. Short-term investments include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). 3. Receivables usually reported as net of allowance for uncollectable accounts. 4. Inventory trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule. 5. Prepaid expenses these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries. securities [9] Securities that can be converted into cash quickly at a reasonable price The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.
Long-term investments
Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of three types of investments: 1. Investments in securities such as bonds, common stock, or long-term notes. 2. Investments in fixed assets not used in operations (e.g., land held for sale). 3. Investments in special funds (e.g. sinking funds or pension funds). Different forms of insurance may also be treated as long term investments.
Fixed assets
Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. These are also called capital assets in management accounting.
Asset
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Intangible assets
Intangible assets lack of physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Websites are treated differently in different countries and may fall under either tangible or intangible assets.
Tangible assets
Tangible assets are those that have a physical substance and can be touched, such as currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals.
Other related meanings

Information asset
In Information technology, chiefly in Information security, data needed to conduct the organization business and the technical equipment to manage (input, store, display, print) are called information asset. They can represent a large portion of intangible and tangible asset of an organization. If these assets become unavailable, business operations can be disrupted. Confidential information disclosure can represent a huge liability. While evaluating the potential loss tied to an asset or a group of assets, the value tied to the largest sum between the related asset and their value should be considered.[10] [11]
References
[1] Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.272. ISBN0-13-063085-3. [2] J. G. Siegel, N. Dauber & J. K. Shim, "The Vest Pocket CPA", Wiley, 2005.
There are different methods of assessing the monetary value of the assets recorded on the Balance Sheet. In some cases, the Historical Cost is used; such that the value of the asset when it was bought in the past is used as the monetary value. In other instances, the present fair market value of the asset is used to determine the value shown on the balance sheet.
[3] J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms", Baron's Financial Guides, 2003 [4] J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms", Baron's Financial Guides, 2003; and J. G. Siegel, N. Dauber & J. K. Shim, "The Vest Pocket CPA", Wiley, 2005. [5] IFRS for SMEs. 1st Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom: IASB (International Accounting Standards Board). 2009. pp.14. ISBN978-0-409048-13-1. [6] The International Accounting Standards Board (http:/ / www. iasb. org/ Home. htm), IASB [7] IASB.org (http:/ / www. iasb. org/ NR/ rdonlyres/ 1C268B9D-C477-4C0F-BA86-7C540ACA5E56/ 0/ Dec050512ob02a. pdf), IFRS [8] Intermediate Accounting--Kieso, et. al [9] http:/ / en. wikipedia. org/ wiki/ Marketable_securities|Marketable [10] "An Introduction to Factor Analysis of Information Risk (FAIR)", Risk Management Insight LLC, November 2006 (http:/ / www. riskmanagementinsight. com/ media/ docs/ FAIR_introduction. pdf); [11] Technical Standard Risk Taxonomy ISBN 1-931624-77-1 Document Number: C081 Published by The Open Group, January 2009.
Asset protection
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Asset protection
Asset protection (sometimes also referred to as debtor-creditor law) is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of all asset protection planning is to insulate assets from claims of creditors without concealment or tax evasion.[1]
Overview
Asset protection consists of methods available to protect assets from liabilities arising elsewhere. It should not be confused with limiting liability, which concerns the ability to stop or constrain liability to the asset or activity from which it arises.[2] Assets that are shielded from creditors by law are few (common examples include some home equity, certain retirement plans and interests in LLCs and limited partnerships (and even these are not always unreachable). Assets that are almost always unreachable are those to which one does not hold legal title. In many cases it is possible to vest legal title to personal assets in a trust, an agent or a nominee, while retaining all the control of the assets. The goal of asset protection is similar to bankruptcy, and the two practice areas go hand-in-hand. When a debtor has none to few assets, the bankruptcy route is preferable. When the debtor has significant assets, asset protection may be the solution.[3]
United States legislation

United States federal bankruptcy laws and ERISA laws exempt certain assets from creditors, including certain retirement plans. All fifty states also have laws that exempt certain assets from creditors. These vary from state to state, but they often include exemptions for a certain amount of equity in a personal residence, individual retirement accounts, clothing, or other personal property. All fifty U.S. states also have laws that protect the owners of a corporation, limited partnership, or limited liability company from the liabilities of the entity. Many states limit the remedies of a creditor of a limited partner or a member in an LLC, thereby providing some protection for the assets of the entity from the creditors of a member. All fifty U.S. states provide some protection for the assets of a trust against the creditors of the beneficiaries. Some states allow asset protection for a self-settled trust (a trust in which the settlor or creator of the trust is included as a potential discretionary beneficiary) and some states do not. Creditors have several tools to overcome the laws that provide asset protection. First, there are federal and state fraudulent transfer laws.[4] Today there are two bodies of fraudulent transfer law: the Bankruptcy Code and state fraudulent transfer statutes. Most states have adopted Uniform Fraudulent Transfer Act which defines what constitutes a fraudulent transfer. The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the "actual intention to hinder, delay or defraud" any creditor of the debtor. Regarding the modifier "any" (creditor), Jacob Stein, author of textbooks on asset protection, divides the creditors into three classes: present, future and future potential creditors. While UFTA applies clearly to present creditors, the distinction between a future creditor and a future potential creditor is not as clear. The UFTA is commonly held to apply only to future creditors and not to future potential creditors (those whose claim arises after the transfer, but there was no foreseeable connection between the creditor and the debtor at the time of the transfer).[5] There are also laws which allow a creditor to pierce the corporate veil of an entity and go after the owners for the debts of the entity. It may also be possible for a creditor of a member to reach the assets of an entity through a constructive trust claim, or a claim for a reverse piercing of a corporate veil. Asset protection planning requires a working knowledge of federal and state exemption laws, federal and state bankruptcy laws, federal and state tax laws, the comparative laws of many jurisdictions (onshore and offshore),
Asset protection choice of law principals, in addition to the laws of trusts, estates, corporations and business entities. The process of asset protection planning involves assessing the facts, circumstances, and objectives of an individual, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish all the objectives of the individual (including asset protection objectives), preparing legal documents to carry out the plan, and ensuring that the various legal entities are operated properly in accordance with the laws and the objectives of the individual. This process involves providing legal advice and legal work and most states prohibit the practice of law without a license. Asset protection planning began to develop as a stand-alone area of the law in the late 1970s. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Colorado attorney Barry Engel is credited with the introduction of that concept and the development of asset protection trust law statutes in the Cook Islands.[6] The most distinctive feature of the offshore trust is the fact that the settlor or creator of the trust may be included among the potential beneficiaries of the trust without causing the assets of the trust to be subject to the creditors of the settlor. This is often referred to as a "self-settled trust." Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. A 2003 article in the Wall Street Journal claimed that 60% of America's millionaires have considered engaging in asset protection planning.[7] Choice of law rules in the United States make it possible for a person from any state to create a trust, corporation, limited partnership or limited liability company that is governed by the laws of any other state or jurisdiction. Because of this ability to "forum shop," various states and other jurisdictions have modified their laws to allow greater asset protection in order to make them competitive with other jurisdictions. In most states, the assets of a self-settled trust are not protected from the creditors of the settlor. In 1997, the State of Alaska passed a statute which provided that the assets of an Alaska self-settled trust are not subject to the creditors of the settlor.[8] Since 1997, the following states have adopted legislation allowing for a self-settled asset protection trust: Nevada, Delaware, South Dakota, Wyoming, Tennessee, Utah, Oklahoma, Colorado, Missouri, Rhode Island and New Hampshire. This legislation created a favorable offshore asset protection trust jurisdiction also for non-US settlors.[9] There is considerable debate about the comparative effectiveness of the asset protection provided by the laws of each jurisdiction, onshore and offshore. Similarly, the asset protection features provided by corporations, limited partnerships and limited liability companies vary from jurisdiction to jurisdiction. Once again, Alaska's limited liability company statute provides innovative advantages over other states. Case law from North Carolina demonstrates the asset protection advantages of a transfer to a limited liability company (see Herring v. Keasler, 150 NC App 598 (01-1000) 06/04/2002). Just as the Cook Islands have developed a reputation for the best offshore jurisdiction for an asset protection trust, Nevis stands out in the competition for the best jurisdiction to file a limited liability company. The Nevis limited liability company statute is based on the Delaware limited liability statute, but they have a few added advantages. One advantage of a Nevis LLC is that the members and managers are not disclosed to the public. There is some debate over the ethics of asset protection planning. On one hand, every attorney that creates a trust, corporation, limited partnership, or limited liability company is engaging in some form of asset protection planning. On the other hand, most would agree that it is ethically inappropriate to assist a person to commit fraud or evade income taxes. The timing and the purposes of the plan seem to be the determinative factors as to whether a plan will be considered ethically and legally appropriate. In recent cases, individuals have gone to jail for contempt of court for failing to unwind a plan that a judge felt was repugnant to our principals of law and justice.[10]
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Asset protection
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References
[1] Jacob Stein (Winter 2007). "The Importance of Trusts in Asset Protection" (http:/ / www. maximumassetprotection. com/ publications/ articles. html). California Trusts and Estates Quarterly, Volume 12, Issue 4, p. 17-25. . Retrieved September 24, 2010. [2] Richard T. Williamson (2008). The Real Estate Investor's Guide to Corporations, LLCs & Asset Protection Entities. Kaplan Publishing. p.43. ISBN9781427797025. [3] Jacob Stein (September 10, 2010). "McCourt Divorce Shines A Light on Asset Protection" (http:/ / www. maximumassetprotection. com/ publications/ articles. html). Los Angeles Daily Journal. . Retrieved September 27, 2010. [4] 11 USC 548 [5] Jacob Stein (August 2010). "Asset Protection May Risk Fraudulent Transfer Violations" (http:/ / www. maximumassetprotection. com/ publications/ articles. html). Estate Planning. . Retrieved September 27, 2010. [6] Low-Tax.net Cook Islands Table of Statutes, May 2007 [7] Wall Street Journal, Oct. 14, 2003, Rachel Emma Silverman, "Litigation Boom Spurs Efforts to Shield Assets" [8] Alaska Statutes Section 34.40.110 [9] Alexander A. Bove, Jr.. "The United States As An Offshore Asset Protection Trust Jurisdiction The Worlds Best Kept Secret" (http:/ / www. bovelanga. com/ publications/ articles/ US as Offshore Asset Protection Jurisdiction. pdf). Trusts & Trustees, Vol. 14 Issue 1 (Oxford Journals, 2008). . Retrieved September 27, 2010. [10] See In re Lawrence (S.D. Fla. December 12, 2006); In re Lawrence, 279 F.3d 1294 (11th Cir. 2002); SEC v. Bilzerian, 131 F. Supp. 2d 10 (D.C. 2001); F.T.C. v. Affordable Media, 179 F.3d 1228, C.A.9 (Nev.),1999.
Assignment
An assignment (Latin cessio) is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one partythe assignorto another partythe assignee.[1] The legal nature of the assignment determines some additional rights and liabilities that accompany the act.
Liabilities
Continuing liability of assignor
Assignor remains liable unless there is an agreement to the contrary. An agreement must manifest intent to transfer rights, it may not necessarily be in writing, words will do, and the rights assigned must be certain. The effect of a valid assignment is to extinguish privity between the assignor and the obligor and create privity between the obligor and the assignee.
Assignment of contract rights

Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if Party A contracts with Party B to sell Party A's car to Party B for $10, Party A can later assign the benefits of the contract - i.e., the right to be paid $10 - to Party C. In this scenario, Party A is the obligee/assignor, Party B is an obligor, and Party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that Party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefitting Party C. However an Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner. Compare Novation.
Assignment
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When assignment will be permitted

The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. For example, the assignment of a legal malpractice claim is void since an assignee would be a stranger to the attorney-client relationship, who was owed no duty by the attorney and would imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.
Requirements for an effective assignment

For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect. Although this prevents a party from assigning the benefits of a contract that has not yet been made, a court of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future. A contract may contain a non-assignment clause, which prohibits the assignment of specific rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void". Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances. Requirement of a writing There are certain situations in which the assignment must be in writing. 1. 2. 3. 4. Assignment of wages Assignment of any interest in real property Assignment of choses in action worth over $5,000 Assignment as collateral for a loan or debt
For more information about contractual writing requirements see Statute of frauds.
Novation
Novation replaces the original party with a new party. For a valid novation, (i) all parties must assent to novation, (ii) there must be a previously valid contract, (iii) the duties provided for in the contract be extinguished immediately, and (iv) a new, enforceable contract need be created.
Revocability
Assignments made for consideration are irrevocable, meaning that the assignor permanently gives up the legal right to take back the assignment once it has been made. Donative assignments, on the other hand, are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another. There are some exceptions to the revocability of a donative assignment:
Assignment 1. The assignment can not be revoked if the obligor has already performed 2. The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for "thing", as in a chose of action) - a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account. 3. The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose - a contract right embodied in any form of token. 4. Estoppel can prevent the revocation of a donative assignment if the assignee changed their position in reliance on the assignment. Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.
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Breach and defenses

A cause of action for breach on the part of the obligor lies with the assignee, who will hold the exclusive right to commence a cause of action for any failure to perform or defective performance. At this stage, because the assignee "stands in the shoes" of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor. Furthermore, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. For example, suppose that A makes a contract to paint B's house in exchange for $500. A then assigns the right to receive the $500 to C, to pay off a debt owed to C. However, A does such a careless job painting the house that B has to pay another painter $400 to correct A's work. If C sues B to collect the debt, B can raise his counterclaim for the expenses caused by the poor paint job, and can reduce the amount owed to C by that $400, leaving only $100 to be collected. When the assignor makes the assignment, he makes with it an implied warranty that the right to assign was not subject to defenses. If the contract had a provision that made the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Similarly, the assignee could also sue under this theory if the assignor wrongfully revoked the assignment.
Successive assignments
Occasionally, an unscrupulous assignor will assign exactly the same rights to multiple parties (usually for some consideration). In that case, the rights of the assignee depend on the revocability of the assignment, and on the timing of the assignments relative to certain other actions. In a quirk left over from the common law, if the assignment was donative, the last assignee is the true owner of the rights. However, if the assignment was for consideration, the first assignee to actually collect against the assigned contract is the true owner of the rights. Under the modern American rule, now followed in most U.S. jurisdictions, the first assignor with equity (i.e. the first to have paid for the assignment) will have the strongest claim, while remaining assignees may have other remedies. In some countries, the rights of the respective assignees are determined by the old common law rule in Dearle v Hall. 1. Earlier donative assignees for whom the assignment was revocable (because it had not been made irrevocable by any of the means listed above) have no cause of action whatsoever. 2. Earlier donative assignees for whom the assignment was made irrevocable can bring an action for the tort of conversion, because the assignment was technically their property when it was given to a later assignee. 3. Later assignees for consideration have a cause of action for breaches of the implied warranty discussed above. See interpleader.
Assignment
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Compare: Delegation
A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause also bars delegation.
Special rules for assignment of certain rights

Property rights
Real property rights can be assigned just as any other contractual right. However, special duties and liabilities attach to transfers of the right to possess property. With an assignment, the assignor transfers the complete remainder of the interest to the assignee. The assignor must not retain any sort of reversionary interest in the right to possess. The assignee's interest must abut the interest of the next person to have the right to possession. If any time or interest is reserved by a tenant assignor then the act is not an assignment, but is instead a sublease. The liability of the assignee depends upon the contract formed when the assignment takes place. However, in general, the assignee has privity of estate with a lessor. With privity of estate comes the duty on the part of the assignee to perform certain obligations under covenant, e.g. pay rent. Similarly, the lessor retains the obligations to perform on covenants to maintain or repair the land. If the assignor agrees to continue paying rent to the lessor and subsequently defaults, the lessor can sue both the assignor under the original contract signed with the lessor as well as the assignee because by taking possession of the property interest, the assignee has obliged himself to perform duties under covenant such as the payment of rent. Unlike a Novation where consent of both the lessor and lesse is required for the third party to assume all obligations and liabilities of the original lessee, an assignment does not always need the consent of all parties. If the contract terms state specifically that the lessor's consent is not needed to assign the contract, then the lesee can assign the contract to whomever the lesee wants to. Absent language to the contrary, a tenant may assign their rights to an assignee without the landlord's consent. In the majority of jurisdictions, when there is a clause that the landlord may withhold consent to an assignment, the general rule is that the landlord may not withhold consent unreasonably unless there is a provision that states specifically that the Landlord may withhold consent at Landlord's sole discretion.
Partnership rights
A person can also assign their rights to receive the benefits owed to a partner in a partnership. However, the assignee can not thereby gain any of the assignor's rights with respect to the operation of the partnership. The assignee may not vote on partnership matters, inspect the partnership books, or take possession of partnership property; rather, the assignee can only be given the right to collect distributions of income, unless the remaining partners consent to the assignment of a new general partner with operational, management, and financial interests. If the partnership is dissolved, the assignee can also claim the assignor's share of any distribution accompanying the dissolution.
Intellectual property rights

Ownership of intellectual property, including patents, copyrights, and trademarks, may be assigned, but special conditions attach to the assignment of patents and trademarks. In the United States, assignment of a patent is governed by statute, 35 U.S.C.261 [2]. Patent rights are assignable by an "instrument in writing." Title in a patent can also be transferred as a result of other financial transactions, such as a merger or a takeover, or as a result of operation of law, such as in an inheritance process, or in a bankruptcy. An assignment of a patent can be recorded with the United States Patent and Trademark Office. Although such recording is not required, if an assignment is not recorded at the USPTO within three (3) months or prior to a subsequent assignment, the assignment will be void
Assignment against a subsequent assignee without notice of the earlier, unrecorded assignment. With respect to a trademark, the owner of the mark may not transfer ownership of the mark without transferring the goodwill associated with the mark. Companies sometimes request from employees that they assign all intellectual property they create while under the employment of the company. This is typically done within an Employment Agreement, but is sometimes done through a specific agreement called Proprietary Information and Inventions Agreement (PIIA).
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Personal injury torts

The standard rule is that personal injury tort causes of action are nonassignable as a matter of public policy.[3] These should be distinguished from final settlements or judgments resulting from lawsuits brought on such causes of action, which may be assignable.
Equitable assignment
An equitable assignment is possible in equity.
References
[1] For the assignment of claim: Trans-Lex.org (http:/ / www. trans-lex. org/ 917000) [2] http:/ / www. law. cornell. edu/ uscode/ 35/ 261. html [3] Pony v. County of Los Angeles, 433 F.3d 1138 (9th Cir. 2006).
Attestation clause
In the statutory law of wills and trusts, an attestation clause is a clause that is typically appended to a will, often just below the place of the testator's signature. Attestation clauses were introduced into probate law with the promulgation of the first version of the Model Probate Code in the 1940s. A typical attestation clause reads: We, the undersigned testator and the undersigned witnesses, respectively, whose names are signed to the attached or foregoing instrument declare: (1) that the testator executed the instrument as the testator's will; (2) that, in the presence of both witnesses, the testator signed or acknowledged the signature already made or directed another to sign for the testator in the testator's presence; (3) that the testator executed the will as a free and voluntary act for the purposes expressed in it; (4) that each of the witnesses, in the presence of the testator and of each other, signed the will as a witness; (5) that the testator was of sound mind when the will was executed; and (6) that to the best knowledge of each of the witnesses the testator was, at the time the will was executed, at least eighteen (18) years of age or was a member of the armed forces or of the merchant marine of the United States or its allies. This attestation clause is modeled on the Model Probate Code's version. Statutes that authorize self-proved wills typically provide that a will that contains this language will be admitted to probate without affidavits from the attesting witnesses. In order to issue an attestation report, Active CPA status is required by federal law.[1] The validity and form of an attestation clause is usually a matter of U.S. state law, and will vary from state to state. Many states allow attestation clauses to be added as codicils to wills that were originally drafted without them.
Attestation clause
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Notes
[1] http:/ / www. dora. state. co. us/ ACCOUNTANTS/ faqslicensure. htm
References
Burns' Annotated Indiana Statutes, ss. 29-1-5-3.1
Beach bum trust provision

A beach bum trust provision, in the law of trusts, ties the ability of a trust beneficiary to take from the trust to the beneficiary's own earnings. Such a provision serves to prevent a beneficiary from lazily living off the trust funds (i.e. a "beach bum"). If the beneficiary earns no income, then he reaps nothing from the trust.
Beneficial interest
A beneficial interest is "that right which a person has in a contract made with another" (third) person. [1] The typical example is "if A makes a contract with B that he will pay C a certain sum of money, B has the legal interest in the contract, and C the beneficial interest." [2] More generally, a beneficial interest is any "interest of value, worth, or use in property one does not own," for example, "the interest that a beneficiary of a trust has in the trust." [3] More specifically, it could be: "A property interest that inures solely to the benefit of the owner," or Property that "remains of an estate after the payment of debts and the expenses of administration", or The right of a person having a power of appointment to appoint himself." [4] Black's Law Dictionary defines beneficial interest as "Profit, benefit or advantage resulting from a contract, or the ownership of an estate as distinct from the legal ownership or control." [5] [6] Examples of beneficial interests in mining claims include unrecorded deeds and agreements to share profits, but not mortgages and other liens.[7] [8] A beneficial interest is also "distinguished from the rights of someone like a trustee or official who has responsibility to perform and/or title to the assets but does not share in the benefits." [9]
References
[1] [2] [3] [4] [5] [6] [7] [8] [9] The 'Lectric Law Library's Lexicon (http:/ / www. lectlaw. com/ def/ b092. htm) Id., The 'Lectric Law Library's Lexicon (http:/ / www. lectlaw. com/ def/ b092. htm) Ballentine's Law Dictionary, p. 48 (Legal Assistant edition, 1994). Id., Ballentine's Law Dictionary, at 48. Ontario Government web site (http:/ / www. mndm. gov. on. ca/ MNDM/ MINES/ LANDS/ policies/ gapolicy/ ga810-1_e. asp), citing Black's Law Dictionary, at p. (page needed). Law Dictionary (http:/ / dictionary. law. com/ default2. Asp?selected=50& bold=||||), same. Ontario Government web site (http:/ / www. mndm. gov. on. ca/ MNDM/ MINES/ LANDS/ policies/ gapolicy/ ga810-1_e. asp) Cf. definition of real property as including mortgages and other liens. Law Dictionary (http:/ / dictionary. law. com/ default2. Asp?selected=50& bold=||||).
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Beneficial owner
Beneficial owner is a legal term where specific property rights ("use and title") in equity belong to a person even though legal title of the property belongs to another person. Black's Law Dictionary (2nd Pocket ed. 2001 pg. 508). This often relates where the legal title owner has implied trustee duties to the beneficial owner. Under United States copyright law, an author may transfer some rights to the copyright owner (often an employer) while retaining a future "reversionary interest," such as that of copyright renewal. For example, "[t]he legal or beneficial owner of an exclusive right under a copyright . . . to institute an action for any infringement of that particular right committed while he or she is the owner of it." 17 U.S.C.501(b) [1] A common example of a beneficial owner is the real owner of funds held by a nominee bank or for stocks held in the name of a brokerage firm.
Greenpeace Airplot
In January 2009, Greenpeace and three celebrities bought a plot of land in the proposed area for the expansion of Heathrow Airport. They then signed up thousands of people as beneficial owners in order to create as difficult as possible legal obstacle to building the third runway. As of April 25, 2010, Greenpeace has signed up just over 80,000 people from all over the world as beneficial owners and is aiming to get 100,000 beneficial owners.[2]
References
[1] http:/ / www. law. cornell. edu/ uscode/ 17/ 501. html [2] http:/ / www. airplot. org. uk/
Beneficial ownership
Beneficial ownership is enjoyed by anyone who has the benefits of ownership of a Security (finance) or property, and yet does not nominally own the asset itself. In US securities law, a beneficial owner (as distinct from a "nominee owner," "registered owner," or "record holder") of a security includes any person who, directly or indirectly, has or shares voting or investment power.[1]
References
[1] http:/ / www. law. uc. edu/ CCL/ 34ActRls/ rule13d-3. html
Beneficial use
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Beneficial use
Beneficial use is a legal term describing a person's right to enjoy the benefits of specific property, especially a view or access to light, air, or water, even though title to that property is held by another person. [1] This may also be termed "beneficial enjoyment". Black's Law Dictionary (2nd Pocket ed. 2001 pg. 236. Compare this with a "beneficial interest", where a beneficiary has an interest in a thing ("res" Res (disambiguation)) (such as a trust or estate) but does not own the underlying property. Black's Law Dictionary (2nd Pocket ed. 2001 pg. 64. This usually entitles the beneficiary to some of the income from the underlying property. Also, compare this to beneficial owner where specific property rights ("use and title") in equity belong to a person even though legal title of the property belongs to another person. Black's Law Dictionary (2nd Pocket ed. 2001 pg. 508. For example companies often hold stocks or bank funds in their name for the benefit of a person.
References
[1] http:/ / legal-dictionary. thefreedictionary. com/ beneficial+ use
Beneficiary (trust)
"Cestui que use" redirects here. See also, Cestui que. In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction structures.[1] With the exception of charitable trusts, and some specific anomalous non-charitable purpose trusts, all trusts are required to have ascertainable beneficiaries. Generally speaking, there are no strictures as to who may be a beneficiary of a trust; a beneficiary can be a minor, or under a mental disability (in fact many trusts are created specifically for persons with those legal disadvantages). It is also possible to have trusts for unborn children, although the trusts must vest within the applicable perpetuity period.
Categorisation
There are various ways in which beneficiaries of trusts can be categorised, depending upon the nature and need of the categorisation. From the perspective of the trustees' duties, it is most common to differentiate between: fixed beneficiaries, who have a simple fixed entitlement to income and capital; and discretionary beneficiaries, whom the trustees must make decisions as to the respective entitlements. Where a trust gives rise to sequential interests, from a tax perspective (and also from the point of view of trustee's duties), it is often necessary to differentiate beneficiaries sequentially, between: those with a vested interest, such as tenants for life; and those with a contingent interest, such as remaindermen For the purposes of various exercise of beneficiaries' rights, it is often necessary to distinguish between: beneficiaries under a bare trust (including a constructive or resulting trust), to whom the trustee owes basic duties arising by law; and beneficiaries under an express trust (either an inter vivos trust or a testamentary trust), where the trustee owes additional duties and has additional powers specified by the trust instrument.
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Rights and interest

The nature of a beneficiaries' interest in the trust fund varies according to the type of trust. In the case of a fixed trust, the beneficiaries' interest is proprietary; they are the owners of an equitable interest in the property held under the trust. The position is slightly different in the case of a discretionary trust; in such cases the beneficiaries are dependent upon the exercise by the trustees of their powers under the trust instrument in their favour.[2] Similarly, where a trust gives rise to successive interest, the title of a remainderman is a prospective, or contingent, interest; although unlike a discretionary beneficiary, this is still a species of property that can be dealt with, much in the same was as a contingent or prospective debt.
Taxation
Tax planning usually plays a considerable role in relating to the use of trusts.[3] Historically, whilst the courts have been fairly amenable to the use of trusts in tax planning,[4] as tax planning schemes have become more aggressive, so the courts have increasingly taken a restrictive view of the tax treatment of trusts. Although individual countries tend to have very detailed rules about the taxation of trusts, the three mechanisms whereby taxation is usually assessed is by either treating (i) the trust as a separately taxable entity in its own right, (ii) treating the trust property as still the property of the settlor, and (iii) treating the trust property as belonging absolutely to the beneficiaries. Some jurisdictions apply different combinations of the rules in income tax, capital gains tax and inheritance tax.
Beneficiaries' powers
Because an interest under a trust is a species of property, adult beneficiaries of sound mind are able to deal with their rights under the trust fund as they could with any other species of property. They can sell it, assign it, exchange it, release it,[5] mortgage it, and do most other things that they could do with a chose in action. If all of the beneficiaries of the trust are adults and of sound mind, then they can terminate the trust under the rule in Saunders v Vautier, and require the trustees to transfer absolute legal title to the trust assets to the beneficiaries.
Footnotes
[1] See for example Quistclose trusts and orphan structures, both of which commonly involve non-human beneficiaries of trusts. [2] In Gartside v IRC [1968] AC 553 it was argued that because a beneficiary might receive all the income, he should be treated as being entitled to all of the income, however, the House of Lords held that it could not be said that any individual beneficiary under a discretionary trust was entitled to any quantifiable share [3] Although it is not the only role. Trusts have a variety of uses outside of the tax sphere, notably for protecting minor and disabled beneficiaries. Although because the tax treatment of trusts is usually complex in most countries, even when the trust is being used for non-tax related purposes, tax planning considerations often come into play. [4] In IRC v Duke of Westminster [1936] AC 1 the House of Lords asserted "Every man is entitled to do what he can to order his affairs sothat the tax attaching under the appropriate Acts is less than it otherwise would be" at page 19. [5] Where the trust is a discretionary trust, the beneficiary may renounce his position as a class member; see Re Gulbenkian's Settlement (No 2) [1970] Ch 408
Capacity
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Capacity
The capacity of both natural and legal persons determines whether they may make binding amendments to their rights, duties and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will. Capacity is an aspect of status and both are defined by a person's personal law: for natural persons, the law of domicile or lex domicilii in common law jurisdictions, and either the law of nationality or lex patriae, or of habitual residence in civil law states; for legal persons, the law of the place of incorporation, the lex incorporationis for companies while other forms of business entity derive their capacity either from the law of the place in which they were formed or the laws of the states in which they establish a presence for trading purposes depending on the nature of the entity and the transactions entered into. When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. Sometimes such legal incapacity is referred to as incompetence. For comparison, see Competence (law).
Discussion
As an aspect of the social contract between a state and its citizens, the state adopts a role of protector to the weaker and more vulnerable members of society. In public policy terms, this is the policy of parens patriae. Similarly, the state has a direct social and economic interest in promoting trade, so it will define the forms of business enterprise that may operate within its territory, and lay down rules that will allow both the businesses and those that wish to contract with them a fair opportunity to gain value. This system worked well until social and commercial mobility increased. Now persons routinely trade and travel across state boundaries (both physically and electronically), so the need is to provide stability across state lines given that laws differ from one state to the next. Thus, once defined by the personal law, persons take their capacity with them like a passport whether or however they may travel. In this way, a person will not gain or lose capacity depending on the accident of the local laws, e.g. if A does not have capacity to marry her cousin under her personal law (a rule of consanguinity), she cannot evade that law by travelling to a state that does permit such a marriage (see nullity). In Saskatchewan Canada, an exception to this law allows married persons to become the common law spouse spouse of other(s) prior to divorcing the first spouse. This law is not honored amongst other Canadian provinces.
Natural persons
Standardized classes of person have had their freedom restricted. These limitations are justified exceptions to the general policy of freedom of contract and the detailed human and civil rights that a person of ordinary capacity might enjoy. Hence, for example, freedom of movement may be modified, the right to vote may be withdrawn, etc. As societies have developed more equal treatment based on gender, race and ethnicity, many of the older incapacities have been removed. For example, English law used to treat married women as lacking the capacity to own property or act independently of their husbands (the last of these rules was repealed by the Domicile and Matrimonial Proceedings Act 1973, which removed the wife's domicile of dependency for those marrying after 1974, so that a husband and wife could have different domiciles). Infancy The definition of an infant or minor varies, each state reflecting local culture and prejudices in defining the age of majority, marriageable age, voting age, etc. In many jurisdictions, legal contracts, in which (at least) one of the contracting parties is a minor, are voidable by the minor. For a minor to undergo medical procedure, consent is determined by the minor's parent(s) or legal guardian(s). The right to vote in the United States is currently set at 18 years, while the right to buy and consume alcohol is often set at 21 years by U.S. state law.
Capacity Some laws, such as marriage laws, may differentiate between the sexes and allow women to marry younger. There are instances in which a person may be able to gain capacity earlier than the prescribed time through a process of emancipation. Conversely, many states allow the inexperience of childhood to be an excusing condition to criminal liability and set the age of criminal responsibility to match the local experience of emerging behavioral problems (see doli incapax). For sexual crimes, the age of consent determines the potential liability of adult accused. As an example of liability in contract, the law in most of Canada provides that an infant is not bound by the contracts he or she enters into except for the purchase of necessaries and for beneficial contracts of service. Infants must pay fair price only for necessary goods and services. However, the British Columbia Infants Act [1] (RSBC 1996 c.223) declares all contracts, including necessities and beneficial contracts of service, are unenforceable against an infant. Only student loans and other contracts made specifically enforceable by statute will be binding on infants in that province. In contracts between an adult and an infant, adults are bound but infants may escape contracts at their option (i.e. the contract is voidable). Infants may ratify a contract on reaching age of majority. In the case of executed contracts, when the infant has obtained some benefit under the contract, he/she cannot avoid obligations unless what was obtained was of no value. Upon repudiation of a contract, either party can apply to the court. The court may order restitution, damages, or discharge the contract. All contracts involving the transfer of real estate are considered valid until ruled otherwise. Minors and Contractual Capacity A minor (typically under 18) can disaffirm a contract made, no matter the case. However, the entire contract must be disaffirmed. Depending on the jurisdiction, the minor may be required to return any of the goods still in his possession. Also, barter transactions such as purchasing a retail item in exchange for a cash payment are generally recognized through a legal fiction not to be contracts due to the absence of promises of future action. A minor may not disavow such a trade.[2] Disaffirmance - it must be timely. For example, a contract that goes beyond two years of reaching the age of majority would be considered ratified. Minors are still allowed to disaffirm, even if their age is misrepresented. They will not face tort violations. Some states don't allow disaffirmance if the consideration cannot be returned. Obligations - most states hold that a minor only must return the goods (consideration) if the goods are still in the minors possession. Many states are requiring that the minor restore the adult (other party) to the state they were in before the contract was made. Minors are beginning to be held responsible for damages, wear, tear, etc. of the good in question upon return. A suit for tort is considered by some states to be an enforcement of the contract and is not allowed. Liability - for necessities, (1) the item contracted for must be necessary for minors existence, (2) the value must be up to that of the current standard of living or financial/social status (not excessive in value), (3) the minor must not be under the care of a parent/guardian who is required to supply the item. A minor could be held liable for a contract for the purchase of luxury items (those that are not in the financial/social/standard of living range). Ratification - accepting and giving legal force to an obligation. Express ratification (for a minor) is expressly stating, orally or in writing that he/she intends to be bound by the contract. Implied ratification is when the conduct of the minor is inconsistent with that of disaffirmance or when minor fails to disaffirm an executed contract within a reasonable period. Generally, the courts base their determination on whether the minor, after reaching the age of majority, has had ample opportunity to consider the nature of the contractual obligations he or she entered into as a minor and the extent to which the adult party to the contract has performed.[3]
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Capacity As one court put it, "the purpose of the infancy doctrine is to protect 'minors from foolishly squandering their wealth through improvident contracts with crafty adults who would take advantage of them in the marketplace.'"[4] Insanity, mental illness, or mental/medical condition Individuals may have an inherent physical condition which prevents them from achieving the normal levels of performance expected from persons of comparable age, or their inability to match current levels of performance may be caused by contracting an illness. Whatever the cause, if the resulting condition is such that individuals cannot care for themselves, or may act in ways that are against their interests, those persons are vulnerable through dependency and require the protection of the state against the risks of abuse or exploitation. Hence, any agreements that were made are voidable, and a court may declare that person a ward of the state and grant power of attorney to an appointed legal guardian. In England and Wales, this is a specific function of the Court of Protection, and all matters concerning persons who have lost, or expect soon to lose, mental capacity are regulated under the Mental Capacity Act 2005. This makes provision for lasting powers of attorney under which decisions about the health, welfare and financial assets of a person who has lost capacity may be dealt with in that person's interests. This sort of problem sometimes arises when people suffer some form of medical problem such as unconsciousness, coma, extensive paralysis, or delirious states, from accidents or illnesses such as strokes, or often when older people become afflicted with some form of medical/mental disability such as Huntington's disease, Alzheimer's disease, Lewy body disease, or similar dementia. Such persons are often unable to consent to medical treatment and otherwise handle their financial and other personal matters. If the afflicted person has prepared documents beforehand about what to do in such cases, often in a revocable living trust or related documents, then the named legal guardian may be able to take over their financial and other affairs. If the afflicted person owns his/her property jointly with a spouse or other able person, the able person may be able to take over many of the routine financial affairs. Otherwise, it is often necessary to petition a court, such as a probate court, that the afflicted person lacks legal capacity and allow a legal guardian to take over their financial and personal affairs. Procedures and court review have been established, dependent on the area of jurisdiction, to prevent exploitation of the incapacitated person by the guardian. The guardian periodically provides a financial accounting for court review. In the Criminal Law, the traditional common law M'Naghten Rules excused all persons from liability if they did not understand what they were doing or, if they did, that they did not know it was wrong. The consequences of this excuse were that those accused were detained indefinitely or until the medical authorities certified that it was safe to release them back into the community. This consequence was felt to be too draconian and so statutes have introduced new defenses that will limit or reduce the liability of those accused of committing offenses if they were suffering from a mental illness at the relevant time (see the insanity and mental disorder defenses). Drunkenness or drug abuse Although individuals may have consumed a sufficient quantity of intoxicant or drug to reduce or eliminate their ability to understand exactly what they are doing, such conditions are self-induced and so the law does not generally allow any defense or excuse to be raised to any actions taken while incapacitated. The most generous states do permit individuals to repudiate agreements as soon as sober, but the conditions to exercising this right are strict. Bankruptcy If individuals find themselves in a situation where they can no longer pay their debts, they lose their status as credit-worthy and become bankrupt. States differ on the means whereby their outstanding liabilities can be treated as discharged and on the precise extent of the limits that are placed on their capacities during this time but, after discharge, they are returned to full capacity. In the United States, some states have spendthrift laws
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Capacity under which an irresponsible spender may be deemed to lack capacity to enter into contracts (in Europe, these are termed prodigality laws) and both sets of laws may be denied extraterritorial effect under public policy as imposing a potentially penal status on the individuals affected. Enemy aliens and/or terrorists During times of war or civil strife, a state will limit the ability of its citizens to offer help or assistance in any form to those who are acting against the interests of the state. Hence, all commercial and other contracts with the "enemy", including terrorists, would be considered void or suspended until a cessation of hostilities is agreed.
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Business entities
Corporations The extent of an artificial person's capacity depends on the law of the place of incorporation and the enabling provisions included in the constitutive documents of incorporation. The general rule is that anything not included in the corporation's capacity, whether expressly or by implication, is ultra vires, i.e. "beyond the power" of the corporation, and so may be unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected. General and limited partnerships There is a clear division between the approach of states to the definition of partnerships. One group of states treats general and limited partnerships as aggregate. In terms of capacity, this means that they are no more than the sum of the natural persons who conduct the business. The other group of states allows partnerships to have a separate legal personality which changes the capacity of the "firm" and those who conduct its business and makes such partnerships more like corporations. Unions In some states, trade unions have limited capacity unless any contract made relates to union activities. Insolvency When a business entity becomes insolvent, an administrator, receiver, or other similar legal functionary may be appointed to determine whether the entity shall continue to trade or be sold so that the creditors may receive all or a proportion of the money owing to them. During this time, the capacity of the entity is limited so that its liabilities are not increased unreasonably and to the detriment of the existing creditors.
References
[1] http:/ / www. qp. gov. bc. ca/ statreg/ stat/ I/ 96223_01. htm [2] Barnett, Randy E. A Consent Theory of Contracts (http:/ / www. randybarnett. com/ aconsent. htm) Columbia Law Review (March, 1986) pp. 299, fn 123 [3] Jentz, Gaylord A. and Roger LeRoy Miller Business Law Today: The Essentials South-Western College/West, Ohio, 2003 pp. 213-216 [4] Hauer v. Union State Bank of Wautoma, 192 Wis. 2d 576, 593 (1995), quoting Halbman v. Lemke, 99 Wis. 2d 241, 245 (1980)
Cestui que
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Cestui que
Cestui que (also cestuy que) (English pronunciation: /sstwi ke/) is a shortened version of cestui a que use le feoffment fuit fait, literally, "The person for whose use the feoffment was made." It is a Law French phrase of medieval English invention, which appears in the legal phrases cestui que trust, cestui que use, or cestui que vie. In contemporary English the phrase is also commonly pronounced "setty-kay" (/stike/) or "sesty-kay" (/sstike/). According to Roebuck, Cestui que use is pronounced "setticky yuce" (/stkijus/).[1] Cestui que use and cestui que trust are more or less interchangeable terms. In some medieval materials, the phrase is seen as cestui a que. The cestui que use is the person for whose benefit the trust is created. The cestui que trust is the person entitled to an equitable, as opposed to a legal, estate. Thus, if land is granted to the use of A in trust for B, B is cestui que trust, and A trustee, or use. The term, principally owing to its cumbersome nature, has been virtually superseded in modern law by that of "beneficiary", and general law of trusts. The cestui que use and trust were rooted in medieval law, and became a legal method to avoid the feudal (medieval) incidents (payments) to an overlord, while leaving the land for the use of another, who owed nothing to the lord. The law of cestui que tended to defer jurisdiction to courts of equity as opposed to common law courts. The cestui que was often utilized by persons who might be absent from the kingdom for an extended time (as on a Crusade, or a business adventure), and who held tenancy to the land, and owed feudal incidents to a lord. The land could be left for the use of a third party, who did not owe the incidents to the lord. This legal status was also invented to circumvent the Statute of Mortmain. That statute was intended to end the relatively common practice of leaving real property to the Church at the time of the owner's death. Since the Church never died, the land never left the "dead hand" ("Mortmain" or Church). An alternative explanation of "mortmain" was that an owner from generations earlier was still dictating land use years after death, by leaving it to the Church. Hence the term "dead hand." Before the Statute of Mortmain, large amounts of land were bequethed to the Church, which never relinquished it. This was in contradistinction to normal lands which could be inherited in a family line or revert to a lord or the Crown upon death of the tenant. Church land had been a source of contention between the Crown and the Church for centuries. Cestui que use allowed religious orders to inhabit land, while the title resided with a corporation of lawyers or other entities, who nominally had no relation to the Church.
History in German and Roman Law

It is the opinion of William Holdsworth[2] quoting such scholars as Gilbert, Sanders, Blackstone, Spence and Digby, that cestui que in English law had a Roman origin. An analogy exists between cestui que uses and a usufructus (usufruct) or the bequest of a fideicommissum. These all tended to create a feoffement to one person for the use of another. Gilbert[3] writes, (also seen in Blackstone)[4] : "that they answer more to the fideicommissum than the usufructus of the civil law." These were transplanted into England from Roman Civil Law about the close of the reign of Edward III of England by means of foreign ecclesiastics who introduced them to evade the Statute of Mortmain. Others argue that the comparison between cestui que and Roman law is merely superficial. The transfer of land for the use of one person for certain purposes to be carried out either in the lifetime or after the death of the person conveying it has its basis in Germanic law. It was popularly held that land could be transferred for the use from one person to another in local custom. The formal English or Saxon law didn't always recognize this custom. The practice was called Salman or Treuhand. "Sala" is German for "transfer".[5] It is related to the Old English "sellen", "to sell". The earliest appearance of cestui que in the medieval period was the feoffee to uses, which like the Salman, held on account of another. This was called the cestui que use. It was because the feoffor could impose on him many various duties that landowners acquired through his instrumentality the power to do many things with their land. This was a to avoid the rigidity of medieval common law of land and its uses. Germanic law was familiar with the idea that a
Cestui que man who holds property on account of, or to the use of another is bound to fulfill his trust. Frankish formulas from the Merovingian period describe property given to a church "ad opus sancti illius." Mercian books in the ninth century convey land "ad opus monachorum". The Domesday Book refers to geld or money, sac and soc held in "ad opus regus", or in "reginae" or "vicecomitis". The laws of William I of England speak of the sheriff holding money "al os le rei" ("for the use of the king").[6] [7] Others state that the cestui que use trust was the product of Roman Law. In England it was the invention of ecclesiastics who wanted to escape the Statute of Mortmain. The goal was to obtain a conveyance of an estate to a friendly person or corporation, with the intent that the use of the estate would reside with the original owner.[8] [9] [10] Pollock and Maitland describe cestui que use as the first step toward the law of agency.[11] They note that the word "use" as it was employed in medieval English law was not from the Latin "usus", but rather from the Latin word "opus", meaning "work". From this came the Old French words "os" or "oes".[12] Although with time the Latin document for conveying land to the use of John would be written "ad opus Johannis" which was interchageable with "ad usum Johannis", or the fuller formula, "ad opus et ad usum", the earliest history suggests the term "use" evolved from "ad opus".[13]
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Medieval invention
Many reasons have been given for the invention of the cestui que use as a legal device. During the Crusades, and other wars on the Continent, landowners might be gone for long periods of time. Others might be absent because of business adventures or religious pilgrimages. There was no assurance they would ever return home. The cestui que use allowed them to leave a trusted friend or relative with the sort of powers, discretions and they hoped, the duties. Today, this power would be called the "power of attorney". Religious orders such as Franciscans, Cistercians, Benedictines and other mendicant orders took vows of poverty, yet retained the use of donated property. Cestui que use allowed them the benefits of land without legal ownership.[14]
[15]
Besides the obvious limitations placed on cestui que by the Statute of Mortmain, Statute of Uses and the Statute of Wills, its legality was shaped indirectly by provisions within the Magna Carta and Quia Emptores.
Typical medieval patterns

Derek Roebuck[16] has given the following typical fact patterns which were often found in medieval cestui que use:
Cistercian Buckland Abbey, established on land near Yelverton, Devon donated by Amicia, Countess of Devon in 1278
Example 1: Albert is the owner of a landholding called Blackacre. He conveys this to Richard with the command that Richard hold the land with the duty not for Richard's benefit, but for a different purpose. This could be to do a job, such as collect rents and profits for the purpose of passing them to a third person, Lucy. This was nothing more than a clever legal device with Richard playing either an active or passive role. Example 2: If Jane (women could engage in cestui que use), granted Blackacre to Charles to the use of David, then David became the beneficial owner and Jane could not vary or detract from that ownership. Example 3: If Mary wanted to grant Blackacre away from her direct heir James, to her younger son Jasper, then she might well do so by a grant of Richard to the use of Jasper in tail, remainder to James in fee simple. Only Richard
Cestui que had a legal estate, the interests of Jasper and James being equitable analogues of a legal fee tail and fee simple in remainder. Example 4: If Mary wanted to make a will of the equitable ownership of Blackacre, she would be able to do so by a grant to Richard to the use of herself, Mary. The ownership of Blackacre did not pass on Mary's death to her heir but went to wherever she might will it. By this method, Mary could keep her wishes secret until her death when her will would be read, and would prevail. This was a way to defeat primogeniture inheritance. Example 5: Uses were so common by the middle of the fifteenth century that they were presumed to be in existence even if no intention could be proved. If Martin granted Blackacre to Martha, and she could show no consideration (that is, that she paid for it), then Martha would be considered in equity to be the feoffee to unspecified uses to be announced at Martin's discretion. If Martin sold Blackacre to Martha, but did not go through the formal routines of feoffment to complete the conveyance, Martha could not become the legal owner. But in equity, Martin held the land to the cestui que use of Martha. It would have been unconscionable for him to do otherwise having taken her money for the sale of Blackacre. Example 6: Albert might convey Blackacre to Richard for the use of Jane. In this case, Richard was called the "feoffee of uses". Jane was the "cestui que use". This was short for "cestui a qui use le feoffment fuit fait", i.e. "The person to whose use the feoffment was made." This device separated legal from beneficial ownership.
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Cestui que as a method of fraud

From the Doctor and Student (1518) [17] "It will be somewhat long and peradventure somewhat tedious to show all the causes particularly." By the fifteenth century, cestui que use was a vehicle to defraud creditors. The main use was to leave land, or parts of land to members of the family other than the primary heir. This was a way to avoid primogeniture inheritance. While the use was intact, the occupant of the land could take advantage of the cestui que use to avoid the feudal payments and duties (incidents). Incidents such as wardship, marriage penalties and other gifts, taxes, fines, fees, and knight service were onerous. Common law did not recognize cestui que uses as such, and there was difficulty fitting these cases into the existing writs and case law. The incidents could not be enforced against a person who was on a Crusade, or other war, or business adventure. They were not present in the kingdom to be enforced to perform. Since the feudal oath was to the person, and not the land, there could be no lien against the land. A hallmark of medieval feudalism was the person to person oath of allegiance. The feudal incidents could not be enforced upon the beneficiaries of the cestui que use, since these were not the owners of the land. The users had not sworn an oath to the lord. Therefore, they owed the lord nothing. The cestui que use had no estate. They had no seisin, nor a trespass, and therefore, ejectment could not be effected. These required possession. Assumpsit was of no avail. In 1402, the Commons had petitioned the king for a remedy against dishonest feoffees to uses, apparently with no result. Cestui que use became a new kind of property and property use.[18]
Henry VII
Concerted efforts were made under Henry VII of England to reform cestui que. A change in the laws made feoffees the absolute owners of the property of which they had been enfeoffed, and they became subject to all the liabilities of ownership. They were the only ones who could take proceedings against those who interferred with their ownership. If a trespass had been committed with the license of the cestui que use they could take proceedings against him, for he was at law only a tenant at sufferance. Similarly, feoffees were the only ones who could take the proceedings against tenants of the land to compel them to perform their obligations.[19] [20] [21] [22] If a debt was brought for rent by a cestui que use, and the defendant pleaded "nihil habuit tempore dimissions", the plaintiff would have lost his action if he had not made a special replication setting out the facts.[23] The purpose of these changes was to make cestui que in general, and cestui que use trusts more cumbersome and economically unattractive.
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Henry VIII
Henry VIII sought to end all cestui que uses and regain the incidents (fees and payments) that had been deprived him. Thomas Cromwell and Audley who succeeded Thomas More vigorously crushed cestui que uses in the courts, persuading judges to declare them illegal or void.[24] By 1538-39, over 800 religious land holdings had been returned to the Crown. Many of these were subsequently sold, converted to private dwellings, given to loyal supporters of the English Reformation, dismantled for building materials, or abandoned and allowed to degenerate into ruins. Claims of St. Mary's Abbey, York, a Benedictine monastery dissolved by Henry VIII in 1539 religious corruption were frequently used to justify reclamation by the Crown. Since many of these religious orders provided charity, much of the local medical and social services were left in disarray. (see: Dissolution of the Monasteries, List of monasteries dissolved by Henry VIII of England)
Statute of Uses
The Statute of Uses was enacted in 1535, and was intended to end the abuses which had incurred in cestui que use. It declared that any holder of a cestui que use became the holder of the legal title of the ownership in fee simple. This voided the advantages of a cestui que use. The feoffee to uses was bypassed. The cestui que use had seisin. Henry VIII of England got his incidences back. The land owner lost the ability to will the land to heirs other than those in direct lineage. There could be no bypassing of heirs with a cestui que. This condition was modified in the Statute of Wills (1540). One of the effects of the Statute of Uses in executing the use, was to make a mere sale of land without feoffment (the formal public transfer) effective to pass the legal estate. The buyer became the owner by operation of the statute. It necessitated a public announcement of the intended sale to determine if the land had been surreptitiously sold to someone else. The Statute of Uses required a public registry of sale of land, later called the Statute of Enrollments.[25] Lawyers quickly determined that adding the words to a conveyance "land to Leonard and his heirs, to the use of John and his heirs, to the use of Kenneth and his heirs." For a time, this device defeated the intent of the Statute of Uses. Lord Hardwicke wrote that the Statute had no real effect other than to add, at most three words, to a conveyance. He was referring to the doctrine that had become settled before his time: that the old use might still be effected despite the Statute, by a "use on a use".[26] The Statute of Uses had been considered a great failure. It did not wipe out double ownership, legal and equitable, which has survived into the modern system of trusts. The preamble of the Statute went far in enumerating the abuses the system of uses had brought into play. The Statute did not, as had previously been suggested, try to remedy these abuses by declaring any uses void. It merely declared that the possession should be transferred to the use and that the cestui que use should have the possession after such manner and form as he had before the use.[27] [28]
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In Re Chudleigh's Case
In Re Chudleigh's Case was the first application of the Statute of Uses, and occurred fifty years after its enactment. This case was argued several times in front of several courts in England. It has been described as a judicial scrutiny of "use on a use".[29] Francis Bacon argued for the defense. The case is replete with desultory and curious discussion which, in the opinion of Lord Hardwicke, is difficult to understand. The disposition and policy of the judges was to check contingent uses, which they deemed to be productive of mischiefs and tending to perpetuities. They regarded the Statute of Uses as intending to extirpate uses, which were often found to be subtle and fraudulent contrivances. Their evident object was to restore the simplicity and integrity of the common law.[30] The great controversy in Chudleigh's case was whether the Statute of Uses had reduced the feoffee to uses to a mere conduit pipe through which possession passed to the cestui que use, or whether he still retained some of the old powers he had before the Statute of Uses. What the majority judges sought in the case was just what the projectors of the present property reform in England were after, the free alienability of land. Chudleigh's Case became known as the Case of Perpetuities. The case turned on the doctrine of scintilla juris which Bacon called metaphysics of the worst kind. Scintilla juris (Latin: a spark of right), is a legal fiction allowing feoffees to uses to support contingent uses when they come into existence, thereby to enable the Statute of Uses to execute them.[31] [32] Chudleigh's Case represented the turning point of the old medieval common law of cestui que uses, and the trend toward modernity. Bacon suggested that Justice Coke had "ripped uses from their cradle." [33]
United States cases

Town of Pawlet v. Clark (1815)
In the 1815 case of Town of Pawlet v. Clark[34] the United States Supreme Court found that a Royal grant of land to the Church of England in the colony of New Hampshire was not completed. The grant had been made prior to the American Revolutionary War, and the State of Vermont, as successor to the English Crown, could claim the land and convey it to the town of Pawlet for schools. The cestui que nature of the trust which held the land was found to be void. The Episcopal Church in the town had no right or title to the land.
Terrett v. Taylor (1815)

In the 1815 case of Terrett v. Taylor,[35] the United States Supreme Court found that the State of Virginia could not expropriate property of the formerly established Episcopal Church or abolish its incorporation. At issue was a 516-acre (2.09km2) land grant which was given in deed of bargain and sale on September 18, 1770 by the direction of the then vestry of the church. The land had been conveyed to Townsend Dade and James Wren, both of the county and 44 other church wardens, and to their successors in office in a form of cestui que for the use and benefit of the said church in the said parish.
Society for Propagation of the Gospel v. Town of New Haven (1823)

The 1823 case of Society for the Propagation of the Gospel v. Town of New Haven[36] looked at the issue of lands granted to an English corporate body, the "Society" which had a religious purpose. The land had been granted by George III of England in New Hampshire in 1761. It was held in corporation by a form of cestui que. On October 30, 1794, the State of Vermont passed a statute whereby the land of the Society would be appropriated by the state. The Supreme Court was divided in its opinion. It ruled that the property of English corporations at the time of the Revolution were protected by the Treaty of Peace, 1783.[37] See Treaty of Paris (1783), Treaty of Versailles (1783) There could be no confiscations of such corporate holdings or lands because of the treaty.
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Beatty v. Kurtz (1829)

In the 1829 case of Beatty v. Kurtz[38] the United States Supreme Court decided the issue of title in an unincorporated Lutheran Church land. The land had been used as a cemetery. The fact that the land was held by a non-corporation was deficient at law. Nevertheless, equity permitted settlement of the title in the favor of the church organization out of religious sensitivity and sensibility. There should be sentiments for the kindred of the deceased.
Goesele v. Bimeler (1852)

A group of German separatists settled land in Ohio. The lands were held in community, and there was a renunciation of individual property. All crops and goods were donated to the community. Later the community formally incorporated, using the terms of the previous unincorporated association. The nature of the holding was in the form of a traditional cestui que use. The heirs of a deceased member of the Society of Separatists sued, seeking a portion of the lands held in community. In Goesele v. Bimeler,[39] 1852, the United States Supreme Court ruled that the descendant heirs of the deceased member could not recover.
United States case law of recovery from disseisee in cestui que

In a few American jurisdictions the grantee from one whose land is adversely held is still precluded from maintaining an action in his own name to oust the adverse possessor.[40] [41] [42] [43] A conveyance of land held adversely to the grantor is champertous and void. The title to the land remains in the grantor and the grantee cannot maintain an action for breach of the covenant in the conveyance. The fact that the transaction was fair and bona fide does not change the rule.[44] It has been said that the common law doctrine is obsolete, not being suitable to conditions and circumstances of the people of this country.[45] [46] Possession by a cestui que trust is not adverse to his trustee, and such possession will not void the latter to be champertous.[47] [48]
United States Rule Against Perpetuities

In the United States the Rule Against Perpetuities, where it is in effect, applies to both legal and equitable interests, created in trust.[49] The Rule Against Perpetuities varies from state to state. The common law rule may be stated, "No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the date of the creation of the interest." [50] Vesting indicates a right to an interest in the trust. The rule is directed entirely against remoteness in vesting. An identification of the person whose interest is defined by the trust, must either vest or fail in s specified time. Any interest which may remain contingent beyond the period of the rule is invalid.[51] A beneficiary must be an identifiable person born within the time span of the trust, and vest in it. All interests in a charitable trust, are subject to the rule with a few exceptions. A charitable trust which gives a gift from the first charity to a second charity on a condition precedent is not void by reason of the fact tha the condition may not occur without the period of the Rule. (See Example 2 below.) Property transferred from a non-charity and then left over to a second charity on a remote contingency is void. (See Example 3 below.)
Examples of the Rule Against Perpetuities

Example 1: Alex leaves property in trust to Bill to hold for the benefit of Alex's children during their lives and on the death of the last survivor of Alex's children, to distribute the principle to Alex's grandchildren then living. At Alex's death he has three children living, C1, C2 and C3. It is certain that the remainder to the grandchildren will vest at the death of one of the three whose life will span both the time of the creation of the interest (Alex's death) and the vesting interest of the interest (his own death). It is unnecessary to determine whether it will be C1, C2 or C3.[52] Example 2: Alphonse leaves property to Brandon in a trust to pay the income to St. John's Church, located in Anytown, so long as it conducts its regular services in accordance with the Book of Common Prayer, 1789 Version.
Cestui que If at any time it should discontinue this practice, then the trust income reverts to St. Matthew's Church. This is a valid contingency.[53] Example 3: Beth leaves property in trust to hold for Mary's children for life and on the death of Mary's last surviving child, the property reverts to Mary's living female grandchildren. If no female grandchild is living, then the property reverts to the Cathedral School for Girls. Mary is living at the time of Beth's death. The gift to the Cathedral School is void.[54] Example 4: Albert leaves property to Thomas in trust to pay the income to St. Mark's Church so long as it conducts its regular services in accordance with the Book of Common Prayer, 1789 Version. If at any time in the future, it should discontinue to so conduct its services in such a manner, the income passes to Robert, or Robert's heirs then living. The gift over is void because it may remain contingent for a period longer than the Rule Against Perpetuities. It makes no difference that it is preceded by a gift to charity.[55] Example 5: Martin leaves property to Joseph in trust to hold for the benefit of St. Vincent's Church if it should adopt a new liturgy proposed by the religious convention held in 1970. The gift is void. The contingency may not occur within the period of the Rule. There is no exception for a gift to charity under such circumstances.[56]
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Wait and See Rule

The Wait and See Rule was instituted to eliminate or mitigate the harsh effect of the common law Rule Against Perpetuities. Under this doctrine, the court decides the validity of future estates only at the time the prior estate terminates and then tests whether the interest violates the rule by the events which have actually happened rather than the possibilities existing at the time the interest was created.[57]
Cy Pres Rule
Cy pres doctrine was also instituted to mitigate the harshness of the common law Rule Against Perpetuities. Cy pres means "as near as possible" or "as close as possible". Cy Pres allows the court to reform the interest within the limits of the Rule to approximate most closely the intention of the creator of the interest. Both Wait and See and Cy Pres approaches have been adopted by the American Law Institute as to the traditional Rule Against Perpetuities.[58] [59]
[60]
References
[1] Roebuck, Derek,[I wrote 'Cestui que use (pronounced 'setticky yuce') beneficiary' DR] "The Background of the Common Law", Oxford, 1990, Index [2] Holdsworth, W, "A History of English Law", Brown, Little & Co. 1927, pp.410-411 [3] Gilbert, ed. 1811 [4] Blackstone ii, 327, 328 [5] Holdsworth, W. ibid. pp.410-411 [6] Legis Wilhelmus I 2 section 3 [7] Holdworth, W. ibid. pp. 410-411 [8] Bogert, "Law of Trusts", 1921 [9] Fletcher, "Corporations, Vol. 9", 1920 [10] Loring "Trustee's Handbook, Second Edition", 1900 [11] Pollock and Maitland, "History of English Law, Vol. 2" Cambridge University Press, 1968 p. 228 et seq [12] L. Q. R. iii. 116 [13] Pollock and Maitland, ibid. [14] Roebuck, Derek, "The Background of the Common Law, Second Edition", Oxford University Press, 1990, p. 75 [15] Holdsworth, W. "A History of English Law", Brown, Little & Co., 1927 p. 410-411 [16] Roebuck, Derek, "The Background of the Common Law, Second Edition", Oxford University Press, 1990 pp. 75-80 [17] "Doctor and Student", Christopher St. Germaine, 1518
Cestui que
[18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] Holdsworth, W. ibid. p. 410-411 Year Book 10 Henry VII, Pasch. pl. 12 Year Book 5 Henry VII, Hil. pl 4 S. C. Henry VII, Mich. pl. 18 Holdsworth, ibid. p. 427-430 Year Book 2 Henry VII Mich pl. 18 Re: Lord Decre of the South, 1535 Roebuck, Derek, "The Background of the Common Law" Oxford, 1990 p. 78-80 Hopkins v. Hopkins, 1 Atk. 580, 591, 1783 Holdsworth, ibid. vol. 4 p. 455-456, 578 Percy Bordwell, "The Repeal of the Statute of Uses", Harv L. Rev. 39, 466-484, 1926 Percy Bordwell, "Seisin and Disseisin", 34 Harv. L. Rev. 592, 599, 1921 In Re Chudleigh's Case 1 Co. Rep. 1136, 76 Eng. Rep. 261 K. B. 1594; also reported in 1 Co. 120, 1 Anderson 309 27 Henry VIII 4 Kent's Com. 238 et seq 7 Bacon, 617, 618 Town of Pawlet v. Clark, 13 US (9 Cranch) 292, 1815 Terrett v. Taylor, 13 US (9 Cranch) 43, 1815 21 US (* Wheat.) 464, 1832 8 Stat. 83 Beatty v. Kurtz, 27 US (2 Pet.) 566, 1829 Goesele v. Bimeler, 55 US (14 How.) 589 Farrington v. Greer, 94 Fla 457, 113 So 722 Meade v. Ruff, 133 Ky 411, 118 SW 271 Setterstrom v. Phelan, 182 Okla 453, 78 P 2nd 415 14 Am Jur 2nd "Champerty and Maintenance", section 12 Kitchen-Miller Co. v. Kern, 170 Tenn 10, 91 SW 2nd 291 Gurule v. Duran, 20 NM 348, 149 P 302 14 AM Jur 2nd "Champerty and Maintenance", section 12 Behrens v. Crawford, 32 Ky LR 1281, 108 SW 288 14 Am Jur 2nd "Champerty and Maintenance", section 13 Moody, Rossen and Sogg "Smith's Review, Wills, Trusts, Probate, Administration and the Fiduciary, Third Edition", West, 1982, p.174 Gray, "Rule Against Perpetuities, Fourth Edition", Little, Brown & Co. Boston, 1942 p. 191 Moody, Rossen and Sogg "Smith's Review, Wills, Trusts, Probate, Administration and the Fiduciary, Third Edition", West, 1982, p. 174 ibid. p. 174 ibid. ibid. p. 175 ibid. ibid. Merchant's National Bank v. Curtis, 98 NH, 97 A 2nd 207 (1953) Restatement, Second, Property sections 104-105 (Tentative Draft No. 2, 1979) Leach, "Perpetuities: The Nutshell Revisited", 78 Harv. L. Rev. 973, 1965 Smith's Review, "Real and Personal Property, Conveyancing and Future Interests", Chapter XV
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Characterisation (conflict)
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In conflict of laws, characterisation is the second stage in the procedure to resolve a lawsuit involving a foreign law element. This process is described in English law as classification and as qualification in French law. In those cases where a different result would be achieved depending on which of several possibly relevant laws is applied, this stage of the process reveals the relevant rule for the choice of law but it is not necessarily a simple process (see the incidental question). The first stage is for the court to determine whether it has jurisdiction, where appropriate confronting the problem of forum shopping.
Discussion
Once the forum court has decided that it does have jurisdiction to hear the case, it then must characterise or classify the cause(s) of action. This is regarded as the most important and difficult problem in conflict of laws as trade and travel between states have become the norm and the effects of broken promises, defective goods, traffic accidents, and marital squabbles are no longer confined to the sovereign territory of one particular state or nation. But local laws are usually enacted to satisfy domestic interests by legislators who focus on keeping the support of their constituents rather than on harmonising their own laws to conform to international principles. This reflects a prevailing tension between legal unilateralism and multilateralism. Hence, every law has both a territorial and a personal application so it is applied by courts within the boundaries of the state yet, as an aspect of the social contract, it also claims to bind those individuals who owe the government allegiance, no matter where they may be.
Which law will be applied to characterise?

Characterising by reference to the lex causae (the law identified in the choice of law stage of the conflict process as the one to be applied to determine the case) would be problematic. Although it may appear logical to allow the whole of the lex causae, including its characterisation rules, to apply, it actually produces a circular argument, i.e. the lex causae is to apply to the process of characterisation before the process of characterisation has led to the choice of the relevant lex causae. So the conflict rules of the lex fori (the domestic law of the court dealing with the case) are usually applied even though, in extreme cases, the application of only the substantive provisions of the foreign law by the forum court could produce a judgment that neither the lex causae nor the lex fori would normally have produced. Nevertheless, in Macmillan Inc. v Bishopsgate Investment Trust plc [1996] 1 ALL E R 585, the most recent English case, Auld LJ. accepted that, ". . .the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and the defence". There are several cases when characterisation is not made by the lex fori: choice of law clause (lex voluntatis) subsequent characterisation (which is a problem of the lex causae) real estate or immovables (when lex situs applies) renvoi unknown legal institutions law of nationality (when lex patriae applies) international treaties
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The process
The court is required to analyse the pleadings prepared by the parties and to assign each component element to the most appropriate juridical concept or category. The rules of any given system of law are arranged under different categories, addressing procedure, status, contract, tort, divorce, nullity, etc. For each category, there is one or more choice of law rule(s). Hence, for example, all questions as to the status of a person before a court, viz. an infant or adult, legitimate, legitimated or illegitimate, married or not, mentally incapacitated or not, bankrupt or not, etc. will all be governed by the person's personal law, namely the law of nationality (the lex patriae) or habitual residence in a civil law state, or the law of domicile (the lex domicilii) in a common law state. Characterising laws as either procedural or substantive is necessary, but this part of the process can be abused by the forum court to maximise the use of the local law. The generality of the characterisation process is not, and cannot be, a wholly scientific process. It is always a matter of interpretation. For example, if A who is a national of Arcadia, dies having made a valid local will leaving land situated in Barsoom to C who is domiciled in Catilage, how is the issue to be classified? One might say that any rights that C might have are vested by the will that was made in Arcadia (i.e. the lex loci actus). Equally, the right to succeed to title might be an aspect of C's status as the oldest surviving male heir under Cartilagean law (the lex loci domicilii). Or it may be a matter for the law of Barsoom since all matters of title to land must be adjusted by the lex situs as the law of the place where the land is situated. Thus, completely different judgments might result depending on how the forum court characterises the action. One of the most enduring solutions to this problem was proposed by Savigny (17791861). He argued that it was always necessary for the court to find the "natural seat" or "centre of gravity" for the case by identifying the largest cluster of "connecting factors" to a particular legal system. If all courts adopted such an international outlook, he reasoned, this would eliminate forum shopping by producing the same choice of law no matter where the case was begun. Unfortunately, the theory has not delivered the desired results. Forum shopping remains a problem, and neither legislators nor judges have been able to agree on characterisation issues, producing classifications that extend rather than reduce international divergences. In an attempt to avoid obviously unjust results in particular cases, some judges therefore created a number of public policy exceptions to justify decisions "on the merits". Ernest G Lorenzen commented that this strategy was a warning that there must be serious problems with the rules if policy exceptions were the solution.
Exclusion of the foreign law

Because the early system of connecting factors was mechanical and inflexible, the results could offend a court's sense of justice. For example, with the development of the motor car, the classification of the cause as tort required the application of the lex loci delicti commissi rule. In France, the Cour de Cassation's insistence on this linkage frequently barred or severely limited relief for French parties injured in states that had no developed law for the compensation of such victims. Consequently, the lower courts used a variety of judicial devices to avoid the injustice. In the U.S., the New York Court of Appeals set a national trend in Babcock v. Jackson, 240 N.E.2d 279 (N.Y. 1963), when it decided to abandon the lex loci delicti rule completely. Most jurisdictions have not been so radical, preferring to retain the framework of categories and choice of law rules but leave public policy in place as the avoidance device. This exception provides that states will not apply any 'foreign' law that offends the deeply held principles of the forum state's legal system. For example, it would be considered improper to give enforcement to a law that defined the status of a person as a slave or as in the possession of another, e.g. for the purposes of sexual exploitation. In cases involving alleged immorality or injustice, this rule has been criticised as susceptible to abuse, for a court could characterise almost any statute or rule as being offensive to the public policy of their state. Less controversial are bars to any cases that would give extraterritorial effect to laws which are confiscatory, seeking to collect taxes owing in another state, or penal, i.e. laws that are designed to punish the party committing the wrong, rather than to compensate the party that suffered loss or injury. This can sometimes lead to a fine balancing act between claims for
Characterisation (conflict) compensatory and exemplary damages. States traditionally will not apply the penal laws of other states in civil suits, just as one state would not apply the criminal laws of another state against a person charged with committing a crime. In the U.S., the concept of governmental interest analysis was developed by Brainerd Currie and is favoured by many American conflicts writers. Currie focused on each state's substantive rules rather than on a metaphorical test for the seat of the legal relationships and assumed that governments are less interested in what happens within their territorial boundaries than in the well-being of their subjects. The methodology he proposed relies almost entirely on the personal nexus between the litigants and the states. However, there is no single test for this nexus at an international level. Some states use the concept of domicile, others nationality, and the remainder citizenship; and definitions of domicile vary from state to state. So this methodology has never been accepted outside the U.S. Further, if the litigants are from different states, relying on one personal law rather than another may be arbitrary. To cope with this difficulty, Currie advocated that the lex fori should be applied whenever his method produced what he called a "true conflict". Critics have therefore alleged that Currie's approach is nothing more than a complex pretext for not applying foreign law when there are two or more personal laws.
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Modern approach
Given that the characterisation system and the choice of law rules were operating in an inflexible way, the solution has been to allow the growth of judicial discretion within both parts of the system. Hence, most legal systems have opted for what English law calls the proper law approach, i.e. the identification and application of the law that has the closest connection with the cause(s) of action. It is accepted that the words have the same apparent spirit as the older approach, which requires some caution in their evaluation. In theory, this flexibility will preserve an international outlook and multilateral approach by the courts and, outside America, the results are not unencouraging. In the U.S., however, the test now adopted is termed the most significant contacts test or, in a slightly modified form defined in the Second Conflicts Restatement, the most significant relationship test. But, because different courts have interpreted these impressionistic phrases in different ways, there has been little judicial consistency.
References
Currie, Brainerd. (1963). Selected Essays on the conflict of laws p.180. Lorenzen, Ernest G. (1947). Selected Articles on the conflict of laws. pp.1314. Savigny, Friedrich Karl Von. (1849). System des heutigen rmischen Rechts". Vol. 3, pp.12126.
Condition precedent
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Condition precedent
Condition precedent refers to an event or state of affairs that is required before something else will occur. In contract law a condition precedent is an event which must occur, unless its non-occurrence is excused, before performance under a contract becomes due, i.e., before any contractual duty arises.[1] For instance, in the sentence "Jack will only go to heaven after he has died," the death of Jack is a condition precedent to Jack going to heaven (although it is also possible in this example for the occurrence of other conditions precedent to be needed before Jack goes to heaven: it is not stated that Jack will necessarily go to heaven if he dies). In estate and trust law, it is a provision in a will or trust that prevents the vesting of a gift or bequest until something occurs or fails to occur, e.g. the attainment of a certain age or the predecease of another person. For comparison, a condition subsequent brings a duty to an end whereas a condition precedent initiates a duty.
Cases
Poussard v Spiers and Pond (1876) 1 QBD 410
Notes
[1] Restatement (Second) of Contracts 224
Condition subsequent
Condition subsequent refers to an event or state of affairs that brings an end to something else. A condition subsequent is often used in a legal content as a marker bringing an end to one's legal rights or duties. A condition subsequent may be either an event or a state of affairs that must either (1) occur or (2) fail to continue to occur.
Examples
A condition subsequent may be either an event or a state of affairs that must either (1) occur or (2) fail to continue to occur. An example of the first, a condition that must occur to bring and end to something else: "When I run out of fuel, the fire will die down." An example of the second, a condition that must fail to occur to bring an end to something else: "So long as I have fuel, the fire will continue." In both cases, running out of fuel is a condition subsequent to the continuance of the fire.
In Law
A condition subsequent is noted for its common use in the law.
In contract law
In contract law: A contract may be frustrated on the occurrence of a condition subsequent: in a contract to provide a music hall for a musical performance, the burning down of the music hall may frustrate the contract and automatically bring it to an end. Taylor v Caldwell 3 B. & S. 826, 122 Eng. Rep. 309 (1863)
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In property law
In property law: Main Article: Fee simple subject to condition subsequent A right in land may be cut off by a condition subsequent. When land rights are subject to a condition subsequent, this creates a defeasable fee called a Fee simple subject to condition subsequent. In such a fee, the future interest is called a "right of reentry" or "right of entry." There, the fee simple subject to condition subsequent does not end automatically upon the happening of the condition, but if the specified future event occurs, the grantor has a right to retake his property (as opposed to it reverting to him automatically). Again, the right of entry is not automatic, but rather must be exercised to terminate the fee simple subject to condition subsequent. To exercise right of entry, the holder must take substantial steps to recover possession and title, for example, by filing a lawsuit. One of the languages used to create a fee simple subject to condition subsequent and a right of entry is "to A, but if A sells alcohol on the land, then grantor has the right of reentry." Common uses include language such as "may", "but if", "however", or "provided that..."
Compared to Condition Precedent

In comparison, a condition subsequent brings a duty to an end whereas a condition precedent initiates a duty.
Conveyancing
In law, conveyancing is the transfer of legal title of property from one person to another, or the granting of an encumbrance such as a mortgage or a lien.[1] The term conveyancing may also be used in the context of the movement of bulk commodities or other products such as water, sewerage, electricity, or gas. A typical conveyancing transaction contains two major landmarks: the exchange of contracts (whereby equitable title passes) and completion (whereby legal title passes). Conveyancing occurs in three stages: before contract, before completion and after completion. A buyer of real property must ensure that he or she obtains a good and marketable 'title' to the land; i.e., that the seller is the owner, has the right to sell the property, and there is no factor which would impede a mortgage or re-sale. A system of conveyancing is usually designed to ensure that the buyer secures title to the land together with all the rights that run with the land, and is notified of any restrictions in advance of purchase. In most mature jurisdictions, conveyancing is facilitated by a system of land registration which is designed to encourage reliance on public records and assure purchasers of land that they are taking good title.[2]
Conveyancing
145
United Kingdom
In England and Wales, this is usually done by a solicitor or a licensed conveyancer. Either may employ or supervise an unqualified conveyancer. The domestic conveyancing market is price competitive, with a high number of firms of solicitors and conveyancing companies offering a similar service. It is possible for someone to carry out their own conveyancing. Under English and Welsh law agreements are not legally binding until contracts are exchanged. This affords both the advantage of freedom before contract, but also the disadvantage of wasted time and expense in the event the deal is not done. The normal practice is for the buyer to negotiate an agreed price with the seller then organise a survey and have the solicitor (or conveyancer) carry out their searches and pre-contract enquiries. The seller's solicitor or conveyancer will prepare the draft contract to be approved by the buyer's solicitor. The seller's solicitor will also collect and prepare property information to be provided to the buyer's solicitors, in line with the Law Society's National Protocol for domestic conveyancing. It takes on average 1012 weeks to complete a conveyancing transaction, but while some transactions are quicker, many take longer. The timescale is determined by a host of factors - legal, personal, social and financial. During this period prior to exchange of contracts (exchange being the point at which the transaction becomes legally-binding) either party can pull out of the transaction at any time and for any reason, with no legal obligation to the other. This gives rise to a risk of gazumping and its converse, gazundering. Conveyancing has been identified as one of the key targets for companies looking to take advantage of the changes in the law (originally planned to be introduced in October 2011, but which is likely to be delayed for several months), with the introduction of the Legal Services Act [3]. This enables non-lawyers to own law firms, and is a significant threat to solicitors that today rely on income from conveyancing. The reason why this area of law has been targeted is because it is highly process-driven and therefore perceived as being more easily managed by non-lawyers. Recent trends indicate that instead of new firms that will actually carry out the work, instead, panel organisations are being created who take the instruction and pass the work to a panel of solicitors and take a fee from the client for this distribution service. These new panels employ "progressors" whose role is to merely contact solicitors that are actually transacting the instruction to check on progress. This raises the issue of client-confidentiality and what information may be provided to such non-connected third parties. These progressors have received the moniker of Legal Naggers (or Laggers [4]). The position in Scotland under Scots law is that the contract is generally concluded at a much earlier stage, and the initial offer, once accepted by the seller, is legally binding. This results in a system of conveyancing where buyers get their survey done before making a bid through their solicitor to the seller's solicitor. If there is competing interest for a property, sellers will normally set a closing date for the initial offers. The contract is normally formed by letters between the solicitors on behalf of each of the seller and purchaser, called missives. Once all the terms of the contract are agreed, the missives are said to be concluded, and there is then a binding contract for the sale of the property. Normally the contract is conditional upon matters such as the sellers being able, before completion of the transaction, to prove that they have good title to the property and to exhibit clear searches from the property registers and the local authority. The fact that there is a binding contract at a relatively early stage, compared with the normal practice in England and Wales, makes the problem of gazumping a rarity. The disadvantage for the buyer is that they usually have to bear the cost of the survey for unsuccessful bids, though trials have been made of a system where the seller arranges for one survey available to all bidders. From 1 December 2008 properties for sale will have to be marketed with information, now branded as the 'Home Information Report'. This should consist of: a Single Survey, an Energy Report and a Property Questionnaire local authority searches and evidence of legal title. The Home Report will be made available on request to prospective buyers of the home. The date of final settlement is in Scotland known as the "date of entry".
Conveyancing
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Feudal England
The conveyancing process applicable to feudal fiefdoms heritable by an heir was that of "re-enfeoffment", involving the consecutive procedures of paying homage, paying a feudal relief and obtaining seisin.
Australia
In Australia much of the land which was first colonised by the United Kingdom is still Common Law (also known as Old System). However since the introduction of Torrens title in 1858 most land is now under the new system of conveyance. Conveyancing in Australia is usually completed by a solicitor or a licensed conveyancer. There are also kits available if the buyer wishes to complete the process themselves, but due to the complexity of varying state and council laws and processes, this is usually not recommended. A common conveyance by a solicitor or licensed conveyancer usually takes 46 weeks. Most firms offer fixed price services which usually includes costs of searches, legal advice and other outlays. In most states and territories a typical conveyance includes, but is not limited to, the following: Title Searches checking for encumbrances and restrictions on the property ensuring any special conditions mentioned in the contract are met making sure rates, land tax and water consumption charges are paid by the appropriate party arranging for the payment of fees and charges preparation of legal documents.
Searches tend to take up the bulk of the conveyance. Due to the three level system of government in the country (federal, state and local), it must be made sure that all rights and title are properly awarded to the seller. Most information is retrieved from state or local (council) authorities. It is important to note that conveyancing processes, legal documentation, contract requirements and search requirements vary between each state and territory. A standard search package could include: Company search Contaminated Land search Council Property search Full Council Inspection of Records search Land Tax search Main Roads search Registered Plan Search or Building Units/Group Titles Plan Search Titles Search & check title search
Requirements, searches and costs can vary from state to state, depending on local property legislation and safeguards.
United States
The conveyancing process in the United States varies from state to state depending on local legal requirements and historical practice. In most situations, three attorneys will be involved in the process: one each to represent the buyer, seller, and mortgage holder; frequently all three will sit around a table with the buyer and seller and literally "pass papers" to effect the transaction. (Some states do not require all parties to be present simultaneously.) In order to protect themselves from defects in the title, buyers will frequently purchase title insurance at this time, either for themselves or for their lender.
Conveyancing In most states, a prospective buyer's offer to purchase is made in the form of a written contract and bound with a deposit on the purchase price. The offer will set out conditions (such as appraisal, title clearance, inspection, occupancy, and financing) under which the buyer may withdraw the offer without forfeiting the deposit. Once the conditions have been met (or waived), the buyer has "equitable title" and conveyancing proceeds or may be compelled by court order. There may be other last-minute conditions to closing, such as "broom clean" premises, evictions, and repairs. Typical papers at a conveyancing include: deed(s), certified checks, promissory note, mortgage, certificate of liens, pro rata property taxes, title insurance binder, and fire insurance binder. There may also be side agreements (e.g., holdover tenants, delivery contracts, payment holdback for unacceptable repairs), seller's right of first refusal for resale, declaration of trust, or other entity formation or consolidation (incorporation, limited partnership investors, etc.). Where "time is of the essence," there have been cases where the entire deposit is forfeited (as liquidated damages) if the conveyancing is delayed beyond the time limits of the buyer's contingencies, even if the purchase is completed. Words used to indicate conveyance, or words of conveyance include grant, devise, give, and sell.
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Notes
[1] Black's Law Dictionary (7th ed. 1999) [2] Dukeminier et al., Property 559 (6th ed. 2006) [3] http:/ / www. sra. org. uk/ sra/ legal-services-act/ lsa-questions-faqs. page [4] http:/ / en. wiktionary. org/ wiki/ lagger#Noun
External links
(England) Council for Licensed Conveyancers (http://www.conveyancer.org.uk/), the regulatory body for Licensed Conveyancers. (England and Wales ) E-Conveyancing (http://www.landreg.gov.uk/e-conveyancing/), government information about the e-conveyancing programme. (Australia ) Law Institute of Victoria (http://www.liv.asn.au/), government information about the conveyancing.
Coroner's jury
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Coroner's jury
An inquest is a judicial investigation in common law jurisdictions, conducted by a judge, jury, or government official. The most common kind of inquest is an inquiry including a medical examination by a coroner into the cause of a death that was sudden, violent or suspicious, or occurred in prison. A coroner's jury may be convened to assist in this type of proceeding. Inquest can also mean such a jury and the result of such an investigation. In general usage, inquest is also used to mean any investigation or inquiry. An inquest uses witnesses, but suspects are not permitted to defend themselves. The verdict can be, for example, natural death, accidental death, misadventure, suicide, or murder. If the verdict is murder or culpable accident, criminal prosecution may follow, and suspects are of course able to defend themselves there. Since juries are not used in most European civil law systems, these do not have any (jury) procedure similar to an inquest, but medical evidence and professional witnesses have been used in court in continental Europe for centuries.[1] [2] [3] Larger inquests can be held into disasters, or in some jurisdictions (not England & Wales) into cases of corruption.[3]
History
The inquest, as a means of settling a matter of fact, developed in Scandinavia and the Carolingian Empire before the end of the tenth century.[4] It was the method of gathering the survey data for the Domesday Book in England after the Norman conquest.[4]
United Kingdom
In the United Kingdom, all inquests were once conducted with a jury. They acted somewhat like a grand jury, determining whether a person should be committed to trial in connection to a death. Such a jury was made up of up to twenty-three men, and required the votes of twelve to render a decision. Similar to a grand jury, a Coroner's Jury merely accused, it did not convict. Since 1927, Coroner's Juries have rarely been used in England. Under the Coroners Act, 1988,[5] a Jury is only required to be convened in cases where the death occurred in prison, police custody, or in circumstances which may affect public health or safety. The coroner can actually choose to convene a jury in any investigation, but in practice this is rare. The qualifications to sit on a Coroner's Jury are the same as those to sit on a jury in Crown Court, the High Court, and the county courts.[6] Additionally, a Coroner's Jury only determines cause of death, its ruling does not commit a person to trial. While grand juries, which did have the power to indict, were abolished in the United Kingdom by 1948 (after being effectively stopped in 1933), Coroner's Juries retained those powers until the Criminal Law Act 1977. This change came about after Lord Lucan was charged in 1975 by a Coroner's Jury in the death of Sandra Rivett, his children's nanny.[6]
Coroner's jury
149
United States
A coroner's jury deemed Wyatt Earp, Doc Holiday, and their posse guilty in the death of Frank Stilwell in March 1882.[7]
Cultural references
Da Vinci's Inquest was a long-running CBC drama featuring the Vancouver coroner.
References
[1] [2] [3] [4] [5] [6] [7] http:/ / www. bartleby. com/ 61/ 71/ I0157100. html http:/ / www. bartleby. com/ 65/ in/ inquest. html [Anon.] (2001) "Inquest", Encyclopaedia Britannica, Deluxe CDROM edition Baker, J. H. (2002). An Introduction to English Legal History (4th ed. ed.). London: Butterworths. pp.pp7273. ISBN 0-406-93053-8. "Coroners Act 1988, s 8(3)" (http:/ / www. bailii. org/ uk/ legis/ num_act/ 1988/ ukpga_19880013_en_1. html#pb3-l1g8). BAILII. . "King's College of London - Coroner's Law Resource" (http:/ / www. kcl. ac. uk/ depsta/ law/ research/ coroners/ jury. html). . http:/ / members. tripod. com/ ~Tombstonehistory/ wefs. html
External links
Scan of a standard pamphlet (http://www.courtsni.gov.uk/NR/rdonlyres/ 27EBDF24-84C3-4D5F-A354-2BBDB1511C63/0/p_ucs_coronersjuryservice.pdf) sent those called to serve on a Coroner's Jury in Northern Ireland Jarvis on Coroners (http://www.kcl.ac.uk/depsta/law/research/coroners/noterup.html) Writeup explaining concepts and example cases of a Coroner's Jury (http://www.omnux.com/kvandivo/jury/)
Credible witness
In the law of evidence, a credible witness is a person making testimony in a court or other tribunal, or acting otherwise as a witness, whose credibility is unimpeachable. A witness may have more or less credibility, or no credibility at all. In the common law system, the term 'credible witness' may be used generally, to refer to testimony, or for the witnessing of certain documents. A credible witness is "competent to give evidence, and is worthy of belief."[1]
Testifying in court
In a wide variety of cases that use the rules of evidence, testimony must be given by credible witnesses. In Scottish law, a credible witness is one "whose credibility commends itself to the presiding magistrate ... the trustworthiness" of whom is good.[2] In English law, a credible witness is one who is not "speaking from hearsay."[3] In English: Credible seems here to be used in the way that people have employed it ever since it appeared in the English language in the fourteenth century: of something that is convincing or is capable of being believed. (It came from Latin credibilis, worthy of being believed, from the verb credere, to believe.) Michael Quinion (italics in original)[4] In the United States, such a witness is "more than likely to be true based on his/her experience, knowledge, training and appearance of honesty and forthrightness...."[5] Some factors for determining the credibility of testimony in U.S. courts include: (1) the witness had personal knowledge, (2) he or she was actually present at the scene, (3) the witness paid attention at the scene, and (4) he or she told the whole truth.[1] The probative value of a credible witness
Credible witness is not a required element in any criminal case.[6] However, credibility is always a factor in civil cases.[7] The number of witnesses does not matter for credibility: "The question for the jury is not which side has more witnesses, but what testimony they believe."[8] Only the "quality or power" of believability matters.[9] In Australian law, the reliability of every witness in a criminal case must be taken into account.[10]
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Witnessing of wills and documents

Credible witnesses must be used to give meaning or existence to certain types of documents, such as a last will and testament, codicil, apostille, deposition, interrogatories, certified document, or government record. For example, in most common law jurisdictions, two or three witnesses must sign their names to the Will at the attestation clause below the testimonium clause that is executed by the testator. The exact number of witnesses depend on the state or local law. Under the English Statute of Wills of 1540, it was three witnesses. Under modern New York law, only two witnesses are required.[11] In Canadian law, a credible witness to a Will "means a witness not incapacitated by mental inbecility (sic), interest or crime."[12] For authentication of a document, a credible witness is needed whose major duty is identify, to a notary public, the signer of the document.[13]
References
John Beecroft Saunders, ed., Words and Phrases legally defined, Vol. 1, (Butterworth & Co. Longdon & Edinburgh 1988) ISBN 0-406-08041-0.
Notes
[1] [2] [3] [4] 'Lectric Law Library website definition of "credible witness" (http:/ / www. lectlaw. com/ def/ c328. htm). Last accessed October 22, 2009. Words and Phrases legally defined, Vol. 1, pp. 373-374, citing Manson v. Macleod, 1918 SC(J) 60 at 66. Words and Phrases legally defined, Vol. 1, p. 374, citing R. v. Noakes, 1 KB 581 (CCA 1917). Michael Quinion,"Credible", found at World Wide Words website (http:/ / www. worldwidewords. org/ topicalwords/ tw-cre1. htm). Accessed October 26, 2009. [5] Entry in the Legal Dictionary (http:/ / legal-dictionary. thefreedictionary. com/ Credible+ witness). Accessed October 22, 2009. [6] United States v. Welsh, 774 F.2d 670 (4th Cir. 1985), found at US Courts website (http:/ / bulk. resource. org/ courts. gov/ c/ F2/ 774/ 774. F2d. 670. 84-5138. html). Accessed October 26, 2009. [7] See Federal Rules of Civil Procedure Rule 11 (for frivolous motions) and Rule 32 ("Using depositions in Civil Proceedings"). [8] West's Encyclopedia of American Law (Cengage Learning 2005) found at West's Encyclopedia of American Law online (http:/ / www. encyclopedia. com). Access date October 25, 2009. [9] United States v. Welsh, op. cite, 774 F.2d 670 (4th Cir. 1985), found at US Courts website (http:/ / bulk. resource. org/ courts. gov/ c/ F2/ 774/ 774. F2d. 670. 84-5138. html), citing Webster's 3rd New International Dictionary, p. 532, and Burleson v. State, 131 Tex.Cr.R. 576, 100 S.W.2d 1019, 1020 (1936). [10] "Separate Consideration of Charges - Single Defendant," Model jury charges for a criminal case, Queensland, p. 1, footnote 2, found at Queensland Courts Government website (http:/ / www. courts. qld. gov. au/ Benchbook/ SD-34-SeparateConsiderationOfCharges-SingleDeft. pdf), citing Markuleski [2001] NSW CCA 290; cf. Doggett [2001] HCA 46 [55]; M [2001] QCA 458 [17]-[22]; S [2002] QCA 167 [8], [29]. Accessed October 26, 2009. [11] N.Y. EPTL 3-2.1 (a) (4), found at York State Assembly government website (http:/ / public. leginfo. state. ny. us/ menugetf. cgi?COMMONQUERY=LAWSNew), go to "EPT" (Estates Powers and Trusts Law), then Article 3, Part 2, and finally 3-2.1. [12] Words and Phrases legally defined, Vol. 1, p. 374, citing Ryan v. Devereaux, 26 UCR 100 at 107 (Ont. CA 1866). [13] San Diego Notary website (http:/ / www. notary-92127. com/ glossary. html). Accessed October 1, 2009.
Cy-prs doctrine
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Cy-prs doctrine
The cy-prs doctrine (pronounced /sipre/ see-pray) is a legal doctrine that first arose in courts of equity. The term can be translated (from old Norman French to English) as "as near as possible" or "as near as may be."[1] The doctrine originated in the law of charitable trusts, but has been applied in the context of class action settlements in the United States.[2] When the original objective of the settlor or the testator became impossible, impracticable, or illegal to perform, the cy-prs doctrine allows the court to amend the terms of the charitable trust as closely as possible to the original intention of the testator or settlor, to prevent the trust from failing. A typical example would be a trust established to turn public opinion against slavery. Once slavery was abolished, the trust's stated purpose had become impossible to effect. The court will then modify the particular purpose of the trust, leaving it within the same general charitable purpose. In Jackson v. Phillips,[3] the testator bequeathed to trustees money to be used to "create a public sentiment that will put an end to negro slavery in this country."[4] Thereafter, slavery was abolished by the Thirteenth Amendment to the United States Constitution. The funds were nevertheless applied cy-prs to the "use of necessitous persons of African descent in the city of Boston and its vicinity."[5]
Application in England and Wales

The cy-prs doctrine applied in England and Wales limited the strictness of the rules of mortmain under which property disposed of otherwise than to a legal heir was subject to forfeiture in certain circumstances. Following abolition of mortmain, the modern application of the cy-prs doctrine has predominantly occurred in relation to charities as these are the most important trusts for a general purpose (not private benefit) permitted under English law. The Charity Commission for England and Wales has the statutory power to apply the cy-prs doctrine on behalf of a charity where, for example, no trustees remain in a charity or the necessary mandate cannot be agreed. These powers extend to a corporate charity or unincorporated association (which the common law rules may not cover). Similar powers apply to the equivalent bodies in Northern Ireland and Scotland. The cy-prs doctrine will not be applied where a charity has alternative powers to redirect its funds under its constitution. In jurisdictions which have retained the English cy-prs doctrine but do not have an equivalent state body to the Charity Commission (or in relation to foreign charities' assets in the United Kingdom), charity trustees may seek the approval of the Court to their entry into cy-prs arrangements to avoid later accusations of breach of trust.
Model Code
In the United States there is a Uniform Trust Code ("UTC"), which is a model code that various jurisdictions (e.g. states) may adopt by statute. The UTC codifies that cy-prs applies only to charitable trusts where the original particular purpose of the trust has become impossible or impracticable, and the terms of the trust do not specify what is to happen in such a situation. The UTC provides, in part, that "if a particular charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful ... the court may apply cy-prs to modify or terminate the trust ... in a manner consistent with the settlors charitable purposes."[6] However, the UTC further provides that the court may not apply cy-prs where "[a] provision in the terms of a charitable trust ... would result in distribution of the trust property to a noncharitable beneficiary" and also that cy-prs may not be used to violate the rule against perpetuities.[7]
Cy-prs doctrine The UTC also contains a cy-prs rule for noncharitable trusts. It provides that "[t]he court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust."[8] This power over trusts other than charitable trusts is not found in English law, or in most common law jurisdictions outside the United States.
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United States class actions

In 1986, the California Supreme Court endorsed cy-prs mechanisms in class action settlements, and other American courts followed.[2] Cy-prs mechanisms allow money to be used to promote the interests of class members, rather than reverting to a defendant, which could be seen as a windfall to a defendant charged with breaking the law. Judge Richard Posner has argued that the term is a misnomer in the class action context, because cy-prs awards serve a punitive effect.[2] Some commentators have criticized the use of cy-prs settlements; the American Law Institute's Draft of the Principles of the Law of Aggregate Litigation proposes limiting cy-prs to "circumstances in which direct distribution to individual class members is not economically feasible, or where funds remain after class members are given a full opportunity to make a claim."[2] [9]
References
[1] Black's Law Dictionary, p. 349 (5th ed. 1979). [2] Theodore H. Frank (March 2008). "Cy Pres Settlements" (http:/ / www. fed-soc. org/ publications/ pubid. 887/ pub_detail. asp). Federalist Society Class Action Watch. . [3] Jackson v. Phillips, (1867) 96 Mass. 539. [4] Jackson v. Phillips, (1867) 96 Mass. 539, 541. [5] Jackson v. Phillips, (1867) 96 Mass. 539, 597. [6] Section 413(a) of the Uniform Trust Code (http:/ / www. assetprotectionbook. com/ UTC_cy_pres_413. htm). [7] Section 413(b) of the Uniform Trust Code (http:/ / www. assetprotectionbook. com/ UTC_cy_pres_413. htm). [8] Section 412 of the Uniform Trust Code (http:/ / www. assetprotectionbook. com/ UTC_unanticipated_circumstances_412. htm). [9] Adam Liptak (2007-11-26). "Doling Out Other Peoples Money" (http:/ / www. nytimes. com/ 2007/ 11/ 26/ washington/ 26bar. html). New York Times. .
Disclaimer of interest
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Disclaimer of interest
Disclaimer of interest (also called a renunciation), in the law of inheritance, wills and trusts, is a term that describes an attempt by a person to renounce their legal right to benefit from an inheritance (either under a will or through intestacy) or through a trust. There are a number of reasons why a person might wish to avoid an inheritance, particularly if the proceeds would only go to their creditors, or if it would drastically affect their income tax liabilities. Under the common law, a person who disclaimed their interest would be treated as though they had died before the trust or will came into effect. This was a sensible option if the disclaiming party was an heir by descent, whose own children would then take in his place and without the imposition of a gift tax. The disclaimer must be in writing and submitted to the court overseeing the disposition of the estate within a legally specified time period, which is usually nine months after the death of the person from whom the disclaiming party stands to inherit, or twelve months after the creation of a trust by a living person. An affidavit may be required in which the disclaiming party must swear that he has not received any consideration (i.e., compensation) for the disclaimer. The disclaimer must also occur before the disclaiming party has enjoyed any benefits of the trust or inheritance. Many jurisdictions now have statutes that prohibit a disclaimer when the individual is insolvent or receiving certain public benefits due to low income. A disclaimer of interest is irrevocable. It must be a complete, and not a partial disclaimer. Such a disclaimer can be made by a legal guardian on behalf of a person who lacks the capacity to make the disclaimer themselves, but this usually requires the finding by a court that the disclaimer is in the ward's best interest.
Disclaimers and Deeds of Variation: England and Wales

In England and Wales, a disclaimer is likewise irrevocable and covers the entire testamentary gift. It may be a unilateral act but should be communicated in writing to the persons administering the estate. It does not need to be registered with the court; the persons administering the estate are obliged to retain the communication as they may be required to provide an account to the court of their actions in the administration. A similar effect to a disclaimer (including for inheritance tax and capital gains tax purposes) can be achieved with a greater degree of flexibility through the use of a deed of variation (or deed of family arrangement). A person or persons due to inherit property may enter into such a deed with the personal representatives (executors or administrators of an intestate estate) and redirect property due to the persons entering into the deed to whomsoever they wish. However one cannot vary one's entitlement under a deed of variation! A deed of variation may be revocable or irrevocable. Disclaimers and deeds of variation may be overturned by the bankruptcy court and assets traced.
Disclaimer of other interests

In addition to the more typical disclaimer under wills, an individual may also be able to disclaim his interest as the beneficiary of a life insurance policy or employee benefit plans. It may also apply to concurrent interests in real property that automatically transfer after death by operation of law rather than by the rules of inheritance (such as joint tenancies or tenancies by the entirety).
Doctrine of exoneration of liens
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Doctrine of exoneration of liens

The doctrine of exoneration of liens (sometimes simply referred to as "doctrine of exoneration") refers to a common law rule. The rule says that encumbrances (i.e. a mortgage) of a property conveyed by a will is discharged with funds from the originating estate, not from the property itself.[1]
References
[1] Johanson, Stanley M.; Dukeminier, Jesse (2000), Wills, Trusts, and Estates (http:/ / books. google. com/ books?id=-Aelkpuz5jsC& q="doctrine+ of+ exoneration+ of+ liens"& dq="doctrine+ of+ exoneration+ of+ liens"& ei=MwJ6S_W2MonEywSpg9WfBA& client=firefox-a& cd=1), Aspen Law & Business, p.468, ISBN0735506361,
Donatio mortis causa

A donatio mortis causa (Latin, meaning "gift on the occasion of death") is a gift made during the life of the donor which is conditional upon, and takes effect upon, death (in the United States, it is often referred to as a gift causa mortis). It is separate and distinct from both a normal inter vivos gift, under which title passes immediately to the transferee, and from a testamentary gift, which takes effect under the provisions of a properly executed will. Where the subject matter is a chattel which has been delivered to the donee, the donee's title is complete on the donor's death, no further act being necessary. In the case of a chose in action or land, the donee's title is not complete on the donor's death as the legal title vests in the donor's personal representatives. The donee can seek the assistance of the courts to compel the personal representatives to do whatever is necessary to perfect the donee's title,[1] and this is one of relatively few exceptions to the equitable maxim that "equity will not assist a volunteer."
Requirements
There are three requirements for a valid donatio mortis causa, and these were laid down by Lord Russell CJ in Cain v Moon [1896] 2 QB 283: 1. the gift must have been made in contemplation of, though not necessarily expectation, of death;[2] 2. the subject matter of the gift must have been delivered to the donee;[3] and 3. the gift must have been made under such circumstances as to show that the property is to revert to the donor if the donor should recover.[4]
Contemplation of death
The donor must have been contemplating death more particularly than by merely reflecting that we must all die some day. Commonly, donationes mortis causa are made in reference to a particular illness, but the principle applies equally to other causes such as the embarkation of a hazardous journey,[5] or possibly the contemplation of active service in war.[6] However, if death occurs, the gift may still be valid even though it comes from a different cause to that contemplated by the donor.
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Delivery of subject-matter
A donatio mortis causa will not be valid without a delivery of the property to the donee[7] with the intention of parting with the "dominion" over it. It will not be sufficient for the property to be merely handed over for safe custody.[8] Antecedent delivery (i.e. delivery that was made before the gift) is also deemed effective for the doctrine to operate.[3] For choses in action the donor must hand over such documents as constitute "the essential indicia or evidence of title, possession or production which entitles the possessor to the money or property purported to be given."[9] For land, although it has been judicially doubted whether a donatio mortis causa could be made with respect to land,[10] in Sen v Headley [1991] Ch 425 a donatio of land was upheld where the donor told the donee that he wished her to have the house, and he delivered the keys to the donee, and the donor told her where the title deeds were located.
Intention of the donor

The donor's intention must be to make a gift which is conditional upon death, and which is revocable upon recovery by the donor. There is no donatio mortis causa where the donor intends to make an immediate unconditional gift, even though that gift may fail,[11] nor where the intention is to make a future gift.[12] The conditional nature of the gift need not be expressed, but may be implied from the circumstances.[13]
Revocation
In addition to the automatic revocation upon the donor's recovery,[14] the donor may revoke expressly, or by recovering dominion over the subject matter.[15] But the donor cannot revoke by will, as the donee's title is complete before the will takes effect.[16] Where the gift is revoked but the title has actually been transferred, the donee holds the subject matter on trust for the donor. The gift also fails if the donee predeceases the donor.[17]
Exceptional Status
Donationes mortis causa are one of the relatively rare exceptions to the general rule of public policy in common law countries that dispositions upon death must be under a will (or a document incorporated by reference into a will) that complies with applicable statutory requirements.[18] Arguably this exception to the Wills Act 1837 comes about because the gift is inter vivos, i.e. it comes into force before the death of the donor. This device also avoids the formalities of the Law of Property Act 1925 s53(1) - that requires dispositions of land to be made in writing. This latter exception was decided in Sen v Headley [1991] Ch 425, where the court finds that a "donatio mortis causa" is a form of constructive trust - thus falling under the exception of the Law of Property Act 1925 s53(2).
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Footnotes
[1] Duffield v Elwes (1827) 1 Bli(NS) 497; Re Lillingston [1952] 2 All ER 184 [2] See also, Wilkes v Allington [1931] 2 Ch 104 [3] Cain v Moon [1896] 2 QB 283 [4] Wilkes v Allington [1931] 2 Ch 104 [5] cf. Thompson v Mechan [1958] OR 357, where it was held that the ordinary hazards of air travel were insufficient. [6] Agnew v Belfast Banking Co [1896] 2 IR 204 at 221 [7] Ward v Turner (1752) 2 Ves Sen 431 [8] Hawkins v Blewitt (1798) 2 Esp 663 [9] Birch v Treasury Solicitor [1951] Ch 298 at 311 [10] Duffield v Elwes (1827) 1 Bli (NS) 497 [11] Edwards v Jones (1836) 1 My & Cr 226 [12] Solicitor to the Treasury v Lewis [1900] 2 Ch 812 [13] Re Lillingston [1952] 2 All ER 184 [14] Staniland v Willott (1852) 3 Mac & G 664 [15] Bunn v Markham (1816) 7 Taunt 224 [16] Jones v Selby (1710) Prec Ch 300 at 303 [17] Tate v Hilbert (1793) 2 Ves 111 at 120 [18] The other main exception, also an anachronism, is that of secret trusts.
Equitable conversion
Equitable conversion is a doctrine of the law of real property under which a purchaser of real property becomes the equitable owner of title to the property at the time he/she signs a contract binding him/her to purchase the land at a later date. The seller retains legal title of the property prior to the date of conveyance, but this land interest is considered personal property (a right to the payment of money, rather than a right to the property). The risk of loss is then transferred to the buyer if a house on the property burns down after the contract has been signed, but before the deed is conveyed, the buyer will nevertheless have to pay the agreed-upon purchase price for the land. Such issues can and should be avoided by parties by stipulating in the contract who will bear the loss in such occurrences. The above rule varies by jurisdiction, but is the general rule.
Effect of death of a party

If one of the parties dies after the contract for sale of the property has been executed, the doctrine will govern how that party's interest will pass to his heirs. For example, the seller wills his real property to his son, and his personal property to his daughter. If the seller dies after the contract for conveyance is signed, his interest in the land will be treated as personal property, and will pass to his daughter. The State of New York does not recognize equitable conversion. In New York, as long as the buyer is without fault, the risk of loss remains on the seller until the buyer takes title or possession.
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Uniform Vendor and Purchaser Risk Act

A growing minority of States have adopted the Uniform Vendor and Purchaser Risk Act (UVPRA) in one form or another.[1] The UVPRA negates the doctrine of Equitable Conversion as it relates to the risk associated with loss. The risk of loss is retained by the seller (Vendor/Grantor) under the UVPRA. Generally, the provisions of the UVPRA can be modified or avoided in the Land Sale Contract.
References
[1] Rabin, Edward et al. Fundamentals of Property Law. Foundation Press: New York, 2006. pp. 1128-1129.
Equitable interest
An equitable interest is an "interest held by virtue of an equitable title (a title that indicates a beneficial interest in property and that gives the holder the right to acquire formal legal title) or claimed on equitable grounds, such as the interest held by a trust beneficiary."[1] The equitable interest is a right in equity that, if violated (suffers a harm), is subject to satisfaction by an equitable remedy. This concept only exists in the common law.
Equity
Equity is a concept of rights distinct from legal rights, i.e., "the body of principles constituting what is fair and right (natural law)."[2] It was "the system of law or body of principles originating in the English Court of Chancery and superseding the common and statute law (together called 'law' in the narrower sense) when the two conflict."[2] In equity, a judge determines what is fair and just and makes a decision as opposed to deciding what is legal. An example of an equitable interest, may be found in a trust. In a trust, the trustee has a legal interest in the trust. However, the beneficiaries to the trust has an equitable interest in the trust. The trustee has the power of attorney, or legal rights over the trust. Meanwhile the beneficiaries, the holder of the equitable interest has an equitable right in the trust. If the trustee fails to perform his or her duties, then the beneficiary may sue the trustee in equity to perform his or her duties. Such a situation includes the trustee failing to disburse cash from the trust's property, corpus, to the beneficiary. Likewise a trustee may embezzle the trust's property and, although the trustee has a legal interest in the trust, the beneficiary has an equitable interest in the trust and so may sue for the trustee to return the trust's property or reimburse the trust for the value of the property embezzled.
Land Law
An equitable interest over land which is not conveyed correctly may still be effective because of the rule in Walsh v Lonsdale.[3] In this case it was held that 'equity looks on as done that which ought to be done' and a contract, which does not meet the requirements of a deed,[4] may be specifically enforced to convey the equitable interest to the new purchaser. This rule has had a significant impact because it allows interests which have not been conveyed by a deed to still be binding on future purchasers, through the doctrine of constructive notice. However, the UK Parliament has weakened the impact of this rule, with the Law of Property (Miscellaneous Provisions) Act 1989 s.2[5] which requires all contracts for the sale of land (which could be specifically enforceable) to be in writing and be signed by both parties. Any contracts which are not in writing and signed by both parties cannot be specifically enforced, therefore will not create or transfer an equitable interest in land.
Equitable interest
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References
[1] [2] [3] [4] [5] Black's Law Dictionary. Second Pocket Edition. p. 361. 2001 West Group. Bryan A. Garner (editor in chief) Black's Law Dictionary. Second Pocket Edition. p. 241. 2001 West Group. Bryan A. Garner (editor in chief) (1882) 21 Ch.D. 9. Required by the Law of Property Act 1925 s.52(1) Law of Property (Miscellaneous Provisions) Act 1989 s.2 (http:/ / www. opsi. gov. uk/ acts/ acts1989/ ukpga_19890034_en_1#l1g2)
Escheat
Escheat (pronounced "ee-sheet") is a common law doctrine which transfers the property of a person who dies without heirs to the crown or state. It serves to ensure that property is not left in limbo without recognised ownership. It originally applied to a number of situations where a legal interest in land was destroyed by operation of law, so that the ownership of the land reverted to the immediately superior feudal lord.
Modern application
Most common-law jurisdictions have abolished the concept of feudal land tenure of property, and so the concept of escheat has lost something of its meaning. In England and Wales, where escheat still operates as a doctrine of land law, since the abolition of feudal tenure in 1660 there are no legally recognised [1] feudal overlords to take property on an escheat, so that in practice the recipient of an escheated property is the Crown, under its allodial title. The term is often now applied to the transfer of the title to a person's property to the state when the person dies intestate without any other person capable of taking the property as heir. For example, a common-law jurisdiction's intestacy statute might provide that when someone dies without a will, and is not survived by a spouse, descendants, parents, grandparents, descendants of parents, children or grandchildren of grandparents, or great-grandchildren of grandparents, then the person's estate will escheat to the state. In some jurisdictions, escheat can also occur when an entity, typically a bank, credit union or other financial institution, holds money or property which appears to be unclaimed, for instance due to a lack of activity on the account by way of deposits, withdrawals or any other transactions for a lengthy time in a cash account. In many jurisdictions, if the owner cannot be located, such property can be revocably escheated to the state. In commerce, it is the process of re-assigning legal title in unclaimed or abandoned payroll checks, or stocks and shares whose owners cannot be traced, to a state authority (in the United States). A company is required to file unclaimed property reports with its state annually and, in some jurisdictions, to make a good-faith effort to find the owners of their dormant accounts. The escheating criteria are set by individual state regulations.
Etymology
The term " Escheat" derives ultimately from the Latin ex-cadere, to "fall-out", via mediaeval French escheoir.[2] The sense is of a feudal estate in land falling-out of the possession by a family into the possession by the overlord.
Origins in feudalism
In feudal England, escheat referred to the situation where the tenant of a fee (or "fief") died without an heir or committed a felony. In the case of such decease of a tenant-in-chief, the fee reverted to the King's demesne permanently, when it became once again a mere tenantless plot of land, but could be re-created as a fee by enfeoffment to another of the king's followers. Where the deceased had been subinfeudated by a tenant-in-chief, the fee reverted temporarily to the crown for one year and one day by right of primer seisin after which it escheated to the over-lord who had granted it to the deceased by enfeoffment. From the time of Henry III, the monarchy took particular interest in escheat as a source of revenue.
Escheat
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Background
At the Norman Conquest of England all the land of England was claimed as the personal possession of William the Conqueror under allodial title. The monarch thus became the sole "owner" of all the land in the kingdom, a position which persists to the present day. He then granted it out to his favoured followers, who thereby became tenants-in-chief, under various contracts of feudal land tenure. Such tenures, even the highest one of "feudal barony", never conferred ownership of land but merely ownership of rights over it, that is to say ownership of an estate in land. Such persons are therefore correctly termed "land-holders" or "tenants" (from Latin teneo to hold), not owners. If held freely, that is to say by freehold, such holdings were heritable by the holder's legal heir. On the payment of a premium termed feudal relief to the treasury, such heir was entitled to demand re-enfeoffment by the king with the fee concerned. Where no legal heir existed, the logic of the situation was that the fief had ceased to exist as a legal entity, since being tenantless no one was living who had been enfeoffed with the land, and the land thus technically was owned by the crown without a tenant. Logically therefore it was in the occupation of the crown alone, that is to say in the royal demesne. This was the basic operation of an escheat, a failure of heirs. Where the fee had been subinfeudated by the tenant-in-chief to a mesne lord, and perhaps the process of subinfeudation had been continued by a lower series of mesne-lords, the operation of an escheat altered so that on failure of the heir of the holder of the fee the escheat would be to the demesne of the holder's immediate overlord.
Procedure
From the 12th century onward, the Crown appointed escheators to manage escheats and report to the Exchequer, with one escheator per county established by the middle of the 14th century. Upon the death of a tenant-in-chief, the escheator would be instructed by a writ of diem clausit extremum ("he has closed his last day", i.e. he is dead) issued by the king's chancery, to empanel a jury to hold an "inquisition post mortem" to ascertain who the legal heir was, if any, and what was the extent of the land held. Thus it would be revealed whether the king had any rights to the land. It was also important for the king to know who the heir was, and to assess his personal qualities, since he would thenceforth form a constituent part of the royal army, if he held under military tenure. If there was any doubt, the escheator would seize the land and refer the case to the king's court where it would be settled, ensuring that not one day's revenue would be lost. This would be a source of concern with land-holders when there were delays from the court.
English common law

Historical position
Thus, under English common law, there were two main ways an escheat could happen: 1. A person's property escheated if he was convicted of a felony (but not treason, when the property was forfeited to the Crown). If the person was executed for the crime, his heirs were attainted, i.e. ineligible to inherit. In most common-law jurisdictions, this type of escheat has been abolished outright, for example in the United States under Article 3 3 of the United States Constitution, which states that attainders for treason do not give rise to posthumous forfeiture, or "corruption of blood". 2. If a person had no heir to receive their property under a will or under the laws of intestacy, then any property he owned at death would escheat. This rule has been replaced in most common-law jurisdictions by bona vacantia or a similar concept.
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Current operation
Escheat can still occur in England and Wales, if a person is made bankrupt or a corporation is liquidated. Usually this means that all the property held by that person is 'vested in' (transferred to) the Official Receiver or Trustee in Bankruptcy. However, it is open to the Receiver or Trustee to refuse to accept that property by disclaiming it. It is relatively common for a trustee in bankruptcy to disclaim freehold property which may give rise to a liability, for example the common parts of a block of flats owned by the bankrupt would ordinarily pass to the trustee to be realised in order to pay his debts, but the property may give the landlord an obligation to spend money for the benefit of lesees of the flats. The bankruptcy of the original owner means that the freehold is no longer the bankrupt's legal property, and the disclaimer destroys the freehold estate, so that the land ceases to be owned by anyone and effectively escheats to become land held by the Crown in demesne. This situation affects a few hundred properties each year. Although such escheated property is owned by the Crown, it is not part of the Crown Estate, unless the Crown (through the Crown Estate Commissioners) 'completes' the escheat, by taking steps to exert rights as owner. However, usually, in the example given above, the tenants of the flats, or their mortgagees would exercise their rights given by the Insolvency Act 1986 to have the freehold property transferred to them. This is the main difference between escheat and bona vacantia, as in the latter, a grant takes place automatically, with no need to 'complete' the transaction. One consequence of the Land Registration Act 1925 was that only estates in land (freehold or leasehold) could be registered. Land held directly by the Crown, known as property in the "royal demesne", is not held under any vestigial feudal tenure (the crown has no historical overlord other than, for brief periods, the papacy) and there is therefore no estate to register. This had the consequence that freeholds which escheated to the Crown ceased to be registrable. This created a slow drain of property out of registration, amounting to some hundreds of freehold titles in each year. The problem was noted by the Law Commission in their report "Land Registration for the Twenty-First Century". The Land Registration Act 2002 was passed in response to that report. It provides that land held in demesne by the Crown may be registered.
Sources
S.T. Gibson, "The Escheatries, 1327-1341", English Historical Review, 36(1921). John Bean, The Decline of English Feudalism, 1215-1540, 1968.
External links
http://www.unclaimed.org/
References
[1] There exist a few ancient English families, such as the Berkeley family of Berkeley Castle, who continue to hold lands originally granted as feudal baronies, still in possession of great tenanted estates, who might still be deemed feudal overlords to their tenants were it not for the operation of the 1660 act [2] Collins Dictionary of the English Language, London, 1986, p.520
Estate Planner
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Estate Planner
Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and beneficiaries in incapacity.
Devices
Estate planning involves the will, trusts, beneficiary designations, powers of appointment, property ownership (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gift, and powers of attorney, specifically the durable financial power of attorney and the durable medical power of attorney. After widespread litigation and media coverage surrounding the Terri Schiavo case, many estate planning attorneys now advise clients to also create a living will. Specific final arrangements, such as whether to be buried or cremated, are also often part of the documents. More sophisticated estate plans may even cover deferring or decreasing estate taxes or winding up a business.
Remainder
The tax code allows people to set up charitable remainder trusts and set up qualified personal residence trusts to own their personal residence yet leave it to their children without estate tax.
Tax
Because the United States tax code does not tax life insurance proceeds as income, a life insurance trust could be used to pay estate taxes. However, if the decedent holds any incidents of ownership like the ability to remove or change beneficiary, the proceeds will remain in his estate. For this reason, the trust vehicle is used to own the life insurance policy and it must be irrevocable to avoid inclusion in the estate.
Mediation
Mediation serves as an alternative to a full-scale litigation to settle disputes. At a mediation, family members and beneficiaries discuss plans on transfer of assets. Because of the potential conflicts associated with blended families, step siblings, and multiple marriages, creating an estate plan through mediation allows people to confront the issues head-on and design a plan that will minimize the chance of future family conflict and meet their financial goals.
Estate planner
Estate planning is usually a legal and tax specialty for an attorney or an accountant. Many estate planners earn credentials such as Trust and Estate Practitioner, Chartered Financial Analyst, Certified Financial Planner and Chartered Trust and Estate Planner.
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References Bibliography
Society of Certified Senior Advisors (2009). "Working with Seniors Health, Financial and Social Issues".
External links
National Committee On Planned Giving website (http://www.ncpg.org/) organization for estate planners
Estate planning
Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and beneficiaries in incapacity.
Devices
Estate planning involves the will, trusts, beneficiary designations, powers of appointment, property ownership (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gift, and powers of attorney, specifically the durable financial power of attorney and the durable medical power of attorney. After widespread litigation and media coverage surrounding the Terri Schiavo case, many estate planning attorneys now advise clients to also create a living will. Specific final arrangements, such as whether to be buried or cremated, are also often part of the documents. More sophisticated estate plans may even cover deferring or decreasing estate taxes or winding up a business.
Remainder
The tax code allows people to set up charitable remainder trusts and set up qualified personal residence trusts to own their personal residence yet leave it to their children without estate tax.
Tax
Because the United States tax code does not tax life insurance proceeds as income, a life insurance trust could be used to pay estate taxes. However, if the decedent holds any incidents of ownership like the ability to remove or change beneficiary, the proceeds will remain in his estate. For this reason, the trust vehicle is used to own the life insurance policy and it must be irrevocable to avoid inclusion in the estate.
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163
Mediation
Mediation serves as an alternative to a full-scale litigation to settle disputes. At a mediation, family members and beneficiaries discuss plans on transfer of assets. Because of the potential conflicts associated with blended families, step siblings, and multiple marriages, creating an estate plan through mediation allows people to confront the issues head-on and design a plan that will minimize the chance of future family conflict and meet their financial goals.
Estate planner
Estate planning is usually a legal and tax specialty for an attorney or an accountant. Many estate planners earn credentials such as Trust and Estate Practitioner, Chartered Financial Analyst, Certified Financial Planner and Chartered Trust and Estate Planner.
References Bibliography
Society of Certified Senior Advisors (2009). "Working with Seniors Health, Financial and Social Issues".
External links
National Committee On Planned Giving website (http://www.ncpg.org/) organization for estate planners
Future interest
In property law and real estate, a future interest is a legal right to property ownership that does not include the right to present possession or enjoyment of the property. Future interests are created on the formation of a defeasible estate; that is, an estate with a condition or event triggering transfer of possessory ownership. A common example is the landlord-tenant relationship. The landlord may own a house, but has no general right to enter it while it is being rented. The conditions triggering the transfer of possession, first to the tenant then back to the landlord, are usually detailed in a lease. As a slightly more complicated example, suppose O is the owner of Blackacre. Consider what happens when O transfers the property "to A for life, then to B." Person A acquires possession of Blackacre. Person B does not receive any right to possess Blackacre immediately; however, once person A dies, possession will fall to person B (or his estate, if he died before person A). Person B has a future interest in the property. In this example, the event triggering the transfer is person A's death. Because they convey ownership rights, future interests can usually be sold, gifted, willed, or otherwise disposed of by the beneficiary (but see Vesting below). Because the rights vest in the future, any such disposition will occur before the beneficiary actually takes possession of the property. There are five kinds of future interests recognized at common law: three in the transferor and two in the transferee.[1]
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Vesting
Vesting means granting a person an immediate right to present or future enjoyment of property. In plain English, one has a right to a vested asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal estate can be transferred to any other party, it is termed a vested interest. A vested interest may be one of three types: A future interest is absolutely (or indefeasibly) vested if its beneficiary must (legally) eventually take possessory ownership. A future interest is vested subject to open if it belongs to a class of beneficiaries, where that class can expand. A common example is a grant from O "to A's children": the class of A's children can't be closed until approximately thirty eight weeks after A dies, so any children alive at the time of the grant are vested subject to open. This interest is also sometimes referred to as being vested subject to partial divestment. A future interest is vested subject to divestment if something can occur that would divest the remainder of his interest. For example "From O to A for life, then to B, but if A stops growing corn, then to C" B would have a vested remainder subject to divestment because he could be divested of his interest before it becomes possessory by an act of A. A person may divest themselves of, or alienate, only those interests that are guaranteed to vest. This rule aligns with the policy that a person should not be allowed to sell a thing that he or she does not own outright. Interests that are not guaranteed to vest are subject to the rule against perpetuities.
Future interests in the transferor

Reversion
A reversion occurs when a granted estate is absolutely vested in the grantor. Example: "O grants Blackacre to A for life." Analysis (O): A is guaranteed to die (eventually), at which point Blackacre returns to O. This future interest is absolutely (indefeasibly) vested in O. Analysis (A): A has a life estate. Alienation: O can alienate her future interest. A can alienate his rights in the property, but only to the extent that those rights were granted him (i.e., as a life estate). So A can sell Blackacre to B, but once A dies it returns to O. Notice that B has no control over this kind of vesting. Reversion is not subject to the rule against perpetuities, because O's future interest is absolutely vested.
Possibility of reverter
There is a possibility of reverter when an estate will return to the grantor if a condition is violated. The possibility of reverter can only follow a fee simple determinable. Example: "O grants Blackacre to A, as long as A refrains from drinking alcohol." Analysis: If A never drinks after the grant (and never sells the property), then Blackacre will belong to A at A's death, and be distributed according to the rules of probate. If A does drink after the grant, then the property returns to O. Language used: Durational. Examples include "for as long as", "while", and "during". Alienation: A's interest is freely transferable. This type of future interest can only follow the fee simple determinable. The vesting of the future interest is determinable at the time of the grant, because reverter is automatic if the condition is broken.
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Right of entry (or power of termination)

This type of future interest follows a fee simple subject to a condition subsequent. A grantor has the power of termination when an estate may return to the grantor if a condition is violated and the grantor decides to reclaim the estate. This type of grant may occur when the grantor wants the option of deciding the severity of the violation. Example: "O grants Blackacre to A, on condition that A refrains from drinking alcohol." Analysis: If A never drinks after the grant (and never sells the property), then Blackacre will belong to A at A's death, and be distributed according to the rules of probate. If A does drink after the grant, then A's rights in Blackacre end, although A is still in possession of Blackacre. Language used: Conditional. Examples include "on condition", "if used for", and "provided that". Alienation: A's interest is vested. This interest is never subject to the rule against perpetuities. A's interest cannot be transferred inter vivos ("between living people"); can only be transferred by will or by intestate succession upon death of the grantor. This type of future interest follows a fee simple subject to a condition subsequent. To see why, consider that in order to retain Blackacre, A must continue to perform under the terms of the grant (by not drinking). If A fails to "not drink", that condition will trigger the subsequent loss of A's rights in Blackacre.
Future interests in a transferee

Remainders
A remainder is a future interest in a third party that vests upon the natural conclusion of the grant to the original grantee. It is the interest in the property that is "left over", or remains, after the original grantee is finished possessing it. For example, O's grant "to A for life, then to B" creates a remainder in B. There are two types of remainders: vested and contingent. Vested remainders A vested remainder is created when property is granted to both a direct grantee and a named third party, and is not subject to a condition precedent to the third party taking possession. Example: "O grants Blackacre to A for life, then to B". Analysis (A): A has a life estate. Analysis (B): B has a vested remainder, because Blackacre will vest in B after A dies, with no further conditions. Alienation: B may divest his (absolutely) vested remainder, which is not subject to the rule against perpetuities. A is subject to the rules regarding divestiture of a life estate, as noted above. Example(2): "O grants Blackacre to A for life, then to B". and B dies before A. Who takes possession? Answer: B's heirs. The terms "and his heirs" are assumed to be part of the conveyance. Contingent remainders A contingent remainder is created when a remainder cannot fully vest at the time of granting. This normally occurs in two situations: when the property can't vest because the beneficiary is unknown (for example, if the beneficiary is a class subject to open), or when the property can't vest because the (known) beneficiary is subject to a condition precedent which has not yet occurred.
Future interest Remainders subject to open Example: "O grants Blackacre to A for life, then to B's children". Analysis: The class of B's children can't be determined until approximately thirty-eight weeks after B dies, so any children who are unborn at the time of the grant have a remainder contingent upon B having offspring. Children of B are fully vested as soon as they are born, provided A is still alive. B's children who are born have vested remainder subject to open, because the conveyance was given to a class of persons (B's Children) and B could still have more children. If A dies before B, then the class is closed, and only those children alive at A's death will have an interest. Remainders subject to condition precedent Example: "O grants Blackacre to A for life, then to B if B is married to C (at the time A dies)". Analysis (O): If B is married to C when A dies, B will own Blackacre. If B isn't married to C, then the property will vest in O (or O's estate) without O having to make a claim for it. So O has a reversion. Analysis (A): A has a life estate. Analysis (B): B has a contingent remainder subject to condition precedent, because Blackacre will vest in B, but only if B is married to C at the moment A dies. Alienation: B does not vest unless he is married to C at the moment of A's death. In other words, he will have to wait until A dies to divest. Note: a different result would be reached if the grant was "O to A for life, then to B if B has married C". In this case, B could marry C to obtain a fully vested interest, then divorce C without affecting his rights to Blackacre. Legislatures and courts tend to prefer vested remainders over contingent remainders, to reduce uncertainty in ambiguous grants, and to speed up probate.
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Executory interests
An executory interest is a future interest, held by a third party transferee (i.e. someone other than the grantee), which either cuts off another's interest or begins after the natural termination of a preceding estate. An executory interest vests upon any condition subsequent except the natural termination of the original grantee's rights. In other words, an executory interest is any future interest held by a third party that isn't a remainder. Executory interests usually arise when a grantor gives property to one person, provided that they use it a certain way. If the person fails to use it properly, the property transfers to a third party. There are two different types of executory interests: shifting and springing. Executory limitations transferring ownership from the grantor to a third party are called springing executory interests, and those that transfer from the grantee to a third party are called shifting executory interests. Shifting executory interest A shifting executory interest cuts short someone other than the grantor. For example, if O conveys property "To A, but if B returns from Florida within the next year, to B"; here, B has a shifting executory interest, and A has a fee simple subject to this shifting executory interest. A shifting executory interest may be premised on any event, irrespective of whether that event is under the control of one party or the other, or if it is an external event under the control of neither party. For example, a conveyance "To A, but if the property is ever used as a commercial dairy, to B" would leave A in control of the condition; so long as A does not use the property in the proscribed manner it will remain hers. Conversely, a conveyance "To A, but if the B receives a law degree, to B" places B entirely in control of the dispensation of the property; if B is able to fulfill the condition, B will get the property irrespective of what A does. Finally, the interest may shift based on a wholly external event, for example, "To A, but if the Chicago Cubs win the World Series, to B".
Future interest If the conveyance to A is for a limited time, or for the life of A, then the condition triggering the executory interest must occur within that time, or the property will return to the grantor. Example: "O grants Blackacre to A for life, but if A ever drinks alcohol, then Blackacre immediately goes to B." A has a life estate. B has an executory interest, because his interest does not vest unless A's life estate terminates due to the 'unnatural' condition subsequent. The interest is shifting, because if A drinks, then the property "shifts" from one grantee to another. If A never drinks on the property, then A will retain ownership, and on A's death the property will go to O, or the heirs of O. Springing executory interest A springing executory interest cuts short the grantor's own interest, in favor of the grantee. For example, O conveys to A for life, and one year after As death to B and his heirs. O will have a one year interest, that will spring/be cut short one year after A's death, and will go to B, the grantee. Suppose B is 15 years old. Example: "O grants Blackacre to A for life, then to B if B reaches the age of 25 years." Analysis (O): O has a reversion (see above), since A might die before B reaches 25. Analysis (A): A has a life estate. Analysis (B): B has an executory interest, because his interest does not vest until he reaches 25, a condition that is unrelated to the expiration of A's interest. If A lives until B is 25, B's interest will vest absolutely. If not, the interest is springing, because when B reaches 25 possession of Blackacre will "spring" from the grantor O, who will have taken possession when A died. Limitations on the creation of executory interests The grantor never retains an ultimate future interest when there is an executory condition present. If the executory condition is never met, the original grantee retains the interest, while if the condition is met, the interest transfers to a third party. However, the grantor may have a future possessory interest. Executory interests are subject to the rule against perpetuities, which disqualifies any interest that can vest more than twenty-one years after the death of every party who was living at the time the interest was created. However, if all of the potential vesting beneficiaries are named, the rule will never be violated. Thus, a property can not be conveyed "to A and her heirs, but if alcohol is consumed on the property, to B and his heirs". Because A's heirs may hew to the condition for generations, causing a violation centuries after the condition was set down and creating chaos in efforts to shift title to the appropriate heirs of B. Third party beneficiaries of executory interests cannot alienate them, since the interests are contingent upon a condition subsequent, so the interest is not guaranteed to vest.
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References
[1] See James Smith et al., Property 371 (2nd ed. 2008).
Gifts
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Gifts
A gift, in the law of property, is the voluntary transfer of property from one person (the donor or grantor) to another (the donee or grantee) without full valuable consideration. In order for a gift to be legally effective, the donor must have intended to give the gift to the donee (donative intent), and the gift must actually be delivered to and accepted by the donee. Gifts can be either: lifetime gifts (inter vivos gift, donatio inter vivos) - a gift of a present or future interest made and delivered in the donor's lifetime; or deathbed gifts (gift causa mortis, donatio mortis causa) - a future gift made in expectation of the donor's imminent death. A gift causa mortis is not effective unless the donor actually dies of the impending peril that he or she had contemplated when making the gift, i.e. these gifts can only be made when the donor is in a terminable condition. Gifts can also be: outright - made free of any restrictions, such as being subject to a trust; onerous - made with a burden or obligation imposed on the donee; or remunerative - made to compensate for services rendered
Intention
The donor of the gift must have a present intent to make a gift of the property to the donee. A promise to make a gift in the future is unenforceable, and legally meaningless, even if the promise is accompanied by a present transfer of the physical property in question. Suppose, for example, that a man gives a woman a ring and tells her that it is for her next birthday and to hold on to it until then. The man has not made a gift, and could legally (albeit inadvisedly) demand the ring back on the day before the woman's birthday. In contrast, suppose a man gives a woman a deed and tells her it will be in her best interest if the deed stays in his safe-deposit box. The man has made a gift and would be unable to legally reclaim it.
Delivery
The gift must be delivered to the donee. If the gift is of a type that cannot be delivered in the conventional sense - a house, or a bank account - the delivery can be effected by a constructive delivery, wherein a tangible item allowing access to the gift - a deed or key to the house, a passbook for the bank account - is delivered instead. Symbolic delivery is also sometimes permissible where manual delivery is impractical, such as the delivery of a key that does not actually open anything, but is intended to symbolize the transfer of ownership. Certain forms of property must be transferred following particular formalities described by statute law. In England, real property must be transferred by a written deed (s. 52, Law of Property Act (1925)). The transfer of equitable interests must be performed in writing by the owner or their agent. A gift is assumed when property owner deeds real estate as joint tenants with rights of survivorship. Regardless of contribution to purchase price, such a deed guaranteees each tenant equal shares upon sale or partition of the property.
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Acceptance
The donee must accept the gift in order for the property transfer to take place. However, because people generally accept gifts, acceptance will be presumed, so long as the donee does not expressly reject the gift. A rejection of the gift destroys the gift, so that a donee cannot revive a once-rejected gift by later accepting it. In order for such an acceptance to be effective, the donor would have to extend the offer of the gift again.
Revocation
A donor may revoke a future gift, however a gift delivered and accepted cannot be revoked.
Gift Taxation In India

In India, previously there was Gift Tax Act under which donor had to pay the gift tax on the amount of gift. However, the said Act has been abolished and from FY 2004-05, a new provision was inserted in the Income Tax Act (1961) under section 56 (2) which provides that if the gift is received by an individual or Hindu undivided family from any relatives or blood relatives or at the time of marriage or as inheritance or in contemplation of death and the aggregagte of gifts received exceeds Rs 50,000 in a year, the gift will be taxable as income from other source. For the United States see Gift tax in the United States.
Hotchpot
In property law, hotchpot (sometimes referred to as hotchpotch or the hotchpotch rule) refers to the blending or combining of property in order to ensure equality of division.[1] It usually arises in cases of divorce or in connection with advances made from the estate of a deceased, if so provided for in his Will. Hotchpot was abolished for all persons dying intestate ( that is without a Will)by section 1(2)of the Law Reform (Succession) Act 1995 in respect of all intestates dying on or after January 1 1996. The name hotch-pot is taken from a kind of pudding. The term is derived from the French word hocher, or "shake." It was used as early as 1292 as a law term, and from the 15th century in cooking for a sort of broth with many ingredients (see Hodge-Podge soup), and so it is used figuratively for any heterogeneous mixture.
English law
In English law, Hotch-pot or hotch-potch is the name given to a rule of equity whereby a person, interested along with others in a common fund, and having already received something in the same interest, is required to surrender what has been so acquired into the common fund, on pain of being excluded from the distribution. The same principle is to be found in the collatio bonorum of Roman law: emancipated children, in order to share the inheritance of their father with the children unemancipated, were required to bring their property into the common fund. It is also found in the law of Scotland.
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United States
Hotchpot is a slang term referring to the blended group of Section 1231 "Gains and Losses" of the U.S. Tax Code. According to the Code, a section 1231 gain is: 1. Any recognized gain on the sale or exchange of property used in the trade or business, and 2. Any recognized gain from compulsory/involuntary conversion of 1. Property used in the trade or business, or 2. Any capital asset which is held for more than one year and is held in connection with a trade or business or a transaction entered into for profit 3. Into other property or money 4. Because of 1. 2. 3. 4. Total or partial destruction Theft or seizure An exercise of the power of requisition or condemnation Threat or imminence of such exercise
A section 1231 loss is any loss that occurs under the same circumstances required for a section 1231 gain. Under this definition, the term property used in the trade or business is subject to the limitations of Section 1231(b) of the Internal Revenue Code. Additionally, A capital asset is property held by the taxpayer, whether or not that property is connected with his trade or business, but not that which falls into the eight categories set forth in Section 1221(a). Those eight sections are: 1. Property held by the taxpayer primarily for sale to customers, or stock or inventory 2. Property used in a trade or business which is subject to depreciation in section 167, or real property used in trade or business 3. A copyright, composition, letter/memo, or something similar, held by the person who made the property, or, in the case of letter/memo, for whom the property was prepared/produced, or the person who determines the basis of such property 4. Accounts or notes receivable acquired in the normal course of trade or business for services rendered or sale of property to customers from stock/inventory 5. A publication of the U.S. Government which is received by the Government or one of its agencies, unless it is purchased at a public sale price and is held by the taxpayer who received it or the taxpayer who determines its basis 6. Any commodities derivative financial instrument held by such a dealer, unless the Secretary of the Treasury is satisfied that the instrument has no connection to the holders activities as a dealer and the instrument is clearly identified in the dealers records as such before the close of the day on which it was acquired, originated, or entered into 7. Any hedging transaction clearly identified as such before the close of the day on which it was acquired, originated, or entered into 8. Supplies of the type regularly used/consumed by the taxpayer in the ordinary course of trade/business Hotchpot gains and losses are given preferential status by Section 1231 of the Code, a taxpayer-friendly policy that dates back to the World War II era. (Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials 519 (2nd ed. 2007). This preferential status allows hotchpot gains and losses to be treated as long-term capital gains and losses when the gains are greater than the losses (thereby treating the net gain at a more favorable tax rate), and allows them to be treated as ordinary income and ordinary losses when the gains are less than or equal to the losses (thereby allowing the losses to cancel out the income) (Id. at 522.) Under the Code, long-term capital gains are gains from the sale or exchange of a capital asset held for more than one year, if and to the extent that such gain is considered when computing gross income. Long-term capital losses are those from the sale or exchange of a capital asset held for more than one year, if and to the extent that such losses are considered in
Hotchpot computing taxable income. While the average taxpayer may have no need to identify "1231 gains and losses" as "Hotchpot gains and losses," that taxpayer likely benefits from the preferential tax treatment. In addition, section 1231(a)(4)(C) contains a special rule for the purposes of determining whether a 1231 gain or 1231 loss enters the hotchpot. (Samual A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials. 521 (2nd ed. 2007)). This subsection states that if recognized losses from an involuntary conversion as a result of casualty or from theft, of any property used in the trade or business or of any capital asset held for more than one year, exceed the recognized gains from an involuntary conversion of any such property as a result of casualty or from theft, such losses and gains do not enter the hotchpot. 26 U.S.C. 1231(a)(4)(C). Thus, section 1231 does not apply to gains and losses resulting from casualties and thefts if the losses exceed the gains. The practical effect of this subsection is that net losses from such involuntary conversions will be treated as ordinary income. Reg. 1.1231-1(e)(3). Abolished by s1(2) Law Reform (Succession) Act 1995 in intestacy cases from 1 January 1996.
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References
[1] Webster's New Collegiate Dictionary, ISBN 0-87779-339-5
Incorporation by reference
Incorporation by reference is the act of including a second document within another document by only mentioning the second document.[1] This act, if properly done, makes the entire second document a part of the main document. Incorporation by reference is often done in creating laws as well as in contract law and trust and estate law. In law regarding wills, it is a doctrine at common law which allows a testator, or a creator of a will, to dispose of assets in his estate in accordance with a separate document. To be valid, such a document must comply with the following requirements: 1. it must have existed at the time the will was executed; 2. the will must describe the document with particularity, so that it may be identified; and 3. the will must clearly manifest the intent that the document be incorporated. An exception to the first requirement is made for small gifts of tangible personal property, such as household furniture and items of sentimental value. Oral instructions can not be used as incorporation by reference. For example, if a testator states in the will that he has recited to a third party the intended disposition of testamentary assets, such attempt to circumvent the requirements of a written will is void.
References
[1] Bryan A. Garner, ed (2001). Black's Law Dictionary (2nd pocket ed.). St. Paul, MN: West Group. pp.341. ISBN0314257918.
Infectious invalidity
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Infectious invalidity
Infectious invalidity is a doctrine of property law that provides that under certain defined circumstances because one action is improper another action is invalid.[1] If applicable, the failure of certain transfers may cause interests that are otherwise valid to fail also. This approach was taken in the Massachusetts case of New England Trust Co. v. Sanger, 337 Mass. 342, 149 N.E.2d 598 (1958). The Restatement (2d) of Property, which is a treatise describing general legal principles applied by the courts in the United States states that Infectious invalidity means that the failure of certain transfers may cause interests that are otherwise valid to fail also. This approach was taken in New England Trust Co. v. Sanger, 337 Mass. 342, 149 N.E.2d 598 (1958). A trust provided for income to be paid to the surviving children of the settlor's brother for life, and on the death of the last surviving child of the settlor's brother, an equal division of the trust principle was to be made among the issue of the children of the settlor's brother. The gift to the issue of the brother's children failed, because the ascertainment of issue could not be made until the brother's children died, and the brother might have children born after the creation of the trust who might not die within the permissible period. However, a later trust had been established by the settlor, which stated that if any provision in the first trust indenture should be declared invalid, any income or principal which reverted to his estate should be deemed held in trust by the settlor for the benefit of his brother's children and their issue. Applying the doctrine of infectious invalidity to avoid a distortion of the settlor's "clear desire," the court held that the second trust should govern the trust distribution. It stated that by striking down all the gifts, valid and invalid, made in the first trust, and by giving effect to the second trust, the settlor's plan for the income gifts was substantially carried out. [ 1.5 comment 7] In zoning law, infectious invalidity is a term used to describe a principle where a parcel of land that itself complies with zoning requirements is considered to be in violation of zoning laws because of the circumstances of its creation. The situation arises when a parcel of land is improperly divided into two lots, resulting in one of the new lot conforming to the applicable zoning standards and one lot not conforming. The legal principle is applied resulting in the conforming lot being deemed to be infected because of the illegal condition created on the other lot and the creation of the two lots is deemed invalid. Infectious invalidity affects both zoning and property ownership rights.
References
[1] Bobrowski, Mark (2002). Handbook of Massachusetts Land Use and Planning Law: Zoning, Subdivision Control, and Nonzoning Alternatives (http:/ / books. google. com/ books?id=UkAeXDrZu-sC& pg=PA389& dq="Infectious+ invalidity"& hl=en& ei=5czaTMi8D8KAlAebv8G6CQ& sa=X& oi=book_result& ct=result& resnum=1& ved=0CC8Q6AEwAA#v=onepage& q="Infectious invalidity"& f=false). Aspen Publishers Online. p.389. ISBN0735530041. .
Insane delusion
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Insane delusion
An insane delusion is the legal term of art in the common law tradition used to describe a false conception of reality that a testator of a will adheres to against all reason and evidence to the contrary. A will made by a testator suffering from an insane delusion that affects the provisions made in the will may fail in whole or in part. Only the portion of the will caused by the insane delusion fails, including potentially the entire will. Will contests often involve claims that the testator was suffering from an insane delusion. An insane delusion is distinct from testamentary capacity. A testator might be suffering from an insane delusion but otherwise possess the requisite capacity to make a will. Similarly, an insane delusion is distinct from a mere mistake. If suffering from an insane delusion, a testator is not subject to change his or her mind regarding the delusion if presented with contrary evidence, whereas a mistake is capable of being corrected if the testator is told the truth. Additionally, while an insane delusion may cause portions of a will to fail, most courts will not reform or invalidate a will because of a mistake unless it was the result of fraud.[1]
Origin
The insane delusion concept was created in the 1826 British case Dew v. Clark. In that case, a father believed that his daughter was "the devil incarnate" and disinherited her in his will of 1818. After her father's death, evidence presented by the daughter showed that she was well-known for her good disposition and that her father had falsely told others that he lavished his daughter with praise and wealth. The probate court found that the father's mindset when he made the 1818 will was normal in all respects except toward his daughter. The court found that his thoughts about her, "did and could only proceed from, and be founded in, insanity," a "partial insanity" that only extended to his thoughts about his daughter and caused him to disinherit her. The court said that this delusion caused the will to fail.[2]
Examples
In the 1854 case Addington v. Wilson [3], the Supreme Court of Indiana held that a testator who disinherited his daughters because he believed them to be witches was not for that reason alone so insane as to deem him incapable of making a valid will. The court justified its decision by pointing to distinguished jurists and religious figures who affirmed the possibility of witchcraft; if these people's beliefs did not render them insane, neither did the testator's.[4] In In re Robertson's Estate [5] (1948), the Supreme Court of Oklahoma held that a testator who declared that he had "no children" and "no deceased children" in his will, when he actually had two living children, was suffering from an insane delusion, as the testator had "no rational basis whatsoever" to declare that he had no children.[6]
References
[1] [2] [3] [4] [5] [6] Jesse Dukeminier & Stanley M. Johanson, Wills, Trusts & Estates, Sixth Edition, Aspen Publishers, 2000, ISBN 0-7355-0636-1 Dew v. Clark, 162 Eng. Rep. 410 (Prerog. 1826) http:/ / books. google. com/ books?id=n5u2AAAAIAAJ& pg=PA23& dq=addington+ v. + wilson#PPA81,M1 Addington v. Wilson, 5 Blackf. (Ind.) 137, 61 Am.Dec. 81 (Sup. Ct. Ind. 1854) http:/ / www. oscn. net/ applications/ oscn/ DeliverDocument. asp?CiteID=58393 In re Robertson's Estate, 189 P.2d 615 (Okla. 1948)
Intangible asset
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Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, and trademarks) and competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities). Legal intangibles are known under the generic term intellectual property and generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price. Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed. The area of finance that deals with intangible assets is known as Intangible Asset Finance. The Uniform Commercial Code (Section 9-102(a)(42)) defines "general intangibles" as "any personal property...other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter of credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software."
Intangible Assets vs. Goodwill

While goodwill is technically an intangible asset, it is usually listed as a separate item on a company's balance sheet. As a distinct type of intangible asset, goodwill typically comes into play only in an acquisition, and represents the amount of money a company has paid or would pay over the fair value of the net assets to acquire another company.
Research & Development

Millions are spent each year by corporations to research and develop new intangible assets. To protect their research and development (R&D) efforts, corporations generally rely on intellectual property law.
Financial accounting
General standards
The International Accounting Standards Board (IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for in financial statements. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third-parties are recognized. Wordings are similar to IAS 9. Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.
Expense recognition
Intangible assets are typically expensed according to their respective life expectancy.[1] Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. Examples of intangible assets with identifiable useful lives include copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairment loss is determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If
Intangible asset impaired, goodwill is reduced and loss is recognized in the Income statement.
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Taxation
For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses. Treasury regulations generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets.[2] For example, an amount paid to obtain a trademark must be capitalized. Certain amounts paid to facilitate these transactions must also be capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required.[3] Definition of "intangibles" differs from standard accounting, in some US state governments. These governments may refer to stocks and bonds as "intangibles."[4]
References
[1] International Accounting Standards IAS38 (http:/ / www. iasplus. com/ standard/ ias38. htm) [2] Treas. Reg. 1.263(a)-4. [3] Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul: Thomson West, 2007. pg. 200. [4] Florida Intangible Tax (http:/ / www. docstoc. com/ docs/ 28185447/ The-Florida-Intangible-Tax)
Intangible property
Intangible property, also known as incorporeal property, describes something which a person or corporation can have ownership of and can transfer ownership of to another person or corporation, but has no physical substance. It generally refers to statutory creations such as copyright, trademarks, or patents. It excludes tangible property like real property (land, buildings and fixtures) and personal property (ships, automobiles, tools, etc.). In some jurisdictions intangible property are referred to as choses in action. Intangible property is used in distinction to tangible property. It is useful to note that there are two forms of intangible property - legal intangible property (which is discussed here) and competitive intangible property (which is the source from which legal intangible property is created but cannot be owned, extinguished, or transferred). Competitive intangible property disobeys the intellectual property test of voluntary extinguishment and therefore results in the sources that create intellectual property (knowledge in its source form, collaboration, process-engagement, etc) escaping quantification. Generally, ownership of intangible property gives the owner a set of legally enforceable rights over reproduction of personal property containing certain content. For example, a copyright owner can control the reproduction of the work forming the copyright. However, the intangible property forms a set of rights separate from the tangible property that carries the rights. For example, the owner of a copyright can control the printing of books containing the content, but the book itself is personal property which can be bought and sold without concern over the rights of the copyright holder. In English law and other Commonwealth legal systems, intangible property is traditionally divided in pure intangibles (such as debts, intellectual property rights and goodwill) and documentary intangibles, which obtain their character through the medium of a document (such as a bill of lading, promissory note or bill of exchange). The recent rise of electronic documents has blurred the distinction between pure intangibles and documentary intangibles. [addedon20101027 by colbert2422: Libling, D. F. 1978: *The Concept of Property: Property in Intangibles,* The Law Quarterly Review, v. 94, Jan 1978, pp.103119. Cited for its applicability to copyright materials. With respect to copyright, he states: *Any expenditure of mental or physical effort, as a result of which there is created an entity, whether tangible or intangible, vests in the person who brought the entity into being, a proprietary right to the commercial exploitation of that entity, which right is separate and independent from the ownership of that entity.*
Intangible property Since the present work is derivative [ 17 U.S.C. 101 (1982)], there is a commitment to share payments among the originators of the source works. [ There are over 1,000 sources for the material in this volume - WHC]. See Plant 1934 for a comment on embodiments of ideas. California has a law on this relating to artistic works. See Section 14.1 of the model ordinance at the beginning of this volume PQOLVOL1 for a proposed application of this concept. nb the Alaska Permanent Fund creates a right to certain state revenues for every man,woman and child in that state. Is it tangible or not???]
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Inter vivos
Inter vivos (Latin, between the living) is a legal term referring to a transfer or gift made during one's lifetime, as opposed to a testamentary transfer (a gift that takes effect on death). The term is often used to describe a trust established during one's lifetime, i.e., an Inter vivos trust as opposed to a Testamentary trust which is established on one's death, usually as part of a will. An Inter vivos trust is often used synonymously with the more common term Living trust, but an Inter vivos trust, by definition, includes both revocable and irrevocable trust. The term inter vivos is also used to describe living organ donation, in which one patient donates an organ to another while both are alive. Generally, the organs transplanted are non-vital. A common example of this practice is the inter vivos transplantation of kidneys.
Jus tertii
Jus tertii (Latin, third party rights) is the legal classification for an argument made by a third party (as opposed to the legal title holder) which attempts to justify entitlement to possessory rights based on the showing of legal title in another person. By showing legitimate title in another person, jus tertii arguments imply that the present possessors interest is illegitimate or that the present possessor is a thief. Under United States law, jus tertii arguments are generally insufficient to support actions for replevin because they fail to show that possession is more legitimate in the third party than in the present possessor.[1] However, a bailee or other legal agent of the owner may successfully assert the argument. The principle is sometimes used to allow one person to enforce or test the constitutional rights of another, which usually can't be done due to lack of standing. This is only possible for fundamental rights, where there is a close connection between the person whose rights are violated and the person wishing to enforce them, and the constitutional right being enforced is a fundamental right. See, e.g., Singleton v. Wulff Et Al., 96 S. Ct. 2868, 428 U.S. 106 (U.S. 1976).
Jus tertii
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Hypothetical example
Art brings an action for replevin against Burt, seeking to recover a bicycle. In support for the action, Art presents evidence that Cathy is in fact the true owner of the bicycle in question, not Burt. A US court would reject Arts jus tertii argument for replevin because he has failed to show that he has a more legitimate interest in the bike than does Burt.
Case law example

In Gissel v. State, 727 P.2d 1153 (Idaho 1986), Gissel unlawfully harvested wild rice growing on land jointly owned by the state of Idaho and the National Forest Service. An Idaho Court convicted Gissel of trespass, and Idaho officials seized and sold the rice at auction. Because Idaho had only one half interest in the land, Gissel challenged the states authority to seize, sell, and keep the profits from all of the rice. The Idaho Supreme Court held that Gissel was entitled to half of the profits because Idaho did not effectively make the jus tertii argument on behalf of the federal government, the Gissels, though trespassers and without legal title, which title rests with the Forest Service, still by mere possession have greater rights superior to that of the state.
References
[1] See Gissel v. State, 727 P.2d 1153 (Idaho 1986)
External links
"West's Encyclopedia of American Law" (http://www.enotes.com/wests-law-encyclopedia/jus-tertii). "West's Property: Cases and Statutes" (http://www.rogerbernhardt.com/assets/RB Publication Intros/ Intro_Property1&2.pdf). Professor Roger Bernhardt's Property Law Textbook
Lapse and anti-lapse
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Lapse and anti-lapse

Lapse and anti-lapse are complementary concepts under the law of wills, which address the disposition of property that is willed to someone who dies before the testator (the writer of the will).
Lapse
At common law, lapse occurs when the beneficiary or the devisee under the will predeceases the testator, invalidating the gift. The gift would instead revert to the residuary estate or be granted under the law of intestate succession. If the deceased beneficiary was intended to inherit part or all of the residuary estate, then that portion of the estate would pass by intestate succession, as though the testator had left no will. This rule is referred to as the doctrine of no residue of a residue, because the portion of the residuary estate that did not itself pass under the will could not be considered part of the residuary estate at all. Under section 2-604(b) of the uniform probate code, "if the residue is devised to two or more persons, the share of a residuary devisee that fails for any reason passes to the other residuary devisee, or to other residuary devisees in proportion to the interest of each in the remaining part of the residue." Simply put, if there are two parties in the remainder and one has not survived, the entirety of the remainder goes to the surviving residuary devisee or divisees. In jurisdictions which have adopted the Uniform Simultaneous Death Act, or the 1991 version of the Uniform Probate Code (but not the previous Uniform Probate Code), any devisee who dies within 120 hours after the testator is legally considered to have died before the testator. In such jurisdictions, only a devisee who survives more than 120 hours after the testator is considered to have met this "statutory survival test."
Anti-lapse statutes
Most common-law jurisdictions have enacted an anti-lapse statute to address this situation. The anti-lapse statute "saves" the bequest if it has been made to parties specified in the statute, usually members of the testator's immediate family, if they had issue that survived the testator. For example, the New York anti-lapse statute specifies brothers, sisters, and issue, specifically. If the anti-lapse statute does indeed apply, then the issue of the deceased beneficiary will inherit whatever was willed to the beneficiary. The testator can prevent the operation of an anti-lapse statute by providing that the gift will only go to the named beneficiary if that beneficiary survives the testator, or by simply stating in the will that the anti-lapse statute does not apply. Another modification to the common law of lapse is the elimination of the "no residue of a residue" rule where multiple beneficiaries are named to inherit the residue. The modern view is that where a beneficiary was intended to inherit part of the residuary estate who predeceases the testator, and that beneficiary is not covered by the anti-lapse statute, then that beneficiary's inheritance will return to the residuary estate, to be inherited by the other beneficiaries to whom the residue has been willed.
Legitime
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Legitime
In Civil law and Roman law, the legitime (legitima portio), or forced share, of a decedent's estate is that portion of the estate from which he cannot disinherit his children, or his parents, without sufficient legal cause. The word comes from French hritier lgitime, meaning "rightful heir." The legitime is usually a statutory fraction of the decedent's gross estate and passes as joint property to the decedent's next-of-kin in equal undivided shares. The legitime cannot be infringed in order to give a spouse or other beneficiary a greater share of the estate. Therefore, when a decedent has children and leaves a will, it is unlawful for the testator to override the legitime by special gift which exausts the estate or by designating his spouse or other person as sole beneficiary. This is known as preterition when arising by omission and disinheritance when heirs are expressly deprived.
Common law
At common law, there is no legitime; the Statute of Wills, 32 Hen. VIII c. 1, provided for the unfettered distribution of a decedent's entire estate; a testator is entitled to disinherit any and all of his children, for any reason and for no reason. Most jurisdictions in the United States have enacted statutes that prohibit a testator from disinheriting a spouse, or provided that in the event of such a will the spouse may elect to "take against the will" and claim a statutory share of a decedent's estate. This is done as a substitute for the common law rights of dower and curtesy.
In certain jurisdictions
Brazil
In Brazil, the descendants (alternatively, the parents or grandparents) and the spouse must receive at least 50% of it among themselves.
Czech Republic
In the Czech Republic, the nearest descendants can require a half of their intestacy portion if they are of age or the whole intestacy portion if they are under age. (If a child of the deceased died before him, his children can claim forced share instead of him etc.)
Louisiana
In Louisiana, up until recently, the situation was different. In Louisiana the legitime operated to prevent a parent from wholly disinheriting his children, who were called forced heirs. If there was one child, that child must receive at least 25% of the decedent's estate. If there were two or more children, they must receive at least 50% of it among themselves. Similar provisions prevented a decedent with living parents from disinheriting them. Current Louisiana law provides for a forced share if the decedent's children are under 24 years of age, or are permanently unable to take care of themselves.
Scotland
In Scotland, legitim is the right of the issue (including adult issue) to not less than a defined share of the value of the moveable estate of the deceased. The share is one half, if the deceased left no relict (widow or widower), or one third if there was a relict. For example if a testator has two children, and no spouse, and in her/his testament leaves everything to one of them, the other would be entitled to half of the legitim fund, which means a half of a half of the total net value of the moveable estate. (Or half of a third if there were a spouse.) Legitim is also called the Bairn's Pairt, or Part (of gear) (Scots bairn = child). (See D R Macdonald, Succession (3rd edn 2001); Hilary Hiram, The
Legitime Scots Law of Succession (2nd edn 2007)).
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Philippines
Under the Civil Code of the Philippines, the legitime is given to and/or shared by the compulsory heirs of the decedent. This is also called compulsory succession because the law has reserved it for the compulsory heirs and thus, the testator has no power to give it away to anyone of his liking. The compulsory heirs include the children, or descendants (this class includes the adopted children and legitimated children), legitimate or illegitimate; in their default, the legitimate parents, or legitimate ascendants; the surviving spouse, which concurs with the foregoing classes; and the illegitimate parents. Thus, legitimate children always get one half of the estate, divided equally between them. The surviving spouse gets a share equal to that of a legitimate child, except when there is only one legitimate child, in which case he or she gets one fourth of the estate. Illegitimate children get one half of the share given to legitimate children. The legitimate parents or ascendants are excluded by legitimate children or descendants, but not by illegitimate children, and get one half of the estate in such cases. The surviving spouse or illegitimate children, when either concur with the parents or ascendants, get one fourth of the estate. If all concur, the share of the surviving spouse is reduced to one eighth of the estate. The surviving spouse gets one half of the estate when there are no other heirs, and in certain cases, when the marriage is in articulo mortis, he or she gets one third. The surviving spouse also gets one third of the estate when concurring with illegitimate children, who also get the same share. However, the surviving spouse gets one fourth when concurring with illegitimate parents, who also get one fourth of the estate. The illegitimate children, in default of everyone, gets one half of the estate. The illegitimate parents, who are excluded by everyone except the surviving spouse, also get one half in default of everyone.
External links
The Louisiana Civil Code [1] on Successions
References
[1] http:/ / www. findlaw. com/ 11stategov/ la/ civilcode2. html
Letter of wishes
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Letter of wishes
A letter of wishes is a non-binding indication by the settlor of the manner in which he wishes the trustees to exercise their discretion in relation to a discretionary trust. Letters of wishes are normally used in testamentary trusts, although theoretically there is no reason why they should not be used in an inter vivos trust. Letters of wishes are useful where a trust instrument gives the trustees very wide powers and discretions. The letter of wishes principally sets out the manner in which the settlor wishes the trustees to exercise their powers and discretions, but is not binding on the trustees. All binding requirements must be contained in the trust instrument itself. It is also quite common for letters of wishes to make posthumous expressions of thanks or love to the objects of the trust.
Life estate
A life estate is a concept used in common law and statutory law to designate the ownership of land for the duration of a person's life. In legal terms it is an estate in real property that ends at death when there is a "reversion" to the original owner. The owner of a life estate is called a "life tenant". Although the ownership of a life estate is of limited duration because it ends at the death of the person who is the "measuring life," the owner has the right to enjoy the benefits of ownership of the property, including income derived from rent or other uses of the property, during his or her possession. Because a life estate ceases to exist at the death of the measuring person's life, this temporary ownership agreement cannot be left to heirs (intestate) or devisees (testate), and the life estate cannot normally be inherited (but see Life Estate Pur Autre Vie, and Estate for Term of years). At death, the property involved in a life estate typically falls into the ownership of the remainderman named in the life estate agreement. A land owner of an estate cannot give a "greater interest" in the estate than he or she owns. That is, a life estate owner cannot give complete and indefinite ownership (fee simple) to another person because the life tenant's ownership in the property ends when the person who is the measuring life dies. For instance, if Bob conveyed to Ashley for the life of Ashley, and Ashley conveys a life estate to another person, Brenda, for Brenda's life [an embedded life estate], then Brenda's life estate interest would last only until whoever dies first, Brenda or Ashley. Then Brenda's interest conveys to the remainder interest or reverts to the original grantee. Once Ashley dies, however, whoever possesses the land loses it (with the land likely reverting to its original grantor). This is a life estate "pur autre vie", or the life of another. Such a life estate can also be conveyed originally, such as "to A until B dies." Another limitation on a life estate is the legal doctrine of waste, which prohibits life tenants from damaging or devaluing the land, as their ownership is technically only temporary.
Uses of a life estate

In the United States, a life estate is typically used as a tool of an estate planning. A life estate can avoid probate and ensure that an intended heir will receive title to real property. For example, Al owns a home and desires that Bill inherit it after Al's death. Al can effectuate that desire by transferring title to the home to Bill and retaining a life estate in the home. Al keeps a life estate and Bill receives a vested fee simple remainder. As soon as Al dies, the life estate interest merges with Bill's remainder, and Bill has a fee simple title. Such transfer of interests make unnecessary the use of a will and eliminates the need to probate the asset. The disadvantage to the grantor, however, is that the grant to the remainderman is irrevocable. "Beneficiary deeds" have been statutorily created in some states
Life estate to address this issue. It is less well known that the intestacy laws of certain American states, such as Arkansas [1], Delaware [2], and Rhode Island [3], still limit the surviving spouse's rights to the deceased spouse's real estate to a life estate (as shown by the programs linked to the state names). Louisiana employs a similar mechanism in successions called usufruct.
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Duration of a life estate

Life estates are measured either by the life of the property recipient, or by the life of some other person; these latter are called life estates pur autre vie (Law French, "for the life of another"). A life estate pur autre vie is most commonly created in one of two circumstances. First, when the owner of property conveys his interest in that property to another person, for the life of a third person. For example if A conveys land to B during the life of C, then B owns the land for as long as C lives; if B dies before C, B's heirs will inherit the land, and will continue to own it for as long as C lives. Second, if A conveys land to C for life, C can then sell the life estate to B. Again, B and B's heirs will own the land for as long as C lives. In either scenario, once C dies, the ownership of the land will revert to A. If A has died, ownership will revert to A's heirs. The right to succeed to ownership of the property upon the expiration of the life estate is called a remainder.
Validity of a life estate

The early common law did not recognize a life estate in personal property, but such interests were cognizable in equity. Thus, although life estates in real estate are still created today, the life estate is more commonly used in trust instruments, typically in an attempt to minimize the effect of the inheritance tax or other taxes on transfers of wealth. The law of England and Wales no longer recognises the life estate at law in relation to land; instead the holder of legal title to the land (whether the freehold fee simple or a lease) will hold that land on trust first for the life tenant and then for the remainderman.
References
[1] http:/ / www. mystatewill. com/ states/ AR/ ARintcalc. htm [2] http:/ / www. mystatewill. com/ states/ DE/ DEintcalc. htm [3] http:/ / www. mystatewill. com/ states/ RI/ RIintcalc. htm
Life interest
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Life interest
A life interest (or life rent in Scotland) is some form of right, usually under a trust, which lasts only for the lifetime of the person benefiting from that right. A person with a life interest is known as a life tenant. A life interest ends when the life tenant dies. An interest in possession trust is the most common example of a life interest trust. In a typical interest in possession trust, the life tenant receives all the income from the trust for the rest of his or her life. On the life tenant's death, the trust comes to an end, and the capital of the trust is paid to another person, known as the remainderman, as specified by the trust document. One form of life interest is a life estate, an ownership interest in property which lasts for the life of the party to whom it has been granted. Unlike the beneficiary of a trust, the owner of a life estate in property has the right to actual possession of the property itself, and may use it as any other owner, subject only to a duty to avoid waste of the property value affecting parties with a future interest.
Merger doctrine
In the law of trusts the term "doctrine of merger" refers to the fusing of legal and equitable title in the event the same person becomes both the sole trustee and the sole beneficiary of a trust. In such a case, the trust is sometimes deemed to have terminated (with the result that the beneficiary owns the trust property outright).[1]
References
[1] See R. Wellman, L. Waggoner & O. Browder, Palmer's Cases and Materials on Trusts and Succession 489 (4th ed. 1983).
Pledges
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Pledges
A pledge (also pawn) is a bailment or deposit of personal property to a creditor (the pledgee) to secure repayment for some debt or engagement,[1] [2] The term is also used to denote the property which constitutes the security. Pledge is the ravi of Roman law, from which most of the modern law on the subject is derived. It differs from hypothecation and from the more usual mortgage in that the pledge is in the possession of the pledgee; it also differs from mortgage in being confined to personal property (rather than real property). A mortgage of personal property in most cases takes the name and form of a bill of sale. The chief difference between Roman and English law is that certain things (e.g. apparel, furniture and instruments of tillage) could not be pledged in Roman law, while there is no such restriction in English law. In the case of a pledge, a special property passes to the pledgee, sufficient to enable him to maintain an action against a wrongdoer, but the general property, that is the property subject to the pledge, remains in the pledgor. As the pledge is for the benefit of both parties, the pledgee is bound to exercise only ordinary care over the pledge. The pledgee has the right of selling the pledge if the pledgor make default in payment at the stipulated time. No right is acquired by the wrongful sale of a pledge except in the case of property passing by delivery, such as money or negotiable securities. In the case of a wrongful sale by a pledgee, the pledgor cannot recover the value of the pledge without a tender of the amount due. The law of Scotland and the United States generally agrees with that of England as to pledges. The main difference is that in Scotland and in Louisiana a pledge cannot be sold unless with judicial authority. In some of the U.S. states the common law as it existed apart from the Factors Acts is still followed; in others the factor has more or less restricted power to give a title by pledge.
See
pawnshop/pawnbroker
References
[1] Joseph Story, Story on Bailments, 286. [2] Black, Henry C. (1990). Black's Law Dictionary. St. Paul, Mn.: West Publishing. pp.1153. ISBN1153.
Power of appointment
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Power of appointment
A power of appointment is a term most frequently used in the law of wills to describe the ability of the testator (the person writing the will) to select a person who will be given the authority to dispose of certain property under the will. Although any person can exercise this power at any time during their life, its use is rare outside of a will. The power is divided into two broad categories: general powers of appointment and special powers of appointment. The holder of a power of appointment differs from the trustee of a trust in that the former has no obligation to manage the property for the generation of income, but need only distribute it.
General power of appointment

Example: "I leave my video game collection to be distributed as my son Andrew sees fit." A general power of appointment is defined for federal estate tax purposes in the Internal Revenue Code 2041.[1] A general power of appointment is one which allows the holder of the power to appoint to himself, his estate, his creditors, or the creditors of his or her estate. The holder of a general power of appointment is treated for estate tax purposes as if he or she is the owner of the property subject to the power, whether or not the power is exercised. Thus, the property which is subject to the power is includable in the power holder's estate for estate tax purposes. A general power of appointment is a key element of a type of marital deduction trust (law)trust as prescribed in Internal Revenue Code 2056(b)(5). It is a trust that qualifies for the marital deduction, provided that the surviving spouse is given the income at least annually and the surviving spouse has a general power of appointment over the trust property remaining at his death. Most general powers of appointment are exercisable under a will. The holder of the power refers to the document creating the power in his or her will and designates who among the permissible objects of the power should receive the property. The power could be exercised by creating further trusts. If the power of appointment is not exercised, the default provision of the document that created the power takes over.
Special power of appointment

Example: "I leave my cactus collection to my children, my wife Pat to choose who receives which cactus." A special power of appointment allows the recipient to distribute the designated property among a specified group or class of people, not including donee, donee's estate, creditors of donee, or creditors of donee's estate. For example, a testator might grant his brother the special power to distribute property among the testator's three children. The brother would then have the authority to choose which of the testator's children gets which property. Unlike a general power of appointment, the refusal of the appointed party to exercise a specific power of appointment causes the designated property to revert as a gift to the members of a group or a class. A special power of appointment may be exclusive or nonexclusive. If exclusive, the donee can appoint all the property to one or more members of the class of permissible appointees to the exclusion of the other members of the class. If nonexclusive, the donee must appoint some property to each object.[2]
Testamentary power and power presently exercisable

In addition to general and special powers, donors may limit when the power may be exercised by the donees. Testamentary powers are usually indicated by the inclusion of limiting language in the granting instrument such as "to B for life, remainder to persons as B shall 'by will' appoint". General powers presently exercisable do not contain such limitations on power. Wording such as "to B for life, and upon B's death to those that B shall appoint" indicates a power presently exercisable, not a testamentary power.
Power of appointment In some jurisdictions, the donee's creditors cannot reach the appointive property when the donee has a presently exercisable power of appointment as long as the power is unexercised.[3]
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External links
Powers of Attorney and Appointment [4] In a power of appointment every word counts [5]
References
[1] (http:/ / frwebgate. access. gpo. gov/ cgi-bin/ usc. cgi?ACTION=RETRIEVE& FILE=$$xa$$busc26. wais& start=15995806& SIZE=8880& TYPE=TEXT) Internal Revenue Code 2041 [2] Dukeminier, J. et al. Wills, Trusts, and Estates, Eighth Edition. Aspen Publishers, New York: 2009, p. 822 [3] See e.g., Irwin Union Bank & Trust Co. v. Long , 312 N.E.2d 908 (Indiana 1974) [4] http:/ / estate. findlaw. com/ estate-planning/ estate-planning-other-topics/ estate-planning-power-of-attorney. html [5] http:/ / www. nysscpa. org/ cpajournal/ old/ 11592003. htm
Principal-agent problem
In political science and economics, the principalagent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the principal ispresumablyhiring the agent to pursue the principal's interests. Various mechanisms may be used to try to align the interests of the agent in solidarity with those of the principal, such as piece rates/commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the agent posting a bond, or fear of firing. The principalagent problem is found in most employer/employee relationships, for example, when shareholders hire top executives of corporations. Political science has noted the problems inherent in the delegation of legislative authority to bureaucratic agencies. As another example, the implementation of legislation (such as laws and executive directives) is open to bureaucratic interpretation, which creates opportunities and incentives for the bureaucrat-as-agent to deviate from the intentions or preferences of the legislators. Variance in the intensity of legislative oversight also serves to increase principalagent problems in implementing legislative preferences.
Principal-agent problem
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Overview
In political science and economics, the problem of motivating a party to act on behalf of another is known as the principalagent problem. The terms 'principal' and 'agent' originate in law; see Law of agency. The principalagent problem arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe. This is the case to some extent for all contracts that are written in a world of information asymmetry, uncertainty and risk.
Basic idea of Agency Theory (P: Principal, A: Agent)
Here, principals do not know enough about whether (or to what extent) a contract has been satisfied. The solution to this information problem closely related to the moral hazard problem is to ensure the provision of appropriate incentives so agents act in the way principals wish. In terms of game theory, it involves changing the rules of the game so that the self-interested rational choices of the agent coincide with what the principal desires. Even in the limited arena of employment contracts, the difficulty of doing this in practice is reflected in a multitude of compensation mechanisms (the carrot) and supervisory schemes (the stick), as well as in critique of such mechanisms as e.g., Deming (1986) expresses in his Seven Deadly Diseases of management.
Employment contract
In the context of the employment contract, individual contracts form a major method of restructuring incentives, by connecting as closely as is optimal the information available about employee performance, and the compensation for that performance. Because of differences in the quantity and quality of information available about the performance of individual employees, the ability of employees to bear risk, and the ability of employees to manipulate evaluation methods, the structural details of individual contracts vary widely, including such mechanisms as piece rates, [share] options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred compensation, and so on.[1] Typically, these mechanisms are used in the context of different types of employment: salespeople often receive some or all of their remuneration as commission, production workers are usually paid an hourly wage, while office workers are typically paid monthly or semimonthly (and if paid overtime, typically at a higher rate than the hourly rate implied by the salary). The way in which these mechanisms are used is different in the two parts of the economy which Doeringer and Piore called the primary and secondary sectors (see also dual labour market). The secondary sector is characterised by short-term employment relationships, little or no prospect of internal promotion, and the determination of wages primarily by market forces. In terms of occupations, it consists primarily of low or unskilled jobs, whether they are blue-collar (manual-labour), white-collar (e.g., filing clerks), or service jobs (e.g., waiters). These jobs are linked by the fact that they are characterized by low skill levels, low earnings, easy entry, job impermanence, and low returns to education or experience. In a number of service jobs, such as food service, golf caddying, and valet parking jobs, workers in some countries are paid mostly or entirely with tips.
Principal-agent problem The use of tipping is a strategy on the part of the owners or managers to align the interests of the service workers with those of the owners or managers; the service workers have an incentive to provide good customer service (thus benefiting the company's business), because this makes it more likely that they will get a good tip. As a solution to the principalagent problem, though, tipping is not perfect. In the hopes of getting a larger tip, a server, for example, may be inclined to give a customer an extra large glass of wine or a second scoop of ice cream. While these larger servings make the customer happy and increase the likelihood of the server getting a good tip, they cut into the profit margin of the restaurant. In addition, a server may dote on generous tippers while ignoring other customers, and in rare cases harangue bad tippers.
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Non-financial compensation
Part of this variation in incentive structures and supervisory mechanisms may be attributable to variation in the level of intrinsic psychological satisfaction to be had from different types of work. Sociologists and psychologists frequently argue that individuals take a certain degree of pride in their work, and that introducing performance-related pay can destroy this psycho-social compensation, because the exchange relation between employer and employee becomes much more narrowly economic, destroying most or all of the potential for social exchange. Evidence for this is inconclusive Deci (1971), and Lepper, Greene and Nisbett (1973) find support for this argument; Staw (1989) suggests other interpretations of the findings.
Team production
On a related note, Drago and Garvey (1997) use Australian survey data to show that when agents are placed on individual pay-for-performance schemes, they are less likely to help their coworkers. This negative effect is particularly important in those jobs that involve strong elements of team production (Alchian and Demsetz 1972), where output reflects the contribution of many individuals, and individual contributions cannot be easily identified, and compensation is therefore based largely on the output of the team. In other words, pay-for-performance increases the incentives to free-ride, as there are large positive externalities to the efforts of an individual team member, and low returns to the individual (Holmstrom 1982, McLaughlin 1994). The negative incentive effects implied are confirmed by some empirical studies, (e.g., Newhouse, 1973) for shared medical practices; costs rise and doctors work fewer hours as more revenue is shared). Leibowitz and Tollison (1980) find that larger law partnerships typically result in worse cost containment. As a counter, peer pressure can potentially solve the problem (Kandel and Lazear 1992), but this depends on peer monitoring being relatively costless to the individuals doing the monitoring/censuring in any particular instance (unless one brings in social considerations of norms and group identity and so on). Studies suggest that profit-sharing, for example, typically raises productivity by 3-5% (Jones and Kato 1995, Knez and Simester 2001), although there are some selection issues (Prendergast).
Empirical evidence
There is however considerable empirical evidence of a positive effect of compensation on performance (although the studies usually involve simple jobs where aggregate measures of performance are available, which is where piece rates should be most effective). In one study, Lazear (1996) saw productivity rising by 44% (and wages by 10%) in a change from salary to piece rates, with a half of the productivity gain due to worker selection effects. Paarsch and Shearer (1996) also find evidence supportive of incentive and productivity effects from piece rates, as do Banker, Lee, and Potter (1996), although the latter do not distinguish between incentive and worker selection effects. Fernie and Metcalf (1996) find that top British jockeys perform significantly better when offered percentage of prize money for winning races compared to being on fixed retainers.
Principal-agent problem McMillan, Whalley and Zhu (1989) and Groves et al. (1994) look at Chinese agricultural and industrial data respectively and find significant incentive effects. Kahn and Sherer (1990) find that better evaluations of white-collar office workers were achieved by those employees who had a steeper relation between evaluations and pay. Nikkinen and Sahlstrm (2004) find empirical evidence that agency theory can be used, at least to some extent, to explain financial audit fees internationally.
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Contract design
Milgrom and Roberts (1992) identify four principles of contract design: When perfect information is not available, Holmstrom (1979) developed the Informativeness Principle to solve this problem. This essentially states that any measure of performance that (on the margin) reveals information about the effort level chosen by the agent should be included in the compensation contract. This includes, for example, Relative Performance Evaluation measurement relative to other, similar agents, so as to filter out some common background noise factors, such as fluctuations in demand. By removing some exogenous sources of randomness in the agents income, a greater proportion of the fluctuation in the agents income falls under his control, increasing his ability to bear risk. If taken advantage of, by greater use of piece rates, this should improve incentives. (In terms of the simple linear model below, this means that increasing x produces an increase in b.) However, setting incentives as intense as possible is not necessarily optimal from the point of view of the employer. The Incentive-Intensity Principle states that the optimal intensity of incentives depends on four factors: the incremental profits created by additional effort, the precision with which the desired activities are assessed, the agents risk tolerance, and the agents responsiveness to incentives. According to Prendergast (1999, 8), the primary constraint on [performance-related pay] is that [its] provision imposes additional risk on workers A typical result of the early principalagent literature was that piece rates tend to 100% (of the compensation package) as the worker becomes more able to handle risk, as this ensures that workers fully internalize the consequences of their costly actions. In incentive terms, where we conceive of workers as self-interested rational individuals who provide costly effort (in the most general sense of the workers input to the firms production function), the more compensation varies with effort, the better the incentives for the worker to produce. The third principle the Monitoring Intensity Principle is complementary to the second, in that situations in which the optimal intensity of incentives corresponds highly to situations in which the optimal level of monitoring is also high. Thus employers effectively choose from a menu of monitoring/incentive intensities. This is because monitoring is a costly means of reducing the variance of employee performance, which makes more difference to profits in the kinds of situations where it is also optimal to make incentives intense. The fourth principle is the Equal Compensation Principle, which essentially states that activities equally valued by the employer should be equally valuable (in terms of compensation, including non-financial aspects such as pleasantness of the workplace) to the employee. This relates to the problem that employees may be engaged in several activities, and if some of these are not monitored or are monitored less heavily, these will be neglected, as activities with higher marginal returns to the employee are favoured. This can be thought of as a kind of disintermediation targeting certain measurable variables may cause others to suffer. For example, teachers being rewarded by test scores of their students are likely to tend more towards teaching for the test, and de-emphasise less relevant but perhaps equally or more important aspects of education; while AT&Ts practice at one time of rewarding programmers by the number of lines of code written resulted in programs that were longer than necessary i.e., program efficiency suffering (Prendergast 1999, 21). Following Holmstom and Milgrom (1990) and Baker (1992), this has become known as multi-tasking (where a subset of relevant tasks is rewarded, non-rewarded tasks suffer relative neglect). Because of this, the more difficult it is to completely specify and measure the variables on which reward is to be conditioned, the less likely that performance-related pay will be used: in essence, complex jobs will typically not be evaluated through explicit contracts. (Prendergast 1999, 9).
Principal-agent problem Where explicit measures are used, they are more likely to be some kind of aggregate measure, for example, baseball and American Football players are rarely rewarded on the many specific measures available (e.g., number of home runs), but frequently receive bonuses for aggregate performance measures such as Most Valuable Player. The alternative to objective measures is subjective performance evaluation, typically by supervisors. However, there is here a similar effect to multi-tasking, as workers shift effort from that subset of tasks which they consider useful and constructive, to that subset which they think gives the greatest appearance of being useful and constructive, and more generally to try to curry personal favour with supervisors. (One can interpret this as a destruction of organizational social capital workers identifying with, and actively working for the benefit of, the firm in favour of the creation of personal social capital the individual-level social relations which enable workers to get ahead (networking).)
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Linear model
The four principles can be summarized in terms of the simplest (linear) model of incentive compensation:
where w stands for the wage, e for (unobserved) effort, x for unobserved exogenous effects on outcomes, and y for observed exogenous effects; while g and a represent the weight given to y, and the base salary, respectively. The interpretation of b is as the intensity of incentives provided to the employee. The above discussion on explicit measures assumed that contracts would create the linear incentive structures summarised in the model above. But while the combination of normal errors and the absence of income effects yields linear contracts, many observed contracts are nonlinear. To some extent this is due to income effects as workers rise up a tournament/hierarchy: Quite simply, it may take more money to induce effort from the rich than from the less well off. (Prendergast 1999, 50). In addition, the marginal return to effort may increase: it is more important for a CEO to work hard than for a shop floor worker (e.g., Murphy 1998 highlights the importance of bonuses for executives). Similarly, the threat of being fired creates a nonlinearity in wages earned versus performance. Moreover, many empirical studies illustrate inefficient behaviour arising from nonlinear objective performance measures, or measures over the course of a long period (e.g., a year), which create nonlinearities in time due to discounting behaviour. This inefficient behaviour arises because incentive structures are varying: for example, when a worker has already exceeded a quota or has no hope of reaching it, versus being close to reaching it e.g., Healy (1985), Oyer (1997), Leventis (1997). Leventis shows that New York surgeons, penalised for exceeding a certain mortality rate, take less risky cases as they approach the threshold. Courty and Marshke (1997) provide evidence on incentive contracts offered to agencies, which receive bonuses on reaching a quota of graduated trainees within a year. This causes them to rush-graduate trainees in order to make the quota.
Performance evaluation
Objective performance evaluation
The major problem in measuring employee performance in cases where it is difficult to draw a straightforward connection between performance and profitability is the setting of a standard by which to judge the performance. One method of setting an absolute objective performance standardrarely used because it is costly and only appropriate for simple repetitive tasksis time-and-motion studies, which study in detail how fast it is possible to do a certain task. These have been used constructively in the past, particularly in manufacturing. More generally, however, even within the field of objective performance evaluation, some form of relative performance evaluation must be used. Typically this takes the form of comparing the performance of a worker to that of his peers in the firm or industry, perhaps taking account of different exogenous circumstances affecting that. The reason that employees are often paid according to hours of work rather than by direct measurement of results is that it is often more efficient to use indirect systems of controlling the quantity and quality of effort, due to a variety
Principal-agent problem of informational and other issues (e.g., turnover costs, which determine the optimal minimum length of relationship between firm and employee). This means that methods such as deferred compensation and structures such as tournaments are often more suitable to create the incentives for employees to contribute what they can to output over longer periods (years rather than hours). These represent pay-for-performance systems in a looser, more extended sense, as workers who consistently work harder and better are more likely to be promoted (and usually paid more), compared to the narrow definition of pay-for-performance, such as piece rates. This discussion has been conducted almost entirely for self-interested rational individuals. In practice, however, the incentive mechanisms which successful firms use take account of the socio-cultural context they are embedded in (Fukuyama 1995, Granovetter 1985), in order not to destroy the social capital they might more constructively mobilise towards building an organic, social organization, with the attendant benefits from such things as worker loyalty and pride (...) [which] can be critical to a firms success... (Sappington 1991,63)
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Subjective performance evaluation

Subjective performance evaluation allows the use of a subtler, more balanced assessment of employee performance, and is typically used for more complex jobs where comprehensive objective measures are difficult to specify and/or measure. Whilst often the only feasible method, the attendant problems with subjective performance evaluation have resulted in a variety of incentive structures and supervisory schemes. One problem, for example, is that supervisors may under-report performance in order to save on wages, if they are in some way residual claimants, or perhaps rewarded on the basis of cost savings. This tendency is of course to some extent offset by the danger of retaliation and/or demotivation of the employee, if the supervisor is responsible for that employees output. As an example, there have been numerous cases where net profits were apparently underreported on successful Guy Ritchie films, where actors or writers had been promised a percentage of net profits Cheatham, David, and Cheatham (1996). Another problem relates to what is known as the compression of ratings. Two related influences centrality bias, and leniency biashave been documented (Landy and Farr 1980, Murphy and Cleveland 1991). The former results from supervisors being reluctant to distinguish critically between workers (perhaps for fear of destroying team spirit), while the latter derives from supervisors being averse to offering poor ratings to subordinates, especially where these ratings are used to determine pay, not least because bad evaluations may be demotivating rather than motivating. However, these biases introduce noise into the relationship between pay and effort, reducing the incentive effect of performance-related pay. Milkovich and Wigdor (1991) suggest that this is the reason for the common separation of evaluations and pay, with evaluations primarily used to allocate training. Finally, while the problem of compression of ratings originates on the supervisor-side, related effects occur when workers actively attempt to influence the appraisals supervisors give, either by influencing the performance information going to the supervisor: multitasking (focussing on the more visibly productive activities Paul 1992), or by working too hard to signal worker quality or create a good impression (Holmstrom 1982); or by influencing the evaluation of it, e.g., by currying influence (Milgrom and Roberts 1988) or by outright bribery (Tirole 1992).
Incentive structures
Tournaments
Much of the discussion here has been in terms of individual pay-for-performance contracts; but many large firms use internal labour markets (Doeringer and Piore 1971, Rosen 1982) as a solution to some of the problems outlined. Here, there is pay-for-performance in a looser sense over a longer time period. There is little variation in pay within grades, and pay increases come with changes in job or job title (Gibbs and Hendricks 1996). The incentive effects of this structure are dealt with in what is known as tournament theory (Lazear and Rosen 1981, Green and Stokey (1983), see Rosen (1986) for multi-stage tournaments in hierarchies where it is explained why CEOs are paid many times more than other workers in the firm). See the superstar article for more information on the tournament
Principal-agent problem theory. Workers are motivated to supply effort by the wage increase they would earn if they win a promotion. Some of the extended tournament models predict that relatively weaker agents, be they competing in a sports tournaments (Becker and Huselid 1992, in NASCAR racing) or in the broiler chicken industry (Knoeber and Thurman 1994), would take risky actions instead of increasing their effort supply as a cheap way to improve the prospects of winning. These actions are inefficient as they increase risk taking without increasing the average effort supplied. A major problem with tournaments is that individuals are rewarded based on how well they do relative to others. Co-workers might become reluctant to help out others and might even sabotage others' effort instead of increasing their own effort (Lazear 1989, Rob and Zemsky 1997). This is supported empirically by Drago and Garvey (1997). Why then are tournaments so popular? Firstly, because especially given compression rating problems it is difficult to determine absolutely differences in worker performance. Tournaments merely require rank order evaluation. Secondly, it reduces the danger of rent-seeking, because bonuses paid to favourite workers are tied to increased responsibilities in new jobs, and supervisors will suffer if they do not promote the most qualified person. Thirdly, where prize structures are (relatively) fixed, it reduces the possibility of the firm reneging on paying wages. As Carmichael (1983) notes, a prize structure represents a degree of commitment, both to absolute and to relative wage levels. Lastly when the measurement of workers' productivity is difficult, e.g., say monitoring is costly, or when the tasks the workers have to perform for the job is varied in nature, making it hard to measure effort and/or performance, then running tournaments in a firm would encourage the workers to supply effort whereas workers would have shirked if there are no promotions. Tournaments also promote risk seeking behavior. In essence, the compensation scheme becomes more like a call option on performance (which increases in value with increased volatility (cf. options pricing). If you are one of ten players competing for the asymmetrically large top prize, you may benefit from reducing the expected value of your overall performance to the firm in order to increase your chance that you have an outstanding performance (and win the prize). In moderation this can offset the greater risk aversion of agents vs principals because their social capital is concentrated in their employer while in the case of public companies the principal typically owns his stake as part of a diversified portfolio. Successful innovation is particularly dependent on employees' willingness to take risks. In cases with extreme incentive intensity, this sort of behavior can create catastrophic organizational failure. If the principal owns the firm as part of a diversified portfolio this may be a price worth paying for the greater chance of success through innovation elsewhere in the portfolio. If however the risks taken are systematic and cannot be diversified e.g., exposure to general housing prices, then such failures will damage the interests of principals and even the economy as a whole. (cf. Kidder Peabody, Barings, Enron, AIG to name a few). Ongoing periodic catastrophic organizational failure is directly incentivized by tournament and other superstar/Winner take all compensation systems. [Holt 1995].
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Deferred compensation
Tournaments represent one way of implementing the general principle of deferred compensation, which is essentially an agreement between worker and firm to commit to each other. Under schemes of deferred compensation, workers are overpaid when old, at the cost of being underpaid when young. Salop and Salop (1976) argue that this derives from the need to attract workers more likely to stay at the firm for longer periods, since turnover is costly. Alternatively, delays in evaluating the performance of workers may lead to compensation being weighted to later periods, when better and poorer workers have to a greater extent been distinguished. (Workers may even prefer to have wages increasing over time, perhaps as a method of forced saving, or as an indicator of personal development. e.g., Loewenstein and Sicherman 1991, Frank and Hutchens 1993.) For example Akerlof and Katz 1989: if older workers receive efficiency wages, younger workers may be prepared to work for less in order to receive those later. Overall, the evidence suggests the use of deferred compensation (e.g., Freeman and Medoff 1984, and Spilerman 1986 seniority provisions are often included in pay, promotion and retention decisions, irrespective
Principal-agent problem of productivity.)
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Other applications
The "principalagent problem" has also been discussed in the context of energy consumption by Jaffe and Stavins in 1994. They were attempting to catalog market and non-market barriers to energy efficiency adoption. In efficiency terms, a market failure arises when a technology which is both cost-effective and saves energy is not implemented. Jaffe and Stavins describe the common case of the landlord-tenant problem with energy issues as a principalagent problem. [I]f the potential adopter is not the party that pays the energy bill, then good information in the hands of the potential adopter may not be sufficient for optimal diffusion; adoption will only occur if the adopter can recover the investment from the party that enjoys the energy savings. Thus, if it is difficult for the possessor of information to convey it credibly to the party that benefits from reduced energy use, a principal/agent problem arises. [2] The energy efficiency use of the principal agent terminology is in fact distinct from the usual one in several ways. In landlord/tenant or more generally equipment-purchaser / energy-bill-payer situations, it is often difficult to describe who would be the principal and who the agent. Is the agent the landlord and the principal the tenant, because the landlord is hired by the tenant through the payment of rent? As (Murtishaw and Sathaye, 2006) point out, In the residential sector, the conceptual definition of principal and agent must be stretched beyond a strictly literal definition. Another distinction is that the principal agent problem in energy efficiency does not require any information asymmetry: both the landlord and the tenant may be aware of the overall costs and benefits of energy-efficient investments, but as long as the landlord pays for the equipment and the tenant pays the energy bills, the investment in new, energy-efficient appliances will not be made. In this case, there is also little incentive for the tenant to make a capital efficiency investment with a usual payback time of several years, and which in the end will revert to the landlord as property. Since energy consumption is determined both by technology and by behavior, an opposite principal agent problem arises when the energy bills are paid by the landlord, leaving the tenant with no incentive to moderate her energy use. This is often the case for leased office space, for example. The energy efficiency principal agent problem applies in many cases to rented buildings and apartments, but arises in other circumstances, most often involving relatively high up-front costs for energy-efficient technology. Though it is challenging to assess exactly, the principal agent problem is considered to be a major barrier to the diffusion of efficient technologies. This can be addressed in part by promoting shared-savings performance-based contracts, where both parties benefit from the efficiency savings. The issues of market barriers to energy efficiency, and the principal agent problem in particular, are receiving renewed attention because of the importance of global climate change and rising prices of the finite supply of fossil fuels. The principalagent problem in energy efficiency is the topic of an International Energy Agency report: [3] "Mind the GapQuantifying PrincipalAgent Problems in Energy Efficiency" (2007). Flyvbjerg and Cowi (2004) explained systematic and large cost overruns in the provision of major transportation infrastructure in terms of principalagent problems. The authors further proposed improved incentive structures and better budgeting methods to curb the principalagent problem. The proposed improvements have been implemented by the UK and Danish governments in practical policy for the provision of transportation infrastructure.[4] The problem also occurs in the relationship between lenders and borrowers, and in the complex system of derivatives, credit default swaps, and other varieties of financial speculation. The recent admission by former Federal Reserve Chairman Alan Greenspan that he had made a mistake in trusting investment managers to protect the interests of their shareholders, reveals how this problem can become a threat to the public.[5] The problem manifests itself in the ways middle managers discriminate against employees who they deem to be "overqualified" in hiring, assignment, and promotion, and repress or terminate "whistleblowers" who want to make senior management aware of fraud or illegal activity. This may be done for the benefit of the middle manager and against the best interest of the shareholders (or members of a non-profit organization). Public officials are agents,
Principal-agent problem and people adopt constitutions and laws to try to manage the relationship, but officials may betray their trust and allow themselves to be unduly influenced by lobby groups or they may abuse their authority and managerial discretion by showing personal favoritism or bad faith by hiring an unqualified friend or by engaging in corruption or patronage, such as selecting the firm of a friend or family member for a no-bid contract. The problem arises in client-attorney, probate executor, bankruptcy trustee, and other such relationships. In some rare cases, attorneys who were entrusted with estate accounts with sizeable balances acted against the interests of the person who hired them to act as their agent by embezzling the funds or "playing the market" with the client's money (with the goal of pocketing any proceeds).
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Further reading
Eisenhardt, K. (1989) Agency theory: An assessment and review, Academy of Management Review, 14 (1): 57-74.
[6]
Flyvbjerg, Bent and Cowi, 2004, Procedures for Dealing with Optimism Bias in Transport Planning: Guidance Document (London: UK Department for Transport, June 2004). [7] Green, J. R. and N. L. Stokey. 1983. "A Comparison of Tournaments and Contracts", Journal of Political Economy, 91, 349-364. [8] IEA (2007) Mind the GapQuantifying PrincipalAgent Problems in Energy Efficiency [9] Murtishaw, S. and J. Sathaye, 2006. Quantifying the Effect of the PrincipalAgent Problem on US Residential Use, Report LBNL-59773 [10] Hongxia Li (2011). Capital Structure on Agency Costs in Chinese Listed Firms "International Journal of Governance", 1(2): 26-39. Nikkinen, Jussi and Sahlstrm, Petri (2004): Does agency theory provide a general framework for audit pricing? International Journal of Auditing, 8: November, 253-262. Rosen, S. 1986. "Prizes and Incentives in Elimination Tournaments", American Economic Review, 76, 4, 701-715. Sappington, David E.M., Incentives in PrincipalAgent Relationships, Journal of Economic Perspectives 5:2 (Spring 1991), 45-66 Stiglitz, Joseph E. (1987). "Principal and agent, The New Palgrave: A Dictionary of Economics, v. 3, pp. 966-71. Rees, R., 1985. The Theory of Principal and AgentPart I. Bulletin of Economic Research, 37(1), 3-26 Rees, R., 1985. The Theory of Principal and AgentPart II. Bulletin of Economic Research, 37(2), 75-97 "Worldbank report Disrupting Corruption" [11]. siteresources.worldbank.org.
Notes
[1] [2] [3] [4] Pendergast, Canice (1999). "The Provision of Incentives in Firms". Journal of Economic Literature 37: 763. JSTOR2564725. HKS.harvard.edu (http:/ / www. hks. harvard. edu/ fs/ rstavins/ Papers/ The Energy Efficiency Gap. pdf) IEA.org (http:/ / www. iea. org/ Textbase/ publications/ free_new_Desc. asp?PUBS_ID=1954) Flyvbjerg, B., 2008, "Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice." European Planning Studies, vol. 16, no. 1, January, pp. 3-21. (http:/ / www. sbs. ox. ac. uk/ centres/ bt/ Documents/ Curbing Optimism Bias and Strategic Misrepresentation. pdf) [5] Clark, Andrew (2008-10-24). "Greenspan - I was wrong about the economy. Sort of" (http:/ / www. guardian. co. uk/ business/ 2008/ oct/ 24/ economics-creditcrunch-federal-reserve-greenspan). The Guardian (London). . Retrieved 2010-05-22. [6] http:/ / www. jstor. org/ stable/ 258191 [7] http:/ / flyvbjerg. plan. aau. dk/ 0406DfT-UK%20OptBiasASPUBL. pdf [8] http:/ / faculty. arec. umd. edu/ cmcausland/ RAKhor/ RAkhor%20Task7/ Green83. pdf [9] http:/ / www. iea. org/ textbase/ nppdf/ free/ 2007/ mind_the_gap. pdf [10] http:/ / ies. lbl. gov/ iespubs/ 59773Rev. pdf [11] http:/ / siteresources. worldbank. org/ INTWBIGOVANTCOR/ Resources/ DisruptingCorruption. pdf
Private trustee
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Private trustee
In the United States a Private Trustee is a position set up through a Trust Indenture. It is a private agreement, between the Settlor of a Trust and the Trustee.[1] Even though this position was established long before 1634, no records can be found, by this author, of it existence prior to this date. This makes both the Trust and the Trustee private. This arrangement differs from a bank Trustee or a corporate Trustee, both mainly focus on legalities and accounting in the public arena. A Private Trustee works for and with the family and Beneficiaries becoming familiar with their needs and wishes. Thus, the Private Trustee is more likely to move the Trust group forward keeping these priorities in mind. Usually the Settlor and the Trustee work closely together establishing investments for the trust.
Notes
[1] United States Constitution Article I, 10
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation. Depending on the nature of the property, an owner of property has the right to consume, sell, rent, mortgage, transfer, exchange or destroy it, or to exclude others from doing these things.[1] [2] [3] Important widely recognized types of property include real property (the combination of land and any improvements to or on the land), personal property (physical possessions belonging to a person), private property (property owned by legal persons or business entities), public property (state owned or publicly owned and available possessions) and intellectual property (exclusive rights over artistic creations, inventions, etc.), although the latter is not always as widely recognized or enforced.[4] A title, or a right of ownership, establishes the relation between the property and other persons, assuring the owner the right to dispose of the property as the owner sees fit. Some philosophers assert that property rights arise from social convention. Others find origins for them in morality or natural law.
Use of the term

Various scholarly disciplines (such as law, economics, anthropology or sociology) may treat the concept more systematically, but definitions vary within and between fields. Scholars in the social sciences frequently conceive of property as a bundle of rights. They stress that property is not a relationship between people and things, but a relationship between people with regard to things. Property is usually thought of as being defined and protected by the local sovereignty. Ownership, however, does not necessarily equate with sovereignty. If ownership gave supreme authority, it would be sovereignty, not ownership. These are two different concepts. Public property is any property that is controlled by a state or by a whole community. Private property is any property that is not public property. Private property may be under the control of a single person or by a group of persons jointly.[5]
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General characteristics
Modern property rights are based on conceptions of owners and possession as belonging to legal persons, even if the legal person is not a natural person. In most countries, corporations, for example, have legal rights similar to those of citizens. Therefore, the corporation is a juristic person or artificial legal entity, under a concept that some refer to as "corporate personhood". Property rights are protected in the current laws of most states, usually in their constitution or in a bill of rights. Protection is also prescribed in the United Nations' Universal Declaration of Human Rights, Article 17, and in the European Convention on Human Rights (ECHR), Protocol 1. Traditional principles of property rights include: 1. 2. 3. 4. control of the use of the property the right to any benefit from the property (examples: mining rights and rent) a right to transfer or sell the property a right to exclude others from the property.
Traditional property rights do not include: 1. uses that unreasonably interfere with the property rights of another private party (the right of quiet enjoyment) [See Nuisance] 2. uses that unreasonably interfere with public property rights, including uses that interfere with public health, safety, peace or convenience. [See Public Nuisance, Police Power] Not every person or entity with an interest in a given piece of property may be able to exercise all possible property rights. For example, as a lessee of a particular piece of property, you may not sell the property, because a tenant is only in possession and does not have title to transfer. Similarly, while you are a lessee, the owner cannot use their right to exclude to keep you from the property, or, if they do, you may be entitled to stop paying rent or sue for access. Further, property may be held in a number of forms, such as through joint ownership, community property, sole ownership or lease. These different types of ownership may complicate an owner's ability to exercise property rights unilaterally. For example, if two people own a single piece of land as joint tenants then, depending on the law in the jurisdiction, each may have limited recourse for the actions of the other. For example, one of the owners might sell their interest in the property to a stranger whom the other owner does not particularly like. Legal systems have evolved to cover transactions and disputes that arise over the possession, use, transfer, and disposal of property, most particularly involving contracts. Positive law defines such rights, and the judiciary is used to adjudicate and to enforce property rights. According to Adam Smith, the expectation of profit from "improving one's stock of capital" rests on private property rights. It is an assumption central to capitalism that property rights encourage their holders to develop the property, generate wealth, and efficiently allocate resources based on the operation of markets. From this has evolved the modern conception of property as a right enforced by positive law, in the expectation that this will produce more wealth and better standards of living. In his text The Common Law, Oliver Wendell Holmes describes property as having two fundamental aspects. The first is possession, which can be defined as control over a resource based on the practical inability of another to contradict the ends of the possessor. The second is title, which is the expectation that others will recognize rights to control resource, even when it is not in possession. He elaborates the differences between these two concepts, and proposes a history of how they came to be attached to persons, as opposed to families or entities such as the church. Classical liberals, Objectivists, and related traditions Most thinkers from these traditions subscribe to the labor theory of property. They hold that you own your own life, and it follows that you must own the products of that life, and that those products can be traded in
Property free exchange with others. "Every man has a property in his own person. This nobody has a right to, but himself." (John Locke, Second Treatise on Civil Government) "The reason why men enter into society is the preservation of their property." (John Locke, Second Treatise on Civil Government) "Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place." (Frdric Bastiat, The Law) Socialism's fundamental principles are centered on a critique of this concept, stating, among other things, that the cost of defending property is higher than the returns from private property ownership, and that, even when property rights encourage their holders to develop their property or generate wealth, they do so only for their own benefit, which may not coincide with benefit to other people or to society at large. Libertarian socialism generally accepts property rights, but with a short abandonment period. In other words, a person must make (more or less) continuous use of the item or else lose ownership rights. This is usually referred to as "possession property" or "usufruct". Thus, in this usufruct system, absentee ownership is illegitimate and workers own the machines or other equipment that they work with. Communism argues that only collective ownership of the means of production through a polity (though not necessarily a state) will assure the minimization of unequal or unjust outcomes and the maximization of benefits, and that therefore private ownership of capital should be abolished. Both communism and some kinds of socialism have also upheld the notion that private ownership of capital is inherently illegitimate. This argument centers mainly on the idea that private ownership of capital always benefits one class over another, giving rise to domination through the use of this privately owned capital. Communists are not opposed to personal property that is "hard-won, self-acquired, self-earned" (Communist Manifesto) by members of the proletariat. Both socialism and communism are careful to make the distinction between private ownership of capital (land, factories, resources, etc...) and private property (homes, material objects, and so forth).
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Theories of property
There exist many theories. One is the relatively rare first possession theory of property, where ownership of something is seen as justified simply by someone seizing something before someone else does.[6] Perhaps one of the most popular, is the natural rights definition of property rights as advanced by John Locke. Locke advanced the theory that when one mixes ones labor with nature, one gains a relationship with that part of nature with which the labor is mixed, subject to the limitation that there should be "enough, and as good, left in common for others."[7] From the RERUM NOVARUM, Pope Leo XIII wrote "It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own." Anthropology studies the diverse systems of ownership, rights of use and transfer, and possession[8] under the term "theories of property." Western legal theory is based, as mentioned, on the owner of property being a legal person. However, not all property systems are founded on this basis. In every culture studied ownership and possession are the subject of custom and regulation, and "law" where the term can meaningfully be applied. Many tribal cultures balance individual ownership with the laws of collective groups: tribes, families, associations and nations. For example the 1839 Cherokee Constitution frames the issue in these terms: Sec. 2. The lands of the Cherokee Nation shall remain common property; but the improvements made thereon, and in the possession of the citizens respectively who made, or may rightfully be in possession of them: Provided, that the citizens of the Nation possessing exclusive and indefeasible right to their improvements, as
Property expressed in this article, shall possess no right or power to dispose of their improvements, in any manner whatever, to the United States, individual States, or to individual citizens thereof; and that, whenever any citizen shall remove with his effects out of the limits of this Nation, and become a citizen of any other government, all his rights and privileges as a citizen of this Nation shall cease: Provided, nevertheless, That the National Council shall have power to re-admit, by law, to all the rights of citizenship, any such person or persons who may, at any time, desire to return to the Nation, on memorializing the National Council for such readmission. Communal property systems describe ownership as belonging to the entire social and political unit. Such arrangements can under certain conditions erode to open access resources. This development has been critiqued by the tragedy of the commons. Corporate systems describe ownership as being attached to an identifiable group with an identifiable responsible individual. The Roman property law was based on such a corporate system. Different societies may have different theories of property for differing types of ownership. Pauline Peters argued that property systems are not isolable from the social fabric, and notions of property may not be stated as such, but instead may be framed in negative terms: for example the taboo system among Polynesian peoples.[9]
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Property in philosophy
In medieval and Renaissance Europe the term "property" essentially referred to land. Much rethinking has come to be regarded as only a special case of the property genus. This rethinking was inspired by at least three broad features of early modern Europe: the surge of commerce, the breakdown of efforts to prohibit interest (then called "usury"), and the development of centralized national monarchies.
Ancient philosophy
Urukagina, the king of the Sumerian city-state Lagash, established the first laws that forbade compelling the sale of property. The Ten Commandments shown in Exodus 20:2-17 and Deuteronomy 5:6-21 stated that the Israelites were not to steal, a blanket early protection of private property. Aristotle, in Politics, advocates "private property" He argues that self-interest leads to neglect of the commons. "[T]hat which is common to the greatest number has the least care bestowed upon it. Every one thinks chiefly of his own, hardly at all of the common interest; and only when he is himself concerned as an individual."[10] In addition he says that when property is common, there are natural problems that arise due to differences in labor: "If they do not share equally enjoyments and toils, those who labor much and get little will necessarily complain of those who labor little and receive or consume much. But indeed there is always a difficulty in men living together and having all human relations in common, but especially in their having common property." (Politics, 1261b34 [11])
Pre-industrial English philosophy

Thomas Hobbes (17th century) The principal writings of Thomas Hobbes appeared between 1640 and 1651during and immediately following the war between forces loyal to King Charles I and those loyal to Parliament. In his own words, Hobbes' reflection began with the idea of "giving to every man his own," a phrase he drew from the writings of Cicero. But he wondered: How can anybody call anything his own? He concluded: My own can only truly be mine if there is one unambiguously strongest power in the realm, and that power treats it as mine, protecting its status as such.
Property James Harrington (17th century) A contemporary of Hobbes, James Harrington, reacted differently to the same tumult; he considered property natural but not inevitable. The author of 'Oceana', he may have been the first political theorist to postulate that political power is a consequence, not the cause, of the distribution of property. He said that the worst possible situation is one in which the commoners have half a nation's property, with crown and nobility holding the other halfa circumstance fraught with instability and violence. A much better situation (a stable republic) will exist once the commoners own most property, he suggested. In later years, the ranks of Harrington's admirers included American revolutionary and founder John Adams. Robert Filmer (17th century) Another member of the Hobbes/Harrington generation, Sir Robert Filmer, reached conclusions much like Hobbes', but through Biblical exegesis. Filmer said that the institution of kingship is analogous to that of fatherhood, that subjects are but children, whether obedient or unruly, and that property rights are akin to the household goods that a father may dole out among his childrenhis to take back and dispose of according to his pleasure. John Locke (17th century) In the following generation, John Locke sought to answer Filmer, creating a rationale for a balanced constitution in which the monarch had a part to play, but not an overwhelming part. Since Filmer's views essentially require that the Stuart family be uniquely descended from the patriarchs of the Bible, and since even in the late 17th century that was a difficult view to uphold, Locke attacked Filmer's views in his First Treatise on Government, freeing him to set out his own views in the Second Treatise on Civil Government. Therein, Locke imagined a pre-social world, the unhappy residents of which create a social contract. They would, he allowed, create a monarchy, but its task would be to execute the will of an elected legislature. "To this end" he wrote, meaning the end of their own long life and peace, "it is that men give up all their natural power to the society they enter into, and the community put the legislative power into such hands as they think fit, with this trust, that they shall be governed by declared laws, or else their peace, quiet, and property will still be at the same uncertainty as it was in the state of nature." Even when it keeps to proper legislative form, though, Locke held that there are limits to what a government established by such a contract might rightly do. "It cannot be supposed that [the hypothetical contractors] they should intend, had they a power so to do, to give any one or more an absolute arbitrary power over their persons and estates, and put a force into the magistrate's hand to execute his unlimited will arbitrarily upon them; this were to put themselves into a worse condition than the state of nature, wherein they had a liberty to defend their right against the injuries of others, and were upon equal terms of force to maintain it, whether invaded by a single man or many in combination. Whereas by supposing they have given up themselves to the absolute arbitrary power and will of a legislator, they have disarmed themselves, and armed him to make a prey of them when he pleases..." Note that both "persons and estates" are to be protected from the arbitrary power of any magistrate, inclusive of the "power and will of a legislator." In Lockean terms, depredations against an estate are just as plausible a justification for resistance and revolution as are those against persons. In neither case are subjects required to allow themselves to become prey. To explain the ownership of property Locke advanced a labor theory of property.
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Property William Blackstone (18th century) In the 1760s, William Blackstone sought to codify the English common law. In his famous Commentaries on the Laws of England he wrote that "every wanton and causeless restraint of the will of the subject, whether produced by a monarch, a nobility, or a popular assembly is a degree of tyranny." How should such tyranny be prevented or resisted? Through property rights, Blackstone thought, which is why he emphasized that indemnification must be awarded a non-consenting owner whose property is taken by eminent domain, and that a property owner is protected against physical invasion of his property by the laws of trespass and nuisance. Indeed, he wrote that a landowner is free to kill any stranger on his property between dusk and dawn, even an agent of the King, since it isn't reasonable to expect him to recognize the King's agents in the dark. David Hume (18th century) In contrast to the figures discussed in this section thus far, David Hume lived a relatively quiet life that had settled down to a relatively stable social and political structure. He lived the life of a solitary writer until 1763 when, at 52 years of age, he went off to Paris to work at the British embassy. In contrast, one might think, to his outrage-generating works on religion and his skeptical views in epistemology, Hume's views on law and property were quite conservative. He did not believe in hypothetical contracts, or in the love of mankind in general, and sought to ground politics upon actual human beings as one knows them. "In general," he wrote, "it may be affirmed that there is no such passion in human mind, as the love of mankind, merely as such, independent of personal qualities, or services, or of relation to ourselves." Existing customs should not lightly be disregarded, because they have come to be what they are as a result of human nature. With this endorsement of custom comes an endorsement of existing governments, because he conceived of the two as complementary: "A regard for liberty, though a laudable passion, ought commonly to be subordinate to a reverence for established government." These views led to a view on property rights that might today be described as legal positivism. There are property rights because of and to the extent that the existing law, supported by social customs, secure them.[12] He offered some practical home-spun advice on the general subject, though, as when he referred to avarice as "the spur of industry," and expressed concern about excessive levels of taxation, which "destroy industry, by engendering despair."
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Critique and response

"Civil government, so far as it is instituted for the security of property, is, in reality, instituted for the defense of the rich against the poor, or of those who have property against those who have none at all." Adam Smith, The Wealth of Nations, 1776 [13] By the mid 19th century, the industrial revolution had transformed England and had begun in France. The established conception of what constitutes property expanded beyond land to encompass scarce goods in general. In France, the revolution of the 1790s had led to large-scale confiscation of land formerly owned by church and king. The restoration of the monarchy led to claims by those dispossessed to have their former lands returned. Furthermore, the labor theory of value popularized by classical economists such as Adam Smith and David Ricardo were utilized by a new ideology called socialism to critique the relations of property to other economic issues, such as profit, rent, interest, and wage-labor. Thus, property was no longer an esoteric philosophical question, but a political issue of substantial concern.
Property Charles Comte legitimate origin of property Charles Comte, in Trait de la proprit (1834), attempted to justify the legitimacy of private property in response to the Bourbon Restoration. According to David Hart, Comte had three main points: "firstly, that interference by the state over the centuries in property ownership has had dire consequences for justice as well as for economic productivity; secondly, that property is legitimate when it emerges in such a way as not to harm anyone; and thirdly, that historically some, but by no means all, property which has evolved has done so legitimately, with the implication that the present distribution of property is a complex mixture of legitimately and illegitimately held titles." (The Radical Liberalism of Charles Comte and Charles Dunoyer [14] Comte, as Proudhon later did, rejected Roman legal tradition with its toleration of slavery. He posited a communal "national" property consisting of non-scarce goods, such as land in ancient hunter-gatherer societies. Since agriculture was so much more efficient than hunting and gathering, private property appropriated by someone for farming left remaining hunter-gatherers with more land per person, and hence did not harm them. Thus this type of land appropriation did not violate the Lockean proviso there was "still enough, and as good left." Comte's analysis would be used by later theorists in response to the socialist critique on property. Pierre Proudhon property is theft In his 1849 treatise What is Property?, Pierre Proudhon answers with "Property is theft!" In natural resources, he sees two types of property, de jure property (legal title) and de facto property (physical possession), and argues that the former is illegitimate. Proudhon's conclusion is that "property, to be just and possible, must necessarily have equality for its condition." His analysis of the product of labor upon natural resources as property (usufruct) is more nuanced. He asserts that land itself cannot be property, yet it should be held by individual possessors as stewards of mankind with the product of labor being the property of the producer. Proudhon reasoned that any wealth gained without labor was stolen from those who labored to create that wealth. Even a voluntary contract to surrender the product of labor to an employer was theft, according to Proudhon, since the controller of natural resources had no moral right to charge others for the use of that which he did not labor to create and therefore did not own. Proudhon's theory of property greatly influenced the budding socialist movement, inspiring anarchist theorists such as Mikhail Bakunin who modified Proudhon's ideas, as well as antagonizing theorists like Karl Marx. Frdric Bastiat property is value Frdric Bastiat's main treatise on property can be found in chapter 8 of his book Economic Harmonies (1850).[15] In a radical departure from traditional property theory, he defines property not as a physical object, but rather as a relationship between people with respect to an object. Thus, saying one owns a glass of water is merely verbal shorthand for I may justly gift or trade this water to another person. In essence, what one owns is not the object but the value of the object. By "value," Bastiat apparently means market value; he emphasizes that this is quite different from utility. "In our relations with one another, we are not owners of the utility of things, but of their value, and value is the appraisal made of reciprocal services." Strongly disputing Proudhon's equality-based argument, Bastiat theorizes that, as a result of technological progress and the division of labor, the stock of communal wealth increases over time; that the hours of work an unskilled laborer expends to buy e.g. 100 liters of wheat decreases over time, thus amounting to "gratis" satisfaction. Thus, private property continually destroys itself, becoming transformed into communal wealth. The increasing proportion of communal wealth to private property results in a tendency toward equality of mankind. "Since the human race started from the point of greatest poverty, that is, from the point where there were the most obstacles to be overcome, it is clear that all that has been gained from one era to the next has been due to the spirit of property." This transformation of private property into the communal domain, Bastiat points out, does not imply that private property will ever totally disappear. This is because man, as he progresses, continually invents new and more
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Property sophisticated needs and desires.
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Contemporary views
Among contemporary political thinkers who believe that natural persons enjoy rights to own property and to enter into contracts, there are two views about John Locke. On the one hand there are ardent Locke admirers, such as W.H. Hutt (1956), who praised Locke for laying down the "quintessence of individualism." On the other hand, there are those such as Richard Pipes who think that Locke's arguments are weak, and that undue reliance thereon has weakened the cause of individualism in recent times. Pipes has written that Locke's work "marked a regression because it rested on the concept of Natural Law" rather than upon Harrington's sociological framework. Hernando de Soto has argued that an important characteristic of capitalist market economy is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded. These property rights and the whole formal system of property make possible: Greater independence for individuals from local community arrangements to protect their assets; Clear, provable, and protectable ownership; The standardization and integration of property rules and property information in the country as a whole; Increased trust arising from a greater certainty of punishment for cheating in economic transactions;
More formal and complex written statements of ownership that permit the easier assumption of shared risk and ownership in companies, and insurance against risk; Greater availability of loans for new projects, since more things could be used as collateral for the loans; Easier access to and more reliable information regarding such things as credit history and the worth of assets; Increased fungibility, standardization and transferability of statements documenting the ownership of property, which paves the way for structures such as national markets for companies and the easy transportation of property through complex networks of individuals and other entities; Greater protection of biodiversity due to minimizing of shifting agriculture practices. All of the above enhance economic growth.[16]
Types of property
Most legal systems distinguish different types (immovable property, estate in land, real estate, real property) of property, especially between land and all other forms of propertygoods and chattels, movable property or personal property. They often distinguish tangible and intangible property (see below). One categorization scheme specifies three species of property: land, improvements (immovable man-made things), and personal property (movable man-made things). In common law, real property (immovable property) is the combination of interests in land and improvements thereto, and personal property is interest in movable property. Real property rights are rights relating to the land. These rights include ownership and usage. Owners can grant rights to persons and entities in the form of leases, licenses and easements.
This sign declaring a parking lot to be "private property" illustrates one method of identifying and protecting property. Note the citations to legal statutes.
Later, with the development of more complex forms of non-tangible property, personal property was divided into tangible property (such as cars and clothing) and intangible property (such as financial instruments, including stocks and bonds, and intellectual property, including patents, copyrights, and trademarks).
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What can be property?

The two major justifications given for original property, or homesteading, are effort and scarcity. John Locke emphasized effort, "mixing your labor" with an object, or clearing and cultivating virgin land. Benjamin Tucker preferred to look at the telos of property, i.e. What is the purpose of property? His answer: to solve the scarcity problem. Only when items are relatively scarce with respect to people's desires do they become property.[17] For example, hunter-gatherers did not consider land to be property, since there was no shortage of land. Agrarian societies later made arable land property, as it was scarce. For something to be economically scarce, it must necessarily have the exclusivity property - that use by one person excludes others from using it. These two justifications lead to different conclusions on what can be property. Intellectual property - non-corporeal things like ideas, plans, orderings and arrangements (musical compositions, novels, computer programs) - are generally considered valid property to those who support an effort justification, but invalid to those who support a scarcity justification, since they don't have the exclusivity property (however they may still support other 'intellectual property'-laws such as Copyright, as long as these are a subject of contract instead of government arbitration). Thus even ardent propertarians may disagree about IP.[18] By either standard, one's body is one's property. From some anarchist points of view, the validity of property depends on whether the "property right" requires enforcement by the state. Different forms of "property" require different amounts of enforcement: intellectual property requires a great deal of state intervention to enforce, ownership of distant physical property requires quite a lot, ownership of carried objects requires very little, while ownership of one's own body requires absolutely no state intervention. Many things have existed that did not have an owner, sometimes called the commons. The term "commons," however, is also often used to mean something quite different: "general collective ownership" - i.e. common ownership. Also, the same term is sometimes used by statists to mean government-owned property that the general public is allowed to access (public property). Law in all societies has tended to develop towards reducing the number of things not having clear owners. Supporters of property rights argue that this enables better protection of scarce resources, due to the tragedy of the commons, while critics argue that it leads to the 'exploitation' of those resources for personal gain and that it hinders taking advantage of potential network effects. These arguments have differing validity for different types of "property"things that are not scarce are, for instance, not subject to the tragedy of the commons. Some apparent critics advocate general collective ownership rather than ownerlessness. Things that do not have owners include: ideas (except for intellectual property), seawater (which is, however, protected by anti-pollution laws), parts of the seafloor (see the United Nations Convention on the Law of the Sea for restrictions), gases in Earth's atmosphere, animals in the wild (though there may be restrictions on hunting etc. -- and in some legal systems, such as that of New York, they are actually treated as government property), celestial bodies and outer space, and land in Antarctica. The nature of children under the age of majority is another contested issue here. In ancient societies children were generally considered the property of their parents. Children in most modern societies theoretically own their own bodies but are not considered competent to exercise their rights, and their parents or guardians are given most of the actual rights of control over them. Questions regarding the nature of ownership of the body also come up in the issue of abortion, drugs and euthanasia. In many ancient legal systems (e.g. early Roman law), religious sites (e.g. temples) were considered property of the God or gods they were devoted to. However, religious pluralism makes it more convenient to have religious sites owned by the religious body that runs them. Intellectual property and air (airspace, no-fly zone, pollution laws, which can include tradeable emissions rights) can be property in some senses of the word.
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Rights of use as property

Ownership of land can be held separately from the ownership of rights over that land, including sporting rights,[19] mineral rights, development rights, air rights, and such other rights as may be worth segregating from simple land ownership.
Who can be an owner?

Ownership laws may vary widely among countries depending on the nature of the property of interest (e.g. firearms, real property, personal property, animals). Persons can own property directly. In most societies legal entities, such as corporations, trusts and nations (or governments) own property. In the Inca empire, the dead emperors, who were considered gods, still controlled property after death.[20]
Whether and to what extent the state may interfere with property
Under United States law the principal limitations on whether and the extent to which the State may interfere with property rights are set by the Constitution. The "Takings" clause requires that the government (whether state or federalfor the 14th Amendment's due process clause imposes the 5th Amendment's takings clause on state governments) may take private property only for a public purpose, after exercising due process of law, and upon making "just compensation." If an interest is not deemed a "property" right, or the conduct is merely an intentional tort, these limitations do not apply and the doctrine of sovereign immunity precludes relief.[21] Moreover, if the interference does not almost completely make the property valueless, the interference will not be deemed a taking but instead a mere regulation of use.[22] On the other hand, some governmental regulations of property use have been deemed so severe that they have been considered "regulatory takings."[23] Moreover, conduct sometimes deemed only a nuisance or other tort has been held a taking of property where the conduct was sufficiently persistent and severe.[24]
References
[1] "property definition" (http:/ / www. businessdictionary. com/ definition/ property. html), BusinessDictionary.com, [2] "property" (http:/ / www. bartleby. com/ cgi-bin/ texis/ webinator/ sitesearch?FILTER=col61& query=property& x=0& y=0), American Heritage Dictionary, [3] "property" (http:/ / wordnetweb. princeton. edu/ perl/ webwn?s=property& sub=Search+ WordNet& o2=& o0=1& o7=& o5=& o1=1& o6=& o4=& o3=& h=), WordNet, , retrieved 2010-06-19 [4] Anti-copyright advocates and other critics of intellectual property dispute the concept of intellectual property. (http:/ / praxeology. net/ anticopyright. htm). [5] Understanding Principles of Politics and the State, by John Schrems, PageFree Publishing (2004), page 234 [6] "Property". Graham Oppy. The shorter Routledge encyclopedia of philosophy. Editor Edward Craig. Routledge, 2005, p. 858 [7] Locke, John (1690). "The Second Treatise of Civil Government" (http:/ / www. constitution. org/ jl/ 2ndtr05. txt). . Retrieved 2010-06-26. [8] Hann, Chris A new double movement? Anthropological perspectives on property in the age of neoliberalism (http:/ / www. ingentaconnect. com/ search/ article?title=anthropology& title_type=tka& year_from=1998& year_to=2007& database=1& pageSize=20& index=14) Socio-Economic Review, Volume 5, Number 2, April 2007, pp. 287-318(32) [9] http:/ / propertyimpian. blogspot. com/ 2007/ 06/ theories-of-property-natural-rights. html [10] This bears some similarities to the over-use argument of Garrett Hardin's "Tragedy of the Commons". [11] http:/ / www. cavehill. uwi. edu/ bnccde/ PH19C/ tutorial10. html [12] This view is reflected in the opinion of the United States Supreme Court in United States v. Willow River Power Co.. [13] An Inquiry Into the Nature and Causes of the Wealth of Nations, by Adam Smith, Cooke & Hale, 1818, pg 167 [14] http:/ / homepage. mac. com/ dmhart/ ComteDunoyer/ Ch6. html#RTFToC4 [15] http:/ / www. econlib. org/ library/ Bastiat/ basHar. html [16] http:/ / www. imf. org/ external/ pubs/ ft/ fandd/ 2001/ 03/ desoto. htm [17] http:/ / www. zetetics. com/ mac/ libdebates/ ch6intpr. html [18] (http:/ / praxeology. net/ anticopyright. htm) [19] http:/ / www. basc. org. uk/ media/ 2001_definition_of_sporting_rights. pdf [20] Mckay, John P. , 2004, "A History of World Societes". Boston: Houghton Mifflin Company
Property
[21] See, for example, United States v. Willow River Power Co. (not a property right because force of law not behind it); Schillinger v. United States, 155 U.S. 163 (1894) (patent infringement is tort, not taking of property); Zoltek Corp. v. United States, 442 F.3d 1345 (Fed. Cir. 2006). [22] Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978). [23] See United States v. Riverside Bayview Homes, Inc., 474 U.S. 121 *(1985). [24] United States v. Causby, 328 U.S. 256 (1946).
205
Bibliography
Frdric Bastiat, 1850. Economic Harmonies. (http://www.econlib.org/library/Bastiat/basHar.html) W. Hayden Boyers, trans.; George B. de Huszar, ed. Liberty Fund. Dean Russell, "The Law" (http://www.mondopolitico.com/library/thelaw/mpintro.htm), 1850. Tom Bethell, 1998. The Noblest Triumph: Property and Prosperity through the Ages. New York: St. Martin's Press. William Blackstone, 1765-69. Commentaries on the Laws of England (http://www.yale.edu/lawweb/avalon/ blackstone/blacksto.htm), 4 vols. Oxford Univ. Press. Especially Books the Second and Third. Hernando De Soto, 1989. The Other Path. Harper & Row. Hernando De Soto and Francis Cheneval, 2006. Realizing Property Rights (http://www.swisshumanrightsbook. com). Ruffer & Rub. Ellickson, Robert, 1993, " Property in Land (http://www.law.yale.edu/documents/pdf/ Ellickson_Property_in_Land.pdf)PDF(6.40MB)", Yale Law Journal 102: 1315-1400. Fruehwald, Edwin, A Biological Basis of Rights, 19 Southern California Interdisciplinary Law Journal 195 (2010). Mckay, John P., 2004, "A History of World Societies". Boston: Houghton Mifflin Company Richard Pipes, 1999. Property and Freedom. Ankerl, Guy, 1978, "Beyond Monopoly Capitalism and Monopoly Socialism: Distributive Justice in a Competitite Society." Cambridge MA, ISBN0-87073-938-7.
External links and references

"Right to Private Property" (http://www.iep.utm.edu/p/property.htm), Tibor Machan, Internet Encyclopedia of Philosophy
Protector (trust)
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Protector (trust)
In trust law, a protector is a person appointed under the trust instrument to direct or restrain the trustees in relation to their administration of the trust. Historically, the concept of a protector developed in offshore jurisdictions where settlors were (perhaps understandably) concerned about appointing a trust company in a small, distant country as sole trustee of an offshore trust which is to hold a great deal of the settlor's wealth. However, protectors now form a part of mainstream tax planning in most jurisdictions which recognise trusts. There are a number of reasons that a settlor may wish to appoint a protector in relation to a trust: protectors allow a great degree of flexibility when dealing with changes in circumstances, including both factual circumstances (death, premature divorce, previously unknown children) and legal changes (any legal changes, but most frequently changes to applicable revenue laws); the settlor may be concerned that the trustee may not pay sufficient attention to his wishes; the settlor wishes certain powers to be withheld from the trustees; or the settlor wishes a third party to act as a main point of contact, between the beneficiaries and the trustees. The powers vested in the protector vary both according to the proper law of the trust and the terms of the trust instrument. The powers may include: 1. 2. 3. 4. 5. 6. 7. 8. power to remove and appoint trustees; power to approve a change of proper law; power to approve the addition or removal of beneficiaries; power to approve proposed trust distributions; power to approve the appointment of an agent or adviser either generally or in relation to specific matters; power to approve investment recommendations; power to appoint replacement protectors; and power to terminate the trust or approve the termination of the trust.
Conceptually many commentators have difficulty with the idea of a protector, as this undermines the role which in law has historically been fulfilled by the trustees. As protectors are a relatively recent innovation in trust law, case law is scant. Is it not even clear if as a matter a law a protector would owe fiduciary duties to the beneficiaries (although in practice, many trust instruments expressly state that they shall).[1] It is sometimes suggested that where the protector is too close to the beneficial interest in the trust (for example, if the protectors have power to confer benefits upon themselves, directly or indirectly) this may destroy the essential nature of the trust. If the protector has power to grant beneficial interests in the trust fund to the settlor, this may have disastrous tax consequences in some jurisdictions.
External links
Article on Trust Protectors [2]
Footnote
[1] Although legislation in Idaho seems to assume that in that state at least a protector is a fiduciary. (http:/ / www3. state. id. us/ cgi-bin/ newidst?sctid=150070501. K) [2] http:/ / www. ctcdelaware. com/ trustpro3. html
Quasi-property
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Quasi-property
Quasi-property is a legal concept, in which some rights similar to ownership may accrue to a party who does an act which benefits society as a whole. Black's Law Dictionary defines "quasi" as being "almost" or "resembling" - but not actually the same as the suffix item. [1] Property Law gives the owner of real property or personal property a "bundle of rights" for beneficial use, such as the right to sell the property or right to lifetime use of the property.
Examples
A notable and early occurrence of quasi-property being found by a court under American law was the case of International News Service v. Associated Press. The Associated Press Sued International News Service for taking the substance of AP news stories, rewriting the articles, and publishing the stories in its own member newspapers. This activity did not violate copyright law because the original AP articles were not copyrighted, and also because the subsequent INS articles copied only the facts using different language to report the story. Nonetheless, the Court recognized an interest in the news distributor of information they had researched and gathered. A traditional property right would have granted the AP a right to exclude others from the content of their news stories good for all time and against everyone. The court described this new right as quasi-property because it only granted them the power to exclude their competitors for a limited amount of time from the substance of their articles. The general public had free rein to distribute the subject matter of the news without restriction. Creation of the new right was justified as protecting the AP from the "unfair competition" of a party who was reproducing the information and attempting to profit by distributing it faster than the creator.[2] Another prominent example of quasi-property under US law is the continuing ownership of a person's right to publicity even after death.
References
[1] Black's Law Dictionary (2nd Pocket ed. 2001 pg. 576). [2] http:/ / caselaw. lp. findlaw. com/ cgi-bin/ getcase. pl?court=us& vol=248& invol=215
Remainders
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Remainders
A remainder in property law is a future interest given to a person (who is referred to as the transferree or remainderman) that is capable of becoming possessory upon the natural end of a prior estate created by the same instrument. For example, a person, D, gives ("devises") a piece of real property called Blackacre to A for life, and then to B and her heirs. A receives a life estate in Blackacre and B holds a remainder which is capable of becoming possessory when the prior estate naturally terminates (As death). However, B cannot claim the property until A's death. There are two types of remainders in property law, vested and contingent. A future interest following a fee simple absolute cannot be a remainder because of the preceding infinite duration.
Vested remainder
A remainder is vested if (1) the remainder is given to a presently existing and ascertained person, and (2) it is not subject to a condition precedent. A vested remainder may be indefeasibly vested, meaning that it is certain to become possessory in the future, and cannot be divested. An example, O conveys to "A for life, then to B and B's heirs." B has an "indefeasibly vested remainder" certain to become possessory upon termination of A's life estate. B or B's heirs will clearly be entitled to possession upon As death. A vested remainder may not be certain to become possessory. An example of this: O conveys "to A for life, then to A's children." A has one child, B, so B has a vested remainder because B is ascertainable. But, A may have no other children in his life, and B could die before A, so the vested remainder is not certain to become possessory.
Contingent remainder
A remainder is contingent if one or more of the following is true: (1) it is given to an unascertained or unborn person, (2) it is made contingent upon the occurrence of some event other than the natural termination of the preceding estates. For example, if we assume that B is alive, and O conveys "to A for life, then to the heirs of B...", then the remainder is contingent because the heirs of B cannot be ascertained until B dies. No living person can have actual heirs, only heirs apparent.
Identifying remainders
The key difference between a reversion and a remainder is that a reversion is held by the grantor of the original conveyance, whereas "remainder" is used to refer to an interest that would be a reversion, but is instead transferred to someone other than the grantor. Similarly to reversions, remainders are usually created in conjunction with a life estate, life estate pur autre vie, or fee tail estate (or a future interest that will eventually become one of these estates). Usage Note: Although the term reversion is sometimes used to refer to the interest retained by a landlord when he grants possession to a tenant, not all real estate professionals can agree on the correctness of this usage of the term. Few people would refer to such a transferred interest as a remainder, so this type of "remainder" tends not to be a problem when discussing property rights.
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Examples
"A and her heirs, then to B" B is not a remainder since a remainder cannot follow an estate held in fee simple absolute. "A for life, then to B" B is a vested remainder since the remainder is given to an ascertained person (B) and there are no precedent conditions (such as "if B is not married"). "A for life, then to B if B reaches 21, and if B does not reach 21 then to C and C's heirs" B and C are both contingent remainders. While B and C are ascertained persons, the condition (reaching 21) implies alternative contingent remainders for both parties.
References
Conveyance Interpreter (Experimental) [1]
References
[1] http:/ / essentially. net:8080/ property/ index. jsp
Settlement (trust)
In the context of trusts, a settlement is a deed (also called a trust instrument) whereby real estate, land, or other property is given by a settlor into trust so that the beneficiary only has the limited right to the property (for example during their life), but usually has no right to transfer the land to another or leave it in their own will. Instead the property devolves as directed by the settlement. Today, in most jurisdictions, settlements only confer beneficial rights under a trust, but formerly they were used to create legal estates for life or in tail, also to make provision for portions for younger children. For detailed discussion, see Trust Law
Settlor
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Settlor
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor.[1] Where the trust is a testamentary trust, the settlor is usually referred to as the testator. The settlor may also be the trustee of the trust (where he declares that he holds his own property on trusts) or a third party may be the trustee (where he transfers the property to the trustee on trusts). In the common law it has been held, controversially, that where a trustee declares an intention to transfer trust property to a trust of which he is one of several trustees, that is a valid settlement notwithstanding the property is not vested in the other trustees.[2] Capacity to be a trustee is generally co-extensive with the ability to hold and dispose of a legal or beneficial interest in property. In practice, special considerations arise only with respect to minors and mentally incapacitated persons. A settlor may create a trust by manifesting an intention to create it. In most countries no formalities are required to create an inter vivos trust over personal property, but there are often formalities associated with trusts over real property,[3] or testamentary trusts.[4] The words or acts of the settlor must be sufficient to establish an intention that either another person or the settlor himself shall be trustee of the property the beneficiary; a general intention to benefit another person on its own is sufficient.[5] These formalities apply to express trusts only, and not to resulting, implied or constructive trusts. For a settlor to validly create a trust, in most common law legal systems they must satisfy the three certainties, established in Knight v Knight: 1. certainty of intention - whether the settlor (or testator) has manifested an intention to create a trust. 2. certainty of subject matter - whether the property identified as being settled is sufficiently accurately identified.[6] 3. certainty of objects - the beneficiaries must be clearly ascertainable within the perpetuity period.[7] Where a settlement of property on a third party trustee by a settlor fails, the property is usually said to be held on resulting trusts for the settlor. However, if a settlor validly transfers property to a third party, and the words used are held not to create a trust, the usual rule is that the donee take the property absolutely.[8]
Footnotes
[1] In common law legal systems outside of the U.S.A., a donor is usually refer to someone who grants a "power" in distinction to a "trust". [2] T Choithram International SA and others v Pagarani and others [2001] 2 All ER 492 [3] For example, in the United Kingdom, evidence in writing is required to create a trust in land, see section 53(1)(b) of the Law of Property Act 1925; although a failure to comply with the section renders the trust unenforceable and not void, see Gardner v Rowe (1828) 5 Russ 258 [4] In the United Kingdom, see section 9 of the Wills Act 1837, as amended by section 17 of the Administration of Justice Act 1982 [5] See for example Paul v Constance [1977] 1 WLR 521 [6] Trust which have been held to fail include trusts over "the bulk of my estate" (Palmer v Simmonds (1854) 2 Drew 221), "such parts of my ... estate as she shall not have sold" (Re Jones [1898] 1 Ch 438), "anything that is left" (In the Estate of Last [1958] P 137) and "all my other houses" [meaning after prior legatees had chosen which houses they wished] (Boyce v Boyce (1849) 16 Sim 476). But these cases should be contrasted with those where the subject-matter of the gift is determined by the discretion of the trustees, for example, in Re Golay's Will Trusts [1965] 1 WLR 969 where a direction to allow a beneficiary to "enjoy one of my flats during her lifetime and to receive a reasonable income from my other properties" was upheld as the trustees could select and decide the matters. Certum est quod certum reddi potest. [7] "It is clear law that a trust (other than a charitable trust) must be for ascertainable beneficiaries", per Lord Denning in Re Vandervell's Trusts (No 2) [1974] Ch 269 at 319 [8] Lassence v Tierney (1849) 1 Mac & Cr 551
Tacking (law)
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Tacking (law)
Tacking is a legal concept arising under the common law relating to competing priorities between two or more security interests arising over the same asset. The concept is best illustrated by way of example. 1. Bank A lends a first advance to the borrower, which is secured by a mortgage over the borrower's property. The mortgage is expressed to secure this advance and any future advances. 2. Bank B subsequently lends more money to the borrower and takes a second ranking mortgage over the same property. 3. Bank A then subsequently lends a second advance to the borrower, relying on its original mortgage. Bank A will always have a first priority claim against the property for the full amount of its first advance. But it will be able to claim against the property in priority to Bank B with respect to its second advance only if it is permitted to tack the second advance to the mortgage that was taken at the time the first advance was made. If Bank A is not permitted to tack the second advance, then Bank B's claim in respect of the sums that it lent will have priority over Bank A's claims with respect to the second advance. In American jurisprudence, Black's Law Dictionary defines tacking in slightly narrower terms: "The uniting of securities given at different times, so as to prevent any intermediate purchaser from claiming a title to redeem or otherwise discharging one lien, which is prior, without redeeming or discharging the other liens also, which are subsequent to his own title. The terms is particularly applied to the action of a third mortgagee who, by buying the first lien and uniting it to his own, gets priority over the second mortgagee." Separately, in the definition of tabula in naufragio, Black's comments: "It may be fairly said that the doctrine survives only in the unjust and much criticised English rule of tacking."
The common law rules

The first case which approached the position in relation to competing mortgagees was Gordon v Graham (1716) 2 Eq Cas Abr 598. Surviving reports of that case are extremely short,[1] and during the nineteenth century, the authority of the decision came to be doubted. It was questioned whether it had been correctly reported and, even if correctly reported, whether it correctly stated the law. The matter subsequently came before the House of Lords in Hopkinson v Rolt (1861) 9 HL Cas 514, 11 ER 829. In the case the borrower entered into a mortgage over his land which was expressed to "secure the sums due and which shall from time to time become due" to the bank. Later, the borrower granted a second mortgage in favour of another creditor. Notice of the second mortgage was given to the bank. The borrower was later declared bankrupt, and a dispute arose as to the priority of the bank with respect to advances which were made under the first mortgage after it had received notice of the second mortgage. The three law lords who heard the case were divided, with a majority favouring priority for the second mortgagee. Lord Campbell, the Lord Chancellor, opined: "I must say that the doctrine [in Gordon v Graham] seems to me to be contrary to principle. Although the mortgagor has parted with the legal interest in the hereditaments mortgaged, he remains the equitable owner of all his interest not transferred beneficially to the mortgagee, and he may still deal with his property in any way consistent with the rights of the mortgagee. How is the first mortgagee injured by the second mortgage being executed. . . ? The first mortgagee is secure as to past advances, and he is not under any obligation to make any farther advances (emphasis added). He has only to hold his hand when asked for a farther loan. Knowing the extent of the second mortgage, he may calculate that the hereditaments mortgaged are an ample security to the mortgagees; and if he doubts this, he closes his account with the mortgagor, and looks out for a better security.
Tacking (law) Lord Chelmsford agreed with Lord Campbell. The dissenting judge, Lord Cranworth, was in favour of upholding the rule in Gordon v Graham as it was reported. He expressed his view in a dissenting opinion: "I certainly had understood that in such a case, excluding all special circumstances, the first mortgagee would be secure for any subsequent advances covered by his security, even though he had notice of the second mortgage. This is so laid down on authority, has, I believe, been often acted on, and seems to me perfectly just and reasonable. Mortgages are but contracts; and when once the rights of parties under them are defined and understood, it is impossible to say that any rule regulating their priority is unjust. If the law is once laid down and understood, that a person advancing money on a second mortgage, with notice of a prior mortgage covering future as well as present debts, will be postponed to the first mortgagee, to the whole extent covered or capable of being covered by the prior security, he has nothing to complain of. He is aware when he advances his money, of the imperfect nature of his security, and acts at his peril. ... The rule ... is a convenient rule, causing injustice to no one. It has, probably, been often acted on, and to depart from it may, I think, retrospectively cause great injustice, and prospectively prevent advances of money by bankers or others, where such advances might be safely and usefully made"
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Actual notice
Although for years it had been supposed that it was sufficient for the first mortgagee to have either actual or constructive notice of the second mortgage, in Westpac Banking Corporation v Adelaide Bank Limited [2005] NSWSC 517 it was held that constructive notice was not sufficient, and that a first mortgagee could tack future advances unless it had actual notice of the second ranking security.
Term loans and overdrafts

The common law rules relating to tacking caused most difficulty in relation to overdrafts and revolving loan facilities. This was because of another common law rule: the rule in Clayton's Case. That rule provided that in relation to any account, payments into the account are presumed to discharge the earliest debts first. The rule is only a presumption of convenience, but in practice it is difficult to displace, and can have a devastating effect on the security rights of first mortgagees. For example, suppose a customer secures an overdraft with a mortgage against their house. Then at a time when the overdraft stands at 100,000, the customer grants a second mortgage over their house as security for a term loan to another bank. If over the following nine months, the customer was to pay 90,000 into the account and draw a further 70,000 out of the account, the amount owed to the first bank would be reduced to only 80,000, but they would only have first ranking security for a mere 10,000. For the remaining 70,000 they would rank behind the second mortgagee. Accordingly, in practice a bank will normally "break" an account when they receive notice of a subsequent charge over property which stands as security for an overdraft.[2]
Tacking (law)
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Statutory modification
Ultimately, the decision was thought to cause more inconvenience than it solved, and a number of common law jurisdictions have sought to modify the position by statute (see for example, section 49 of the Land Registration Act 2002 in the United Kingdom, section 28 of the Law of Property Act 1929 of British Columbia and section 82 of the Property Law Act in Queensland). Section 49 of the of the Land Registration Act 2002 provides that: (1) The proprietor of a registered charge may make a further advance on the security of the charge ranking in priority to a subsequent charge if he has not received from the subsequent chargee notice of the creation of the subsequent charge. (2) Notice given for the purposes of subsection (1) shall be treated as received at the time when, in accordance with rules, it ought to have been received. (3) The proprietor of a registered charge may also make a further advance on the security of the charge ranking in priority to a subsequent charge if (a) the advance is made in pursuance of an obligation, and (b) at the time of the creation of the subsequent charge the obligation was entered in the register in accordance with rules. (4) The proprietor of a registered charge may also make a further advance on the security of the charge ranking in priority to a subsequent charge if (a) the parties to the prior charge have agreed a maximum amount for which the charge is security, and (b) at the time of the creation of the subsequent charge the agreement was entered in the register in accordance with rules. (5) Rules may (a) disapply subsection (4) in relation to charges of a description specified in the rules, or (b) provide for the application of that subsection to be subject, in the case of charges of a description so specified, to compliance with such conditions as may be so specified. (6) Except as provided by this section, tacking in relation to a charge over registered land is only possible with the agreement of the subsequent chargee.
Footnotes
[1] The report can be safely set out in its entirety as follows without breaching Wikipedia guidelines on the length of articles: "A. mortgages to B. for a Term of Years, to secure a Sum of Money already lent to A., as also such other Sums as should hereafter be lent or advanced to him. A. makes a second Mortgage to C. for a certain Sum, with Notice of the first Mortgage; and then the first Mortgagee, having Notice of the second Mortgage, lends a further Sum, andc. Per Cowper, Lord C.: The second Mortgagee shall not redeem the first Mortgage, without paying as well the Money lent after, as that lent before the second Mortgage was made; for it was the Folly of the second Mortgagee, with Notice, to take such Security." [2] In practice, most security documents provide that granting a subsequent charge is actually an event of default, and could potentially result in enforcement action by the bank.
Tacking (law)
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External links
Report of the Law Commission of Alberta on the law of priorities (http://www.bcli.org/pages/publications/ lrcreports/reports(html)/lrc85.html), which contains an excellent discussion on the law of tacking Sibbles v. Highfern Pty Ltd (1987) 164 CLR 214, 76 ALR 13 (http://law.ato.gov.au/atolaw/view. htm?docid='JUD/164CLR214/00002'), the Australian High Court considering common law tacking rules
Trust instrument
A trust instrument (also sometimes called a deed of trust, where executed by way of deed) is an instrument in writing executed by a settlor used to constitute a trust. Trust instruments are generally only used in relation to an inter vivos trust; testamentary trusts are usually created under a will.[1]
Formalities
Although in most legal systems there are certain formalities associated with settling a trust, most legal systems impose few, if any, strictures on the trust instrument itself. Historically, the concept of a trust is the intervention of the courts of equity to prevent a legal owner treating the property as beneficially his own; provided that state of affairs exists, a trust arises notwithstanding any lack of formality in relation to the form of the trust instrument. However, notwithstanding the flexible approach taken by the law, characteristically the legal profession has taken an extremely formalised approach to trust instruments. Not only are they invariably always executed under seal as a deed, but frequently the initial trust fund (usually a nominal amount), will actually be physically affixed to the trust instrument itself to prove that the initial trust property was transferred.[2] Some slightly unusual practices have arisen in relation to the drafting of trust instruments, which again, are rigidly adhered to by professionals in many common-law countries (although not the U.S.A.). For example, trust deeds will generally avoid all punctuation (including full stops) - to avoid confusion, all new sentences commence with a new, numbered, paragraph. Dates, including years, are conventionally spelled out in words rather than using figures. Part of the over-formalisation which attends the creation of trusts is justified by the significant tax implications which may follow if a trust were to be subsequently held to be void, as most professionally drafted trust instruments are prepared as a part of tax mitigation schemes. Most jurisdictions do not require trust instruments to be publicly filed (in contrast to wills). But in many jurisdictions they are subject to stamp duty.
Provisions
The provisions of a trust instrument will vary according to the type of trust, and the nature of the trust property. A bare trust over a single asset will characteristically have very few provisions. A discretionary trust over a mixed bag of investments will usually have far greater provisions regulation the exercise and management of the trust fund. A trust which is set up as a unit trust will have additional specific provisions specific to the calculation of the NAV and acquisition and redemption of units. Settled land act settlements have specific provisions relating to the underlying subject matter. Trusts which are set up to protect vulnerable beneficiaries, such as blind trusts or spendthrift trusts will have specific provisions relating to the nature of the beneficiaries. However, in general, most trust instruments will have provisions which address the following aspects of the administration of the trust:
Trust instrument 1. The name of the settlement and definitions and interpretation provisions 2. The legal nature of the trust (ie. a trust for sale) 3. Powers to add and exclude beneficiaries 4. Trusts over property added to the trust fund 5. Power of appointment (ie. distribution) 6. Trusts in default of appointment, and, sometimes, ultimate default trusts 7. General administrative powers of the trustees 8. Extended power of maintenance 9. Extended power of advancement 10. Usually, a trustee charging clause 11. Regulation of the appointment of new trustees 12. The proper law and forum and place of administration for the settlement 13. Often, an exclusion of settlor (and spouse) from benefiting from the trust (where required for tax reasons) 14. Usually, an indemnity for the trustees out of the trust fund Most trust instruments will then also have two schedules: 1. a schedule setting out the powers of the trustees (often in addition to any powers granted or implied by operation of law) 2. a summary of the initial trust fund (usually a nominal amount of money)
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External links
Sample trust instrument [3]
Footnotes
[1] Although not always. It is possible for the deceased to convey property to trustees upon death which perfects a trust. See also secret trusts. [2] The substantial trust fund is usually added later by a deed of addition. [3] http:/ / www. livingtrustnetwork. com/ content/ rlt/ sample_trusts/ sample_declaration_trust_1. php
Trust law
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Trust law
In common law legal systems, a trust is a relationship between whereby property (real or personal, tangible or intangible) is held by one party for the benefit of another. A trust conventionally arises when property is transferred by one party to be held by another party for the benefit of a third party, although it is also possible for a legal owner to create a trust of property without transferring it to anyone else, simply by declaring that the property will henceforth be held for the benefit of the benficiary. A trust is created by a settlor (archaically known, in the context of trusts of land, as the feoffor to uses), who transfers some or all of his property to a trustee (archaically known, in the context of land, as the feoffee to uses), who holds that trust property (or trust corpus) for the benefit of the beneficiaries (archaically known as the cestui que use, or cestui que trust). In the case of the self-declared trust, the settlor and trustee are the same person. The trustee has legal title to the trust property, but the beneficiaries have equitable title to the trust property (separation of control and ownership). The trustee owes a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property. (Note: A trustee may be either a natural person, or an artificial person (such as a company or a public body), and there may be a single trustee or multiple co-trustees. There may be a single beneficiary or multiple beneficiaries. The settlor may himself be a beneficiary.). The trust is governed by the terms under which it was created. The terms of the trust are most usually written down in a trust instrument or deed but, in England, it is not necessary for them to be written down to be legally binding, except in the case of land. The terms of the trust must specify what property is to be transferred into the trust (certainty of subject-matter), and who the beneficiaries will be of that trust (certainty of objects). It may also set out the detailed powers and duties of the trustees (such as powers of investment, powers to vary the interests of the beneficiaries, and powers to appointment new trustees). The trust is also governed by local law. The trustee is obliged to administer the trust in accordance with both the terms of the trust and the governing law. In the United States, the settlor is also called the trustor, grantor, donor or creator. In some other jurisdictions, the settlor may also be known as the founder.
History
Roman law had a well-developed concept of the trust (fideicommissum) in terms of "testamentary trusts" created by wills but never developed the concept of the "inter vivos trust" that applied while the creator was still alive. This was created by later common law jurisdictions. Personal trust law developed in England at the time of the Crusades, during the 12th and 13th centuries. At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence, often to pay and receive feudal dues. To achieve this, he would convey ownership of his lands to an acquaintance, on the understanding that the ownership would be conveyed back on his return. However, Crusaders would often return to find the legal owners' refusal to hand over the property. Unfortunately for the Crusader, English common law did not recognize his claim. As far as the King's courts were concerned, the land belonged to the trustee, who was under no obligation to return it. The Crusader had no legal claim. The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could do what was "just" and "equitable", and had the power to decide a case according to his conscience. At this time, the principle of equity was born. The Lord Chancellor would consider it "unconscionable" that the legal owner could go back on his word and deny the claims of the Crusader (the "true" owner). Therefore, he would find in favor of the returning Crusader. Over time, it became known that the Lord Chancellor's court (the Court of Chancery) would continually recognize the claim of a returning Crusader. The legal owner would hold the land for the benefit of the original owner, and would be compelled to convey it back to him when requested. The Crusader was the "beneficiary" and the friend the
Trust law "trustee". The term use of land was coined, and in time developed into what we now know as a trust. Also, the Primogeniture system could be considered as a form of trust. In Primogeniture system, the first born male inherited all the property and "usually assumes the responsibility of trusteeship of the property and of adjudicating attendant disputes." [1] The waqf is an equivalent institution in Islamic law, restricted to charitable trusts. "Antitrust law" emerged in the 19th century when industries created monopolistic trusts by entrusting their shares to a board of trustees in exchange for shares of equal value with dividend rights; these boards could then enforce a monopoly. However, trusts were used in this case because a corporation could not own other companies' stock[2] :447 and thereby become a holding company without a "special act of the legislature".[3] Holding companies were used after the restriction on owning other companies' shares was lifted.[2] :447
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Significance
The trust is widely considered to be the most innovative contribution to the English legal system.[4] Today, trusts play a significant role in all common law systems, and their success has led some civil law jurisdictions to incorporate trusts into their civil codes. France, for example, recently added a similar though-not-quite-comparable notion to its own law with la fiducie,[5] which was modified in 2009;[6] la fiducie, unlike the trust, is a contract. Trusts are recognized internationally under the Hague Convention on the Law Applicable to Trusts and on their Recognition which also regulates conflict of trusts. Although trusts are often associated with intrafamily wealth transfers, they have become very important in American capital markets, particularly through pension funds (essentially always trusts) and mutual funds (often trusts).[2]
Basic principles
Property of any sort may be held on trust, but growth assets are more commonly placed into trust (for tax and estate planning benefits). The uses of trusts are many and varied. Trusts may be created during a person's life (usually by a trust instrument) or after death in a will. In a relevant sense, a trust can be viewed as a generic form of a corporation where the settlors (investors) are also the beneficiaries. This is particularly evident in the Delaware business trust, which could theoretically, with the language in the "governing instrument", be organized as a cooperative corporation, limited liability corporation, or perhaps even a nonprofit corporation.[2] :4756 One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors (particularly the trustee's creditors), making it "bankruptcy remote", and leading to its use in pensions, mutual funds, and asset securitization.[2]
Creation
Trusts may be created by the expressed intentions of the settlor (express trusts) or they may be created by operation of law known as implied trusts. Implied trusts is one created by a court of equity because of acts or situations of the parties. Implied trusts are divided into two categories resulting and constructive. A resulting trust is implied by the law to work out the presumed intentions of the parties, but it does not take into consideration their expressed intent. A constructive trust is a trust implied by law to work out justice between the parties, regardless of their intentions. Typically a trust can be created in the following ways: 1. a written trust instrument created by the settlor and signed by both the settlor and the trustees (often referred to as an inter vivos or "living trust"); 2. an oral declaration;[7] 3. the will of a decedent, usually called a testamentary trust; or 4. a court order (for example in family proceedings).
Trust law In some jurisdictions certain types of assets may not be the subject of a trust without a written document.[8]
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Formalities
Generally, a trust requires three certainties, as determined in Knight v Knight: 1. Intention. There must be a clear intention to create a trust (Re Adams and the Kensington Vestry) 2. Subject Matter. The property subject to the trust must be clearly identified (Palmer v Simmonds). One may not, for example, settle "the majority of my estate", as the precise extent cannot be ascertained. Trust property may be any form of specific property, be it real or personal, tangible or intangible. It is often, for example, real estate, shares or cash. 3. Objects. The beneficiaries of the trust must be clearly identified, or at least be ascertainable (Re Hain's Settlement). In the case of discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries (McPhail v Doulton). Beneficiaries may include people not born at the date of the trust (for example, "my future grandchildren"). Alternatively, the object of a trust could be a charitable purpose rather than specific beneficiaries.
Trustees
The trustee may be either a person or a legal entity such as a company. A trust may have one or multiple trustees. A trustee has many rights and responsibilities; these vary from trust to trust depending on the type of the trust. A trust generally will not fail solely for want of a trustee. A court may appoint a trustee, or in Ireland the trustee may be any administrator of a charity to which the trust is related. Trustees are usually appointed in the document (instrument) which creates the trust. A trustee may be held personally liable for certain problems which arise with the trust. For example, if a trustee does not properly invest trust monies to expand the trust fund, he or she may be liable for the difference. There are two main types of trustees, professional and non-professional. Liability is different for the two types. The trustees are the legal owners of the trust's property. The trustees administer the affairs attendant to the trust. The trust's affairs may include investing the assets of the trust, ensuring trust property is preserved and productive for the beneficiaries, accounting for and reporting periodically to the beneficiaries concerning all transactions associated with trust property, filing any required tax returns on behalf of the trust, and other duties. In some cases, the trustees must make decisions as to whether beneficiaries should receive trust assets for their benefit. The circumstances in which this discretionary authority is exercised by trustees is usually provided for under the terms of the trust instrument. The trustee's duty is to determine in the specific instance of a beneficiary request whether to provide any funds and in what manner. By default, being a trustee is an unpaid job. In modern times trustees are often lawyers, bankers or other professionals who will not work for free. Therefore, often a trust document will state specifically that trustees are entitled to reasonable payment for their work.
Beneficiaries
The beneficiaries are beneficial (or equitable) owners of the trust property. Either immediately or eventually, the beneficiaries will receive income from the trust property, or they will receive the property itself. The extent of a beneficiary's interest depends on the wording of the trust document. One beneficiary may be entitled to income (for example, interest from a bank account), whereas another may be entitled to the entirety of the trust property when he attains the age of twenty-five years. The settlor has much discretion when creating the trust, subject to some limitations imposed by law.
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Purposes
Common purposes for trusts include: 1. Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families, this alone makes the use of trusts ideal. 2. Spendthrift Protection. Trusts may be used to protect beneficiaries (for example, one's children) against their own inability to handle money. It is not unusual for an individual to create an inter vivos trust with a corporate trustee who may then disburse funds only for causes articulated in the trust document. These are especially attractive for spendthrifts. In many cases, a family member or friend has prevailed upon the spendthrift/settlor to enter into such a relationship. However, over time, courts were asked to determine the efficacy of spendthrift clauses as against the trust beneficiaries seeking to engage in such assignments, and the creditors of those beneficiaries seeking to reach trust assets. A case law doctrine developed whereby courts may generally recognize the efficacy of spendthrift clauses as against trust beneficiaries and their creditors, but not against creditors of a settlor. 3. Wills and Estate Planning. Trusts frequently appear in wills (indeed, technically, the administration of every deceased's estate is a form of trust). A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.[9] 4. Charities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also, but even there a trust is the most usual form for a charity to take. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission). 5. Unit Trusts. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the unit trust. 6. Pension Plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries. 7. Remuneration Trusts. Trusts for the benefit of directors and employees or companies or their families or dependents. This form of trust was developed by Paul Baxendale-Walker and has since gained widespread use.[10] 8. Corporate Structures. Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g. corporations) in their structure. 9. Asset Protection. The principle of "asset protection" is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g. "The Teddy Bear Trust"). The above is a considerable simplification of the scope of asset protection. It is a subject which straddles ethical boundaries. Some asset protection is legal and (arguably) moral, while some asset protection is illegal and/or (arguably) immoral. 10. Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases, the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance.For an example see the "nil-band discretionary trust", explained at Inheritance Tax (United Kingdom). 11. Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both,
Trust law owning the legal title as trustee. 12. Construction law. In Canada[11] and Minnesota[12] monies owed by employers to contractors or by contractors to subcontractors on construction projects must by law be held in trust. In the event of contractor insolvency, this makes it much more likely that subcontractors will be paid for work completed.
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Types
Trusts go by many different names, depending on the characteristics or the purpose of the trust. Because trusts often have multiple characteristics or purposes, a single trust might accurately be described in several ways. For example, a living trust is often an express trust, which is also a revocable trust, and might include an incentive trust, and so forth. Constructive trust. Unlike an express trust, a constructive trust is not created by an agreement between a settlor and the trustee. A constructive trust is imposed by the law as an "equitable remedy." This generally occurs due to some wrongdoing, where the wrongdoer has acquired legal title to some property and cannot in good conscience be allowed to benefit from it. A constructive trust is, essentially, a legal fiction. For example, a court of equity recognizing a plaintiff's request for the equitable remedy of a constructive trust may decide that a constructive trust has been created and simply order the person holding the assets to deliver them to the person who rightfully should have them. The constructive trustee is not necessarily the person who is guilty of the wrongdoing, and in practice it is often a bank or similar organization. Dynasty Trust also known as a Generation-skipping trust. A type of trust in which assets are passed down to the grantor's grandchildren, not the grantor's children. The children of the grantor never take title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets were transferred to his or her children first. Generation-skipping trusts can still be used to provide financial benefits to a grantor's children, however, because any income generated by the trust's assets can be made accessible to the grantor's children while still leaving the assets in trust for the grandchildren. Express trust. An express trust arises where a settlor deliberately and consciously decides to create a trust, over their assets, either now, or upon his or her later death. In these cases this will be achieved by signing a trust instrument, which will either be a will or a trust deed. Almost all trusts dealt with in the trust industry are of this type. They contrast with resulting and constructive trusts. The intention of the parties to create the trust must be shown clearly by their language or conduct. For an express trust to exist, there must be certainty to the objects of the trust and the trust property. In the USA Statute of Frauds provisions require express trusts to be evidenced in writing if the trust property is above a certain value, or is real estate. Fixed trust. In a fixed trust, the entitlement of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. Common examples are: a trust for a minor ("to x if she attains 21"); a life interest ("to pay the income to x for her lifetime"); and a remainder ("to pay the capital to y after the death of x") Hybrid trust. A hybrid trust combines elements of both fixed and discretionary trusts. In a hybrid trust, the trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries. Implied trust. An implied trust, as distinct from an express trust, is created where some of the legal requirements for an express trust are not met, but an intention on behalf of the parties to create a trust can be presumed to exist. A resulting trust may be deemed to be present where a trust instrument is not properly drafted and a portion of the equitable title has not been provided for. In such a case, the law may raise a resulting trust for the benefit of the grantor (the creator of the trust). In other words, the grantor may be deemed to be a beneficiary of the portion of
Trust law the equitable title that was not properly provided for in the trust document. Incentive trust. A trust that uses distributions from income or principal as an incentive to encourage or discourage certain behaviors on the part of the beneficiary. The term "incentive trust" is sometimes used to distinguish trusts that provide fixed conditions for access to trust funds from discretionary trusts that leave such decisions up to the trustee. Inter vivos trust (or living trust). A settlor who is living at the time the trust is established creates an inter vivos trust. Irrevocable trust. In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed. Although in rare cases, a court may change the terms of the trust due to unexpected changes in circumstances that make the trust uneconomical or unwieldy to administer, under normal circumstances an irrevocable trust may not be changed by the trustee or the beneficiaries of the trust. Offshore trust. Strictly speaking, an offshore trust is a trust which is resident in any jurisdiction other than that in which the settlor is resident. However, the term is more commonly used to describe a trust in one of the jurisdictions known as offshore financial centers or, colloquially, as tax havens. Offshore trusts are usually conceptually similar to onshore trusts in common law countries, but usually with legislative modifications to make them more commercially attractive by abolishing or modifying certain common law restrictions. By extension, "onshore trust" has come to mean any trust resident in a high-tax jurisdiction. Personal injury trust. A personal injury trust is any form of trust where funds are held by trustees for the benefit of a person who has suffered an injury and funded exclusively by funds derived from payments made in consequence of that injury. Private and public trusts. A private trust has one or more particular individuals as its beneficiary. By contrast, a public trust (also called a charitable trust) has some charitable end as its beneficiary. In order to qualify as a charitable trust, the trust must have as its object certain purposes such as alleviating poverty, providing education, carrying out some religious purpose, etc. The permissible objects are generally set out in legislation, but objects not explicitly set out may also be an object of a charitable trust, by analogy. Charitable trusts are entitled to special treatment under the law of trusts and also the law of taxation. Protective trust. Here the terminology is different between the UK and the USA: In the UK, a protective trust is a life interest which terminates on the happening of a specified event such as the bankruptcy of the beneficiary or any attempt by him to dispose of his interest. They have become comparatively rare. In the USA, a protective trust is a type of trust that was devised for use in estate planning. (In another jurisdiction this might be thought of as one type of asset protection trust.) Often a person, A, wishes to leave property to another person B. A however fears that the property might be claimed by creditors before A dies, and that therefore B would receive none of it. A could establish a trust with B as the beneficiary, but then A would not be entitled to use of the property before they died. Protective trusts were developed as a solution to this situation. A would establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of the property until they died, and thereafter to allow its use to B. The property is then safe from being claimed by A's creditors, at least so long as the debt was entered into after the trust's establishment. This use of trusts is similar to life estates and remainders, and are frequently used as alternatives to them. Purpose trust. Or, more accurately, non-charitable purpose trust (all charitable trusts are purpose trusts). Generally, the law does not permit non-charitable purpose trusts outside of certain anomalous exceptions which arose under the eighteenth century common law (and, arguable, Quistclose trusts). Certain jurisdictions (principally, offshore jurisdictions) have enacted legislation validating non-charitable purpose trusts generally.
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Trust law Resulting trust. A resulting trust is a form of implied trust which occurs where (1) a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets; or (2) a voluntary payment is made by A to B in circumstances which do not suggest gifting. B becomes the resulting trustee of A's payment. Revocable trust. A trust of this kind may be amended, altered or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming increasingly common in the US as a substitute for a will to minimize administrative costs associated with probate and to provide centralized administration of a person's final affairs after death. Secret trust. A post mortem trust constituted externally from a will but imposing obligations as a trustee on one, or more, legatees of a will. Simple trust. In the US jurisdiction this has two distinct meanings: In a simple trust the trustee has no active duty beyond conveying the property to the beneficiary at some future time determined by the trust. This is also called a bare trust. All other trusts are special trusts where the trustee has active duties beyond this. A simple trust in Federal income tax law is one in which, under the terms of the trust document, all net income must be distributed on an annual basis. In the UK a bare or simple trust is one where the beneficiary has an immediate and absolute right to both the capital and income held in the trust. Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland.[13] . Special trust. In the US, a special trust contrasts with a simple trust (see above). A Spendthrift trust is a trust put into place for the benefit of a person who is unable to control their spending. It gives the trustee the power to decide how the trust funds may be spent for the benefit of the beneficiary. Standby Trust or Pourover Trust. The trust is empty at creation during life and the will transfers the property into the trust at death. This is a statutory trust. Testamentary trust or Will Trust. A trust created in an individual's will is called a testamentary trust. Because a will can become effective only upon death, a testamentary trust is generally created at or following the date of the settlor's death. Unit trust. A unit trust is a trust where the beneficiaries (called unitholders) each possess a certain share (called units) and can direct the trustee to pay money to them out of the trust property according to the number of units they possess. A unit trust is a vehicle for collective investment, rather than disposition, as the person who gives the property to the trustee is also the beneficiary.[14] While the preceding list is a great starting point in trust education, this is an ever-expanding field of law. New types of trusts continue to be created, as the IRS continues to expand tax law, and individuals seek to find new ways to properly transfer their wealth to individuals, charities, etc.
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Terms
Appointment. In trust law, "appointment" often has its everyday meaning. It is common to talk of "the appointment of a trustee", for example. However, "appointment" also has a technical trust law meaning, either: the act of appointing (i.e. giving) an asset from the trust to a beneficiary (usually where there is some choice in the mattersuch as in a discretionary trust); or the name of the document which gives effect to the appointment. The trustee's right to do this, where it exists, is called a power of appointment. Sometimes, a power of appointment is given to someone other than the trustee, such as the settlor, the protector, or a beneficiary. Protector. A protector may be appointed in an express, inter vivos trust, as a person who has some control over the trusteeusually including a power to dismiss the trustee and appoint another. The legal status of a protector is
Trust law the subject of some debate. No-one doubts that a trustee has fiduciary responsibilities. If a protector also has fiduciary responsibilities then the courtsif asked by beneficiariescould order him or her to act in the way the court decrees. However, a protector is unnecessary to the nature of a trustmany trusts can and do operate without one. Also, protectors are comparatively new, while the nature of trusts has been established over hundreds of years. It is therefore thought by some that protectors have fiduciary duties, and by others that they do not. The case law has not yet established this point. Trustee. A person (either an individual, a corporation or more than one of either) who administers a trust. A trustee is considered a fiduciary and owes the highest duty under the law to protect trust assets from unreasonable loss for the trust's beneficiaries.
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Tax and regulation

Trusts can be used to avoid taxes and regulation, although in the United States the IRS allows trusts to be taxed as corporations, partnerships, or not at all depending on the circumstances.[2] :478 Tax avoidance concerns have historically been one of the reasons that European countries have been reluctant to adopt trusts.[2] The trust-preferred security is a hybrid (debt and equity) security with favorable tax treatment which is treated as regulatory capital on banks' balance sheets. The Dodd-Frank Wall Street Reform and Consumer Protection Act changed this somewhat by not allowing these assets to be a part of (large) banks' regulatory capital.[15] :23
Inter vivos trusts in the United States

In the United States, a living trust refers to a trust that may be revocable by the trust creator or settlor (known by the IRS as the Grantor). Living trusts are often used because they may allow assets to be passed to heirs without going through the process of probate. Avoiding probate will normally save substantial costs (the probate courts, in some states, charge a fee based on a percentage net worth of the deceased), time, and maintain privacy (the probate records are available to the public, while distribution through a trust is private). Both living trusts and wills can also be used to plan for unforeseen circumstances such as incapacity or disability, by giving discretionary powers to the trustee or executor of the will. The grantor/settlor may also serve as a trustee or co-trustee. In the case where two or more co-trustees serve, the trust instrument may provide that either trustee may act alone on behalf of the trust or require both co-trustees to act/sign. The trust instrument may also provide that the other co-trustee shall act as sole trustee if the grantor becomes incompetent and is unable to continue administering the trust. There are also some negative aspects to a living trust in the United States. Beneficiaries do not save on federal estate or state inheritance taxes. Setting up a trust may be expensive, and the expense is immediate, not delayed till after the grantor's death. The legal drafting of the trust instrument, which creates the trust, usually costs much more than the legal drafting of a will. Trust administration can be more expensive than the administration of a will in the long run, as most state laws allow a fee of 1% of the estate's gross assets to be paid to the trustee for every year the trust is in existence. The fees for probate estate administration under a will are usually from 1% of the gross estate (for very large estates) to 4% of the gross estate (for very small estates), but this is a one-time fee, not yearly. The same one-time fees apply when a person dies without a will or a trust (dies Intestate): State laws require that an intestate probate be opened at the local courthouse, that the decedent's closest relatives be identified, located and notified, and that the decedent's real and personal property be collected, accounted, and distributed to said relatives. Important safeguards contained in the probate laws of most U.S. jurisdictions do not apply to trust administration. If the decedent leaves a will, his/her probate proceedings must be conducted under the auspices of the probate court. Unlike trusts, wills must be signed by two to three witnesses, the number depending on state law. Several safety provisions of probate law in the U.S. protect the decedent's assets from mismanagement, loss, and embezzlement, such as the requirement that the executor of the will be bonded, the real property insured, the executors sale of real
Trust law estate monitored, and itemized accountings filed with the court during and at the end of probate administration. These procedures do not occur when a decedent's estate passes by trust. Trusts are conducted in private, unless a conflict develops and one of the parties seeks resolution by a court order. Living trusts generally do not shelter assets from the U.S. Federal estate tax. A married couple having a trust can, however, effectively double the estate tax exemption amount (the amount of net worth above which an estate tax is levied) by setting up the trust with a formula clause. A formula clause takes advantage of the unlimited spousal deduction allowed under the internal revenue code. When the first married individual dies, the trust pays out to the beneficiaries an amount up to the total unified credit. The amount is set by the formula clause, not strict dollar amounts, because the unified credit increases over time. Without a formula clause, the unified credit could be wasted. The remaining amount of the estate (after the unified credit is exhausted) is paid to the spouse. Thus, when the first spouse dies, no estate tax is owed (just as if the individual died intestate). However, when the second spouse dies, the distribution to the trust beneficiaries is subject to that decedent's unified credit. The rest is subject to estate tax. If the married couple had died intestate, the first decedent's unified credit is lost because everything is transferred to the spouse upon his/her death. A formula clause is necessary only if the value of the estate is larger than the amount of the unified credit. Due to changes in Federal Estate Tax Laws that affect the year 2010 and later, using the Unified Credit formula may have some unintended consequences for persons who die during 2010 and later. For a living trust, the grantor/settlor will often retain some level of relevance to the trust, usually by appointing himor herself as the trustee and/or as the protector under the trust instrument (in jurisdictions where protectors are recognised). Living trusts also, in practical terms, tend to be driven to large extent by tax considerations. If a living trust fails, the property will usually be held for the grantor/settlor on resulting trusts, which in some notable cases, has had catastrophic tax consequences. A living trust is not under the control and supervision of the probate court, and property held by such a trust is not part of a decedent's probated estate.
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Inter vivos trusts in South Africa

In South Africa, there are basically three types of trusts. These are living trusts (in South Africa called inter vivos trusts), testamentary trusts and bewind trusts. Testamentary trusts are created at the winding up of a deceased estate following a specific stipulation in the deceased person's will that a trust must be set up. Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children can not in terms of South African law inherit anything (in the absence of a trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood). Bewind trusts are created as trading vehicles providing trustees with limited liability and certain tax advantages. There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times as to how much and when each beneficiary is to benefit.
Parties to the trust

There are three parties in a living trust, namely the founder, the trustees and the beneficiaries. The trust is managed by the trustees for the benefit of the beneficiaries. The beneficiaries can be any legal persons, including living people, other trusts, and registered businesses. Trustees may also be beneficiaries.
Establishing a living trust

The trust is created by drafting a trust deed (usually in co-operation with an attorney specialising in trust law) and registering the trust with the local High Court. The trust becomes effective as soon as it is registered.
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Asset protection
Until recently, there were tax advantages to living trusts in South Africa, although most of these advantages have fallen away with new legislation. The remaining advantage of a living trust is the protection of assets from creditors. In an ideal situation, since assets held by the trust aren't owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust (there are exceptions). A common scenario of using living trusts for asset protection is a husband and wife acting as trustees along with a third unrelated trustee. The trust is granted a loan equal to the value of their assets, then the trust buys their assets using the loan, and finally the trust pays off the loan over time. When any of trustees die, the trust and any assets owned by it, remain unaffected. Assets transferred into a living trust remain at risk from external creditors for 6 months if the previous owner of the assets is solvent at the time of transfer, or 24 months if he/she is insolvent at the time of transfer. After 24 months, creditors have no claim against assets in the trust, although they can attempt to attach the loan account, thereby forcing the trust to sell its assets. Assets can be transferred into the living trust by selling it to the trust (through a loan granted to the trust) or donating cash to it (any natural person can donate R100 000 per year without attracting donations tax; 20% donations tax applies to further donations within the same tax year).
Tax considerations
In terms of South African tax law, living trusts are considered tax payers. Two types of tax apply to living trusts, namely income tax and capital gains tax (CGT). A trust pays income tax at a flat rate of 40% (individuals pay according to income scales, usually less than 20%). The trust's income can, however, be taxed in the hands of either the trust or the beneficiary. A trust pays CGT at the rate of 20% (individuals pay 10%). Trusts do not pay deceased estate tax (although trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate tax).[16] The taxpayer whose residence has been "locked" in to a trust has now been given another opportunity to take advantage of these CGT exemptions. The Taxation Law Amendment Act was promulgated on 30 September 2009 and takes effect on 1 January 2010 allowing a window period of 2 (two) years from 1 January 2010 to 31 December 2011 for the opportunity of a natural person to take transfer of the residence with advantage of no transfer duty being payable or CGT consequences. Whilst taxpayers can take advantage of this opening of a window of opportunity is not likely that it will ever become available thereafter.[17]
Notes
[1] http:/ / www. britannica. com/ ebc/ article-9061389 [2] Hansmann H, Mattei U. (1998). The Functions of Trust Law: A Comparative Legal and Economic Analysis (http:/ / www. law. yale. edu/ documents/ pdf/ Faculty/ The_Functions_of_Trust_Law. pdf). NYUL Rev. [3] Chandler, Jr AD. (1977). The Visible Hand: The Managerial Revolution in American Business, pp. 31920. Harvard University Press. From Google Books (http:/ / books. google. com/ books?id=hUkqx76sF6oC& lr=& source=gbs_navlinks_s). [4] Roy Goode, Commercial Law (2nd ed.) [5] Loi n2007-211 du 19 fvrier 2007 instituant la fiducie, http:/ / www. legifrance. gouv. fr/ affichTexte. do?cidTexte=JORFTEXT000000821047& dateTexte= [6] Ordonnance n2009-79 du 22 janvier 2009, http:/ / www. legifrance. gouv. fr/ affichTexte. do?cidTexte=JORFTEXT000000821047& dateTexte= (consolidated version). [7] See for example T Choithram International SA and others v Pagarani and others [2001] 2 All ER 492 [8] For example, in England, trusts over land must be evidenced in writing under s.56 of the Law of Property Act 1925 [9] What are trusts used for http:/ / scottrosenberglaw. com/ faq. html#TU [10] Paul BW Chaplin#Biography [11] http:/ / www. iflr. com/ Article/ 1984910/ Channel/ 193438/ Construction-law-Breach-of-trust-in-the-construction-industry. html [12] http:/ / www. ehow. co. uk/ info_8644574_subcontractors-against-contractor-not-paying. html [13] http:/ / www. hmrc. gov. uk/ trusts/ types/ bare. htm [14] Kam Fan Sin, The Legal Nature of the Unit Trust, Clarendon Press, 1998.
Trust law
[15] Skadden. The Dodd-Frank Act: Commentary and Insights (http:/ / www. skadden. com/ Cimages/ siteFile/ Skadden_Insights_Special_Edition_Dodd-Frank_Act1. pdf). [16] E-book: Trusts for Business Owners, by Peter Carruthers and Robert Velosa. [17] Winston Earl Miller, Dump That Trust Through The Window Family Trust Tax Window (http:/ / www. lawchambers. co. za/ article_family_trust_tax_window. htm)
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References
Books A Hudson, Equity and Trusts (3rd edn Cavendish Publishing 2003) ISBN 1-85941-729-9 C Mitchell and DJ Hayton, Hayton and Marshall's Commentary and Cases on the Law of Trusts and Equitable Remedies (Sweet & Maxwell, 2005) 12th edn C Mitchell, DJ Hayton and P Matthews, Underhill and Hayton's Law Relating to Trusts and Trustees (17th edn Butterworths 2006)
Trustee
Trustee is a legal term for a holder of property on behalf of a beneficiary. A trust can be set up either to benefit particular persons, or for any charitable purposes (but not generally for non-charitable purposes): typical examples are a will trust for the testator's children and family, a pension trust (to confer benefits on employees and their families), and a charitable trust. In all cases, the trustee may be a person or company, whether or not they are a prospective beneficiary.
General duties of trustees

Trustees[1] have certain duties (some of which are fiduciary). These include the duty to: Carry out the expressed terms of the trust instrument Defend the trust Prudently invest trust assets Be impartial among beneficiaries Account for actions and keep beneficiaries informed Be loyal Not delegate Not profit Not be in a conflict of interest position Administer in the best interest of the beneficiaries
The terms of instrument that creates the trust may narrow or expand these dutiesbut in most instances they cannot be eliminated completely. Corporate trustees, typically trust departments at large banks, often have very narrow duties, limited to those the trust indenture explicitly defines. A trustee carries the fiduciary responsibility and liability to use the trust assets according to the provisions of the trust instrument (and often regardless of their own or the beneficiaries' wishes). The trustee may find himself liable to claimants, prospective beneficiaries, or third parties. In the event that a trustee incurs a liability (for example, in litigation, or for taxes, or under the terms of a lease) in excess of the trust property they hold, they may find themselves personally liable for the excess. Trustees are generally held to a "prudent person" standard in regard to meeting their fiduciary responsibilities, though investment, legal, and other professionals can be held to a higher standard commensurate with their higher expertise. Trustees can be paid for their time and trouble in performing their duties only if the trust specifically
Trustee provides for payment. It is common for lawyers to draft will trusts so as to permit such payment, and to take office accordingly: this may be an unnecessary expense for small estates. In an exception to the duties outlined above, sabbatical officers of students' unions who are also trustees of these organisations they work for do have the right to a salary (and hence profit from their being a trustee). This is an exception explicitly granted in the 1993 act [2]
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Other uses
The term trustee is also applied to someone held to a fiduciary duty similar in some respects to that of a trustee proper. For example, the directors of a bank may be trustees for the depositors, directors of a corporation are trustees for the stockholders and a guardian is trustee of his ward's property. Many corporations call their governing board a board of trustees, though in those cases they act as a board of directors. In the case of UK charities, a trustee is an unpaid volunteer who undertakes fiduciary responsibilities on behalf of the charity, subject to the provisions of Charity Law, a branch of trust law, and the Charities Act 1993 [3]. For charity trustees, the Charity Commission of England and Wales, Office of the Scottish Charity Regulator of Scotland and Voluntary Activity Unit of Northern Ireland often has concurrent jurisdiction with the Courts. Many UK charities are also limited liability companies registered with Companies House, in this case the trustees are also Directors of the company and their liability is limited. This is the preferred model if the charity owns property or employs people. The law on this in England changed considerably with the Charities Act of 2006. An account of the main changes can be found in "Charities Act 2006 A guide to the new law" by Michael King and Ann Phillips. One of the key changes made was that it introduced the Charitable Incorporated Organisation. This is basically a limited liability charity. There are thus now two main aspects of corporate management of charities. One is the traditional way in which a corporation is a corporate trustee of a given charity. The second is the new way, in which the charity itself is incorporated as a CIO. The advantages and disadvantages of the different methods is a complicated matter. According to King and Philips, many of the advantages of incorporating as a CIO are obtained if the trustees are not individuals but a corporate entity.
Local government in the United States

Depending on the state, a Trustee is a member of the Village Board of Trustees, which is a village's elected legislative body as outlined by local or state law. It can be composed of the Mayor and a set number of Trustees and usually manages village property, finances, safety, health, comfort, and general welfare and leadership of the town (acting as a Board of Police or Fire Commissioners or a Moderate Income Housing Board for example). Village Board of Trustees is comparable to but distinguished from City Council or Town Council. Small villages have a Trustee instead of a Mayor who is elected to manage village business in a similar function. In some states, a civil township may be administered by a trustee or a group of trustees; see Indiana Township Trustee for an example.
Bankruptcy Trustee
In the United States, when a consumer or business files for bankruptcy all property of the filer becomes property of a newly created entity, the "bankruptcy estate." (See 11 U.S.C. 541.) For all bankruptcies (consumer or business) filed under Chapter 7, 12 or 13 of Title 11 of the United States Code (the Bankruptcy Code), a trustee (the "trustee in bankruptcy" or TIB) is appointed by the United States Trustee, an officer of the Department of Justice that is charged with ensuring the integrity of the bankruptcy system and with representatives in each court, to manage the property of the bankruptcy estate, including bringing actions to avoid pre-bankruptcy transfers of property. In bankruptcies filed under Chapter 11, the debtor continues to manage the property of the bankruptcy estate, as "debtor in possession," subject to replacement for cause with a trustee.
Trustee Chapter 7 trustees in bankruptcy are chosen by the United States Trustee from a panel, and are known as panel trustees. Every judicial district has a permanent Chapter 13 trustee, known as a "standing trustee." As cases under Chapter 12 (for family farmers or fishermen) are filed fairly infrequently, the United States Trustee usually makes trustee appointments in such cases on an ad hoc basis.
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UK legislation
Trustee Delegation Act 1999 [4] specifically covers matters to do with land. Trustee Act 1925 Trusts of Land and Appointment of Trustees Act 1996 Trustee Act 2000 Charities Act 1993 [3]
References
[1] "The New Palgrave Dictionary of Economics and the Law, Definition of "fiduciary duties" by Tamar Frankel Vol.2, p.127-128" (http:/ / cyber. law. harvard. edu/ trusting/ unit5all. html). Harvard Edu. . Retrieved 2011-09-08. [2] http:/ / www. charity-commission. gov. uk/ Publications/ cc3. aspx#f2 [3] http:/ / www. hmso. gov. uk/ acts/ acts1993/ Ukpga_19930010_en_1. htm [4] http:/ / www. hmso. gov. uk/ acts/ acts1999/ 19990015. htm
Trustee de son tort

A trustee de son tort is a person who may be regarded as owing fiduciary duties by a course of conduct that amounts to a wrong, or a tort. Accordingly, a trustee de son tort is not a person who is formally appointed as a trustee, but one who assumes such a role, and then cannot be heard to argue that he did not owe fiduciary duties.
Overview
Instead of prosecuting this person, the courts may hold him or her to be a constructive trustee and, thereby, impose the liabilities of an actual trustee in accounting for his or her acts. Lewin on Trusts [1] says at 42-74:
If a person by mistake or otherwise assumes the character of trustee when it does not really belong to him, he becomes a trustee de son tort and he may be called to account by the beneficiaries for the money he has received under the colour of the trust. A trustee de son tort closely resembles an express trustee. The principle is that a person who assumes an office ought not to be in a better position than if he were what he pretends; he is accountable as if he had the authority which he has assumed. While it is essential, if a person is to become a trustee de son tort, that he consciously takes the office of trustee, it does not matter whether he knows all the trusts or the extent of his powers.
Thomas and Hudson's The Law on Trusts[2] says at para 30.03:

... trustees de son tort are not expressly declared by the settlor to be trustees but rather are deemed to be constructive trustees by operation of law, due to their meddling with trust affairs, they are therefore constructive trustees.
A "trustee de son tort" is to be contrasted with a delegate who is appointed by a trustee to undertake certain functions: such a person derives his authority from the trustee and is entitled to act in accordance with the delegated authority without himself becoming a trustee. A delegate, in such circumstance, has done no "wrong" and is not intermeddling in the trust and so does not become a trustee de son tort.
Trustee de son tort The court also considered the concept of a trustee de son tort and whether an agent, appointed by a duly constituted trustee, could itself be a trustee de son tort in circumstances where the agent's actions caused loss to the trust fund. It was argued that it was commonplace in the trust industry for the administration of a trust to be carried out largely by another company (other than the trustee) within the same group of companies as the corporate trustee. It would cause considerable surprise in the industry if such a company was to find itself designated a trustee de son tort. Because it was common practice it was important that an authoritative decision be given as to whether such an administrative company should be treated as a trustee de son tort.
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Cases
Dubai Aluminium Company Ltd v. Salaam [2002] UKHL 48 [3] (5 December 2002), House of Lords (UK) Barnes v Addy (1874) LR 9 Ch App 244 Mara v Browne [1896] 1 Ch 199 Re Barney [1892] 2 Ch 265 Williams-Ashman v Price and Williams [1942] Ch 219
References
[1] Tucker, Lynton; Le Poidevin, Nicholas; Brightwell, James (August 2010). Lewin on Trusts (18th ed.). Sweet & Maxwell Ltd. ISBN9780421919907. [2] Thomas, Geraint W.; Hudson, Alastair (25 Mar 2010). The Law of Trusts (2nd ed.). Oxford University Press. ISBN978-0199550289. [3] http:/ / www. bailii. org/ uk/ cases/ UKHL/ 2002/ 48. html
Trusts (conflict)
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Trusts (conflict)
Hague Trust Convention
Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition Signed Location Effective Condition Parties Depositary Languages 1 July 1985 The Netherlands 1 January 1992 ratification by 3 states 12 Ministry of Foreign Affairs (Netherlands) French and English
The Hague Convention on the Law Applicable to Trusts and on their Recognition, or Hague Trust Convention is a multilateral treaty developed by the Hague Conference on Private International Law on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of March 2011 ratified by 12 countries. The Convention aims to harmonise not only the municipal law definitions of a trust, but also the Conflict rules for resolving problems in the choice of the lex causae. The key provisions of the Convention are: each signatory recognises the existence and validity of trusts. However, the Convention only relates to trusts with a written trust instrument. It would not apply trusts which arise (usually in common law jurisdictions) without a written trust instrument. the Convention sets out the characteristics of a trust (even jurisdictions with considerable legal history relating to trusts find this difficult) the Convention sets out clear rules for determining the governing law of trusts with a cross border element.
Background
Many states do not have a developed law of trusts, or the principles differ significantly between states. It was therefore necessary for the Hague Convention to define a trust to indicate the range of legal transactions regulated by the Convention and, perhaps more significantly, the range of applications not regulated. The definition offered in Article 2 is: ...the legal relationship created, inter vivos or on death, by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. A trust has the following characteristics: (a) the assets constitute a separate fund and are not a part of the trustee's own estate; (b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; (c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust. Article 3 provides that the Convention only applies to express trusts created voluntarily and evidenced in writing. It will therefore not cover oral trusts, resulting trusts, constructive trusts, statutory trusts or trusts created by judicial order. But signatory states are free to apply the Convention to any form of trust and the Recognition of Trusts Act
Trusts (conflict) 1987 has applied the provisions to all trusts arising under English law, no matter when or how they were created, albeit only applying the provisions to transactions affecting those trusts made after 1 August 1987. There are incidental question problems if the trust is testamentary and, under Article 4, if it is alleged that the testator lacked capacity, or that the will is formally or substantively invalid, or that it had been revoked, these issues must be determined first under the lex fori Conflict rules on characterisation and choice of law before the Convention rules can apply. This will include, for example, a detailed consideration of any marriage settlement or applicable law containing community property provisions which might prevent the testator alienating property from a spouse or child of the family (see succession (conflict)). Obviously, if the will purporting to create the trust is held invalid, there are no trusts to adjudicate upon.
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The applicable law

Article 6 allows the settlor to select the applicable law in the inter vivos or testamentary document. Under normal circumstances, the settlor will be acting on professional advice and will make an express selection or it will be implied from the facts of the case. But, under Actable 6(2), if the settlor selects a law with no relevant provisions or the provisions in the municipal law selected would be inappropriate, or there is no selection, Article 7 applies to select the law which is most closely connected with the transaction. This is judged by reference to four alternative connecting factors which are to be considered as at the time the putative trust is created: 1. the place where the trust is to be administered; 2. the place where the assets are to be found (for immovables, there is no problem the lex situs is easily identified; for movables, the most common form is choses in action such as shares and bonds, and their location does not change (bearer bonds and other instruments where title is determined by mere possession are relatively uncommon), but for tangible assets, this will usually be the place where the assets are located at the time of the hearing given that this represents the place where any Court Order would have to be enforced: see property (conflict)); 3. the place where the trustee is resident or conducts his or her business; 4. the place where the purpose or object of the trust is to be fulfilled. Despite the identification of these four factors, the court must actually perform a rounded evaluation of all the circumstances. Thus, it would be relevant to consider the distribution of the assets if in separate states, the purpose of the trust (which might be the evasion of taxation or other provisions in some of the states where the assets are located), the lex domicilii or lex patriae of the settlor and the beneficiaries (particularly if the legal transaction is a marriage settlement or testamentary), the legal form of the document, and the law of the place where the document was executed (this latter factor may either be accidental and so of marginal value, or contrived to take advantage of a favourable law and so highly significant).
The scope of the applicable law

Under Article 8, the law specified by Article 6 or 7 shall govern the validity of the trust, its construction, its effects, and the administration of the trust. In particular that law shall govern: (a) the appointment, resignation and removal of trustees, the capacity to act as a trustee, and the devolution of the office of trustee; (b) the rights and duties of trustees among themselves; (c) the right of trustees to delegate in whole or in part the discharge of their duties or the exercise of their powers; (d) the power of trustees to administer or to dispose of trust assets , to create security interests in the trust assets, or to acquire new assets; (e) the powers of investment of trustees;
Trusts (conflict) (f) restrictions upon the duration of the trust, and upon the power to accumulate the income of the trust; (g) the relationships between the trustees and the beneficiaries including the personal liability of the trustees to the beneficiaries; (h) the variation of termination of the trust (because variation is expressly within the scope of the Applicable Law, this may be a significant factor in any issue of forum non conveniens raised if an application to vary is made to a forum other than a forum of the Applicable Law); (i) the distribution of the trust assets; (j) the duty of trustees to account for their administration.
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Severance
Articles 9 and 10 allow the Applicable Law by which the validity of the trust has been established, to sever aspects of the trust and its administration so that separate laws shall apply to each component. In fact, the settlor may expressly select an Applicable Law for each component and the forum court should respect his or her wishes. But, in general terms, it is desirable that a single law should be applied to the administration and the fact that there may be assets located in separate states should not, per se, justify severing the trust. The relevant lex situs can be applied to micromanage the asset(s) by the trustee(s) without having to apply the situs law to the administration of the trust in that state. Equally, this is not an argument for a judicial approach which favours the law of the place of administration as the Applicable Law. Although the administration must comply with the municipal laws for general purposes, the duty to honour the intentions of the settlor may make the law of the place where the most significant part of that intention is to be realised the most significant single law.
Recognition
Under Article 11, a trust complying with the Applicable Law shall be recognised as a trust which implies, as a minimum, that the trust property constitutes a separate fund, that the trustee may sue and be sued in his capacity as trustee, and that he or she may appear or act in this capacity before a notary or any person acting in an official capacity. In so far as the law applicable to the trust requires or provides, this recognition implies in particular: (a) that personal creditors of the trustee shall have no recourse against the trust assets; (b) that the trust assets shall not form part of the trustee's estate upon his insolvency or bankruptcy; (c) that the trust assets shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee's estate upon his death; (d) that the trust assets may be recovered when the trustee, in breach of trust, has mingled trust assets with his own property or has alienated trust assets. However, the rights and obligations of any third party holder of the assets shall remain subject to the law determined by the choice of law rules of the lex fori. Thus, although the Convention makes provision for the trustee(s) and any third parties, it fails to address the position of the beneficiaries who, for example, might wish to pursue assets intermixed with the trustee's personal property through actions for tracing. One of the problems that beneficiaries might encounter is addressed in Article 12 which considers the problem where the situs law does not have a title registration system which reflects ownership registration in a representative capacity. While recognising that the Convention cannot require states to modify their existing registers, it provides that the trustee shall be entitled, in so far as this is not prohibited by or inconsistent with the law of the State where registration is sought, to do so in his capacity as trustee or in such other way that the existence of the trust is disclosed. This implicitly recognises the desirability of all registration systems distinguishing between beneficial and representative titles. This general difficulty of municipal laws failure to support trusts is addressed in Article 13, which considers the situation of those who wish to create a trust but can only do so by invoking laws entirely outside their own state. As an application of comity, no forum state is bound to recognise a trust the significant elements of which, except for
Trusts (conflict) the choice of the applicable law, the place of administration and the habitual residence of the trustee, are more closely connected with States which do not have the institution of the trust or the category of trust involved. But, because this could be interpreted as an invitation not to validate otherwise perfectly appropriate financial arrangements for deserving beneficiaries, Article 14 provides that the Convention shall not prevent the application of rules of law more favourable to the recognition of trusts. This reflects the positive rules of public policy which require that the validity of a transaction (whether commercial or not) be upheld if at all possible where this will give effect to the reasonable expectations of the parties. The only exceptions shall be where this will produce consequences offending against the mandatory policies of the forum court in which case Article 18 empowers the court to deny the Applicable Law, even if it has been expressly selected by the settlor. But Article 15(2) nevertheless requires the forum court to consider adopting an approach that will preserve the overall validity of the trust insofar as that generality does not offend against the mandatory policy.
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States parties
As of March 2012, 12 countries have ratified the convention:[1] Australia, Canada (8 provinces only), China (Hong Kong only), Italy, Luxembourg, Liechtenstein, Malta, Monaco, the Netherlands (European territory only), San Marino, Switzerland and United Kingdom (including 12 dependent territories/crown dependencies).
External links
Text of the Convention [2], Hague Conference on International Private Law Status of ratification and signatories [3], Hague Conference on International Private Law
References
[1] "Status table" (http:/ / www. hcch. net/ index_en. php?act=conventions. status& cid=59). Hague Conference on Private International Law. . Retrieved 6 March 2011.
Trusts and estates
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Trusts and estates

The law of trusts and estates is generally considered the body of law which governs the management of personal affairs and the disposition of property of an individual in anticipation of the event of such person's incapacity or death, also known as the law of successions in civil law. Its techniques are also used to fulfil the wishes of philanthropic bequests or gifts through the creation, maintenance and supervision of charitable trusts. In some jurisdictions, such as the United States, it can overlap with the area that has come to be known as elder law that deals not only with estate planning but other issues that face the elderly, such as home care, long term care insurance or social security or disability benefits. There may also be overlap with areas of the law touching on End-of-life issues, not solely for the elderly, but also persons with terminal conditions.
Estates
In common law, an estate consisted of the tangible assets of real and personal property which belong to a natural person. The property of the estate must either be bequeathed through a will or transferred through the laws of intestacy if there is no will. A will is the most commonly used legal instrument for the distribution of the property of a deceased person. Before property can be disposed of pursuant to the terms of a will, the will must be submitted to a probate court having jurisdiction of the estate of the deceased. Probate is often considered a relatively lengthy and expensive process, albeit one which may provide greater safeguards with regard to the rights of a deceased person's beneficiaries, though probate often is contested by creditors or disgruntled members of the family of the deceased who feel they have not received their fair share of the deceased's property.
Uses of trusts
In order to expedite the process of transferring assets to intended beneficiaries, some people choose to arrange their property so that it can bypass the probate process upon their deaths. For example, placing property into a trust before death (as opposed to a testamentary trust) will often allow the accomplishment of the objectives of property distribution without coming under the jurisdiction of a court and the possible redistribution after a lengthy contested probate process and trial. Similarly, jointly held property (in common law systems), life insurance, annuities, US Tax Code section 401(k) Retirement Plans or Individual Retirement Accounts (also known as Registered Retirement Savings Plans in Canada) will also avoid probate as these devices allow property to transfer to beneficiaries outside the probate process. Special needs trusts are created to ensure that beneficiaries who are developmentally disabled or mentally ill can receive inheritances without losing access to essential government benefits.
Use of estates and trusts

Another major factor in trusts and estates law may be to minimize one's tax exposure. After an applicable exempt amount, the United States federal estate tax very quickly approaches 50% of one's taxable estate. The proper use of trusts may reduce one's tax burden. The applicable exempt amount is currently two million dollars in 2006. The exempt amount is scheduled to increase to three and a half million in 2009, after which the estate tax is temporarily repealed for one year in 2010. The year after, the estate tax is scheduled to be reinstated, with the previous exemption of one million dollars. Trusts may also allow people a certain limited amount of control of how the amount held by the trust is handled. For example, one could leave money for somebody who may not be mature enough to handle money, and state that the money can only be used for health, education, support and maintenance of that person until the age of 35, upon which time the remaining income and principal will be distributed. One can also distribute one's assets to charitable
Trusts and estates purposes by creating an irrevocable charitable trust that may distribute the principal or the income of the trust much in the same manner as a private foundation.
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Vesting
In law, vesting is to give an immediately secured right of present or future enjoyment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal estate can be transferred to any other party, it is termed a vested interest. The concept can arise in any number of contexts, but the most common are inheritance law and retirement plan law. In real estate to vest is to create an entitlement to a privilege or a right. For example, one may cross someone elses property regularly and unrestrictedly for several years, and ones right to an easement becomes vested. The original owner still retains the possession, but can no longer prevent the other party from crossing.
Inheritance law
Some bequests do not vest immediately upon death of the testator. For example, many wills specify that an heir who dies within a set period (such as 60 days) is not to inherit, and further specify how the corresponding share is to be distributed. This is generally done to obviate disputes over the precise time of death, and to avoid paying taxes twice in rapid succession should multiple members of a family die in the wake of a disaster. Such a bequest does not vest until the expiration of the specified period, because the actual heir cannot be determined with certainty. It is also possible to give a person, A, a life interest in a property, with the remainder to go to another person or persons, B. If the beneficiary of the remainder cannot yet be known, then the remainder is said not to have vested, and the remainder is said to be contingent. This may happen with entailed estates, or when property is left in trust to care for a child or relative without heirs. (See trust law for details.)
Employee rights
Retirement plans
Vesting is an issue in conjunction with employer contributions to an employee stock option plan, or to a retirement plan such as a 401(k), annuity or pension plan. A vested right is "an absolute right; when a retirement plan is fully vested, the employee has an absolute right to the entire amount of money in the account." [1] It is a "basic right that has been granted, or has accrued, and cannot be taken away. Example: one's right to a vested pension." [2] The portion vested cannot be reclaimed by the employer, nor can it be used to satisfy the employer's debts. Any portion not vested may be forfeited under certain conditions, such as termination of employment. The portion invested is often determined pro-rata. For retirement plans in the United States, employees are fully vested in their own salary deferral contributions upon inception. For employer contributions, the employer has limited options under the Employee Retirement Income Security Act (ERISA) to delay the vesting of their contributions to the employee. For example, the employer can say that the employee must work with the company for three years or they lose any employer contributed money, which is known as cliff vesting. Or it can choose to have the 20 percent of the contributions vest each year over five years, known as graduated vesting. Choosing a vesting plan allows an employer to selectively reward employees who remain employed for a period of time. In theory, this allows the employer to make greater contributions than would otherwise be prudent, because the money they contribute on behalf of employees goes to the ones they most want to reward.
Vesting
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Ownership in startup companies

Small entrepreneurial companies usually offer grants of common stock or positions in an employee stock option plan to employees and other key participants such as contractors, board members, and major vendors. To make the reward commensurate with the extent of contribution, encourage loyalty, and avoid spreading ownership widely among former participants, these grants are usually subject to vesting arrangements. Vesting of options is straightforward. The grantee receives an option to purchase a block of common stock, typically on commencement of employment, which vests over time. The option may be exercised at any time but only with respect to the vested portion. The entire option is lost if not exercised within a short period after the end of the employer relationship. The vesting operates simply by changing the status of the option over time from fully unexercisable to fully exercisable according to the vesting schedule. Common stock grants are similar in function but the mechanism is different. An employee, typically a company founder, purchases stock in the company at nominal price shortly after the company is formed. The company retains a repurchase right to buy the stock back at the same price should the employee leave. The repurchase right diminishes over time so that the company eventually has no right to repurchase the stock, i.e. the stock becomes fully vested. Vesting periods are usually 35 years for employees, but shorter for Board members and others whose expected tenure at a company is shorter. The vesting schedule is most often a pro-rata monthly vesting over the period with a six or twelve month cliff. In the case of both stock and options, large initial grants that vest over time are preferable to periodic smaller grants because they are easier to account for and administer, they establish the arrangement up-front and are thus more predictable, and (subject to some complexities and limitations) the value of the grants and holding period requirements for tax purposes are set upon the initial grant date, giving a considerable tax advantage to the employee.
Profit-sharing
Profit-sharing plans are usually vested in 10 years, although in some cases a plan may essentially serve as a pension by allowing a limited amount of vesting should the employee retire or leave on good terms after an extended period of employment.
Vesting arrangements and terminology

A vesting period is a period of time an investor or other person holding a right to something must wait until they are capable of fully exercising their rights and until those rights may not be taken away. In many cases vesting does not occur all at once. Specific portions of the rights grant vest on different dates over the duration of the period of the vesting. When part of a right is vested and part remains unvested, it is considered partly vested. In the case of partial vesting, a vesting schedule is a table or chart showing the portion of a right that is vested over time. Most typically the schedule provides for equal portions to vest on periodic vesting dates, usually once per day, month, quarter, or year, in stair-step fashion over the course of the vesting period. There is often a cliff by which the first few steps in the graph are missing, so that there is no vesting at all for a period (usually six or twelve months in the case of employee equity), after which there is a cliff date upon which a large amount of vesting occurs all at once. Some arrangements provide for accelerated vesting, by which all or a major portion of the unvested right vests all at once upon the occurrence of a specified event such as a termination of employment by the company or acquisition of the company by another. Less commonly, the vesting schedule may call for variable grands or subject to conditions such as reaching milestones or employee performance.
Vesting
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Vested rights doctrine in zoning law

The vested rights doctrine is the rule of zoning law by which an owner/developer is entitled to proceed in accordance with the prior zoning provision where there has been a substantial change of position, expenditures or incurrence of obligations made in good faith by an innocent party under a building permit or in reliance upon the probability of its issuance.
References
[1] Lectric Law Dictionary (http:/ / lectlaw. com/ def2/ u032. htm) [2] Ballentine's Law Dictionary, p. 577 (1991).
External links
TIAA CREF discussion of vesting (http://www.tiaa-cref.org/advisors/403b/403b_vesting.html)
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Specific trusts
Accumulation and Maintenance trust
Accumulation & Maintenance ("A&M") trusts are a type of discretionary trust for the benefit of children and young people in England and Wales.
Development and tax treatment

The concept of an A&M trust emerged in England and Wales after the enactment of the Capital Taxes Act 1974 (CTA). The CTA discouraged the use of discretionary trusts by introducing new tax rules, but it made a specific exception for trusts designed to help young people (under the age of 25). This particular type of trust grew in significance over the years and became known as an Accumulation & Maintenance Trust. They came to fall under the purview of s.71 Inheritance Tax Act 1984 (IHTA), which continued their special tax treatment The Finance Act 2006 took A&M Trusts out of the purview of s.71. Today, A&M Trusts are governed by Pt. III, Ch. III IHTA, and therefore receive exactly the same tax treatment as other types of discretionary trusts. As a result, the use of A&M trusts is declining rapidly. The new breed of "18-25" trusts are taking their place.
Asset-protection trust
An asset-protection trust is a term which covers a wide spectrum of legal structures. Any form of trust which provides for funds to be held on a discretionary basis falls within the category. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.
History of trusts
Trusts were developed at common law in England originally to minimize the impact of inheritance taxes arising from transfers at death. The essence of the trust was to separate "legal" title, which was given to someone to hold as "trustee", from "equitable title", which was to be retained by the trust beneficiaries. In the United States and England, a practice developed whereby trust settlors began to use "spendthrift" clauses to prevent trust beneficiaries from alienating their beneficial interests to creditors. Over time, courts were asked to determine the efficacy of spendthrift clauses as against the trust beneficiaries seeking to engage in such assignments, and the creditors of those beneficiaries seeking to reach trust assets. A case law doctrine developed whereby courts may generally recognize the efficacy of spendthrift clauses as against trust beneficiaries and their creditors, but not against creditors of a settlor.
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Overview
The asset-protection trust is a trust that splits the beneficial enjoyment of trust assets from their legal ownership. The beneficiaries of a trust are the beneficial owners of equitable interests in the trust assets, but they do not hold legal title to the assets. Thus this kind of trust fulfills the goal of asset protection planning, i.e. to insulate assets from claims of creditors without concealment or tax evasion.[1] Such trusts must be irrevocable (a revocable trust will not provide asset protection because and to the extent of the settlor's power to revoke). Most of them contain a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor. The spendthrift clause has three general exceptions to the protection afforded: the self-settled trusts (if the settlor of a trust is also a beneficiary of a trust), the case when a debtor is the sole beneficiary and the sole trustee of a trust, and the support payments (a court may order the trustee to satisfy a beneficiary's support obligation to a former spouse or minor child). The first general exception, which accounts for the majority of asset protection trusts, no longer applies in several jurisdictions. Certain nations and certain United States now allow self-settled trusts to afford their settlors the protection of the spendthrift clause.[1]
Domestic asset protection trust

Alaska was the first US jurisdiction to enact laws allowing protection for self-settled trusts (in 1997) and was shortly followed by Delaware, Nevada, South Dakota and a few others. These trusts are known as Domestic Asset Protection Trusts (DAPTs). Usually, a DAPT must comply with the following requirements: the trust must be irrevocable and spendthrift; at least one resident trustee must be appointed; some administration of the trust must be conducted in respective state; the settlor cannot act as a trustee.[1]
Trusts are generally governed by the laws of the jurisdiction that is designated by the settlor as the governing jurisdiction. There are two exceptions to the general rule, which may create conflicts of law: (i) states will not recognize laws of sister states that violate their own public policy, and (ii) if the trust owns real property, such property will be governed by the law of jurisdiction that is the property's situs. Additionally, the Full Faith and Credit clause of the Constitution provides that each state must give full faith and credit to the laws of every other state. This means that if a court from another state refuses to recognize the protection of a DAPT and enters a judgment for the creditor, the creditor may be able to enforce the judgment against the trustee of the DAPT, even if that trustee was located in the DAPT jurisdiction. The efficacy of a DAPT may also be challenged under the Supremacy clause of the U.S. Constitution, under the applicable fraudulent transfer statute, or because the settlor retained some prohibited control over the trust.[1] These jurisdictions are also known as United States Asset Protection Trusts (USAPTs), from the point of view of the non-US settlors. The issues that would seem to apply on a USAPT established by a non-US settlor are: 1) whether a non-US court has jurisdiction over the USAPT; 2) the conflict of US versus non-US laws (i.e., which jurisdiction's laws will apply to the trust and the protection it purports to offer); 3) which fraudulent transfer law would apply; and 4) whether the US state court will recognize the non-US judgment.[2] The context of a non-US settlor has a few advantages over that of a US settlor. The issue of the Full Faith and Credit clause doctrine of the US Constitution would not apply to a non-US settlor facing a non-US judgment. Creditors of non-US settlors would have to first obtain a judgment in their home jurisdiction and then attempt to enforce that "foreign" judgment in the US against the trustee of the USAPT, who was not a party to the original action. Therefore, except in unusual cases, this would mean that the only issues to litigate would be whether a fraudulent transfer has taken place, and in turn, which jurisdictions fraudulent transfer laws would apply. Despite that, the non-US creditor must still seek to first have the foreign judgment recognized, because without formal legal acknowledgment of the judgment in the US court, there would be no basis on which to question the transfer.[2]
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South Dakota
South Dakota is the top choice for a trust company because of the state's advantageous trust and tax laws, its cost-efficient and dedicated workforce, the founders' previous favorable experience and their market recognition with the state. South Dakota was one of the first states (1983) to allow a trust to endure perpetually, essentially jumping outside the onerous federal transfer (gift, estate and generation-skipping) tax system theoretically forever. Currently, twenty-four other states have joined the ranks of offering a long-term trust. Nineteen of these states, including South Dakota, allow for a trust to go on in perpetuity. South Dakota can be distinguished from these other states by its modern trust laws coupled with the fact that it does not impose any form of state taxation on the assets that comprise a trust located there. This includes, but is not limited to: no state income, capital gains, dividend/interest and/or intangible's taxes. Additionally, South Dakota has the lowest insurance premium tax of any state (i.e. 8 basis points or 8/100ths of 1%) and also offers other very favorable insurance legislation. South Dakota also has both excellent self-settled trust as well as Third Party Discretionary trust statutes, both allowing for domestic asset protection planning with trusts. South Dakota is the first and only state in the U.S. with a Third Party Discretionary Trust statute for asset protection, which states that a discretionary interest in third party trust, limited power of appointments, and remainder interests are not considered property interests. This statute is extremely important to properly asset protect trusts set up to benefit one's family. South Dakota also has some of the top-rated Asset Protection statutes for LLCs and LPs based upon a powerful "sole remedy charging order statute". Consequently, most of the unique and creative trust strategies for the wealthy involve trust administration in South Dakota without the necessity of having the trust's family reside there.
Offshore jurisdictions
In 1989, the Cook Islands enacted the world's first asset-protection trust law. A key feature of the Cook Islands International Trusts Act (1984) is that the settlor of a trust may establish a spendthrift trust in which the settlor is a beneficiary. In the United States and England, a common law doctrine developed to prevent trust settlors from enjoying the benefits of a spendthrift trust; it was regarded as void against public policy for a trust settlor to avoid his own debts by the mere act of establishing a trust. The Cook Islands asset protection trust law has now been implemented in one form or another in 13 countries[3] and eight U.S. states.[4] According to Jacob Stein's treatise on asset protection, common provisions enacted among some, but not all, of these countries are: (i) there is no recognition of foreign judgments with respect to trusts; (ii) there is a very short statute of limitations on fraudulent transfers; (iii) to establish a fraudulent transfer the creditor must show that the debtor was insolvent, and must establish the debtor's intent to "hinder, delay or defraud" beyond a reasonable doubt; (iv) the anti-duress provisions are incorporated into the statutes; and (v) spendthrift protection is extended to self-settled trusts. These jurisdictions also offer the additional advantages of (i) not being subject to the U.S. constitutional issues like the Full Faith and Credit clause; (ii) using the English common-law legal system; (iii) having abolished the rule against perpetuities; and (iv) not allowing trusts to be pierced for child or spousal support.[1]
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Cook Islands
The Cook Islands is an independent country joined in "free association" with New Zealand. While the Cook Islands has its own government and court system, it uses the New Zealand dollar as its functional currency, and its citizens carry New Zealand passports. It has a population of roughly 35,000, with more than half residing on its primary island, Rarotonga. With a British common law tradition and English as the primary language, the Cook Islands has an active offshore banking sector attractive to Asians and North Americans. Major offshore-licensed banks in the Cook Islands include Australia and New Zealand Banking Group (ANZ) and Capital Security Bank. The confidentiality laws of the Cook Islands prohibit the disclosure of trust and banking relationships except with the consent of the customer, ensuring that no creditor or foreign government can gain access to bank or trust information except in cases of preventing money laundering or averting the financing of terrorism. The Cook Islands was the first country to enact an explicit asset protection law, implementing particular provisions in 1989 to its International Trusts Act. Several of these changes have been adopted in one form or another in several other countries and a handful of a U.S. states. The most important of these changes permits the settlor of a trust to be named as a spendthrift beneficiary. The trust laws of the Cook Islands provide a shortened statute of limitations on fraudulent transfer claims. While most U.S. states have a four year statute of limitations (and the Statute of Elizabeth in some common law jurisdictions has no statute of limitations), the general statute of limitations in the Cook Islands is reduced to two years for fraudulent transfers; in certain circumstances, it may be as short as one year. If the trust is funded while the settlor is solvent, then the transfer cannot be challenged (i.e., there is no time period for the creditor to challenge the transfer). Several provisions of the Cook Islands law specify the form of pleading that a creditor must establish in order for its claim to be heard in a Cook Islands court. The effect of these provisions is to raise the burden of proof to "beyond a reasonable doubt," something akin to a criminal law standard, in order for a creditor to establish a fraudulent transfer. The "constructive" fraudulent transfer theories are eliminated under Cook Islands law, requiring the creditor to prove that the transfer was made with specific intent to avoid the creditor's claim. It is believed that the Cook Islands now has more registered asset protection trusts than any other country. Along with a body of case law that has interpreted major provisions of its trust law, many lawyers find the Cook Islands to be the premier jurisdiction for asset protection planning. Recently enacted LLC legislation in the Cook Islands includes some asset protection features that are likely to keep the Cook Islands popular among asset protection attorneys.
Nevis
Nevis was one of the first countries to follow the Cook Islands, duplicating an older version of the Cook Islands law and naming it the Nevis International Exempt Trust Ordinance, 1994. One distinguishing feature of the Nevis legislation is that a creditor must post a bond of ECB 25,000 (roughly USD 13,000) to lodge a complaint against a trust registered in Nevis. Very little case law exists in Nevis, which many attorneys interpret to mean that creditors are effectively deterred from bringing suit in Nevis. It has a small offshore banking industry, with St. Kitts-Nevis-Anguilla Bank and Bank of Nevis International as the only licensed offshore banks. LLC legislation modeled after the Delaware LLC Act was passed in 1996. This has enabled Nevis to distinguish itself as a primary offshore jurisdiction for LLC formations, as opposed to other countries that are well known for IBC formations (British Virgin Islands) or trust formations (Cook Islands). A Nevis LLC is often used in conjunction with an asset protection trust because it gives the creator of the trust direct control over the assets if the creator is listed as the manager of the Nevis LLC. This gives the creator added security in that it keeps the assets one step
Asset-protection trust removed from the trustee of the asset protection trust. Because the managers and members of a Nevis LLC are not public information, the creator of the trust is able to assume control over the assets without making disclosing his control on any public records.
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Belize
Belize, for example, offers immediate protection from court action initiated by creditors which challenges the settlors transfer of property into the trust. However, due to the paucity of credible offshore banks in Belize, many trusts established in Belize hold assets with a second trustee or third-party financial institution in another country.
Bahamas
The Bahamas have traditionally been associated with offshore planning. However, the Bahamas are probably more noteworthy for offshore banking and IBC formations than for asset protection trusts. The Bahamas do not recognize self-settled spendthrift trusts, unlike the Cook Islands, Nevis, or Belize. For this reason, the Bahamas are not regarded as an asset-protection trust jurisdiction.
Channel Islands (Guernsey and Jersey)

The Channel Islands have captured the imagination of UK residents longing for offshore asset protection and safe havens to hide assets. However, modern case law indicates that creditors are routinely able to freeze trust assets in the Channel Islands. Furthermore, tax law initiatives in the UK have largely eliminated the tax advantages of placing assets in trust in the Channel Islands. While the Channel Islands enjoys a modern banking sector, most attorneys do not regard the Channel Islands as appropriate for asset protection planning.
Switzerland and Liechtenstein

Switzerland and Liechtenstein are noteworthy for large banking sectors and sophisticated wealth management services. While both countries now recognize trusts (particularly trusts established under the laws of another jurisdiction, such as Nevis), there is as of yet no available case law indicating how the courts of those two countries will enforce offshore asset protection trust laws. Many attorneys establish asset protection trusts under the laws of another country and deposit the trust assets in Switzerland or Liechtenstein. One question raised by this approach is whether a creditor can seize assets in Switzerland or Liechtenstein without having to bring a claim in the trust-protective jurisdiction. Again, a lack of precedent suggests that this is an open issue in Switzerland and Liechtenstein. Both countries are also known for offering asset protection annuities, with a six-month statute of limitations on fraudulent transfers into an annuity. Unfortunately for most Americans, these annuities cannot invest in US securities without punitive taxation due to the offshore status of the insurance carriers that offer these annuity products. Furthermore, many lawyers peddling these annuity products to their clients collect commissions from the insurance carriers. These reasons, among others, may help explain why annuities offered in these two countries are not particularly popular with U.S. persons. This does not mean that taxpayers of other jurisdictions may not significantly benefit from holding a Swiss or Liechtenstein annuity. Also, U.S. persons may benefit from holding an annuity issued by a carrier in an asset-protective jurisdiction (such as the Cook Islands), particularly if the carrier is an electing 953(d) carrier (a reference to a provision of US tax law).[5]
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Challenges
Whether such a trust is a spendthrift trust on the U.S. model, a protective trust on the Commonwealth model or another form of discretionary trust, it is more likely to be subject to challenge under the common law doctrine of sham or under specific statutory provisions if any person setting up the trust (or their spouse and their spouse in turn as in a reciprocal trust): can benefit under its provisions; is the person under risk financially; benefits (whether permitted or not) from the trust; or if the person setting up the trust is at risk financially, if bankruptcy or divorce occurs soon after the establishment of the trust (fraudulent conveyance).
Offshore trusts and other asset protection vehicles typically do not prevent action against the individual concerned in his or her home country. Orders under divorce and creditor protection laws can typically be made against that individual notwithstanding the alleged independence of such trustees. If a judge determines that the trust settlor controls the assets of the offshore trust, the judge may order the settlor to repatriate the trust assets. Failure to comply with the court's order may lead to a finding of contempt of court and imprisonment. For this reason, a properly established asset protection trust should provide a clear separation between the settlor and those who exercise control over the trust assets.
US v. Grant
The most recent case to rule on the merits of a contempt order is US v. Grant. In 2005, a federal district court in Miami ordered a domestic protector of an offshore asset protection trust, under threat of contempt, to exercise her power to replace the foreign trustee with a domestic trustee chosen by the court. The ruling, U.S. v. Grant Case No. 00-08986-Civ-Jordan (D.C. So. Fla. 2005), threatened to draw into question the viability of an asset-protection trust if a domestic protector could be compelled to appoint a domestic trustee to marshal the assets and bring them within the purview of the domestic court proceedings. In May 2008, the U.S. government sought to hold the domestic protector in contempt of court for failing to secure the cooperation of the foreign trustee to resign and repatriate the trust assets. The U.S. District Court for the Southern District of Florida ruled against the government, finding that the domestic protector could not be held in contempt for failure to gain the cooperation of the offshore trustee. In denying the government's contempt motion, the judge observed: "I understand that it has been more than two years since the repatriation order was issued and that the funds had not yet been repatriated. But this failure is not for a lack of effort. I am reluctant to fault Mrs. Grant for her trustees' denial of her requests to repatriate the funds." U.S. v. Grant, 2008 U.S. Dist. LEXIS 51332, 101 A.F. T.R.2d (RIA) 2676 (D.C. So. Fla. 2008). For years, lawyers have vigorously debated the vulnerability of an asset protection trust with a domestic protector. The Grant case stands for the proposition that no vulnerability exists if the domestic protector complies with the court's orders. While a domestic protector may be required to make an effort to repatriate trust assets, failure to achieve repatriation should not entail any dire consequences to the trust or to the domestic protector. As long as a duress clause permits the foreign trustee to ignore the pleas of a domestic protector acting under threat of a contempt order, the selection of a domestic protector should not jeopardize the integrity of the offshore asset protection trust. While most attorneys draft trust agreements to limit the domestic protector's powers to those of a negative nature (i.e., the domestic protector may veto trustee decisions, but a domestic protector cannot order a trustee to do anything), the ruling in Grant implies that even positive powers exercisable by a domestic protector may not jeopardize an offshore asset protection trust containing a duress clause. Whether this leads attorneys to be more cavalier in their trust drafting remains to be seen. At least we know that traditional offshore asset protection trust
Asset-protection trust planning works as anticipated.
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Taxation
There are rigorous US tax reporting requirements that apply to taxpayers who establish offshore trusts. While no additional tax is usually imposed, certain forms of asset protection trusts require full disclosure of all trust assets and activities on the U.S. contributor's tax returns. Confidentiality is usually not enjoyed under these arrangements. Most asset protection trusts established by U.S. settlors are considered "grantor trusts" under U.S. income tax law, meaning that all income of the trust is reportable on the grantor's (i.e., the settlor's) individual income tax return. Asset-protection trusts do not, in and of themselves, offer any tax advantages under U.S. income tax law.
References
[1] Jacob Stein (Winter 2007). "The Importance of Trusts in Asset Protection" (http:/ / www. maximumassetprotection. com/ publications/ articles. html). California Trusts and Estates Quarterly, Volume 12, Issue 4, p. 17-25. . Retrieved October 8, 2010. [2] Alexander A. Bove, Jr.. "The United States As An Offshore Asset Protection Trust Jurisdiction The Worlds Best Kept Secret" (http:/ / www. bovelanga. com/ publications/ articles/ US as Offshore Asset Protection Jurisdiction. pdf). Trusts & Trustees, Vol. 14 Issue 1 (Oxford Journals, 2008). . Retrieved October 8, 2010. [3] These countries include the Cook Islands, Nevis (part of St. Kitts and Nevis), Belize, St. Vincent and the Grenadines, the Bahamas, Anguilla, the British Virgin Islands, and the Cayman Islands, among others. [4] These states include Delaware, South Dakota, Missouri, and Alaska, among others. [5] See Section 953(d) of the United States Internal Revenue Code of 1986, as amended.
Bare trust
A bare trust (sometimes referred to as a simple trust) is a trust in which the beneficiary has a right to both income and capital and may call for both to be remitted into his own name. He is also entitled to take actual ownership and control of the trust property. Although there are trustees, they are only effectively nominees and must act according to the beneficiary's instructions.
Blind trust
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Blind trust
A blind trust is a trust in which the fiduciaries, namely the trustees or those who have been given power of attorney, have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust and no right to intervene in their handling. Blind trusts are generally used when a settlor (sometimes called a trustor or donor) wishes to keep the beneficiary unaware of the specific assets in the trust, such as to avoid conflict of interest between the beneficiary and the investments. Politicians or others in sensitive positions often place their personal assets (including investment income) into blind trusts, to avoid public scrutiny and accusations of conflicts of interest when they direct government funds to the private sector.
British party funding

In the United Kingdom, while the Labour Party was in opposition in 199297, its front bench received funding from blind trusts. One set up to fund its campaign in the 1997 general election received donations from wealthy supporters, some of whose names leaked out, and some of whom received life peerages into the House of Lords after Labour won the election.[1] The Neill Committee's report in 1998 found the use of blind trusts to be "inconsistent with the principles of openness and accountability" and recommended that such trusts be "prohibited as a mechanism for funding political parties, party leaders or their offices, Members of Parliament or parliamentary candidates" [2] This was incorporated into the Political Parties, Elections and Referendums Act 2000 as section 57 "Return of donations where donor unidentifiable".[3]
References
[1] Hencke, David (2007-05-11). "Public standing: A straight sort of guy?" (http:/ / www. guardian. co. uk/ politics/ 2007/ may/ 11/ tonyblair. labour20). The Guardian. . [2] Committee on Standards in Public Life (October 1998) (PDF). The Funding of Political Parties in the United Kingdom (http:/ / www. archive. official-documents. co. uk/ document/ cm40/ 4057/ volume-1/ volume-1. pdf). Fifth Report. Volume 1. Chairman: Lord Neill of Bladen. HMSO. pp.4.714.72, pp.612. Cm 4057I. . Retrieved 2008-06-21. [3] "Return of donations where donor unidentifiable" (http:/ / www. opsi. gov. uk/ acts/ acts2000/ ukpga_20000041_en_7#pt4-ch2-pb1-l1g57). Political Parties, Elections and Referendums Act 2000 (http:/ / www. opsi. gov. uk/ acts/ acts2000/ ukpga_20000041_en_1). Public Acts 2000. Chapter 41. OPSI. 2000-11-30. . Retrieved 2008-06-21.
Bypass trust
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Bypass trust
In the United States, a bypass trust is an irrevocable trust into which the settlor deposits assets and which is designed to pay trust income and principal to an individual's spouse for the duration of their life. The bypass trust is not part of the settlor's and is not subject to federal estate taxes upon his or her death.[1] Bypass trusts are used in the United States as a legitimate tool to circumvent gift tax, and to minimize taxation of assets upon death of a married couple. The term may have different meanings in other jurisdictions.
In the United States

A bypass trust is a long-term planning device. It is typically created as part of an A/B Living trust estate plan after the death of the first spouse to die. During life, a married couple transfers ownership of property into a trust. Upon the death of the first party to die, the terms of the trust require that some portion of the property be transferred into "TRUST A" and some other portion into "TRUST B." Trust A holds property that remains accessible to the surviving spouse during his or her life. That way the surviving spouse has enough wealth at hand to provide for his or her needs until death. Trust B receives the other portion of the original trust's property in a manner that minimizes taxation, which necessarily prevents it from being accessible to the surviving spouse during his or her life. This trust is meant to pass on property to heirs, usually the spouse's children, on death of the remaining spouse, but in a way that minimizes the estate tax and gift tax that would have been applied to the property if it had passed through a will, or if given as a gift during life (gift inter vivos). This Trust B takes advantage of such features as Step-Up in Basis (where the value of the property transferred to the successors of the Trust is said to be the fair market value at the time of the transfer at death, and not what the Parents originally paid for it. This means less capital gains tax will have to be paid by the children when they sell the property).[2] A bypass trust receives property as specified in the trust document - the bypass trust may receive all of the property of the decedent spouse, or half of the spouses' co-owned property, or it may receive enough property to make full use of the decedent's estate tax exclusion. It is important that each trust is drafted with absolute precision as the IRS has specified the exact wording to be used.[2] The bypass trust is typically created to achieve one or more of the following goals: To maximize the use of the decedent's estate tax exclusion amount, in order to minimize estate tax upon the death of the surviving spouse To ensure that the decedent's spouse's property will be disposed of in accordance with the decedent's wishes, even if the surviving spouse remarries or chooses to adopt a different estate plan for the surviving spouse's assets.
References
[1] The free dictionary (http:/ / financial-dictionary. thefreedictionary. com/ Bypass+ trust) [2] What is a bypass trust? (http:/ / www. willsandprobate. com/ FAQ/ bypass. htm)
Charitable trust
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Charitable trust
A charitable trust is an irrevocable trust established for charitable purposes, and is a more specific term than "charitable organization".
United States
Charitable trusts may be set up inter vivos, during a donor's life, or as a part of a trust or will at death, as testamentary. Charitable remainder trusts are irrevocable structures established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates. These "split interest" trusts are defined in 664 of the Internal Revenue Code of 1986 as amended and are normally tax-exempt. A section 664 trust makes its payments, either of a fixed amount (charitable remainder annuity trust 664(d)(1)(D)) or a percentage of trust principal (charitable remainder unitrust), to whomever the donor chooses to receive income. Normally, the donor may claim a charitable income tax deduction, and may not have to pay an immediate capital gains tax when the charitable remainder trust disposes of the appreciated asset and purchases other property as it diversifies its portfolio of trust property. At the end of the trust term, which may be based on either lives or a term of years, the charity receives whatever amount is left in the trust. Charitable remainder unitrusts (664(d)(2)(D)- paying a fixed percentage) provide some flexibility in the distribution of income, and may be helpful in retirement planning, while charitable remainder annuity trusts paying a fixed dollar amount are more rigid and usually appeal to much older donors unconcerned about inflation's impact on income distributions who are using cash or marketable securities to fund the trust. Charitable lead trusts make payments, either of a fixed amount (charitable lead annuity trust) or a percentage of trust principal (charitable lead unitrust), to charity during its term. At the end of the trust term, the remainder can either go back to the donor or to heirs named by the donor. The donor may sometimes claim a charitable income tax deduction or a gift/estate tax deduction for making a lead trust gift, depending on the type of a charitable lead trust. Generally, a non-grantor lead trust does not generate a current income tax deduction, but it eliminates the asset (or part of the assets value) from the donors estate. If the trust has qualified under laws such as Internal Revenue Code section 501(c), donations to the trust may be deductible to an individual taxpayer or corporate donor.
United Kingdom
In England and Wales, charitable trusts are a form of express trust dedicated to charitable goals. There are a variety of advantages to charitable trust status, including exception from most forms of tax and freedom for the trustees not found in other types of English trust.[1] To be a valid charitable trust, the organisation must demonstrate both a charitable purpose and a public benefit.[2] Applicable charitable purposes are normally divided into four categories; trusts for the relief of poverty, trusts for the promotion of education, trusts for the promotion of religion and all other types of trust recognised by the law, which includes trusts for the benefit of animals and a locality. There is also a requirement that the trust's purposes benefit the public (or some section of the public), and not simply a group of private individuals.[3] Such trusts will be invalid in several circumstances; charitable trusts are not allowed to be run for profit,[4] nor can they have purposes that are not charitable (unless these are ancillary to the charitable purpose).[5] In addition, it is considered unacceptable for charitable trusts to campaign for political or legal change, although discussing political issues in a neutral manner is acceptable.[6] Charitable trusts, as with other trusts, are administered by trustees, but there is no relationship between the trustees and the beneficiaries.[1] This results in two things; firstly, the trustees of a charitable trust are far freer to act than other trustees and secondly, beneficiaries cannot bring a court case against
Charitable trust the trustees. Rather, the beneficiaries are represented by the Attorney General for England and Wales as a parens patriae, who appears on the part of The Crown.[7] Jurisdiction over charitable disputes is shared equally between the High Court of Justice and the Charity Commission.[8] The Commission, the first port of call, is tasked with regulating and promoting charitable trusts, as well as providing advice and opinions to trustees on administrative matters.[9] Where the Commission feels there has been mismanagement or maladministration, it can sanction the trustees, removing them, appointing new ones or temporarily taking the trust property itself to prevent harm being done.[8] Where there are flaws with a charity, the High Court can administer schemes directing the function of the charity.[10]
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India
In India, trusts set up for the social causes and approved by the Income Tax Department, get not only exemption from payment of tax but also the donors to such trusts can deduct the amount of donation to the trust from their taxable income.[11] The legal framework in India recognizes activities including "relief of the poor, education, medical relief, and the advancement of any other object of general public utility" as charitable purposes.[12] Companies formed under Section 25 of the Companies Act, 1956 for promoting charity also receive benefits under law including exemption from various procedural provisions of the Companies Act, either fully or in part, and are also entitled to such other exemptions that the Central Government may accord through its orders.[13]
Iran
Currently, in the Islamic Republic of Iran, religious charitable trusts, or Bonyads make up a substantial part of the country's economy, controlling an estimated 20% of Iran's GDP. Unlike some other Muslim-majority countries, the bonyads receive large and controversial subsidies from the Iranian government.[14]
Notes
[1] Hudson (2009 p. 1004 [2] Edwards (2007) p. 205 [3] Edwards (2007) p. 206 [4] Edwards (2007) p. 211 [5] Edwards (2007) p. 229 [6] Edwards (2007) p. 217 [7] Edwards (2007) p. 233 [8] Edwards (2007) p. 236 [9] Dollimore (2007) p. 155 [10] Edwards (2007) p. 239 [11] Section 2(15) read with Sections 11 and 12, Income Tax Act, 1961 [12] Section 2(15), Income Tax Act, 1961 [13] Section 25, Companies Act, 1956 [14] Mackey, Sandra, Iranians, Persia, Islam, and the soul of a nation, New York : Dutton, c1996 (p. 370)
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References
Dollimore, Jean (2007). "The Charities Act 2006: Part 1". Private Client Business (Sweet & Maxwell) 2007 (2). ISSN0967-229X. Edwards, Richard; Nigel Stockwell (2007). Trusts and Equity (8th ed.). Pearson Longman. ISBN9781405846844. Hudson, Alastair (2009). Equity and Trusts (6th ed.). Routledge-Cavendish. ISBN041549771X.
Charitable remainder unitrust

A charitable remainder unitrust is an irrevocable trust created under the authority of Internal Revenue Code 664 [1][2] ("Code"). This special, irrevocable trust (known as a "CRUT") has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets (on an annual or more frequest basis) to a non-charitable beneficiary (which is considered the settlor of the trust); and (2) At the expiration of a specified time (usually the death of the settlor), the remaining balance of the CRUTs assets are distributed to charity. The trustee determines the fair market value of the CRUT's assets at the time of contribution, and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT. Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust. Example Assume an individual, Mr. Smith, has $1 million of publicly traded stock and would like to establish a CRUT. Assume the CRUT is set up to pay the annuity to Mr. Smith over his lifetime. Mr. Smith selects a 10% CRUT. The CRUT will pay Mr. Smith 10% of its assets (initially $100,000) per year until Mr. Smith passes away. At that time, any balance remaining in the CRUT will be distributed to charity. The term "unitrust" means the annuity percentage is fixed; the CRUT will distribute 10% of the value of the CRUT's assets each year, which may increase or decrease over time.
History
Code 664 [1][3] (authorizing CRUTs) was added to the Code in 1969, as part of the Tax Reform Act of 1969 (Pub. L. No. 91-172).
Requirements
A charitable remainder unitrust is a trust that which meets both: (1) The applicable rules under state law for a valid Charitable Trust; and (2) the requirements set forth in Code Section 664(d)(2).[4]
State Law Requirements

First, a CRUT is formed like any other kind of trust, and must be valid under state law. Most states require CRUTs to be registered with the state. For example, California requires charitable trusts to be registered by filing a form CT-1 [5] with the state attorney general. This is because the state attorney general represents the charitable interests involved with CRUT.
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Income Tax Requirements

Code Section 664 imposes the following requirements on CRUTs: Fixed percentage payment The CRUT must distribute a fixed percentage annuity to the non-charitable beneficiary. This percentage may not be less than 5 percent nor more than 50 percent of the net fair market value of the CRUT's assets.[6] The CRUT's assets are valued annually, and the annuity amount is determined at that time.[7] As may be seen, the amount of the annuity might vary from year to year, but the percentage always stays the same. For example, assume a 10% CRUT is established, and assume the value of its portfolio holdings in year 1 is $1 million. The annuity that year is $100,000. Assume the portfolio drops in value, and in year 2 is worth $900,000. The annuity in year 2 will be reduced to $90,000 (10% of the value of the CRUT's assets). The annuity must be distributed not less often than annually to one or more persons. The "person" may be an organization, however, it may not be a charity described in section 170(c) [8]. The CRUT is usually set up so that annuity is paid to the settlor of the trust. In the case of natural persons, payments may be made only to those who are living at the time of the creation of the trust. The annuity is paid to that non-charitable beneficiary for his or her lifetime, or for a fixed term of years (not to exceed 20 years).[9] No other payments The CRUT may not distribute any of its assets to anyone other than the annuity recipient or the qualified charity beneficiary. The CRUT may not let any of its assets be used for the benefit of anyone other than the annuity recipient or the qualified charitable beneficiary. Code Section 664(d)(2)(B). Transfer remainder interest when termination of payments Once the annuity period is over (i.e., at the death of the non-charitable beneficiary, or at the expiration of the term of years), the remainder of the CRUT principal is distributed to charity.[10] The charity must be an organization described in Section 170(c) [11]. Portion of remainder interest in contributions to trusts At least 10% of the statistical fair market value[12] of each contribution of property to the trust, must be a part of the remainder interest that will pass to charity once the annuity term expires.[13] Treasury Regulations have imposed several other conditions relating to CRUTs: NIMCRUTS Treas. Reg. 1.664-3 authorizes CRUTs to be drafted so that the annuity can be the lesser of: 1. The annuity percentage, multiplied by the fair market value of the CRUT's assets (i.e., the normal annuity amount); or 2. The amount of the CRUT's "trust income" for the year. This is known as a "net income CRUT", or NICRUT. For example, assume a 10% CRUT holds $1 million in assets. Assume the CRUT has only $70,000 of income that year. A NICRUT would distribute $70,000, because that is lesser than the ordinary $100,000 annuity. Furthermore, Treas. Reg. 1.664-3(a)(1)(i)(b)(2) allows the CRUT to pay a "makeup amount", which means if the trust income is lower than the selected fixed percentage, the trustee can distribute a "make up amount" from the trust's income in subsequent years. This is known as a "net income/makeup CRUT", or "NIMCRUT". For example, assume the NICRUT above distributed $70,000, and had $130,000 of trust income the following year. Assume the NICRUT included the makeup provision (making it a NIMCRUT). The NIMCRUT would distribute the $130,000 to the annuity beneficiary.
Charitable remainder unitrust The IRS has issued a series of sample CRUT forms since 1989, the latest series in 2005, known as Revenue Procedures 2005-52, 2005-53, 2005-54, 2005-55, 2005-56, 2005-57, 2005-58, and 2005-59. [14] It is not recommended, however, that these sample forms be used verbatim and without any additional supplemented provisions.
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Income, Gift, and Estate Tax Consequences

Charitable Deductions
A donor is entitled to a Charitable Deduction [15][16] based on the present value of the remainder interest in a CRUT. Regs. 1.664-4(e)(3)and (4). The method of determining the charitable deduction is complicated, and is generally stated in Treas. Regs. 1.664-4(e)(3) and (4) [17].[18] Various factors are taken into consideration, including the adjusted payout rate, the value of the remainder interest, the age of the measuring life (the annuitant), the term of the CRUT, the date of trust creation, and federal interest rates.
Gift Tax Implications

The grantor/donor does not make a taxable gift if he or she is the recipient of the CRUT income for life or term of years. However, the creation of a CRUT will have a gift tax consequence if an individual other than the grantor/donor (or his or her spouse) is the designated beneficiary of the CRUT income. [19]
Estate Tax
Section 2055(a) [20][21] provides for a deduction from the value of the gross estate of bequest for public, charitable, and religious purposes. Therefore, the amount of principal contributed to a CRUT is not considered for estate tax purposes. Furthermore, the corpus is not subject to probate.
Unrelated Business Taxable Income

If a CRUT has any unrelated business taxable income (UBTI), the trust becomes a taxable entity subject to a 100% excise tax. UBTI is generally income earned from an active business. Accordingly, it loses its status as a CRUT.
WIFO
The annuity paid from the CRUT is taxable to the person receiving the payment. The annuity is taxed in the so-called "Worst-In, First-Out" (WIFO)method. Roughly, the annuity is taxed in the following order of the CRUTs income: ordinary income, capital gain, other income, and trust corpus. The trust's income, for the year it is required to be taken into account by the trust, is assigned to one of three categories: the ordinary income, the capital gains category, or the other income.[22]
Tax Planning
CRUTs are used for a variety of reasons. Often, CRUTs can be used to save income, gift, and/or estate tax. Because the CRUT is a tax-exempt entity [1][23] a CRUT can be used to sell highly appreciated assets at greatly reduced tax consequences. For example, assume an individual purchases publicly traded stock for $50,000.00. Assume that, over time, the stock appreciates in value to $1 million. If this individual taxpayer were to sell the stock, the taxpayer would have a $950,000.00 capital gain for income tax purposes, and would be subject to a substantial capital gains tax (this example will assume a combined federal and state capital gains tax rate of 20%, or $190,000.00 of capital gains tax). One tax planning idea would be for this individual to contribute the stock to a CRUT prior to the sale of the stock. The CRUT would then sell the stock. Assuming no other activity in the CRUT account, the $190,000.00 capital
Charitable remainder unitrust gains tax on the $950,000.00 gain would be paid over the lifetime of the taxpayer (without the CRUT, the taxpayer would have to pay the $190,000.00 all at once). The taxpayer would receive an annuity from the CRUT based on the full $1 million dollars of sales proceeds, rather than an annuity (or income stream) based on the $810,000.00 after-tax proceeds. One possible concern for the taxpayer in the above situation is the risk of death shortly after setting up the CRUT. In such instance, the CRUT proceeds would pay to charity before the taxpayer has received much benefit from the annuity. In addition, at the taxpayers death, charity receives the assets that might have otherwise passed to children or other heirs. Because of this, tax planners often suggest that their clients purchase life insurance, to be held separately from the CRUT. Using life insurance mitigates the risk of an early death. For example, assume the same taxpayer above were to set up a CRUT and were to die quickly. In such instance, the balance of the CRUT would pay to charity. If this taxpayer purchased a $1 million dollar life insurance policy, in the event of the taxpayers premature death, the taxpayers family would receive the $1 million dollar life insurance proceeds and charity would receive the balance of the CRUT. With proper planning, the life insurance proceeds received by the family would be free from all income tax and estate tax.
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References
[1] http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html [2] 26 U.S.C 664 (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [3] Code 664 (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [4] Code Section 664(d)(2) (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html). [5] http:/ / ag. ca. gov/ charities/ forms/ charitable/ ct1-form. pdf [6] 26 USCA 664(d)(1)(A) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [7] Code Section 664(d)(2)(A) (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [8] http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=170& url=/ uscode/ html/ uscode26/ usc_sec_26_00000170----000-. html [9] Code Section 664(d)(2)(A) (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [10] 26 USCA 664(d)(1)(C) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [11] http:/ / www4. law. cornell. edu/ uscode/ uscode26/ usc_sec_26_00000170----000-. html [12] 26 USCA 7520 (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=7520& url=/ uscode/ html/ uscode26/ usc_sec_26_00007520----000-. html) [13] 26 USCA 664(d)(1)(D) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html) [14] http:/ / www. irs. gov/ irb/ 2005-34_IRB/ ar02. html [15] http:/ / www. law. cornell. edu/ uscode/ 26/ 170(c). . html [16] Code Section 170(a) (http:/ / www. law. cornell. edu/ uscode/ 26/ 170(c). . html) [17] http:/ / edocket. access. gpo. gov/ cfr_2009/ aprqtr/ pdf/ 26cfr1. 664-4. pdf [18] Regs. 1.664-4(e)(3) and (4) (http:/ / edocket. access. gpo. gov/ cfr_2009/ aprqtr/ pdf/ 26cfr1. 664-4. pdf) [19] 26 U.S.C.A. 2511(a) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00002511----000-. html). [20] http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00002055----000-. html [21] Section 2055(a) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00002055----000-. html) [22] Treas Reg 1.664-1(d)(1)(ii) (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html). [23] 26 USCA 664(c) (http:/ / www. law. cornell. edu/ uscode/ search/ display. html?terms=664& url=/ uscode/ html/ uscode26/ usc_sec_26_00000664----000-. html)
Child Trust Fund
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Child Trust Fund

A Child Trust Fund (CTF) is a long-term savings or investment account for children in the United Kingdom. The UK Government introduced the Child Trust Fund with the aim of ensuring every child has savings at the age of 18, helping children get into the habit of saving whilst teaching them the benefits of saving and helping them understand personal finance. The Child Trust Fund scheme was promised in the Labour Party's 2001 election manifesto,[1] and launched in January 2005, with children born after 1 September 2002 eligible.[2] Eligible children receive an initial subscription from the government in the form of a voucher for at least 250. In 2010/11 the child trust fund policy is expected to cost around 520m, less than 0.5% of the 84bn UK education budget.[3] Because the scheme allows for family and friends to top up trust funds, it has given a substantial boost to savings rates, particularly among the poor. According to the Children's Mutual, "In terms of changing people's behaviour, this is the most successful product there's ever been."[4] For households with income of 19,000 a year, 30% of the children in that category are having 19 a month saved for them. Part of this is due to grandparents being more willing to contribute to funds, since the money cannot be diverted to the family finances.[4] The fund was terminated in January 2011 by the Savings Accounts and Health in Pregnancy Grant Act 2010.
Background
Asset-based egalitarianism[5] traces its roots to Thomas Paine, who proposed that every 21-year-old man and woman receive 15, financed from inheritance tax.[1] In 1989 LSE professor Julian Le Grand proposed a similar idea, calling it a "poll grant".[1] Subsequently the related concept of Individual Development Accounts was developed in the United States by Bruce Ackerman and Michael Sherraden.[1] [6] This approach - termed "asset-based welfare" by Sherraden - saw asset redistribution less as an egalitarian measure than as one which supported poverty reduction by encouraging saving.[7] Sherraden argued that owning an asset led to people changing their way of thinking, being more likely to plan and invest in their future - in a way that providing people with an equivalent flow of income does not.[8] In the UK the idea took off in 1999/2000 with a number of contributions to the New Statesman in 1999, including an article from Robert Reich endorsing the idea; and support in 2000 by the influential Institute for Public Policy Research.[1] [9] Sherraden's Center for Social Development collaborated with the IPPR, and a briefing paper by it remarked "It would be impossible to overstate the leadership and contributions of the Institute for Public Policy research in informing and shaping this new policy direction in the United Kingdom".[7] This carried through into proposals being included in the Labour Party's 2001 election manifesto.[1] The Child Trust Fund scheme was promised in the Labour Party's 2001 election manifesto,[1] and launched in January 2005, with children born after 1 September 2002 eligible.[2] Over the course of the development of the policy up to implementation, it became increasingly focussed on encouraging the poor to save and to develop their financial skills, with less emphasis on the egalitarian redistribution of assets.[7] According to the Institute of Public Policy Research
The wealthy have always relied on assets to smooth the path into adulthood, but now every single child will be able to do the same. The lumpy costs, the risky decision, and upfront investment involved in making ones way in life will be eased, whether that means spending money on training, starting a businesses - or simply buying the suit needed to attend an interview... CTFs recognise that assets, not just [5] income, can bring security and opportunities.
Sherraden argued that possessing wealth in your early adulthood improves life outcomes by its effect of changing attitudes:
Income only maintains consumption, but assets change the way people interact with the world. With assets, people begin to think for the long [10] term and pursue long-term goals. In other words, while income feeds peoples' stomachs, assets change their minds.
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Political opposition
Child trust funds have been broadly supported by the Conservative Party, but were opposed by the Liberal Democrats in the 2005 general election, and the Liberal Democrats remain opposed. Their policy has been criticised by Stuart White, who notes various historical examples of CTF-like policies proposed by Liberals in the past, and argues that the Child Trust Fund policy "gives direct expression to a deep, historic Liberal (and SDP) commitment to the ideal of ownership for all."[11] He adds that "At a time of rising wealth inequality, and widespread asset poverty, the old Liberal slogan of ownership for all has never been more urgent."[11] In April 2010 Julian Le Grand argued strongly against Conservative Party plans to means test the funds (limiting them to households on below 16,000 per year income[4] ), saying that "Confining CTFs to the poor would be divisive, and would result in low take-up and stigma. A universal endowment is a badge of citizenship."[3] He added that if funding had to be cut from the scheme, it would be better to reduce the government's topups, and keep the scheme universal.[3]
Details
The funds are held in trust for the child until they turn 18, and the money is then theirs to use as they see fit. CTFs are managed by the parents/legal guardians of the child until the child reaches the age of 16. At this point, the child will have the option to take over management of the account including choice of provider and investment decisions. However, they will still not be able to withdraw funds from the account until reaching 18. The government has stated that they will be introducing a programme of education in personal finance in schools to enable 16-year-olds to competently manage their CTF. All of the funds in the account are exempt from income tax and capital gains tax, including at maturity. However, the 10% dividend tax payable on franked income (UK share dividends) cannot be reclaimed. The UK government has stated that at age 18 it will be possible to transfer the entire CTF into an ISA to keep the tax-free status of the investment. If the CTF is withdrawn as cash, the tax benefits will be permanently lost.
Subscriptions
At birth: The government gives every eligible child a voucher worth 250 to open the account, and also a further 250 directly into the accounts of children who live in low income families. At age 7: The government will make an additional payment of 250 into the account, with a further 250 for children in low income families. At age 11: The government is consulting on the possibility of a further voucher at this age. If vouchers are not invested within one year of issue, HM Revenue and Customs will open a stakeholder account on behalf of the child. Parents and other family members or friends can pay an additional 1,200 a year into their childs fund, on which any gains or dividends will be tax free (except for the 10% tax on UK share dividends). Stakeholder accounts cannot set the minimum contribution above 10, but the provider can set a lower minimum.
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Eligibility
Every child born on or after 1 September 2002 is eligible for the CTF, as long as: child benefit has been awarded for them; they are living in the United Kingdom; and they are not subject to immigration controls The children of Crown servants posted abroad including the Armed Forces qualify because they are treated as being in the UK.
Investment options
Most advisers recommend equity-based CTFs, and the fact accounts allocated by HM Revenue and Customs are put into stakeholder products indicates that the government also believes equities are the best option over such a long period. Stakeholder accounts invest in shares, with a set of rules ("stakeholder standards") to reduce financial risk. These include provision for money in the account being gradually moved to lower risk investments or assets when the child reaches age 13. This is to help to produce a stable return in the run up to the child's 18th birthday. The charge on a stakeholder account is limited to no more than 1.5 per cent a year, whereas charges on all other types of CTF account are not limited in this way. Savings account. These operate in a similar way to a bank deposit account; there is a rate of interest and the nominal value of the funds is secure. Non-stakeholder account. Invests funds according to the type of product. These accounts are not protected by the "stakeholder standards". CTF funds can be transferred between providers. Rules for transfers are similar to those for Individual Savings Accounts customers should inform the new provider they wish to use and they will undertake the move. No penalty or fee can be imposed for transferring the account, except for the cost of selling shares (such as dealing charges) in equity accounts.
Abolition
On May 24, 2010, the Chancellor of the Exchequer George Osborne MP and Chief Secretary to the Treasury David Laws MP announced that the 250 top up payments into the child trust fund would cease in August 2010, with no payments for newborns from the end of 2010.[12] The Savings Accounts and Health in Pregnancy Grant Act 2010 facilitates the abolition of the fund.
References
[1] Julian Le Grand, "Implementing Stakeholder Grants: the British Case", in Erik Olin Wright (ed, 2003), Redesigning Distribution: basic income and stakeholder grants as alternative cornerstones for a more egalitarian capitalism, The Real Utopias Project, Volume V [2] HM Treasury, 10 January 2005, Chancellor and Minister for Children launch Child Trust Fund (http:/ / www. hm-treasury. gov. uk/ press_06_05. htm) [3] Julian Le Grand, The Guardian, 27 April 2010, We must not sacrifice the child trust fund (http:/ / www. guardian. co. uk/ society/ joepublic/ 2010/ apr/ 27/ manifestos-2010-childtrustfunds) [4] Zoe WIlliams, The Guardian, 2 May 2010, Why we cannot afford to raid the child trust fund piggy bank (http:/ / www. guardian. co. uk/ politics/ 2010/ may/ 02/ general-election-child-trust-funds) [5] Dominic Mazwell, IPPR, 1 March 2006, Child Trust Funds in England (http:/ / www. ippr. org/ articles/ ?id=2029& tID=93& pID=2029) [6] Washington University in St Louis, Michael Sherraden (http:/ / gwbweb. wustl. edu/ Faculty/ FullTime/ Pages/ MichaelSherraden. aspx) [7] Finlayson A (2008), "Characterizing New Labour: the case of the Child Trust Fund", Public Administration 86(1): 95-110 [8] Rajiv Prakhar (2009), "What is the future for asset-based welfare?", public policy research, MarchMay 2009, p52 [9] Kelly, Gavin and Lissauer, Rachel Ownership for All. London: Institute for Public Policy Research.
Child Trust Fund

[10] Claire Kober, Baby bonds can asset-based welfare tackle inequality? (http:/ / www. childpoverty. org. uk/ info/ Povertyarticles/ Poverty115/ baby. htm#3), Poverty 115, Summer 2003 [11] Stuart White, "Why do Liberal Democrats oppose the Child Trust Fund?", public policy research, MarchMay 2007 [12] BBC News: George Osborne outlines detail of 6.2bn spending cuts (http:/ / news. bbc. co. uk/ 1/ hi/ uk_politics/ 8699522. stm)
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External links
UK Government Child Trust Fund website (http://www.childtrustfund.gov.uk) List of CTF providers (http://www.childtrustfund.gov.uk/templates/Page.aspx?id=1246) "Beginner's guide to: Child trust funds" (http://www.independent.co.uk/money/invest-save/ beginners-guide-to-child-trust-funds-1639077.html) The Independent article, 7 March 2009 Junior ISA (http://www.taxfreejuniorisa.co.uk) - To replace the Child Trust Fund, 1 November 2011 "Child trust funds and how else to make your children rich" (http://www.thisismoney.co.uk/ctf) thisismoney.co.uk article, 27 February 2009 "Child Trust Funds Explained" (http://business.timesonline.co.uk/tol/business/money/reader_guides/ article3359384.ece) Times Online, 20 February 2008
Constructive trust
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference.[1] There is considerable debate as to whether a constructive trust is a real trust.[2] [3]
Events generating constructive trusts

In a constructive trust the defendant breaches a duty owed to the plaintiff. The most common such breach is a breach of fiduciary duty. A controversial example is the case of Attorney-General for Hong Kong v Reid,[4] in which a senior prosecutor took bribes not to prosecute certain offenders. With the bribe money, he purchased property in New Zealand. His employer, the Attorney-General, sought a declaration that the property was held on constructive trust for it, on the basis of breach of fiduciary duty. The Privy Council awarded a constructive trust. The case is different from Regal (Hastings) because there was no interference with a profit-making opportunity that properly belonged to the prosecutor. This area is highly controversial and may not represent the law in England because of the previous Court of Appeal case of Lister v Stubbs[5] which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the claimant not enjoyed by the defendant's other creditors. In the event of the defendant's insolvency, the trust assets are untouchable by the general creditors. Supporters of Lister v Stubbs suggest that there is no good reason to put the victim of wrongdoing ahead of other creditors of the estate. However, being a Privy Council decision Reid's case did not overrule the decision in Lister v Stubbs, which is still good law in England and Wales, but not in some of its former colonies, such as Australia. There is a tension in English law between Lister and Reid which has been highlighted in the recent cases such as Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.[6]
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Property interference
In Foskett v McKeown[7] a trustee used trust money together with some of his own money to purchase a life insurance policy. Then he committed suicide. The insurance company paid out to his family. The defrauded beneficiaries of the trust sought a declaration that the proceeds were held on constructive trust for them. The House of Lords said that the beneficiaries could choose between either: (a) a constructive trust over the proceeds for the proportion of the life insurance payout purchased with their money; or (b) an equitable lien over the fund for the repayment of that amount. There is controversy as to what the true basis is of this trust. The House of Lords said that it was to vindicate the plaintiffs' original proprietary rights. However, this reasoning has been criticized as tautologous by some scholars who suggest the better basis is unjust enrichment (see below). This is because there must be a reason why a new property right is created (i.e. the trust) and that must be because otherwise the family would be unjustly enriched by receiving the proceeds of the insurance policy purchased with the beneficiaries' money. "Interference with the plaintiff's property" can justify why the plaintiff can get its property back from a thief, but it cannot explain why new rights are generated in property for which the plaintiff's original property is swapped. In Foskett v McKeown, the plaintiff's original property was an interest in the trust fund. The remedy they obtained was a constructive trust over an insurance payout. It is not obvious why such a new right should be awarded without saying it is to reverse the family's unjust enrichment.
Unjust enrichment
In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd[8] one bank paid another bank a large sum of money by mistake (note that the recipient Bank did not do anything wrong - it just received money not owing to it). Goulding J held that the money was held on (constructive) trust for the first bank. The reasoning in this case has been doubted, and in Westdeutsche Landesbank Girozentrale v Islington London Borough Council the House of Lords distanced itself from the idea that unjust enrichment raises trusts in the claimant's favour. This remains an area of intense controversy. These type of trusts are called '"institutional" constructive trusts'. They arise the moment the relevant conduct (breach of duty, unjust enrichment etc) occurs. They can be contrasted with '"remedial" constructive trusts', which arise on the date of judgment as a remedy awarded by the court to do justice in the particular case. An example is the Australian case Muschinski v Dodds.[9] A de facto couple lived in a house owned by the man. They agreed to make improvements to the property by building a pottery shed for the woman to do arts and crafts work in. The woman paid for part of this. They then broke up. The High Court held that the man held the property on constructive trust for himself and the woman in the proportions in which they had contributed to the improvements to the land. This trust did not arise the moment the woman commenced improvements - that conduct did not involve a breach of duty or an unjust enrichment etc. The trust arose at the date of judgment, to do justice in the case. Remedial constructive trusts do not exist in England and Wales, and the High Court of Australia has also distanced itself from Muschinski v Dodds in the later case of Bathurst City Council v PWC Properties.[10]
Usefulness of constructive trusts

For example, if the defendant steals $100,000 from the plaintiff and uses that money to buy a house, the court can trace the house back to the plaintiff's money, and can deem the house to be held in trust for the plaintiff; the defendant must then convey title to the house to the plaintiff - even if rising property values had appreciated the value of the house to $120,000 by the time the transaction occurred. If the value of the house had instead depreciated to $80,000, the plaintiff could demand a remedy at law (money damages equal to the amount stolen) instead of an equitable remedy.
Constructive trust The situation would be different if the defendant had mixed his own property with that of the plaintiff, for example, adding $50,000 of his own money to the $100,000 stolen from the plaintiff and buying a $150,000 house; or using plaintiff's $100,000 to add a room to defendant's existing house. The constructive trust would still be available, but in the proportions of the contributions, not wholly in the claimant's favour. Alternatively, the claimant could elect for an equitable lien instead, which is like a mortgage over the asset to secure repayment. Because a constructive trust is an equitable device, the defendant can raise all of the available equitable defenses against it - including unclean hands, laches, detrimental reliance, and undue hardship.
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Notes
[1] Restitution, Law School Help (http:/ / www. west. net/ ~smith/ resti. htm), Retrieved on May 12, 2008 [2] Constructive Trust, Law Library - American Law and Legal Information (http:/ / law. jrank. org/ pages/ 5634/ Constructive-Trust. html), Retrieved on May 6, 2008 [3] Virgo, Graham (2006). The Principles of the Law of Restitution 2nd edn. Oxford Clarendon Press. pp.606607. [4] [1994] 1 AC 324 [5] (1890) 45 Ch D 1 [6] [2010]EWHC 1614 (Ch) [7] [2001] 1 AC 102 [8] [1980] 2 WLR 202 [9] (1986) 160 CLR 583 [10] (1998) 195 CLR 566
Corporate trust
In the most basic sense of the term, A corporate trust is a trust created by a corporation.[1] However, the term in the United States is most often used to describe the business activities of many financial services companies and banks that involve acting in a fiduciary capacity for investors in a particular security (ie. stock investors or bond investors). For example, instead of borrowing funds from a bank, a company might borrow funds from the general public in the form of a bond. When a bank lends money to a company, it may often inspect the company's financial statements to ensure that the company follows the rules (known as covenants) of the loan agreement, and may also attempt to negotiate a settlement if the company has problems and stops repaying its loan. In the situation of a public bond issuance (the company borrowing from anyone in the general public who chooses to lend the funds), there would be no one clear person who would be capable to monitor the loans on their own, and the investors would find it difficult to agree and communicate their agreement to the company to settle any problems with the loan repayments. Therefore, they agree as a condition of their bond borrowing to appoint a financial institution, known as a "corporate trustee", to be the responsible party for monitoring compliance with the loan terms, acting in interests of the general public who have purchased the bond. Another aspect of this service, which is often performed by a different party, is the distribution of the repayment from the company to the bondholders, this function is known as a "paying agent". In fact, modern bonds often appoint many different financial institutions to have special roles, based on their area of expertise (such as corporate trustee with an expertise in bankruptcy who is only called in if the company stops paying back the bond). Financial institutions receive fees for their services. Large corporate trust providers include Citi, Deutsche Bank, The Bank of New York Mellon, Wells Fargo ,One Investment Group [2] and BNP Paribas Securities Services [3]
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Reasons
A corporation with little or no financial expertise may seek the services of a financial institution (often a corporation as well) through the creation of a corporate trust. By doing so, they are entrusting the finances of their corporation to that particular financial institution.[4]
Services Offered
Corporate trust providers offer a wide range of services, which include but are not limited to: Escrow services Public finance Project finance Corporate finance Money market services Loan Agency and Administration services Structured finance Document Custody services
References
[1] [2] [3] [4] "Corporate Trust" (http:/ / www. investorwords. com/ 1138/ corporate_trust. html). WebFinance. January 1, 2007. . Retrieved 2007-03-10. http:/ / www. oneinvestment. com. au/ services/ trust-services/ http:/ / securities. bnpparibas. com/ jahia/ Jahia/ site/ portal/ lang/ en/ home/ services "Global Corporate Trust" (http:/ / www. bankofny. com/ cptrust/ index. htm). The Bank of New York. January 1, 2007. . Retrieved 2007-03-10.
Crummey trust
In the United States a Crummey trust (named for the first person to use such a structure) is a trust for the benefit of a minor into which gifts are made in a manner qualifying them for exclusion from the unified gift and estate tax. Normally, gifts to minors are subject to parental / guardian control until the age of majority. In order to delay the transfer of control beyond the age of 18, the funds must be placed in trust. However, the annual gift exclusion ($13,000 per individual and $26,000 per married couple as of 2011) from the gift tax is only available for gifts of so-called current interests. Normally, a gift into a trust that comes under control of the beneficiary at a future date does not constitute a current interest. A Crummey trust achieves the desired treatment by offering the recipient a window of time (often 30 days) to take immediate control of the gift. (The control offered only applies to the current gift--by assumption, an amount no greater than the annual exclusion amount--not the entire trust.) If the recipient fails to do so during that window, the gift becomes part of the trust, and is subject to the trust's distribution conditions. However, since the recipient had the opportunity to receive the funds outside of the trust, the gift is deemed to be a current interest, subjecting it to the annual exclusion. The expectation of future annual gifts under the same mechanism (or the expectation of the withholding of such future gifts if the recipient exerts control over the gift) may motivate the recipient to relinquish control of the funds into the trust.
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Use in life insurance trusts

In addition, similar provisions are often added to life insurance trusts or "ILITs" in order to maintain the annual gift tax exclusion by funding the ILIT using Crummey powers. This way additional gifts and beneficiaries can be taken advantage of to fund the life insurance trust. If executed properly the beneficiaries will receive the proceeds of the life insurance trust free of income or estate taxes.
External links
http://www.willsandprobate.com/FAQ/crummey.htm http://www.finaid.org/savings/crummey.phtml http://www.fool.com/personal-finance/retirement/2006/11/14/crummey-trusts-arent-crummy.aspx
Discounted gift trust

A Discounted Gift Trust (DGT) is a type of UK trust arrangement usually set up in connection with an investment in either an onshore or offshore investment bond (insurance bond). It allows the gifting of a lump sum into a trust whilst retaining a life-long 'income' from that money (technically withdrawals of capital), with the over-arching aim of reducing the eventual IHT (inheritance tax) bill on death. The name Discounted Gift Trust was coined by the life insurance industry. In strict legal terms, it is a type of Carve Out Trust. Furthermore, provided the settlor (the person making the gift into the trust) is in reasonable health, a calculation is made as to the likely total amount of 'income' that will be paid back to them by the trustees. This "bag of rights", normally known as the "discount", is deemed to be retained by the client. The remainder will be treated like any other gift into trust (a chargeable transfer (CT) in the case of a discretionary trust, or a potentially exempt transfer (PET) for a bare trust), leaving the IHT net after 7 years (or 14 years in some cases). In the event of the settlor dying within seven years, this retained "bag of rights" should in theory be returned to their personal representatives. However, the accepted IHT treatment, as has been tested many times and accepted by HMRC, is that this right to an income for life has no value once the settlor has died, and therefore no money has to be returned. The effect is that the discount is deemed to leave their estate on day one of settlement of monies into the trust- the remainder will be treated like any other gift into trust and brought back into calculations if death occurs within 7 (in some cases 14) years. In effect, there is an immediate IHT reduction upon creation of a discounted gift trust A discounted gift trust is a very powerful planning tool for anyone in later life whose intentions are to draw income from their investments throughout their lifetime, then to pass on the remainder to their beneficiaries, as it allows for this and helps to reduce the amount of Inheritance Tax that might eventually have to be paid.
Example
This is a simplified example: Mr Smith gifts 100,000 into a discounted gift trust. He selects 4,000 per year 'income' (withdrawals) for life. Based on his age and gender and on HMRC guidelines (drafted with reference to mortality tables), his life expectancy is deemed to be 15 years. 4,000 x 15 = 60,000 is the discount, or the amount of the gift which has technically been 'carved out' and retained (in reality this would be lowered a little to reflect the real cost of providing 4,000 over fifteen years assuming there
Discounted gift trust is some return on capital held). If he dies within seven years: - The 40,000 is brought back into the calculation for inheritance tax, reducing his nil rate band by this amount - The value of the "right to withdrawals for life", which started as 60,000, is now deemed to be nil (as he is dead). Thus, the 60,000 does not come back into play in the IHT calculation. Note - importantly - that Mr Smith will have no future access to any of the 100,000 capital - rather his only benefit will be the 4,000 per annum 'income'. Also, this 'income' is dependent on there being sufficient capital remaining in the investment so in this example 4% per annum net growth is needed just to stand still.
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External links
January 2010 article from Lawskills.co.uk about Discounted Gift Trusts [1] Information from TaxationWeb re DGTs [2] HMRC Technical Note on Discounted Gift Schemes (2007) [3] Information from Prudential on their own version of the DGT [4] Information from Friends Provident on their DGT [5]
References
Hutchison, Julie (2009 (updated 2010)), STEP Certificate for Financial Services (Trusts and Estate Planning): Course Manual, Birmingham: CLT International Limited
References
[1] [2] [3] [4] [5] http:/ / www. lawskills. co. uk/ articles/ personal_finance/ discounted_gift_trusts_the_tax_savingsand_the_tax_costs__part_i. html http:/ / www. taxationweb. co. uk/ tax-articles/ tax-efficient-investments/ discounted-gift-trusts-an-introduction. html http:/ / www. hmrc. gov. uk/ cto/ dgs-tech-note. pdf http:/ / www. pruadviser. co. uk/ content/ acrobat/ IHTB10039. PDF http:/ / www. friendsprovident. co. uk/ doclib/ xsad257. pdf
Discretionary trust
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Discretionary trust
In British and Canadian law, a discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia. Where the discretionary trust is a testamentary trust, it is common for the settlor to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion. Letters of wishes are not legally binding documents. Discretionary trusts can only arise as express trusts. It is not possible for a constructive trust or a resulting trust to arise as a discretionary trust. Discretionary trusts can be discretionary in two respects. First, the trustees usually have the power to determine which beneficiaries (from within the class) will receive payments from the trust. Second, trustees can select the amount of trust property that the beneficiary receives. Although most discretionary trusts allow both types of discretion, either can be allowed on its own. It is permissible in most legal systems for a trust to have a fixed number of beneficiaries and for the trustees to have discretion as to how much each beneficiary receives,[1] or to have a class of beneficiaries from whom they could select members, but provide that the amount to be provided is fixed.[2] Most well-drafted trust instruments also provide for a power to add or exclude beneficiaries from the class;[3] this allows the trustees greater flexibility to deal with changes in circumstances (and, in particular, changes in the revenue laws of the applicable jurisdiction). Characteristically, discretionary trusts provide for a discretionary distribution of income only, but in some cases the trustees also have a power of appointment with respect to the capital in the trust, i.e. the corpus. Discretionary trusts are usually sub-divided into two types: exhaustive, where the trustees must distribute all income accruing to the trust fund; and non-exhaustive, where the trustees have a power to accumulate income.
Analysis
In a fixed trust the beneficiary has a specific proprietary right in relation to the trust fund. Each beneficiary of a discretionary trust, in contrast, is dependent upon the trustees to exercise their power of selection favourably.[4] In Gartside v IRC [1968] AC 553 the Inland Revenue argued that as each beneficiary might be entitled to income from the trust fund, each should be charged as if he were entitled to the whole of the fund. Perhaps unsurprisingly, the House of Lords rejected this argument. Even where there is a sole member of the class remaining, so long as there is a possibility that another member of the class could come into existence, that member is not considered a sole beneficiary for purposes of taxation liability.[5] Gartside v IRC concerned a non-exhaustive discretionary trust; however, in Re Weir's Settlement [1969] 1 Ch 657 and Sainsbury v IRC [1970] Ch 712, the courts held that the same analysis was equally applicable to exhaustive discretionary trusts. The rights of individual beneficiaries under a discretionary trust being uncertain, it was open to question to what extent the beneficiaries of a discretionary trust (if all of adult age and sound mind) could utilise the rule in Saunders v Vautier. It had been held that beneficiaries under a discretionary trust could do so,[6] although that authority was decided pre-McPhail v Doulton, where to be valid the trustees had to be able to draw up a "complete list" of beneficiaries. That notwithstanding, leading commentators have suggested that provided all of the beneficiaries could be ascertained, they should still retain the right to terminate the trust under the rule, so long as it is an exhaustive discretionary trust.[7]
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Duties
The ordinary correlation between beneficiaries' rights and trustees' duties which arises in fixed trusts is absent in discretionary trusts. Although there are clearly duties, it is less clear whether there are any correlating rights.[8] However, it seems clear that the trustees' duty is limited to (a) determining whether to exercise their discretion, and (b) exercising their discretion lawfully under the terms of the trust. Whilst the beneficiaries will have standing to sue the trustees for failing to fulfill their duties, it is not clear that they would gain by such action. In Re Locker's Settlement [1977] 1 WLR 1323 the trustees of a discretionary trust did not make any distributions for a number of years based upon the expressed wishes of the settlor. The trust then fell dormant, and after several more years, the trustees sought directions. The court held that their discretionary powers continued, and that they should exercise it in respect of the dormant years now as they should have done at the time. The court reaffirmed that if trustees refuse to distribute income, or refuse to exercise their discretion, although the court could not compel it be exercised in a particular manner, it could order that the trustees be replaced. The position with a duty to consider exercising discretion in non-exhaustive discretionary trusts is more complicated, as the duty to exercise discretion can be satisfied by deciding to accumulate.
Purposes
Discretionary trusts still serve a useful function, despite their original source of popularity (tax savings) having diminished in most countries. They still continue to be used for these reasons, among others: to protect improvident beneficiaries against creditors - as the beneficiary has no claim to any specific part of the trust fund, none of the trust fund is vulnerable to attachment by the trustee in bankruptcy of any beneficiary to exercise control over young or improvident beneficiaries to create flexibility to react to changes in circumstances in certain jurisdictions, a discretionary trust can be used to protect family assets from forming part of any divorce settlement.[9]
Popularity and decline

The popularity of discretionary trusts rose sharply after the decision of the House of Lords in McPhail v Doulton [1971] AC 424 where Lord Wilberforce restated the test for certainty of objects in connection with discretionary trusts. Previously, it had been understood that for the trust to be valid, the trustees had to be able to draw up a "complete list" of all the possible beneficiaries, and if they could not do so, the trust was void. But Lord Wilberforce held that provided it could be said of any person whether they were "in or out" of the class, as described by the settlor, the trust would be valid. Because under a discretionary trust, no one beneficiary could be said to have title to any trust assets prior to a distribution, this made discretionary trusts a powerful weapon for tax planners. Inevitably, the surge in popularity has led to a legislative response in most jurisdictions,[10] thus in many countries there are now considerable tax disadvantages to discretionary trusts, which has predictably hampered their use outside the scope of charitable trusts.
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Footnotes
[1] [2] [3] [4] Although in many jurisdictions such a trust would be characterized as a fixed trust with a discretionary power of appointment A common example is a scholarship set up by way of a trust fund See Re Manisty's Settlement [1974] Ch 17 and Blausten v IRC [1972] Ch 1 256 Although a discretionary beneficiary clearly does have some species of right under a discretionary trust, he is able to renounce his position as a class member; see Re Gulbenkian's Settlement (No 2) [1970] Ch 408 [5] Re Trafford's Settlement [1985] Ch 32 [6] Re Smith [1928] Ch 915 [7] See Hanbury & Martin (16th ed.) ISBN 0-421-71680-0 [8] It has been suggested that "the discretionary trust in fact depends on a rule-concept of duty, with no such necessity for correlative rights." (1971) 87 LQR 231 [9] Although most jurisdictions simply look through trusts for this purpose, for example, in the United Kingdom see section 25 of the Matrimonial Causes Act 1973 [10] For example, in the United Kingdom, the Finance Act 1975 imposed "capital transfer tax" on any property settled on a discretionary trust; this was replaced in the Finance Act 1988 by inheritance tax.
Express trust
Where property is passed from an owner to a person an implied express trust, but no gift is made by the owner to that person, it is therefore held for the owner by the person, and this is the Resulting trust; where property should for some reason of public policy or rule of Equity be held by a person for someone other than the legal owner, this is either the Statutory trust or the Constructive trust; but where legal title to property is held by someone 'on trust', this is the Express trust.
Terms
Law generally requires only a simple formality to create an express trust. In certain jurisdictions, an express trust may even be established orally. Typically, a settlor would record the disposition, where real property is to be held in trust or the value of property in trust is large. Where legal title to property is being passed to a trustee, a "deed of settlement" or "Trust Instrument" (for jurisdictions that do not recognise Deeds) may be used. Where property is to continue to be held by the person making the trust, a "declaration of trust" will be appropriate. Often, a trust corporation or more than one trustee are appointed to allow for uninterrupted administration of the trust in the event of a trustee's resignation, death, bankruptcy or incapacity. Additionally a Protector may be appointed who, for example, is authorized to appoint new trustees and to review the trustees' annual accounts. To be valid at common law, a trust instrument must ascertain its beneficiaries, as well as the res, or subject matter of the trust, unless it is a charitable trust which does not provide specific beneficiaries.
Common forms of express trust

Bare trust property transferred to another to hold e.g. for a third person absolutely. May be of use where property is to be held and invested on behalf of a minor child or mentally incapacitated person. Life Interest trust the income from property transferred is paid to one person "the life tenant" (e.g. a widow/er) during their lifetime and thereafter is transferred to another person (who may take absolutely or a second life interest according to the terms of the trust, in the second case a third beneficiary would come into play). The trustees may have power to pay capital as well as income to the life tenant; alternatively they may have rights to transfer ("appoint") property to other beneficiaries ahead of their entitlement.
Express trust Discretionary trust the trustees may pay out income to whichever of the beneficiaries they, in the reasonable exercise of their discretion, think fit. They will normally also have a power to pay out capital. They may have extensive powers, even to add new beneficiaries, but such powers may normally only be exercised bona fide in the interests of the beneficiaries as a whole. Charitable trusts trusts for a purpose (as opposed to for individuals) are generally invalid at common law however charities are an exception. Persons wishing to pass money to causes not recognised as charitable may instead make gifts to established companies or associations or may establish trusts or trust-like structures in jurisdictions which do not restrict non-charitable purpose trusts (e.g. Jersey trusts, Danish and US foundations and Liechtenstein Anstallts). Protective trusts and Spendthrift trusts can be established to provide an income for persons who cannot be trusted with it.
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Variation of Trusts in English Law

The Variation of Trusts Act 1958 gave the courts the power to vary trusts in the following circumstances s1(1)(a) Any person having, directly or indirectly, an interest, whether vested or contingent, under the trusts who by reason of infancy or other incapacity is incapable of assenting; or s1(1)(b) Any person (whether ascertained or not) who may become entitled, directly or indirectly, to an interest under the trusts as being at a future date or on the happening of a future event a person of any specified description or a member of any specified class of persons, so however that this paragraph shall not include any person who would be of that description, or a member of that class, as the case may be, if the said date had fallen or the said event had happened at the date of the application to the court; or s1(1)(c) Any person unborn; or s1(1)(d) Any person in respect of any discretionary interest of his under protective trusts where the interest of the principal beneficiary has not failed or determined. The court does not have the power to consent to the variation of a trust on behalf of an ascertained individual who is sui juris.(Someone above the age of consent and of sound mind)
Forms of trust used by UK taxpayers

Accumulation and Maintenance trust A variation on the discretionary trust, the A&M does not carry the Inheritance tax disadvantages of a discretionary settlement but can only be established for persons under 25 who must be entitled to income at that age. Allows the accumulation of income within the trust until 25. Disabled Trust Similar to an A&M trust but established for a disabled person. Reverter to Settlor trust A trust where, on the death of the life tenant, the property reverts to the person making the gift. Nil Rate Band Discretionary trust UK inheritance tax is payable at 40% on estates worth over 325,000 for the 2009-2010 tax year. If assets up to that value are placed in a discretionary trust during a person's lifetime, the trust will not be taken into account for inheritance tax if the person survives for a further 7 years. Likewise in a will, many persons leave a legacy on discretionary trusts so as to take full advantage of their nil rate band (gifts to spouses and
Express trust registered civil partners being wholly exempt).
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Forms of trust used by US persons

Certain US jurisdictions and other jurisdictions have developed a radically different interpretation of the trust. Valid trusts can be established by persons who then continue to deal with property as if it were their own during their lifetime, the trust crystallising on death. Trust funds can be taxed as legal entitles by election ("checking the box").
Fiduciary trust
A fiduciary trust is a fiduciary [1] relationship in which a trustee holds the title to assets for the beneficiary. The trust's creator is called the grantor.
References
[1] fiduciary - Definitions from Dictionary.com (http:/ / dictionary. reference. com/ browse/ fiduciary)
External links
Definition by Trading-Glossary.com (http://www.trading-glossary.com/t0322.asp)
Foreign trust
Foreign trust commonly refers to a trust that is governed by the laws of a jurisdiction other than the United States. These trusts may be used for investment, estate planning and succession planning purposes, but are most commonly used for asset protection. Here are some reason why foreign trusts may be used for asset protection. The commonly understood meaning of the term foreign trust is a trust governed by the laws of a foreign jurisdiction. However, as discussed below, the term foreign trust has a very specific meaning under the Code. Whenever the term foreign trust appears in this text, it refers simply to a trust governed by the laws of a foreign jurisdiction. A foreign trust, per se, does not have any asset protection benefits. The benefits come from the jurisdiction which governs the trust. To understand more fully the benefits of foreign trusts and the reasons why they are so commonly used in asset protection planning the reader must return briefly to (i) domestic trusts, and (ii) fraudulent transfer laws. A domestic discretionary trust, set up for a beneficiary by a third party, has great asset protection benefit. A domestic spendthrift trust also has certain asset protection benefits. In some states, including California, there are statutory limitations placed on the protective benefits of these trusts. The most important statutory limitation is the prohibition against self-settled trusts. That one factor severely limits the use of domestic trusts for asset protection purposes, as most asset protection trusts are self-settled. Several states have now passed legislation allowing self-settled trusts as a protective shield. But questions remain, as these jurisdictions are a part of the United States and are subject to the constitutional restrictions, such as the full faith and credit clause, requiring one state to recognize a judgment from a sister state, and are further hampered by the choice of law analysis. Even assuming that these domestic asset protection trusts manage to overcome such issues, or a debtor establishes a California discretionary trust for the benefit of a third party, there is always a potential of a fraudulent transfer
Foreign trust challenge. No matter how protective a domestic trust is, even if it is fully discretional, in the case of a fraudulent transfer the trustee will have to distribute the trust assets to the creditor. It is in light of these challenges that the efficacy of foreign trusts becomes obvious. Foreign jurisdictions are not subject to the constitutional restrictions placed on U. S. states. Some jurisdictions do not recognize foreign judgments against trusts and have very debtor friendly fraudulent transfer laws. For example, St.Vincent (in the West Indies) requires creditors to establish a fraudulent transfer beyond a reasonable doubt and has a one-year statute of limitations on fraudulent transfers that begins running from the date of the transfer. Foreign trusts are truly efficient for asset protection purposes only if liquid assets are used to fund the trust, and such assets are, at some point, transferred offshore. While a foreign asset protection trust can hold any property, including personal and real property in the U. S., the ability of a U. S. court to reach U. S. property suggests the benefits of holding offshore assets in the foreign trust. Foreign trusts are usually treated as foreign trusts for the purposes of the Internal Revenue Code. This means that transfers of assets to the trust will be treated as a sale for tax purposes. To avoid the sale treatment on the funding of the trust, most foreign trusts are drafted as grantor trusts. Being grantor trusts, they avoid sale treatment on funding, and remain tax neutral during their existence. Foreign asset protection trusts are usually established solely for asset protection purposes, and almost never for tax purposes. Generally, when contrasted with a domestic trust, a foreign trust offers the following benefits: 1. Increased ability of the settlor to retain benefit and control; 2. Less likely to be pursued by a creditor; 3. Foreign jurisdictions usually have more beneficial to the debtor statute of limitations, burden of proof, and other important provisions; 4. No full faith and credit, comity or supremacy clause issues; 5. Favorable to the debtor spendthrift provision laws; 6. Confidentiality and privacy; and 7. Flexibility. It is very important to pick the right jurisdiction as the trusts situs. Over the past decade, certain foreign jurisdictions have implemented trust legislation specifically designed to provide added asset protection to settlers and beneficiaries. Other jurisdictions, while not focusing on asset protection per se, have made their trust laws more flexible in other respects. The following factors should be considered when evaluating a foreign trust situs jurisdiction: 1. Nonrecognition of foreign judgments, 2. Recognition of self-settled trusts, 3. No local taxation, 4. Debtor friendly fraudulent transfer laws, including short statute of limitations and high burden of proof, 5. Availability of competent and reliable trustees, 6. Availability of competent local attorneys and banks, 7. British Commonwealth based culture and legal system, 8. Trust assets are not reachable by creditors, include for alimony or child support, and 9. Stable political environment. Also, in some cases secrecy may be an important consideration, but it is not a factor in most asset protection cases. From an asset protection standpoint three jurisdictions stand out from the rest of the pack: (i) the Cook Islands (in the South Pacific), (ii) St. Vincent and the Grenadines (in the West Indies), and (iii) Nevis (in the West Indies). Certain other offshore jurisdictions also offer asset protection benefits to trusts, but not to the same extent. These jurisdictions include the Cayman Islands, Bermuda, Bahamas, the Channel Islands (Isle of Man, Jersey and Guernsey) and Gibraltar. For example, Cook Islands, St. Vincent and the Grenadines and Nevis have the following favorable to the debtor provisions: (i) nonrecognition of foreign judgments with respect to trusts; (ii) "beyond a reasonable doubt" standard for fraudulent transfers; (iii) a short statute of limitations for fraudulent transfers; (iv) requirement of showing actual fraud and constructive fraud to prove a fraudulent transfer; (v) allowance of self-settled trusts; and (vi) ability by the settlor/beneficiary to retain some control. All three, particularly St. Vincent, have a long established financial services industry and legal system. Bahamas lacks clauses (i), (ii) and (iii). Bermuda and Cayman Islands lack clauses (i), (ii), (iv), (v) and (vi). Mauritius lacks clause (i).
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Foreign trust Interestingly, New Zealand has been recently gaining popularity as an asset protection destination. New Zealand is closely tied to the Cook Islands (which were a former New Zealand protectorate) and its trust laws are at the forefront of other developed nations. New Zealand does not tax trusts that generate their income elsewhere, but it does recognize self-settled trusts. In eyes of some practitioners, New Zealand is not a notorious asset protection jurisdiction, and makes planning easier. There are several disadvantages to using New Zealand for asset protection purposes. New Zealand has a relatively long statute of limitations on fraudulent transfers (four years), it will recognize a U. S. judgment, and there is no established history of protecting trust settlors and beneficiaries from creditors. (At least not to the same extent as in St. Vincent, the Cook Islands and Nevis.) Because foreign asset protection trusts should be used openly, and they are extremely effective if established in the right jurisdiction, perceptions by creditors (and even judges) are not very important.
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Grantor Retained Annuity Trust

A grantor retained annuity trust (commonly referred to by the acronym GRAT), is a financial instrument commonly used in the United States to make large financial gifts to family members without paying a U.S. gift tax.[1]
Basic Mechanism
A donor sets up a GRAT by making a donation into a trust. The trust is set up as an annuity whereby the donor receives an annual payment from the annuity for a fixed period of time. At the end of the term, any remaining value in the trust is passed on to a beneficiary of the trust as a gift. The beneficiary must be a family member of the donor. If the donor dies before the end of the term, then the value of the trust at that time is passed on to the beneficiary. The United States Internal Revenue Service has a number of regulations governing how the remaining value of the trust at the end of the term (or at the death of the donor) is taxed. When the GRAT is first set up, a gift value of the GRAT is calculated. The gift value is set equal to the initial contribution to the GRAT plus a theoretical interest earned on the principal minus the annuity payments that would be made through the end of the term. The theoretical rate of interest is determined by IRS regulations.[2] The rate is set equal to 120% of the federal mid-term rate during the month that the GRAT is established.*** To realize a tax benefit, the sum of the scheduled annuity payments of a GRAT is set to be about equal to the principal plus theoretical interest. Thus, for tax purposes, the initially calculated gift value is zero, since what will be paid back to the donor in annuity payments is anticipated to be about equal to what the donor invested, plus interest. If a GRAT is funded with highly volatile assets, however, it is possible that the actual interest earned on the assets will be substantially higher than the IRS theoretical interest. Thus at the end of the term, the value remaining in the GRAT may still be large, even though the initial IRS calculation suggests that it should have been zero. This remaining value is then passed on to the beneficiary without incurring a gift tax.
Grantor Retained Annuity Trust
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Important Legal Cases

Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), acq. Notice 2003-72, 2003-44 IRB, 15 October 2003.[3] This case established the current way that the IRS established a gift value for a GRAT.
Patents
The Wealth Transfer Group owns a patent covering different methods for managing SOGRATs. A SOGRAT is a GRAT that is at least partially funded with stock options. The patent number is U.S. Patent 6567790 [4], and is entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options". On January 12, 2011, the director of the USPTO initiated a reexamination of US patent 6,567,790. [5] The reexamination serial number is 90/009,868.
References
[1] Ice, Noel, What You Should Know About Your GRAT (Grantor Retained Annuity Trust) How To Make LARGE Gifts Without Paying Gift Tax or Using Any Gift Tax Unified Credit, 2003 (http:/ / www. trustsandestates. net/ GRATs/ GRATMmClIce. htm) [2] Treas. Reg. 25.2702-3(b) and (d) [3] Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000) (http:/ / www. ustaxcourt. gov/ InOpHistoric/ walton. TC. WPD. pdf) [4] http:/ / www. google. com/ patents?vid=6567790 [5] Gene Quinn, "Patent Office Orders Reexamination of Tax Related Patent" IPwatchdog, January 20, 2011 (http:/ / ipwatchdog. com/ 2011/ 01/ 20/ patent-office-orders-reexamination-of-tax-related-patent/ id=14482/ #comment-18608)
Henson trust
A Henson trust (sometimes called an absolute discretionary trust), in Canadian law, is a type of trust designed to benefit disabled persons. Specifically, it protects the assets (typically an inheritance) of the disabled person, as well as the right to collect government benefits and entitlements. The key provision of a Henson trust is that the trustee has "absolute discretion" in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits. An example of such a benefit is the Ontario Disability Support Program. In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary's total assets were considered. However if the trust was established for a person with a disability in Canada, who has qualified for the Disability Tax Credit the trustees can use the "Preferred Beneficiary election" and attribute the trust income to the beneficiary of the trust without actually paying it out. The trust beneficiary would file a tax return as if they earned the trust income. The trust beneficiary would use their personal exemptions and tax credits to reduce their taxable income. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary. The Henson trust was first used in Ontario in the late 1980s. It became of wider interest when the Supreme Court of Ontario ruled in 1989 that the trust assets were not vested in the beneficiary and thus could not be used to terminate government benefit programs. A Henson trust can be established as either a living trust, or a testamentary trust.
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The case
Leonard Henson of Guelph, Ontario had set up an absolute discretionary trust for his daughter. The Ontario Ministry of Community and Social Services took his daughter to court, arguging that she had assets. The Supreme Court of Ontario (later the Court of Appeal for Ontario) ruled that she didn't have assets, as they weren't for her to use.[1]
References
Duties of a Trustee of a Henson Trust [2] Henson Trusts: Providing for a Disabled Family Member [3] Toronto Star [4]
[1] [2] [3] [4] Henson Trust Specialist - Kenneth C. Pope, LL.B., T.E.P: TD Planner Magazine Article (http:/ / www. kpopelaw. ca/ TDplanner. htm) http:/ / www. kpopelaw. ca http:/ / www. blakes. com/ english/ publications/ ET/ Mar03/ hensontrusts. asp http:/ / www. kpopelaw. ca/ TorontoStar. htm
Honorary trust
An honorary trust, under the law of trusts, is a device by which a person establishes a trust for which there is neither a charitable purpose, nor a private beneficiary to enforce the trust. While such a trust would normally be void for lack of a beneficiary, many jurisdictions have carved out two specific exceptions to this rule: trusts for the care of that person's pets; and trusts to provide for the maintenance of cemetery plots. The name of the device derives from the lack of any beneficiary legally capable of enforcing an honorary trust: the trustee is bound by honor, but not by law, to carry out the wishes of the creator of the trust. Like many states, New York has only recently allowed such trusts by statute.
Incentive trust
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Incentive trust
In American estate planning parlance, an incentive trust is a trust designed to encourage or discourage certain behaviors by using distributions of trust income or principal as an incentive. A typical incentive trust might encourage a beneficiary to complete a degree, enter a profession, or abstain from harmful conduct such as substance abuse. The beneficiary might be paid a certain amount of money from the trust upon graduating from college, or the trust might pay a dollar of income from the trust for every dollar the beneficiary earns. Although incentive trusts have apparently become more common in the early 21st century, a 2007 survey found that less than one-third of wealthy Americans attach conditions to the distribution of their estates.[1] According to Joshua Tate, an assistant professor at SMU Dedman School of Law, incentive trusts pose a problem of inflexibility: "because the settlor cannot foresee all potential eventualities or circumstances and take them into account in the trust, the terms of the trust can prove to be a burden for the beneficiaries."[2] Eileen Gallo, a noted psychotherapist, has argued that, although incentive trusts may be effective in changing behavior, they may in fact be damaging to the beneficiaries, in that they rely on external motivation to encourage activities that should be autotelic in nature.[3] The seeming popularity of incentive trusts, however, is reflected in the many websites created by estate planners to market them.
References
Robert Frank, The Wrong Way to Leave Money to Heirs [4], The Wealth Report, Wall Street Journal Online, May 15, 2007. Eileen Gallo, A Psychotherapist Looks at Incentive Trusts [3], Journal of Financial Planning (Dec. 2004). Joshua C. Tate, Conditional Love: Incentive Trusts and the Inflexibility Problem [2], 41 Real Prop., Prob. & Tr. J. 445 (2006). Wells, Marble & Hurst, PLLC, Incentive Trusts: An Idea Whose Time Has Come (and Gone?) [5].
References
[1] [2] [3] [4] [5] https:/ / www. pnc. com/ webapp/ unsec/ Requester?resource=/ wcm/ resources/ file/ ebd25008a977f13/ PNC_WV_Inheritance_Rls. pdf http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=873625 http:/ / www. fpanet. org/ journal/ articles/ 2004_Issues/ jfp1204-art3. cfm http:/ / blogs. wsj. com/ wealth/ 2007/ 05/ 15/ the-wrong-way-to-leave-money-to-heirs http:/ / www. wellsmar. com/ CM/ NewsandArticles/ NewsandArticles42. asp
Interest in possession trust
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Interest in possession trust

An interest in possession trust is a form of legal arrangement which gives a person a "present right to the present enjoyment of something".[1] At least one of the beneficiaries of this type of trust will have the right to receive the income generated by the trust (if trust funds are invested) or the right to enjoy the trust assets for the present time in another way, for example by living in a property owned by the trustees. The beneficiary with the right to enjoy the trust property for the time being is said to have an interest in possession and is colloquially described (though not always strictly accurately) as an income beneficiary. A trust can give the interest in possession to a beneficiary for a fixed period, for an indefinite period or, more usually, for the rest of the beneficiary's life. Such a life interest trust is the most common example of an interest in possession trust. In the example of a life interest trust, the interest in possession ends when the income beneficiary, also called the life tenant, dies. The capital of the trust will then pass to another beneficiary (or more than one). Where a charity has the right to income under a trust, it will also have an interest in possession, but this will clearly not be a life interest trust - an example would be a trust under which an art gallery has the right to display works owned by the trustees for a certain period. Either the will or trust deed establishing the trust, or the general law, will set out how tax and trustees' expenses will be divided between the income beneficiary and the capital of the trust. Trustee investment policies will also allow emphasis on either present income (which may reduce the real value of the capital) or capital growth (increasing income in the long term and capital remaining when the interest in possession is terminated) or a balance. Interest in possession trusts are often created as part of a will. Typically, a surviving spouse will be granted a right to the income of the trust by the settlor. When the surviving spouse dies, the rest of the fund (the remainder) may pass to the couple's children or other named persons.
References
[1] Viscount Dilhorne in Pearson v IRC [1980] STC 318 at 323
Life insurance trust
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A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies.[1] Upon the death of the insured, the Trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. If the trust owns insurance on the life of a married person, the non-insured spouse and children are often beneficiaries of the insurance trust. If the trust owns "second to die" or survivorship insurance which only pays when both spouses are deceased, only the children would be beneficiaries of the insurance trust. In the United States, proper ownership of life insurance is important if the insurance proceeds are to escape federal estate taxation.[2] If the policy is owned by the insured, the proceeds will be subject to estate tax. (This assumes that the aggregate value of the estate plus the life insurance is large enough to be subject to estate taxes.) [3] To avoid estate taxation, some insureds name a child, spouse or other beneficiary as the owner of the policy. There are, however, two drawbacks to having insurance proceeds paid outright to a child, spouse or other beneficiary. Doing so may be inconsistent with the insured's wishes or the best interests of the beneficiary, who might be a minor or lacking in financial sophistication and unable to invest the proceeds wisely. The insurance proceeds will be included in the beneficiary's taxable estate at his or her subsequent death. If the proceeds are used to pay the insured's estate taxes, it would at first appear that the proceeds could not be on hand to be taxed at the beneficiary's subsequent death. However, using insurance proceeds to pay the insured's estate taxes effectively increases the beneficiary's estate since the beneficiary will not have to sell inherited assets to pay such taxes. The solution to both drawbacks is usually an irrevocable life insurance trust. If possible, the trustee of the insurance trust should be the original applicant and owner of the insurance. If the insured transfers an existing policy to the insurance trust, the transfer will be recognized by the Internal Revenue Service only if the insured survives the date of the transfer by not less than three years. IRC 2035. If the insured dies within this three year period, the transfer will be ignored and the proceeds will be included in the insured's taxable estate. Insurance trusts may be funded or nonfunded. A funded life insurance trust owns both one or more insurance contracts and income producing assets. The income from the assets is used to pay some or all of the premiums. Funded insurance trusts are not commonly used for two reasons: 1. the additional gift tax cost of transferring income producing assets to the trust and 2. the grantor trust rules of IRC 677(a)(3) cause the grantor to be taxed on the trusts income. Unfunded insurance trusts own one or more policies of insurance and are funded by annual gifts from the grantor. Customarily, the trustee of the insurance trust is authorized, but not required, to either purchase assets from the insured's estate or loan insurance proceeds to his or her estate. Since the trustee of the insurance trust possesses all incidents of ownership in the insurance policy, the insurance trust provides the insured's estate with liquidity while shielding the insurance proceeds or assets purchased with the proceeds from estate tax when the insured dies, provided the trust has the appropriate Settlor and trustee.
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References
[1] The Use of Life Insurance In Estate Planning: A Guide To Planning And Drafting, Jon J. Gallo, Fall 1999 Real Property, Probate and Trust Journal, American Bar Association [2] Internal Revenue Code Section 2042(1)&(2) [3] In 2009, the threshold for estate taxation is $3,500,000. Internal Revenue Code Section 2010(c)
Massachusetts business trust

A Massachusetts business trust (MBT) is a legal trust set up for the purposes of business, but not necessarily one that is operated in The Commonwealth of Massachusetts. They may also be referred to as an unincorporated business organization or UBO. Business trusts may be established under the laws of other U.S. states. Many businesses are formed as MBTs to mitigate taxation; mutual funds in the U.S. are often structured as MBTs, though sometimes they are organized as Maryland corporations (or other states such as Minnesota). More recently, a Delaware statutory trust or DST has become a popular form of organization, and many new funds have been organizing as DSTs and exiting funds converting to DSTs. Since mutual funds are investment companies and not operating companies, many traditional corporation rules and requirements don't fit them well. During the last century and through the mid years of this century the tax laws and State regulations strongly favored corporate structures, tightening of these laws in the past 1015 years have resulted in the resurgence of the use of the UBO. For example, in 1985 the Scudder Capital Growth Fund, Inc. and Kemper Money Market Fund, Inc. changed their forms of organization from a corporation to a business trust.
History
The business trust made its debut in Massachusetts in 1827. As a result, a U.S. business trust today is often called a "Massachusetts trust" in legal circles. The U.S. Supreme Court defined the Massachusetts trust as a form of business organization, common in Massachusetts consisting essentially of an arrangement whereby property is conveyed to trustees: in accordance with terms of the trust. The business is to be held and managed for the benefit of persons who hold transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided. This method of transacting business in commercial enterprises originated in Massachusetts as a result of negative laws prohibiting the development of real estate without a special act of the legislature or in other words, without "permission" of the State . So, the Business Trust was created under Common-law right to contract to obtain legislatively constructed business organizations advantages but without having to gain "permission" to enter into a business activity and suffer under the burdens and restrictions that are placed on "statutorily constructed organizations". It states on page 1681 of Black's Law Dictionary 4Ed., 1957, under the term "Massachusetts or Business Trust"; See "Trust Estate as Business Company." This particular definition is found on page 1684 and it states this: TRUST ESTATE AS BUSINESS COMPANIES. A practice originating in Massachusetts of vesting a business or certain real estate in a group of trustees, who manage it for the benefit of the beneficial owners; the ownership of the latter is evidenced by negotiable (or transferable) shares. The trustees are elected by the shareholders, or in case of a vacancy, by the board of trustees. Provision is made in the agreement and declaration of the trust to the effect that when new trustees are elected, the trust estate shall vest in them without further conveyance. The declaration of the trust specifies the power of the trustees. They have a common seal; the board is organized with the usual officers of a board of trustees; it is governed by by-laws; the officers have the usual powers of like corporation officers; so far as practicable, the trustees in their collective capacity, are to carry on the business under a specified name. The trustees may also hold shares as beneficiaries. Provision may be made for the alteration or specified manner. In Eliot v.
Massachusetts business trust Freeman, 31 Sup. Ct. 360, 220 U.S. 178, 55 L. Ed. 424, it was held that such a trust was not within the corporation tax provisions of the tariff act of Aug. 5 1909 See also Zonne v. Minneapolis Syndicate, 31 S. Ct. 361, 220 U.S. 187, 55 L. Ed. 428 (Black's Law Dictionary 1957, 4Ed., page 1684)
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Taxation
The terms "business trust", "Massachusetts trust", and "unincorporated business organization" are not used in the Internal Revenue Code. (The terms "business trust" and "Massachusetts trust" are used in other Federal laws to clarify that they are to be treated as corporations under those laws.) The regulations require that trusts operating a trade or business be treated as a corporation, partnership, or sole proprietorship, if the grantor (also known as a "settlor" or "trustor"), beneficiary or fiduciary (also known as a "trustee") materially participates in the operations or daily management of the business. If the grantor maintains control of the trust, then grantor trust rules will apply. Otherwise, the trust would be treated as a simple or complex trust, depending on the trust instrument. (Source: www.irs.gov [1])
Federal income tax implications

For federal income tax purposes in the United States, there are several kinds of trusts: grantor trusts whose tax consequences flow directly to the settlor's Form 1040 (U.S. Individual Income Tax Return) and state return, simple trusts in which all the income created must be distributed to one or more beneficiaries and is therefore taxed to the non-settlor beneficiary (e.g. the widow of a trust created by the late husband), whether or not the income is actually distributed (which can occur), and complex trusts, which are, in general, all trusts that aren't grantor trusts or simple trusts. Some trusts may alternate between simple and complex under certain conditions. Many but not all trust organizations do their own tax work. This can be highly specialized work. All simple and complex trusts are irrevocable and in both cases any capital gains realized in the portfolios are taxed to the trust corpus or principal.
References
[1] http:/ / www. irs. gov/ businesses/ small/ article/ 0,,id=106553,00. html
Offshore trust
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Offshore trust
An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction. Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring (or 'settling') assets (the 'trust property') on the trustees to manage for the benefit of a person or class or persons (the 'beneficiaries'). However, a number of offshore jurisdictions have modified their laws to make their jurisdictions more attractive to settlors forming offshore structures as trusts. Also, two civil jurisdictions, who are sometimes considered to be offshore, Switzerland and Liechtenstein have artificially imported the trust concept from common law jurisdictions by statute.
Rule against perpetuities

Trusts in general are subject to the rule against perpetuities which, in practical terms, puts limits on the length of time within which all trust property must be distributed. Because of the strictures of the rule, a number of trusts have been struck down in wildly hypothetical circumstances because of possible infringement of the rule (see, e.g. the fertile octogenarian). Most offshore jurisdictions which have sophisticated trust laws have modified their laws relating to perpetuity to allow settlor to select lengthy, fixed, perpetuity periods, to avoid the use of "Royal lives" clauses. Many have also adopted "wait and see" laws, which mean that trusts which might potentially infringe the rule against perpetuities are no longer automatically invalid, but instead the trust remains valid unless and until the perpetuity period is breached. No recognised offshore jurisdiction has yet gone as far as some U.S. states and abolished the rule against perpetuities entirely in relation to trusts.
Management of underlying companies

Trusts in general are subject to the rule in Bartlett v Barclays Bank which provides (briefly) that where trust property includes the shares of a company, then the trustees must take a positive role in the affairs on the company. The rule has been criticised, but remains part of trust law in many common law jurisdictions. A number of offshore jurisdictions (notably the Cayman Islands, with STAR trusts, and the British Virgin Islands, with VISTA trusts) have created special forms of trust that may be expressly settled without imposing an obligation of the trustees to interfere in management in this way. Paradoxically, these specialised forms of trusts seem to infrequently be used in relation to their original intended uses. STAR trusts seem to be used more frequently by hedge funds forming mutual funds as unit trusts (where the fund managers wish to eliminate any obligation to attend meetings of the companies in whose securities they invest) and VISTA trusts are frequently used as a part of orphan structures in bond issues where the trustees wish to divorce themselves from supervising the issuing vehicle. Critics in onshore jurisdictions have suggested that these specialised trusts have provisions that so fundamentally undermine the nature of a trust that they should not be recognised in an onshore jurisdiction, but whatever the view of onshore tax authorities and regulators, it seems unlikely that the courts in onshore jurisdictions would be prepared to derogate from the Hague Convention on the Law Applicable to Trusts and on their Recognition.
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Asset protection
Certain jurisdictions (notably the Cook Islands, but the Bahamas also has a species of asset protection trust) have provided special trusts which are styled as asset protection trusts. Whilst all trusts, to a degree, have an asset protection element to them some jurisdictions have enacted laws trying to make life difficult for creditors to press claims against the trust (for example, by providing for particularly short limitation periods). In practice the effectiveness of such trusts is limited as the bankruptcy and/or divorce laws in the settlor's home jurisdiction will usually operate to set aside transfers to the trusts, and most jurisdictions (including offshore jurisdictions) set aside transactions entered into defraud creditors.
Powers of investment
Most traditional jurisdictions only permit trustees to make very conservative financial investments. Most offshore jurisdictions permit (or allow the settlor to specify in the trust instrument that they are permitted) a wider range of investments, including higher risk investments such as derivatives and futures contracts.
Purpose trusts
Whilst in most common law jurisdictions, trusts must either be formed for the benefit of persons, or charitable purposes, many offshore jurisdictions have also amended their laws to permit trusts to be formed for non-charitable purposes. Such trusts need to enforce a "protector" to be able to enforce the terms of the trust, but doubt remains as to who should be treated as the beneficial owner of the trust funds for tax purposes prior to its distribution. Interestingly, no offshore jurisdiction yet appears to have made a serious effort to expand upon the flexibility of discretionary trusts in relation to certainty of objects, as expounded in McPhail v Doulton. This may be because the common law rules are now considered to be sufficiently flexible to make no widening necessary to attract trust business.
Anachronistic common law rules

Many offshore jurisdictions have also legislated to abolish certain anachronistic common law rules which sometimes cause difficulty for trust planning. These include: Rule in Howe v Earl of Dartmouth Rule in Maloney v Alveranga Rule in Re Atkinson
Use of offshore trusts

Official statistics on trusts are difficult to come by as in most offshore jurisdictions (and in most onshore jurisdictions), trusts are not required to be registered. There is a common perception that offshore trusts are predominantly used by wealthy individuals and families as part of their tax planning. This may be true, however there are also other purposes that offshore trusts are used for. Offshore trusts are also sometimes formed as unit trusts to operate as a mutual fund. Offshore trusts are often used as part of an orphan structure in capital markets or trade finance transactions. Pan-national non-governmental bodies are sometimes established as offshore trusts. For example, the International Cricket Council is formed in the British Virgin Islands.
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Swiss trust companies

One of the most commonly used forms of offshore corporations are the so-called seasoned or vintage Swiss trust companies. These are typically corporations that were established in the second half of the 20th century and therefore meet the minimum time since incorporation requirement to be awarded trust status. Typically, Swiss trust companies were incorporated but subsequently became dormant for a variety of reasons. Such dormant companies are then identified and acquired by agencies specializing in vintage Swiss companies with the intention of selling them to end clients, usually for offshore asset management, asset holding or investment flagship purposes.
Percy Sladen Memorial Trust

The Percy Sladen Memorial Trust is a trust fund administered by the Linnean Society of London for the support of scientific research. It was endowed by the wife of marine biologist Percy Sladen (18491900) in his memory. The Trust has in general been devoted to the support of field work. Major scientific expeditions that have been funded under the Trust include: the Percy Sladen Trust Expedition to the Indian Ocean (1905); the Percy Sladen Trust Expedition to Melanesia; the Percy Sladen Trust Expedition to West Africa; the Percy Sladen Trust Expeditions to the Abrolhos Islands (1913,1915); the Percy Sladen Trust Expedition to Lake Titicaca (1937) Other uses of the fun include a grant to the Royal Albert Memorial Museum in Exeter, towards curation of the Sladen Collection of echinoderms.
References
Gardiner, Brian G. (2003). "A biography of Percy Sladen (18491900)" [1]. The Linnean (Special Issue No. 4). Retrieved 2008-05-09.
References
[1] http:/ / www. linnean. org/ fileadmin/ images/ sladen. pdf
Pet trust
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Pet trust
A pet trust is a legal arrangement to provide care for a pet after its owner dies.[1] [2] A pet trust falls under trust law and is one option for pet owners. Options include honorary trusts, provisions in a will and traditional legal trusts. Pet trusts stipulate that in the event of a grantors disability or death a trustee will hold property (cash, for example) in trust for the benefit of the grantors pets. The grantor (also called a settlor or trustor in some states) is the person who creates the trust, which may take effect during a persons lifetime or at death. Payments to a designated caregiver(s) will is made on a regular basis. Depending upon the state law, trusts usually continue for the life of the pet or 21 years, whichever occurs first. Some states allow a pet trust to continue for the life of the pet, without regard to a maximum duration of 21 years. This is particularly advantageous for companion animals who have longer life expectancies than cats and dogs, such as horses and parrots.
History
The development of pet trusts is part of the animal rights movement.
References
[1] Bressant-Kibwe, Kim (2001). "Legal Information: Pet Trust Primer" (http:/ / web. archive. org/ web/ 20031008202741/ http:/ / www. aspca. org/ site/ PageServer?pagename=pettrusts). ASPCA. Archived from the original (http:/ / www. aspca. org/ site/ PageServer?pagename=pettrusts) on 2003-10-08. . (Archived url). [2] Manning, Sue (June 22, 2011). "Pet estate planning: Not just for Leona Helmsley anymore" (http:/ / today. msnbc. msn. com/ id/ 43503433/ ns/ today-today_pets_and_animals/ #. Tj-MMWNAJ64). Associated Press on MSNBC.com. . Retrieved 8 August 2011.
External links
Providing for your pet's future (http://www.littlebuddies.org/petsfuture.htm) on Littlebuddies.org "Providing for your pet" (http://www.nycbar.org/Publications/pub-provforpet.htm). New York City Bar Mott, Maryann (22 May 2005). "And to My Dog, I Leave a $10,000 Trust Fund" (http://www.nytimes.com/ 2005/05/22/business/yourmoney/22pettrust.html?ei=5090&en=408a99187ac97948&ex=1274414400& partner=rssuserland&emc=rss&pagewanted=all). The New York Times. Retrieved 8 December 2008. Willing, Richard (15 August 2002). "Animal owners set up trust funds for their pets" (http://www.usatoday. com/news/nation/2002-08-15-pettrust_x.htm). USA Today. Retrieved 8 December 2008.
Private annuity trust
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Private annuity trust

A private annuity trust (PAT) enables the value of highly appreciated assets, such as real estate, collectables or an investment portfolio, to be realized without directly selling them and incurring substantial taxes from their sale. A PAT can defer 100% of the United States federal capital gains tax due on the sale of an asset, provide a stream of income, and effectively remove the asset from the owner's estate, thus reducing or eliminating estate taxes. With these advantages, a PAT provides an alternative to other methods of deferring capital gains taxes, such as the charitable remainder trust (CRT), installment sale, or tax-deferred 1031 exchange. As of October 2006 the IRS ruled that the PAT is no longer a valid capital gains tax deferral method. Those who utilized the PAT before the IRS ruling are grandfathered in and will continue to recognize its tax deferral benefits. Prior to October 2006, PAT's were very attractive to sellers of highly appreciated real estate. A PAT will allow the owner of investment property to defer up to 100% of the taxes without ever having to buy another property. This is very important because good quality investment properties are difficult to locate. The PAT will also allow the seller of a highly appreciated primary residence to defer up to 100% of the taxes as well. This is important because all gains on primary residences over $250,000 for a single person, and $500,000 for a married couple will be taxed if a PAT is not used. A properly structured PAT involves first transferring the asset to the PAT in return for a lifetime income stream in the form of an annuity. The transfer of the asset is not a taxable transaction. It is important to understand that a PAT is not issued by a commercial insurance company. Anytime after the asset is placed into the PAT the asset can be sold without taxation to the trust. There is no tax on the sale to the PAT because the PAT has actually purchased the asset from the owner for the fair market value of the asset. The PAT pays the owner for the asset with a lifetime income stream. The PAT has a basis equal to the fair market value so the PAT can sell the asset for fair market value and not be subject to taxation. The original owner of the asset pays taxes only on the PAT payments received, not on the transfer of the asset to the PAT. PAT payment amounts are based on IRS Life expectancy tables for a single individual or for the joint lives of the asset owner and his or her spouse. The lifetime annuity payments are then made from the PAT assets and/or investment earnings from asset or, alternately, the asset is sold and the proceeds are reinvested by the trustee to fund the payments. PAT payments are calculated using an IRS formula based on the age of the asset owner(s), the value of the asset, and the current IRS interest rate called the Applicable Federal Rate -AFR. PAT payments can be made monthly, quarterly, or annually. Neither the transfer of the asset to the trust nor its later sale is subject to income taxes if, as is usually the case, the annuity payment is established at a level that gives the annuity a present value equal to the value of the asset sold. However, each annuity payment when received will be partially taxable on the share of capital gains, depreciation recapture and ordinary income included in the payment. The portion representing recovery of original tax basis is not taxable. To preserve the benefits of a PAT, the trustee must be independent, the annuity cannot be secured in any way, and the annuitants cannot have any control over the trust or its investments. Informal suggestions and advice, however, are not prohibited. The primary benefit of a PAT is that it allows the full appreciated value of the asset to be invested and to earn income before capital gains and recapture taxes are paid. This means that the taxes due can be stretched out over the owner's entire lifetime. The IRS does not charge any interest or penalties for this form of tax deferral. If the trust's earnings are greater than the annuity amounts paid, the excess value will accrue or can be paid out to the ultimate beneficiaries. The owner's heirs who will also receive any remaining investments in the PAT completely free of estate taxes after the owner has died. If the owner dies before living out his or her life expectancy, the trust might be required to pay a portion of the deferred capital gains taxes. On the other hand, in most cases if the owner lives at
Private annuity trust least 2/3 of his or her life expectancy, the trust will receive additional tax benefits. The investment of the pre-tax proceeds potentially gives private annuity trusts the ability to generate substantially more money over the long run than a direct and taxed sale. However, partially offsetting this advantage are the compressed income tax brackets for trusts that cause the investment earnings to reach the maximum income tax bracket when income exceeds $9,000$10,000 annually. Also, the PAT is not allowed to deduct the amount of imputed interest built into the annuity payments that it makes. Sometimes the PAT will invest in a deferred annuity in an effort to minimize trust income taxes, but at the expense of sizable commissions, fees, and taxes. Investing PAT assets in a deferred annuity issued by a commercial insurance company should be avoided at ALL costs. Thus, potential benefits from a private annuity trust include lifetime income, deferral of capital gains and depreciation recapture, investment flexibility and diversification, enhancement of retirement income, and tax-free inheritance of the remaining trust funds by the designated beneficiaries. These benefits in many cases will enable a PAT to provide superior results as compared to a charitable remainder trust (CRT), installment sale, or tax-deferred 1031 exchange. After October 2006 the PAT is no longer a method to defer capital gains taxes. Allstate Insurance developed the Structured Sale which utilizes a structured annuity. The Structured Sale (Ensured Installment Sale) has generally considered to be a much superior tax deferral method to the PAT. However, this is heavily debated by E. Anthony Reguero, who contends that if used properly, the Private Annuity Trust is superior to the Structured Sale both in terms of the tax benefits to the beneficiary or client AS WELL AS the number of ways the IRS can benefit by taxing the trust.
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External links
Annuities Institute [1] National independent planning firm NAFEP [2] National Association of Financial & Estate Planning NAPAT [3] National Association for Private Annuity Trust
References
[1] http:/ / www. annuitiesinstitute. com/ [2] http:/ / www. nafep. com/ [3] http:/ / www. napat. org/
Protective trust
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Protective trust
The Protective Trust is a form of settlement found in England and Wales and several Commonwealth countries. It has marked similarities to asset-protection trusts found in several offshore jurisdictions and US Spendthrift trusts. In such a trust assets are ordinarily held to pay an income to the beneficiary. The beneficiary may also have access to capital of the trust with the trustee's permission. The right to receive income from a trust would ordinarily be an asset in the hands of the beneficiary and could be sold, thwarting the intention of the donor to spread the gift over the recipient's lifetime. Additionally on a bankruptcy the right to the income would be sold by the beneficiary's trustee in bankruptcy. To give protection to beneficiaries, a protective trust automatically converts into a discretionary trust, under which the beneficiary has no right to the income, if he or she does anything which breaches a condition specified in the document creating the trust. The establishment of this discretionary trust is ordinarily exempt from the charge to UK inheritance tax on the establishment of discretionary trusts. Such protective trusts have a longstanding history. To reduce the verbose definitions that had previously to be recited in the establishing documents of a protective trust, in England and Wales s33 of the Trustee Act 1925 (and equivalent legislation in other jurisdictions) provides that this protection will arise in any trust described as a "protective trust" in its trust deed. Protective trusts are subject to challenge under creditor protection legislation as are any other forms of asset-protection. However many jurisdictions do not permit a trust to be broken where a debtor who remains a discretionary beneficiary only under a trust and cannot access the fund without the exercise of the trustees' discretion in his favour.
Purpose trust
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Purpose trust
A purpose trust is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind. In most jurisdictions, such trusts are not enforceable outside of certain limited and anomalous exceptions, but some countries have enacted legislation specifically to promote the use of non-charitable purpose trusts. Trusts for charitable purposes are also technically purpose trusts, but they are usually referred to simply as charitable trusts. People referring to purpose trusts are usually taken to be referring to non-charitable purpose trusts. Trusts which fail the test of charitable status usually fail as non-charitable purpose trusts,[1] although there are certain historical exceptions to this, and some countries have modified the law in this regard by statute. The court will not usually validate non-charitable purpose trusts which fail by treating them as a power. In IRC v Broadway Cottages Trust [1955] Ch 20 the English Court of Appeal held: "I am not at liberty to validate this trust by treating it as a power. A valid power is not to be spelled out of an invalid trust."
Conceptual objections
The basis for the general prohibition against non-charitable purpose trusts is usually phrased on one or more of several specific grounds.
The beneficiary principle

A trust is, at its root, an obligation. And accordingly, "every [non-charitable] trust must have a definite object. There must be someone in whose favour the court can decree performance."[2] With a charitable trust, this power of enforcement is usually vested in the Attorney General. However, such conceptual objections seem less strong since the decision of the House of Lords in McPhail v Doulton [1971] AC 424 where Lord Wilberforce rode roughshod over objections to widening the class of valid discretionary trusts on the basis that there would be difficulty ascertaining beneficiaries for the court to enforce the trust in favour of.
Uncertainty
Where the objects of a trust are a purpose rather than an individual or individuals, there is much greater risk that a trust would not be enforceable due to lack of certainty. Cases such as Morice v Bishop of Durham (1804) 9 Ves Jr 399 and Re Astor [1952] Ch 534 re-affirm the court's disinclination to enforce trusts that are not specific and detailed. It is noteworthy that the common law exceptions to the general prohibition on purposes trusts tend to relate to specific and detailed matters, such as maintenance of a specific tomb, or caring for a particular animal.
Excessive delegation of testamentary power

Purpose trusts have been attacked conceptually on the basis that it would amount to the delegation of a testamentary power,[3] although subsequent cases have cast doubt on the correctness of that reasoning.[4]
Perpetuity
Charitable purpose trusts are exempt from the rule against perpetuities. Private trusts are not. Accordingly, all non-charitable purposes trusts, to be valid, need to comply with the perpetuity rules in the relevant jurisdiction.
Common law exceptions

There are, nonetheless, several well recognised exceptions at common law where non-charitable purposes trusts will be upheld.
Purpose trust
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Tombs and monuments

Provisions for the building or maintenance of tombs or monuments have been upheld as a matter of grave concern in common law, although solely on the basis of ancient precedent. In Re Hooper [1932] 1 Ch 38 a trust for the maintenance of graves was upheld, but the court indicated that it would not have done so had it not been bound by Pirbright v Salwey [1896] WN 86. Such trusts still need to comply with the requirement of certainty. Hence a bequest to a Parish council for "the purpose of providing some useful memorial to myself" was struck down.[5]
Animals
Trusts for the care of specific animals have been upheld.[6] In Re Dean (1889) 41 Ch D 552, North J upheld a trust for maintenance of horses and hounds for 50 years relying upon upon much older authorities[7] and the monument cases.
Quistclose trusts
Historically, Quistclose trusts have sometimes been considered to be purpose trusts, but the modern view is that they are resulting trusts to the settlor subject to a power to dispose of the assets in a predetermined fashion.
Others
In most academic textbooks, there are usually a swath of "other" purpose trusts or purported purpose trusts that are held up as a residual anomalous category. The most commonly cited example is Re Thompson [1934] 342 where a gift to Trinity Hall, Cambridge for the promotion and furtherance of fox hunting was upheld. It has been suggested academically that the case has "been elevated to a position of importance which it does not merit".[8] In Re Endacott [1960] Ch 232 it was made clear that the existing exceptions at common law would not be extended; they were described as "troublesome, anomalous and aberrant".
Mistakes about the Common Law

Paul Baxendale-Walker has argued in the book "Purpose Trusts" (Butterworths 1999)Paul BW Chaplin#Biography that the courts took a wrong turn in the mid 20th century and ignored hundreds of previous years of judicial precedents in which purpose trusts of all kinds had been upheld as valid. He contends that the "beneficiary principle" has been misunderstood. His view have received support from Professor Jill Martin and others.
Statutory exceptions
A number of offshore jurisdictions have enacted statutes which expressly validate non-charitable purpose trusts outside of the small group of specific exceptions recognised at common law. Some of the jurisdictions which have done so include the Bahamas, Bermuda, the British Virgin Islands and the Cayman Islands. Characteristically, in those jurisdictions a non-charitable purpose trust requires a written trust instrument and the trust instrument must specify a protector or enforcer who will have locus standi to enforce the terms of the trust against the trustees. This role is created to address the concerns expressed by the courts as to how the courts would have power to control the trustees. However, no real steps have been taken in any of those jurisdictions to address the fundamental conceptual issues of where the beneficial title to the trust assets should be regarded as residing whilst they form part of the trust fund. Arguably, if no other person is regarded as having a beneficial claim to the assets, they would be regarded as being owned solely by the trustees, which could have disastrous tax implications for the trustees.
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Unincorporated associations
Special problems arise in connection with the holding of property by unincorporated associations of persons. Whereas a company has separate legal personality and can hold property, with certain statutory exceptions,[9] unincorporated associations of persons cannot. Accordingly, where an unincorporated association is formed for a non-charitable purpose (which is most often the case), a gift to an unincorporated association can fail as an invalid purpose trust.[10] However, the courts have usually tried to avoid such a result by construing the gift as a gift to the members of the unincorporated association.[11] The difficulty is that such a gift would then have to be construed as a distributive gift to the individual members, rather than a purposive gift for the objects of the unincorporated association. In Re Recher's Will Trust [1972] Ch 526 a more purposive approach was taken, and Brightman J held that a gift to The London and Provincial Anti-Vivisection Society was to be construed as a beneficial gift in favour of the members, not so as to entitle them to an immediate distributive share, but as an accretion to the funds of the society subject to the contract of the members as set out in the rules.[12] Further, it was held that such a construction would be possible whether the society was inward looking (ie. existed to promote the interests of its members) or outward looking (ie. existed to promote some external cause or purpose).
Notes
[1] See for example, Re Shaw [1957] 1 WLR 579, concerning the will of George Bernard Shaw - a provision to develop a new 40 letter alphabet was struck down as not being charitable, as defined by law, and the provision failed as a non-charitable purpose trust. [2] Morice v Bishop of Durham (1804) 9 Ves Jr 399 [3] Leahy v AG for New South Wales [1959] AC 457 at 484 [4] Re Denley's Trust Deed [1969] 1 Ch 373 at 387 [5] Re Endacott [1960] Ch 232 [6] Pettinghall v Pettingall (1842) 11 LJ Ch 176 [7] Mitford v Reynolds (1848) 16 Sim 105 [8] Hanbury and Martin (16th ed.) [9] Such as trade unions and friendly societies, for example (in the United Kingdom, see section 10 of the Trade Union and Labour Relations (Consolidation) Act 1992 and section 54 of The Friendly Societies Act 1974)). [10] See for example Leahy v Attorney General for New South Wales [1959] AC 457 [11] See for example, Re Lipinski's Will Trusts [1976] Ch 235, where such a gift was upheld, even though the testator expressed that it was for a specific non-charitable purpose. [12] As it happened, the Society had dissolved prior to Mr Recher's death, and the gift failed in any event. It has now been replaced by the National Anti-Vivisection Society
Qualified personal residence trust
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Qualified personal residence trust

Residence trusts are used to transfer a grantors residence out of the grantors estate at a low gift tax value. Once the trust is funded with the grantors residence, the residence and any future appreciation of the residence is excluded from grantors estate. Personal residence trusts (PRTs) are irrevocable split interest trusts. The transfer of the residence to the trust constitutes a completed gift. The split interest character of the trust is as follows: the grantor retains the right to live in the house for a number of years, rent free, and then the remainder beneficiaries of the trust become fully vested in their interest. PRTs are similar by nature to other types of retained interest trusts, like GRITs, GRATs and GRUTs. Generally, if the grantor retains an interest in the trust, then for estate and gift tax valuation purposes, his retained interest is valued at zero. However, if the retained interest is qualified within the meaning of United States Internal Revenue Code ("Code") section 2702(b), its value is determined under Code Section 7520. The value of the retained interest, as will be explained in more detail below, is important for gift tax purposes. Because the transfer of the residence to the PRT is a completed gift, it is desirable to minimize the value of the gift. The gift is valued at the fair market value of the residence, less the value of the retained interest. Consequently, if the retained interest is valued at zero, the taxable gift equals the fair market value of the residence. If the retained interest is valued under Code section 7520, its value will be greater than zero, and the gift value is minimized. Code section 7520 values the remainder interest using the term of the trust, the life expectancy of the grantor and the 7520 rate in effect for the month of the transfer. The longer the term of the trust and the higher the 7520 rate, the lower the value of the gift. The age of the grantor also matters. If the grantor is older there is a greater likelihood that the grantor will die during the term of the retained interest (when a contingent reversion is retained by the grantor). The regulations under Code section 2702 allow two types of qualified trusts: personal residence trusts and qualified personal residence trusts (QPRTs). Of the two, QPRTs are more widely used because they possess a greater degree of flexibility. A personal residence is one of the following: 1. the principal residence of the grantor; 2. one other residence of the grantor; or 3. an undivided fractional interest in either. Up to two residences may be transferred into residence trusts, and one must be the primary residence. The other residence, usually a vacation home, may be rented by the grantor a portion of the time, but the grantor must live in the vacation home for more than the greater of 14 days or 10% of the number of days rented.
Mortgages
Personal residences that are mortgaged may be transferred to a residence trust. To the extent the residence is encumbered, the value of the property transferred will be reduced for gift tax purposes. As mortgage payments continue to be made by the grantor, additional gifts are made to the remaindermen.
Personal Residence Trusts

To escape valuation under Code section 2702 (i.e., retained interest valued at zero), a PRT must comply with the following two primary requirements: (i) the trust may hold only one residence which must be used as the grantors personal residence during the term of the trust; and (ii) the trust may not allow the sale of the residence during the term of the trust. Additionally, following the expiration of the residence term, sale to grantor or grantors spouse is also prohibited.
Qualified personal residence trust The inability to sell the residence is a major restriction on the flexibility of a PRT and usually makes QPRTs more desirable. PRTs do not, however, have many other technical restrictions that QPRTs are subject to.
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Qualified Personal Residence Trusts

Similar to PRTs, QPRTs must comply with certain requirements to avoid valuation under Code Section 2702. The QPRT requirements are as follows: (i) income must be distributed to the grantor at least annually; (ii) no distributions of principal may be made to any person other than the grantor; (iii) only one personal residence may be held in the trust, but as discussed below, certain other assets may be held in the trust, as well; (iv) to the extent the trust hold cash in excess of the amount allowed, such cash must be distributed at least quarterly; (v) the QPRT status will cease if the residence is no longer used in such capacity. QPRTs are permitted the following: (i) the residence may be sold, but not to the grantor or the grantors spouse (the residence may pass to the grantors spouse without any consideration at the end of the term); (ii) if the residence is sold, the trust may continue holding the sale proceeds, so long as the cash is held in a separate bank account; (iii) cash may be added to the trust, and then held in a segregated bank account, for the payment of certain expenses connected with the residence; (iii) the trust may permit improvements to be added on to the residence; and (iv) the grantors interest may be converted into an annuity, if the trust contains provisions required by Treasury Regulations Section 25.2702-3 for a qualified annuity interest. If the residence is sold and the trust retains the cash, then the trust must provide that it will terminate as a QPRT with respect to the cash, no later than the earlier of: (i) the date that is two years after the date of sale; (ii) the termination of grantors interest in the trust; or (iii) the date on which a new residence is acquired by the trust. If the QPRT status of the trust terminates as to the cash, then the cash comes back into the grantors estate.
Income Tax Aspects of Residence Trusts

A residence trust (PRT or QPRT) will remain a grantor trust during the grantors retained term. Grantor status is important, because it will allow the grantor to take mortgage interest and property tax deductions, and will also avail the grantor of the Code Section 121 gain exclusion. Following the expiration of the residence term, the grantor status of the trust usually ceases, unless the trust is drafted in a manner to make the trust intentionally grantor following the expiration of the term. This may be advantageous if the trust holds a vacation home and the grantor wishes to deduct mortgage interest and expenses associated with that home.
Estate and Gift Tax Aspects of Residence Trusts

If a grantor dies during the retained term of a residence trust, the full value of the trust property is included in the grantors estate under Code Section 2036(a)(1) (because the grantor retains the right to possess or enjoy the property). If the grantor retains a reversionary interest during the retained term of the trust, the value of the residence is included in the grantors estate under Code Section 2033. However, it is usually prudent to include in a QPRT a contingent reversionary interest during the retained term of the trust. If the grantor dies during the retained term, the residence is included in the grantors estate whether or not there is a reversionary interest. But, if there is a reversionary interest, the age of the grantor now comes into the valuation of the retained interest. Because now there is a possibility that the grantor will die within the retained term and the remainder beneficiaries will then receive nothing, the value of the retained term increases and the value of the remainder interest decreases (only the transfer of the remainder interest is subject to the gift tax, so it is beneficial to decrease its value). Following the expiration of the retained term, the residence is no longer included in the grantors estate; provided that the grantor is not a beneficiary of the trust and does not have the right to rent the residence for less than fair
Qualified personal residence trust market value.
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Sources
This article on personal residence trusts and qualified personal residence trusts is taken from attorney Jacob Stein's treatise on tax planning, with his permission.[1]
References
[1] Jacob Stein (Winter 2007). "The Importance of Trusts in Asset Protection" (http:/ / www. maximumassetprotection. com/ publications/ articles. html). California Trusts and Estates Quarterly. . Retrieved September 24, 2010.
Rabbi trust
In the United States a Rabbi trust is a type of trust used by businesses or other entities to defer the taxability to the person or entity receiving (the payee) such payments as employee compensation or purchase payments in the acquisition of another business.
History
The first such trust set up was for the benefit of a rabbi, resulting in the name. Revenue Procedure 92-64 further clarified the acceptable rules for Rabbi trusts along with a model trust document and the required features to avoid constructive receipt of income to the employee.
Applications
An example of a Rabbi trust applying where an employee receives compensation the taxation of which is deferrable is a nonqualified deferred compensation plan. The Rabbi trust is likewise applicable when one business purchases another business but wants to set aside part of the purchase price and defer its payment as well as taxability to the payee upon the satisfaction of conditions to which both parties agree.
Non-qualified deferred compensation plans

A non-qualified deferred compensation plan is where current income of an employee is deferred but not taxable to the employee. The employer, however, sets aside the assets in a separate trust for the employee's future. Ordinarily, this would cause current inclusion into gross income even though the employer has yet to reduce the money to income because of the economic benefit theory doctrine. So the IRS allowed by private letter ruling that the trust would not result in income, according to Section 83(a) of the Code, if the assets of the trust were available to the reach of the employer's general creditors. This is because until the employee is vested, he is under a substantial risk of forfeiture and under Section 83(a) and accompanying regulations 1.83-1 and as such is not subject to current inclusion into gross income. All non-qualified deferred-compensation plans must involve substantial risk of forfeiture or other methods of avoiding constructive receipt, such as conditioning payment upon performance of future conditions or service. The unique feature of the Rabbi trust is that the money placed in it is protected from changes of heart of the employer. Once placed in the trust the money cannot be revoked by decisions of the employer. So as long as the employer's financial position is sound, the money is relatively protected. If, however, the employer goes into bankruptcy proceedings, the money may be subjected to the claims of the employer's general unsecured creditors.
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Acquisition of a business
When one business purchases another business, the purchasing business may want to set aside part of the purchase price and defer its payment to the payee upon the satisfaction of conditions to which both parties agree. A Rabbi trust may be used in this situation to defer the taxability to the payee of the deferred payments of the purchase price. For the Rabbi trust to be successfully applied, there must be a real risk of forfeiture upon the failure by the payee to fulfill the agreed upon conditions. If the condition is impossible to fail, then constructive receipt may overcome the successful application of the Rabbi trust.
Impact
The Rabbi trust allows the deferment of compensation whether employment income or the purchase price of a business acquisition, and the absence of this would result in the taxability to the payee of the compensation not yet received by the payee. This would serve as a disincentive for deferring such payments.
External links
http://www.finance.cch.com/text/c40s10d440.asp http://www.nysscpa.org/cpajournal/2003/0303/features/f033403.htm
Real estate investment trust

A real estate investment trust or REIT ( /rit/) is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.[1] REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges. REITs can be classified as equity, mortgage, or hybrid. The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), adjusted funds from operations (AFFO) and cash available for distribution (CAD). In the period from 2008 to this writing (2011), REITs face challenges from both a slowing United States economy and the global financial crisis, which depressed share values by 40 to 70 percent in some cases.[2]
History
REITs originated in the 1880s at a time when investors could avoid "double tax," or a tax at corporate and individual level. In the 1930s, this tax benefit was removed, causing investors to pay "double tax." President Eisenhower signed the REIT tax provision contained in the Cigar Tax Excise Tax Extension in 1960.
By region
Australia
The REIT concept was launched in Australia in 1971. General Property Trust was the first Australian real estate investment trust (LPT) on the Australian stock exchanges (now the Australian Securities Exchange). REITs which are listed on an exchange were known as Listed Property Trusts (LPTs) until March 2008, distinguishing them from private REITs which are known in Australia as Unlisted Property Trusts. They have since been renamed Australian Real Estate Investment Trusts (A-REITs) in line with international practice.
Real estate investment trust There are now more than 70 A-REITs listed on the ASX, with market capitalization in excess of A$100bn. Australia is also receiving growing recognition as having the worlds largest REITs market outside the United States. More than 12 percent of global listed property trusts can be found on the ASX.
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Brazil
REITs were introduced in Brazil in 1993 by the law 8668/93 and initially ruled by the instruction 205/94 and, nowadays, by instruction 472/08 from CVM (Comissao de Valores Mobilirios - which is the Brazilian equivalent of SEC). Locally they are described as "FII"s or "Fundos de Investimento Imobilirio". FII's dividends have been free of taxes for personal investors (not companies) since 2006, but only for the funds which have at least 50 investors and that are publicly traded in the stock market. FIIs, referred to as REIT to correspond with the similar investment vehicle in the US, have been used either to own and operate independent property investments, associated with a single property or part property, or to own several real properties (multiple properties) funded through the capital markets.
Bulgaria
REITs were introduced in Bulgaria in 2004 with the so called "Special Purpose Investment Companies Act". They are pass-through entities for corporate income tax purposes (i.e. they are not subject to corporate income tax), but are subject to numerous restrictions.[3]
Canada
Canadian REITs were established in 1993. They are required to be configured as trusts and are not taxed if they distribute their net taxable income to shareholders. REITs have been excluded from the income trust tax legislation passed in the 2007 budget by the Conservative government. Many Canadian REITs have limited liability.[4] On December 16, 2010, the Department of Finance proposed amendments to the rules defining Qualifying REITs for Canadian tax purposes. As a result, Qualifying REITs are exempt from the new entity-level, specified investment flow-through (SIFT) tax that all publicly traded income trusts and partnerships are paying as of January 1, 2011.[5]
Finland
Finnish REITs were established in 2010, when 'the tax exemption law' (Laki eriden asuntojen vuokraustoimintaa harjoittavien osakeyhtiiden verohuojennuksesta, 299/2009)[6] was passed by the Finnish parliament. Together with the 'Law on Real Estate Funds' (Kiinteistrahastolaki, 1173/1997) [7] it enables the existence of tax efficient residential REITs. Qualifications REITs will have to be established as a public listed company (julkinen osakeyhti, Oyj) for this specific purpose. When the REIT is established the minimum equity is 5M and it has to be distributed over 5 separate investors. Minimum holding period: 5 years. At least 80% of its assets have to be invested in residential real-estate. At least 80% of the REIT's gross revenues must come from residential rental income. At least 90% of the REIT's taxable income, excluding unrealised capital gains, has to be distributed to its shareholders through dividends. The corporation is income-tax-exempt, but the shareholders will have to pay individual income tax on the dividends. Largest individual shareholder may own less than 10% of company shares (max. 30% till the end of 2013).
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France
The French acronym for REIT is SIIC. Gecina is the largest French SIIC by market cap and the second largest publicly traded property company in France (after Fonciere des Regions and Icade), with the third highest asset value among European REITs.[8] [9]
Germany
Germany is also planning to introduce German REITs (short, G-REITs) in order to create a new type of real estate investment vehicle. Government fears that failing to introduce REITs in Germany would result in a significant loss of investment capital to other countries. Nonetheless there still is political resistance to these plans, especially by the social democratic party ('SPD'). A law concerning G-REITs was enacted 1 June 2007, and is retroactive to 1 January 2007.[10] Qualifications REITs will have to be established as a corporation "REIT-AG" or "REIT-Aktiengesellschaft". At least 75% of its assets have to be invested in real-estate. At least 75% of the G-REIT's gross revenues must be real-estate related. At least 90% of the REIT's taxable income has to be distributed to its shareholders through dividends.
The corporation is income-tax-exempt, but the shareholders will have to pay individual income tax on the dividends. Some restrictions apply on establishing residential REIT's
Ghana
REITs have been in existence in Ghana since 1994. The Home Finance Company, now HFC BANK, established the first REIT in Ghana in August 1994. HFC Bank has been at the forefront of mortgage financing in Ghana since 1993. It has used various collective investment schemes as well as corporate bonds to finance its mortgage lending activities. Collective Investment Schemes, of which REITs are a part, are currently regulated by the Securities and Exchange Commission of Ghana.
Hong Kong
REITs have been in existence in Hong Kong since 2005, when The Link REIT was launched by the Hong Kong Housing Authority on behalf of the Government. Since 2005, there have been 7 REIT listings as at July 2007, most of which, including Sunlight REIT have not enjoyed success due to low yield. Except for The Link and Regal Real Estate Investment Trust, share prices of all but one are significantly below IPO price. Hong Kong issuers' use of financial engineering (interest rate swaps) to improve initial yields has also been cited as having reduced investors' interest[11]
India
As of January 2010, India was formulating legislation for REITs in the Indian real estate market. Once introduced these Indian REITs (country specific/generic version I-REITs) will help individual investors enjoy the benefits of owning an interest in the securitised real estate market. The greatest benefit will be that of fast and easy liquidation of investments in the real estate market unlike the traditional way of disposing of real estate. The government and Securities and Exchange Board of India SEBI through various notifications is in the process of making it easier to invest in real estate in India directly and indirectly through foreign direct investment, through listed real estate companies and mutual funds.
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Japan
Japan is one of a handful of countries in Asia with REIT legislation (other countries/markets include Hong Kong, Singapore, Malaysia, Taiwan and Korea), which permitted their establishment in December 2001. J-REIT securities are traded on the Tokyo Stock Exchange, and most service providers of the J-REITs are Japanese real estate companies, Japanese conglomerates and foreign investment banks. Since the burst of the real estate bubble in 1990, property prices in Japan have seen steady drops through 2004, with some signs of price stabilization and possibly price increase in 2005 and 2006. Some see J-REITs as a way to increase investment in the real estate market, although notable increases in asset values have not yet been realized. A J-REIT (a listed real estate investment trust) is strictly regulated under the Law concerning Investment Trusts and Investment Companies (the "LITIC") and established as an investment company under the LITIC. In addition to REITs, Japanese law also provides for a parallel system of special purpose companies which can be used for the securitization of particular properties on the private placement basis.
Nigeria
In 2007, the Securities and Exchange Commission (SEC) issued the first set of guidelines for the registration and issuance of requirements for the operation of REITs in Nigeria as detailed in the Investment and Securities Act (ISA). The first REIT, the N50 billion Union Homes Hybrid Real Estate Investment Trust, was launched in September 2008.
Pakistan
The Securities and Exchange Commission of Pakistan is in the process of implementing a REIT regulatory framework that will allow full foreign ownership, free movement of capital and unrestricted repatriation of profits. It will curb speculation in Pakistani real estate markets and gives access to small investors who want to diversify into real estate. The Securities and Exchange Commission of Pakistan is proposing a regulatory framework similar to that of Singapore and Hong Kong. The Securities and Exchange Commission of Pakistan expects that about six REITs will be licensed within the first year, mainly large asset management companies. Pakistan has recently seen an outflow of investments by foreign real estate development companies, mostly based in Malaysia and Dubai.[12]
Philippines
REITs in the Philippines will soon be available to the public after the Real Estate Investment Trust Act of 2009 (RA 9856) passed into law on December 17, 2009. Its Implementing Rules and Regulations were approved by the Securities and Exchange Commission in May 2010.[13]
Singapore
Commonly referred to as S-REITs, there are currently 20 REITs listed on the SGX, the first one to be set up being CapitaMall Trust [14] in July 2002. They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties. S-REITs are regulated as Collective Investment Schemes under the Monetary Authority of Singapore's Code on Collective Investment Schemes,[15] or alternatively as Business Trusts.[16] S-REITs benefit from tax advantaged status.
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United Arab Emirates

The REIT legislation was introduced by Dubai International Financial Centre (DIFC) to promote the development of REITs in the UAE by passing The Investment Trust Law No.5 that went into effect of August 6, 2006. This restricts all 'true' REIT structures to be domiciled within the DIFC. The first REIT license to be issued will be backed by Dubai Islamic Bank with a REIT named 'Emirates REIT' headed up by the dot com entrepreneur, Sylvain Vieujot. The issue is that DIFC domiciled REIT's cannot acquire non-Freezone assets within the Emirate of Dubai. The only federally approved Freezone within the UAE is the DIFC itself so therefore we expect to see Emirates REIT focusing all of its attention within this zone. Outside of the zone properties are purchasable by local Gulf (GCC) passport holders only.
United Kingdom
The legislation laying out the rules for REITs in the United Kingdom was enacted in the Finance Act 2006 and came into effect in January 2007 when nine UK property companies converted to REIT status, including the five that were FTSE 100 members at that time: British Land, Hammerson, Land Securities, Liberty International and Slough Estates (now known as "SEGRO"). The other four were: Brixton (now known as "SEGRO"), Great Portland Estates, Primary Health Properties and Workspace Group. British REITs have to distribute 90% of their income. They must be a close-ended investment trust and be UK resident and publicly listed on a stock exchange recognised by the Financial Services Authority. To support the introduction of REITs in the UK, the REITs and Quoted Property Group was created by several commercial property and financial services companies. Other key bodies involved are the London Stock Exchange the British Property Federation and Reita. The Reita campaign was launched on 16 August 2006 by the REITs and Quoted Property Group, in order to provide a source of information on REITs, quoted property and related investments funds. Reita's aim is to raise awareness and understanding of REITs and investment in quoted property companies. It does this primarily through its portal www.reita.org [17], providing knowledge, education and tools for financial advisers and investors. Doug Naismith, managing director of European Personal Investments for Fidelity International, said: "As existing markets expand and REIT-like structures are introduced in more countries, we expect to see the overall market grow by some ten percent per annum over the next five years, taking the market to $1 trillion by 2010."
United States
In the United States, a REIT is a company that owns, and in most cases operates, income-producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Qualifications In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must: Be structured as a corporation, trust, or association[18] Be managed by a board of directors or trustees[19] Have transferable shares or transferable certificates of interest[20] Otherwise be taxable as a domestic corporation[21] Not be a financial institution or an insurance company[22] Be jointly owned by 100 persons or more[23] Have 95 percent of its income derived from dividends, interest, and property income[24]
Pay dividends of at least 90% of the REIT's taxable income Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule)
Real estate investment trust Have at least 75% of its total assets invested in real estate Derive at least 75% of its gross income from rents or mortgage interest Have no more than 20% of its assets invested in taxable REIT subsidiaries.
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References
[1] "UPREITs, Down-REITs And Other REIT Vehicles: Should You Go Along For The Ride?" (http:/ / library. findlaw. com/ 1998/ Aug/ 1/ 126264. html). FindLaw.com. . [2] Carrick, Rob. "REITs battered down to eye-catching levels" (http:/ / www. globeinvestor. com/ servlet/ story/ GAM. 20081206. STMAIN06/ GITrusts). ctv.ca. . Retrieved 2008-12-08. [3] "Real Estate Investments in Bulgaria" (http:/ / tax. uk. ey. com/ NR/ rdonlyres/ egcdkrifqz33z36rqxhsdzf3ndwjg4wg4nqhvruw5hyjr5n5x3shfe3cpts5xklscwrwtkfmiln4kvgkzrgkqbpudoc/ International+ Alert+ 13. pdf). . Retrieved 2008-01-01. [4] Mark Rothschild (November/December 2005). "Spotlight on North America/Canada" (http:/ / www. nareit. com/ portfoliomag/ 05special/ p73. shtml). Reit.com. . Retrieved 2006-10-17. [5] David Dittman. "REIT Investing, Canadian Style" (http:/ / www. investingdaily. com/ ce/ 18204/ reit-investing-canadian-style. html). InvestingDaily.com. . Retrieved 2011-01-14. [6] http:/ / www. finlex. fi/ fi/ laki/ ajantasa/ 2009/ 20090299 [7] Kiinteistrahastolaki; http:/ / www. finlex. fi/ fi/ laki/ ajantasa/ 1997/ 19971173 [8] "Gecina largest office space in France" (http:/ / www. nareit. com/ portfoliomag/ 05special/ p61. shtml). . [9] "Gecina Reports First-Half Profit as French Company's Properties Gain Value" (http:/ / www. bloomberg. com/ news/ 2010-07-28/ gecina-reports-first-half-profit-as-french-company-s-properties-gain-value. html). 2010-07-28. . [10] Alan O'Sullivan (1 June 2007). "G-Reit news for German property" (http:/ / web. archive. org/ web/ 20070927082324/ http:/ / www. citywire. co. uk/ News/ NewsArticle. aspx?VersionID=92737). citywire.co.uk. Archived from the original (http:/ / www. citywire. co. uk/ News/ NewsArticle. aspx?VersionID=92737) on 2007-09-27. . Retrieved 2007-06-30. [11] Tim LeeMaster & Yvonne Liu, "Swire considers Festival Walk reit", Page B1, South China Morning Post, July 12, 2007 [12] Pakistan ready to allow REITs - It aims to draw $3 billion from overseas investors in 5 years (http:/ / www. iht. com/ articles/ 2006/ 06/ 21/ bloomberg/ sxreits. php) [13] (http:/ / www. reit. ph/ images/ reitPrimer. pdf) [14] Capitamall.com (http:/ / www. capitamall. com/ ) [15] Gov.sg (http:/ / www. mas. gov. sg/ resource/ legislation_guidelines/ securities_futures/ sub_legislation/ Amendments_to_Code_on_CIS_28_Sept_2007. pdf) [16] Gov.sg (http:/ / www. mas. gov. sg/ resource/ legislation_guidelines/ securities_futures/ sub_legislation/ SFA_BusinessTrusts_No2. pdf) [17] http:/ / www. reita. org [18] Internal Revenue Code Sect. 856(a) [19] Internal Revenue Code Sect. 856(a)(1) [20] Internal Revenue Code Sect. 856(a)(2) [21] Internal Revenue Code Sect. 856(a)(3) [22] See Internal Revenue Code Sect. 856(a)(4). See also Internal Revenue Code Sect. 582(c)(2) (defining financial institutions for these purposes); Internal Revenue Code Sect. 801 et. seq. (defining insurance companies for these purposes). [23] Internal Revenue Code Sect. 856(a)(5). [24] Internal Revenue Code Sect. 856(c)(2)
External links
Real Estate Investment Trusts (http://www.dmoz.org/Business/Investing/Real_Estate/ Real_Estate_Investment_Trusts//) at the Open Directory Project EPRA - European Public Real Estate Association (http://www.epra.com) "REITs create rental refugees" at Habitat International Coalition (http://www.hic-net.org/articles. asp?PID=482)
Resulting trust
295
Resulting trust
A resulting trust (from the Latin 'resultare' meaning 'to jump back') is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor (implied settlor). In this instance, the word 'result' means "in the result, remains with", or something similar to "revert" except that in the result the beneficial interest is held on trust for the settlor. Not all trusts whose beneficiary is also its settlor can be called a resulting trust. In common law, the resulting trust refers to a subset of trusts which have such outcome; express trusts which stipulate that the settlor is to be the beneficiary are not normally considered resulting trusts. (or he might not be in the existence,Re Vandervall case)Presumption is Constructive Trust[1] The beneficial interest results in the settlor, or if the settlor has died the property forms part of the settlor's estate (intestacy). And the distinguishment of beneficiary interest should be noted(Beneficial interest only will move but the beneficiary interest will not move)s53(1)(c).it remains with the person and Re Vandervall case has proven that only the Beneficial interest disappears but not the beneficiary interest.
Closely Related Parties

Some jurisdictions may establish a rebuttable presumption of gift for property transfers between relatives. Said presumption may operate as an affirmative defense to a petition to establish a resulting trust implied by operation of law. The law presumes that it is legitimate to transfer property to a family member, particularly for a relative's support. But an unrelated transferee who receives substantial value without consideration is ordinarily presumed to hold the property in trust for benefit of the transferor. The rebuttable presumption of gift affects transfers between siblings, uncles, aunts, children, and grandchildren. A notable exception to the presumption of gift is for property transfers between husband and wife (transmutations)(refer to changes in intestacy). The marital exception to presumption of gift arises from the fiduciary duty that spouses owe to one another. Spouses have a special trusted relationship that imputes an obligation of utmost good faith and fair dealing. Accordingly, spouses are deemed incapable of transmutation except under specified circumstances, such as when making an EXPRESS DECLARATION of transmutation as by clear statement in a deed or other writing of substantial dignity.[2]
Unlawful Purposes
Resulting trust laws arise in equity rather than common law because equity gives clean hand. Accordingly, some jurisdictions might impose equitable defenses such as laches, unclean hands, and the responsibility to do equity. Where a transferor has transferred property for an unlawful purpose, and gained the benefit, then a court might hold that he has waived his right to claim a resulting trust(i.e.:settlor)(inter vivos). In such situations, a court balances the transferee's unjust enrichment with the enablement of cheating by the transferor. Enabling a cheater at gaining from his transaction would erode the legitimacy of the court. Other jurisdictions may elect to disregard an unlawful purpose. In situations involving illegality, it can become difficult to distinguish implementation of a resulting trust theory (implied by operation of law) from an oral express trust (one implied by the facts). A transferor failing upon one theory might still prevail upon the other.
Resulting trust
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Resulting trusts in English law

Classification One attempt to classify resulting trusts was made by Megarry J in Re Vandervell's Trusts (no.2)[1974] Ch 269. According to Megarry J there are two sorts of resulting trusts in English law. Presumptive resulting trusts These are transfers made by A to B, where the law creates a rebuttable presumption of a resulting trust applying if the intention is not made clear by A.(written evidence produced) For example, when A transfers property to B, unless the transfer was made by father to child or by husband to wife, in the absence of any other evidence the law presumes that a resulting trust has been created for A.(Y this category excluded:i.e.:A evidence cannot stand in Course of testimony & remains Hearsay)(A will not get the property if H&W/F&C can adduce evidence it is their property and resulting trust will not arise. The main categories of fact situations giving rise to a presumption of a resulting trust are: - Where A makes a voluntary conveyance of property to B - Where A has made a monetary contribution to the purchase of property for B ( The Venture, [1908] P 218,(1907) 77 L.J.P. 105.) The presumptions are, however, easily rebutted. In Fowkes v Pascoe (1875) LR 10 Ch App 343, evidence was shown that a woman had purchased stock in the names of herself and her grandson; evidence by the grandson and granddaughter-in-law that this had been done as a gift was admissible. On the other hand, the presumption is solely concerned with evidence of an intent to create a trust; ulterior motives to create a trust are not taken into account. In Tinsley v Milligan [1994] 1 AC 340, a woman transferred property to her lover on trust in order to fraudulently claim social security payments; it was held that this did not defeat the presumption of a resulting trust. The fact that is being proved by the presumption of a resulting trust is the intention to create a trust for the settlor. This view of presumed resulting trusts has been endorsed by Lord Browne-Wilkinson in Westdeutsche Landesbank v Council of London Borough of Islington [1996] AC 669); "...the presumption of resulting trust is rebutted by evidence of any intention inconsistent with such a trust, not only by evidence of an intention to make a gift." Some have argued that this presumption arises as a result of a lack of intention to transfer any beneficial interest,.[3] This view has generally not received judicial endorsement.(obiter dicta) Automatic resulting trusts In these trusts " there is no mention of any expression of intention in any instrument, or of any presumption of a resulting trust: the resulting trust takes effect by operation of law,(by law:implied that property will revert back to u) and so appears to be automatic." ( per Megarry J, Re Vandervell's Trusts (No 2)) [1974] Automatic resulting trusts can arise when the settlor tries to set up a trust for a third party, but there is an initial failure for want of objects; for example, by naming beneficiaries which cannot be defined, as in Morice v Bishop of Durham 1805 10 Ves 522, or when the objectives of the trust no longer become possible or relevant by the time of the transfer to the trustee, as in Re Gillingham Bus Disaster Fund [1958] Ch 300. Settlor's intention in automatic resulting trusts In relation to automatic resulting trusts, there is some difference in expressing the nature of the settlor's intention: In Westdeutsche Lord Browne-Wilkinson stated that a resulting trust arises due to a legal "presumed intention to create a trust in favour of the donor" It has also been suggested that it is the fact of a "lack of intention to benefit the recipient" that creates the trust.[4] The settlor intends to retain the beneficial interest in the property, but transfers the legal title to someone else (for example, to let an active child manage the assets). The trust is implied by the settlor's lack of intention to transfer any beneficial interest[5]
Resulting trust Although in many cases the outcome would be the same, the difference is significant. It is often difficult to prove intention, but easier to prove the circumstances when a legal presumption will arise. It may be more or less easy to rebut a presumption than to disprove an intention. Lord Browne-Wilkinson was afraid that this would create a "floodgates" problem, by giving every claimant a proprietary right in bankruptcy - making many more claimants secured creditors, and thus making the position of a secured creditor much less valuable.[6]
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Resulting Trusts in South Africa

In South Africa there is no doctrine of resulting trusts. The main remedy if any of the trust purposes should fail would be through Unjust enrichment. (Westdeutsche Landesbank v Council of London Borough of Islington)
Notes
[1] [2] [3] [4] [5] Gardner (Secret trust), An Introduction to the Law of Trusts http:/ / www. courtinfo. ca. gov/ opinions/ documents/ B203089A. PDF Birks, Restitution and Equity: Resulting Trusts and Equitabe Compensation (2000) ; Chambers, Resulting Trusts, (1997) Chambers, Resulting Trusts, (1997) Re Vandervell's Trusts (No.2) [1974] Ch 269
[6] Westdeutsche landesbank v council of london borough of islington [1996] AC 669
Secret trust
A secret trust is a trust which arises when property is left to a person (the legatee) under a will on the understanding that they will hold the property as trustee for the benefit of beneficiaries who are not named in the will. Secret trusts are divided into two types: Fully secret trusts, where the will is totally silent as to the existence of a trust; and Semi secret trusts or half secret trusts, where the will provides that the legatee is to hold the property on trusts, but does not specify the terms of the trust or the beneficiary. Secret trusts are something of a historical anachronism. They arose because in most common law jurisdictions, wills are public documents after they have been admitted to probate, and where the testator wishes to leave a legacy to (for example) a mistress or an illegitimate child without causing pain or embarrassment to his family, he could devise the property to a trusted person to avoid the name of the mistress or illegitimate child appearing in the will. They fall outside of the Wills Act. Despite their rarity, secret trusts still remain a staple of many law courses at University level, as they represent a rare exception to the rule that any disposition on death must be by way of a will (or a document incorporated by reference into a will) which complies with the applicable statutory requirements in the relevant jurisdiction.[1] Historically, the courts have felt it more important to uphold the rights of the putative beneficiary and to avoid the unjust enrichment of the legatee than to uphold the general rule of public policy that property must devolve by will on death.
Footnote
[1] The other main exception, also a historical anachronism rarely seen in modern times, is a donatio mortis causa
Special needs trust
298
Special needs trust

A special needs trust is created to ensure that beneficiaries who are disabled or mentally ill can enjoy the use of property which is intended to be held for their benefit.[1] In addition to personal planning reasons for such a trust (the person may lack the mental capacity to handle their financial affairs) there may be fiscal advantages to the use of a trust. Such trusts may also avoid beneficiaries losing access to essential government benefits. A trust for a disabled beneficiary may be set up in any of the common law countries or other countries which recognise the concept of the trust. They have particular advantages in legislation in relation to both taxation and state benefits in, for example, Ireland and the United Kingdom, and in relation to the provision of healthcare, long-term care and nursing home benefits under the state-sponsored Medicaid welfare system in the United States of America. Special needs trusts can provide benefits to, and protect the assets of, the physically disabled or the mentally disabled. Special Needs Trusts are frequently used to receive an inheritance or personal injury settlement proceeds on behalf of a disabled person or are founded from the proceeds of compensation for criminal injuries, litigation or insurance settlements. A common feature of trusts in all common law jurisdictions is that they may be run either by family members (a private trust) or by trustees appointed by the court. Especially where a trust is to be established for a disabled child or young person, great care is generally taken in the choice of appropriate trustees to manage the trust assets and to deal with future replacement appointments. The use of a private discretionary trust can not only be more efficient in terms of taxation and access to government benefits but can also allow for more efficient investment of funds held than where funds are held by a court official (such as the Official Receiver in England and Wales). However where no appropriate trustees can be found, e.g. on the death of existing trustees, the court will intervene. Special Needs Trusts are often set up under the guidance of a Structured settlement planner in cooperation with a qualified legal and financial team to ensure the trust is set up correctly. Only authorized non-profit organizations are approved to manage a Special Needs Trust Program. Pooled trusts are available nationwide including The Arc of Northern Virginia, Commonwealth Community Trust in Richmond, Virginia and the Special Needs Trust Center in Florida. Special Needs Trusts are also known as Supplemental Needs Trusts in the USA and a more detailed article on the US specific characteristics of such trusts, including their interaction with the Medicaid system, is found at that page.
References
[1] Minde, Jeffery H. "Supplementary Needs Trusts: Some Frequently Asked Questions" (http:/ / www. nsnn. com/ frequently. htm). National Special Needs Network, Inc. (http:/ / www. nsnn. com/ default. htm) 2006. Web. 2 Mar. 2010.
Spendthrift trust
299
Spendthrift trust
A spendthrift trust is a trust that is created for the benefit of a person (often because he or she is unable to control spending) that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. Creditors of the beneficiary generally cannot reach the funds in the trust, and the funds are not actually under the control of the beneficiary. The creator of a trust (whether or not it is a spendthrift trust) is sometimes called the "trustor", "grantor" or "settlor" of the trust. A trust often will not be treated as a spendthrift trust unless the trust agreement contains language showing that the creator intended the trust to qualify as spendthrift. This is what is known as a spendthrift clause or spendthrift provision. A spendthrift provision in an irrevocable trust prevents creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her. Most well drafted irrevocable trusts contain spendthrift provisions even though the beneficiaries are not known to be spendthrifts. This is because such a provision protects the trust and the beneficiary in the event a beneficiary is sued and a judgment creditor attempts to attach the beneficiary's interest in the trust.
Benefits of a Nevada Spendthrift Trust NRS 166.020 [1]

For example, the Nevada Property Code provides: A. There is no personal or corporate income tax imposed by the state of Nevada. B. A Irrevocable Spendthrift Trust if properly formed in the State of Nevada, is currently not subject to income taxes of other States, as long as the Nevada Spendthrift Trust is qualified to do business in the other State (s). C. A Nevada Spend Thrift Trust is only subject to Federal Income Tax. D. The Settlor has the right to change beneficiaries, or add other beneficiaries at anytime without notification to any beneficiary passed or present, or the state of Nevada, or the Federal Government. E. All rights and privileges of a Spendthrift Trust formed in the State of Nevada are clearly set out in a concise set of statutes in Nevada and are not dependent on court decisions or interpretations for the validity of the Trust. F. There are no registration fees, annual reporting fees or any other recurring fess charged by the State of Nevada or any local Government for the continued validity of the Trust. The Trusts are also not required to retain a Resident Agent in the State of Nevada.
Benefits of a Texas Spendthrift Trust TPC 112.035 [2]

For example, the Texas Property Code provides: (a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.[3] A clause in the terms of a trust agreement that complies with the above-quoted statute is an example of what the law calls an "anti-alienation provision". To continue with the example of the Texas law, the Texas Property Code further provides: (b) A declaration in a trust instrument that the interest of a beneficiary shall be held subject to a "spendthrift trust" is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle. (c) A trust containing terms authorized under Subsection (a) or (b) of this section may be referred to as a spendthrift trust.[4]
Spendthrift trust The above-quoted language essentially means that a trust instrument does not (at least, in Texas) have to contain complex legal jargon to qualify the trust as "spendthrift"; simply using the word "spendthrift" in the trust document may be sufficient.
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Necessaries, child support and alimony

Some creditors may compel payment out of the trust - particularly those who supply the beneficiary with "necessaries" (usually food and shelter, but sometimes clothing and transportation, if these are not extravagant). Most jurisdictions also permit the invasion of spendthrift trust assets to satisfy awards of child support and alimony.
Trusts where the beneficiary is also the creator

A trust created by an individual for his or her own benefit is sometimes called a "self-settled trust", and may be a kind of asset-protection trust. If the creator of a self-settled trust is also a beneficiary of the trust, a particular problem in the context of protection of creditors and prevention of fraud is presented: the danger that the creator of the trust is trying to defraud creditors.
The general rule: Self-settled trusts do not protect the trust creator
To prevent individuals from creating trusts to defeat their own creditors, the laws of most states provide that a spendthrift clause in a trust document does not protect the beneficiary to the extent that the beneficiary is also the person who created the trust. For example, Texas law provides: (d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.[5] Further, laws in some states (like Texas) are worded so broadly that anyone transferring property to the trust might be deemed to be a "creator" (i.e., settlor, grantor, or trustor), not merely the person or persons who originally set up the trust.
The exceptions: DAPT states

However, several states have changed their laws to provide that a person may create a self-settled spendthrift trust (i.e., a spendthrift trust for his or her own benefit). Such trusts are also called Domestic Asset Protection Trusts ("DAPT"), and sometimes informally called "Alaska trusts", as Alaska was a pioneer in allowing this kind of spendthrift trust. However, because of the danger of the misuse of Alaska trusts to defraud creditors, the legality of such trusts (to the extent that they purport to protect the trust share of a beneficiary who is also a creator of the trust) is uncertain in the states not allowing self-settled spendthrift trusts. Nevada has enacted a series of statutes, codified at Chapter 166 of the Nevada Revised Statutes, that specifically enable the creation of self-settled spendthrift trusts. This form of trust is commonly referred to as a "Nevada Asset Protection Trust". Under Chapter 166, an individual can serve as the settlor, trustee and beneficiary of the trust. This network of laws is specifically designed to protect trust assets from the claims of any creditor. NRS 166.170 specifically limits the circumstances under which a creditor may bring a claim. If a creditor existed at the time of the property's transfer to the trust, then the creditor must bring its claim against the trust within 2 years after the transfer or within six months after the creditor reasonably should have known of the transfer, whichever is later. NRS 166.170(1). If the creditor's claim surfaces after the transfer is made, the creditor must bring it's claim within two years after the transfer, regardless of notice. NRS 166.170(1). Moreover, the creditor can only sustain it's claim if it can prove by clear and convincing evidence (a tough evidentiary standard) that the transfer was made as a fraudulent conveyance. NRS 166.170(3).
Spendthrift trust It is unclear the extent to which sister states will recognize the asset protections of these DAPTs, like those created under the laws of Nevada and Alaska. relevant case law is somewhat sparse. While states are generally compelled to honor and recognize the laws of sister states, pursuant to the full faith and credit clause of the United States Constitution, some of these laws may be in direct conflict with the laws of other states. Some of these DAPT laws can be quite expansive. The scope of the Nevada law is drawn quite broadly to govern Nevada's enforcement of all trusts created within or outside the state, so long as they meet certain limited criteria. See NRS 166.015(1). The law goes onto require that the statutes be applied to the enforcement by any other state of any spendthrift trust created within Nevada, so long as the law is not in direct conflict with the other adjudicating state. NRS 166.015(3). In fact, the Nevada law does not even require that the trust assets be located within Nevada, so long as one of the trustees declares his/her domicile as Nevada. NRS 166.015(1)(d). The following other states now have a DAPT statute: Delaware, South Dakota, Wyoming, Tennessee, Utah, Oklahoma, Colorado, Missouri, Rhode Island and New Hampshire.
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Notes
[1] http:/ / www. leg. state. nv. us/ nrs/ nrs-166. html [2] http:/ / law. onecle. com/ texas/ property/ 112. 035. 00. html [3] Texas Property Code 112.035(a). [4] Texas Property Code 112.035(b) and (c). [5] Texas Property Code 112.035(d).
Supplemental Needs Trust

A Supplemental Needs Trust is a U.S.-specific term for a type of special needs trust (an internationally recognised term). Supplemental needs trusts are compliant with provisions of U.S. state and federal law and are designed to provide benefits to, and protect the assets of, physically disabled or mentally disabled persons and still allow such persons to be qualified for and receive governmental health care benefits, especially long-term nursing care benefits, under the Medicaid welfare program. Supplemental or Special Needs Trusts are frequently used to receive an inheritance or personal injury litigation proceeds on behalf of a disabled person in order to allow the person to qualify for Medicaid benefits.
Background of Medicaid law

Medicaid is the Federal program administered by the states which provides health care for those who can't afford it. See 42 U.S.C. 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions. One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be poor and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (SSI). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.
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Trusts as Medicaid countable assets

A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits. Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaids long-term nursing care benefits. These trusts were called special needs trusts or supplemental needs trusts because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A. In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993 will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid. However, spouses can leave property in a supplemental special needs trust at their death to care for their surviving spouses and not have the trust property considered as assets available for Medicaid. 42 U.S.C. 1396p(d)(2)(A)(ii).
Medicaid exempt trusts

Since the effective date of O.B.R.A., only limited types of trusts can now be used and still preserve an applicants Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled persons own assets for the disabled persons own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third partys own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts. These trusts are a good thing to have if someone is expecting a windfall, such as an inheritance.
First-party, self-settled trusts

Most self-settled trusts holding the disabled beneficiarys own assets created after August 11, 1993 are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicants own assets and which will not disqualify the applicant from Medicaid. These trusts are called D-4A Trusts after the subsection of the law which authorizes them. They are also called Federalized Special Needs Trusts because the Federal Medicaid statute makes them available in every state. Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiarys special or supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.
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Disabled Individuals Special Needs Trust

Under the provisions of 42 U.S.C. 1396p(d)(4)(A), a Disabled Individuals Trust will not be counted as a Medicaid asset even when it is funded with the applicants own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the payback provision. It is important to note that the Disabled Individuals Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his or her own trust, even if he or she is otherwise legally competent. Action by a third party is required in creating the trust. In this regard, these types of special needs trusts are often established by a court on behalf of a disabled person as a part of or ancillary to a serious personal injury lawsuit.
"Miller" Trust
A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all; it is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individuals Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is significant only in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states. Also referred to as a qualified income trust.
Nonprofit Pooled Income Special Needs Trust

A Nonprofit Pooled Income Special Needs Trust is authorized by 42 U.S.C. 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance. In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.
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Third-party trusts
Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party, however, is still free to plan with his or her own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as they see fit. Accordingly, trusts which are created by a third party with the third partys own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment. Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the supplemental or special needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable in most cases to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid. A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be available and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parents assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, the third-party trust does not need to include a D-4 payback provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiarys death.
References
http://www.elderlawanswers.com/elder_info/elder_article.asp?id=2742#6 WID Access to Assets Fact Sheets: Special needs or supplemental needs trusts [1] Special-needs trust helps disabled child [2]
References
[1] http:/ / www. wid. org/ programs/ access-to-assets/ fact-sheets/ special-needs-or-supplemental-needs-trusts [2] http:/ / www. usatoday. com/ money/ perfi/ columnist/ block/ 0025. htm
Testamentary trust
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Testamentary trust
A testamentary trust (sometimes referred to as a will trust) is a trust which arises upon the death of the testator, and which is specified in his or her will (testamentary trust literally means a trust in a will).[1] A will may contain more than one testamentary trust, and may address all or any portion of the estate.[2] Testamentary trusts are distinguished from inter vivos trusts, which are created during the settlor's lifetime. There are four parties involved in a testamentary trust: the person who specifies that the trust be created, usually as a part of his or her will, but it may be set up in abeyance during the person's lifetime. This person may be called the grantor or trustor, but is usually referred to as the settlor; the trustee, whose duty is to carry out the terms of the will. He or she may be named in the will, or may be appointed by the probate court which handles the will; the beneficiary(s), who will receive the benefits of the trust;[3] Although not a party to the trust itself, the probate court is a necessary component of the trust's activity. It oversees the trustee's handling of the trust. A testamentary trust is a legal entity created as specified in a person's will, and is occasioned by the death of that person. It is created to address any estate accumulated during that person's lifetime or generated as a result of the death itself, such as a settlement in a wrongful-death suit, or the proceeds from a life insurance policy held on the settlor. A trust can be created to oversee such assets. A trustee is appointed to direct the trust until a set time when the trust expires, such as when minor beneficiaries reach a specified age or accomplish a deed such as completing a set educational goal or achieving a specified matrimonial status. For a testamentary trust, as the settlor is deceased, he or she will generally not have any influence over the trustee's exercise of discretion, although in some jurisdictions it is common for the testator to leave a letter of wishes for the trustee. In practical terms, testamentary trusts tend to be driven more by the needs of the beneficiaries (particularly infant beneficiaries) than by tax considerations, which are the usual considerations in inter vivos trusts. If a testamentary trust fails, the property will usually be held on resulting trusts for the testator's residuary estate. Many famous English trust law cases were on behalf of the residuary legatees under a will seeking to have testamentary trusts declared void so as to inherit the trust property (the most famous, or infamous, example of which is probably Re Diplock [1941] Ch 253, which resulted in the suicide of one of the trustees who was personally liable to account for trust funds that had been disbursed for what he thought were perfectly valid charitable trusts).
Advantages of a testamentary trust

A testamentary trust provides a way for assets devolving to minor children to be protected until the children are capable of fending for themselves;[4] A testamentary trust has low upfront costs, usually only the cost of preparing the will in such a way as to address the trust, and the fees involved in dealing with the judicial system during probate.[5]
Disadvantages of a testamentary trust

The trustee is required to meet with the probate court regularly (at least annually in many jurisdictions) and prove that the trust is being handled in a responsible manner and in strict accordance with provisions of the will which created the trust. This may involve considerable legal fees, especially if the trust endures for several years or involves a sophisticated financial or investment structure, and always involves the fees imposed by the judicial system. Such fees and expenses are deducted from the principal of the estate;
Testamentary trust The trustee must be prepared to oversee the trust for its duration, which involves a considerable commitment in time, possible emotional attachment, and legal liability; A candidate for trustee may be named in the will, but that person has no legal obligation to accept the appointment. If no trustee is named in the will (or is unavailable, even if named), the probate court will appoint a trustee; It can be difficult for beneficiaries to bring a dishonest trustee to account. They may sue at law, or the malfeasance may be pointed out at the annual probate court review, but such remedies are slow, time-consuming and expensive, and are not guaranteed to succeed.
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Summary
Due to the potential problems, lawyers often advise that a revocable living will or inter vivos trust be created instead of a testamentary trust. However, a testamentary trust may be a better solution if the expected estate is small compared to potential life-insurance settlement amounts.
References
[1] http:/ / www. answers. google. com/ answers/ threadview/ id779480. htm [2] http:/ / www. law. freeadvice. com/ estate_planning/ wills/ testamentary-trust-will. htm [3] http:/ / www. undefed. com/ AuthorsRow/ Newland/ testamentarytrusts. html [4] http:/ / testatewill. com/ trusts/ pot-trust-unequal-shares-children/ [5] http:/ / www. wisegeek. com/ what-is-a-testamentary-trust. htm
Totten trust
A Totten trust (also referred to as a "Payable on Death" account) is a form of trust in the United States in which one party (the settlor of the trust) places money in a bank account or security with instructions that upon the settlor's death, whatever is in that account will pass to a named beneficiary. For example, a Totten trust arises when a bank account is titled in the form "[depositor], in trust for [beneficiary]".
Origin
The name is derived from Matter of Totten, 179 N.Y. 112 (1904), the case decided by the Court of Appeals of New York which established the legality of this practice. Although this method of creating a trust did not meet the formal requirements of trust creation, or the testamentary formalities required to make a valid will, the Court noted that such an arrangement typically involved a small amount of money left by a person of modest means, who could not otherwise afford to establish a legal mechanism for passing the specified property. For this reason, the device is sometimes called a "poor man's will". The funds in question are not subject to probate and, if held in a bank account, are insured in the same manner as any deposit. The beneficiary has no access to the account until the depositor's death and need not be notified that the account exists. This is also called a tentative trust because it is contingent upon the death of the settlor or creator of the trust account.
Totten trusts today

Most U.S. states now recognize the validity of Totten trusts. The Restatement 3d of Trusts (Section 26) and the Restatement 3d of Property (Section 7.1 comment i) also recognize its validity. Such a device can be revoked at any time by the settlor, either by closing the account or by executing a will which disposes of the property in the account. The funds in the account can be reached by the creditors of the settlor during the settlor's life. If the intended beneficiary predeceases the settlor, then the gift will lapse, and will generally not be saved by an anti-lapse statute.
Totten trust Totten trusts can be created only with certain types of depository accounts or securities; in particular they can not be used to convey real property. More generally, Totten trusts are sometimes described as "Arrangements for deposit accounts."
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References
Encyclopedia of Everyday Law (http://law.enotes.com/everyday-law-encyclopedia/trusts): Trusts A bank Account Trust Beneficiary always trumps any existing will.
Unit Investment Trust

A Unit Investment Trust (UIT) is a US investment company offering a fixed (unmanaged) portfolio of securities having a definite life. UITs are assembled by a sponsor and sold through brokers to investors. A UIT portfolio may contain one of several different types of securities. The two main types are stock (equity) trusts and bond (fixed income) trusts. Unlike a mutual fund, a UIT is created for a specific length of time and is a fixed portfolio, meaning that the UITs securities will not be sold or new ones bought, except in certain limited situations (for instance, when a company is filing for bankruptcy or the sale is required due to a merger). Stock trusts are generally designed to provide capital appreciation and/or dividend income. They usually issue as many units (shares) as necessary for a set period of time before their primary offering period closes. Equity trusts have a set termination date, on which the trust liquidates and distributes its net asset value as proceeds to the unitholders. (The unitholders may then have special options for the reinvestment of this principal.) Bond trusts issue a set number of units, and when they are all sold to investors, the trust's primary offering period is closed. Bond trusts pay monthly income, often in relatively consistent amounts, until the first bond in the trust is called or matures. When this occurs, the funds from the redemption are distributed to the clients via a pro rata return of principal. The trust then continues paying the new monthly income amount until the next bond is redeemed. This continues until all the bonds have been liquidated out of the trust. Bond trusts are generally appropriate for clients seeking current income and stability of principal. A UIT may be constituted as either a regulated investment company (RIC) or a grantor trust. A RIC is a trust, corporation or partnership in which investors have common investment and voting rights but do not have direct interest in investments of the investment company or fund. A grantor trust, in contrast, grants investors proportional ownership in the underlying securities. A UIT is created by a document called the Trust Indenture. This document is drafted by the Sponsor of the fund, and names the Trustee and the Evaluator. By US law, the Sponsor and the Trustee may not be the same. The sponsor selects and assembles the securities to be included in the fund. The trustee keeps the securities, maintains unitholder records, and performs all accounting and tax reporting for the portfolio. The largest issuer of UITs is First Trust Portfolios. Other sponsors include SmartTrust, Van Kampen, Millington Securities, Advisors Asset Management, Inc.[1] and Guggenheim Funds. Most large brokerage firms (such as Merrill Lynch and A. G. Edwards) sell UITs created by these sponsors. From a tax perspective, UIT's offer a shelter from the unrealized capital gains taxes typical inside of a mutual fund. Because individual UIT's are assembled and purchased for specific periods of time, the cost basis consists of the initial purchase price of the securities held in the trust. A mutual fund on the other hand, taxes the individual based on the entire previous tax year regardless of the date purchased. An investor could, for example, purchase a mutual fund in October, absorb a loss during the last quarter of the year, and yet still be taxed on capital gains within the fund depending on the overall performance of the underlying securities from January 1 of the current year. A UIT
Unit Investment Trust avoids this potential tax consequence by assembling an entirely new "fund" for each individual investor. Some exchange-traded funds (ETFs) are technically classified as UITs: however, ETFs usually do not have set portfolios (they are either managed or update automatically to follow an index), and they do not have defined lives.
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References
[1] Advisors Asset Management, Inc. (2008, June 16). Advisors Asset Management and Fixed Income Securities Unite Under AAM Brand [Press release]. Retrieved from http:/ / findarticles. com/ p/ articles/ mi_m0EIN/ is_2008_June_16/ ai_n27501020/
Unit trust
A unit trust is a form of collective investment constituted under a trust deed. Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore[1] , Malaysia and the UK, unit trusts offer access to a wide range of securities. Unit trusts are open-ended investments; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations.
Structure
The fund manager runs the trust for profit. The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets. The unitholders have the rights to the trust assets. The distributors allow the unitholders to transact in the fund manager's unit trusts The registrars are usually engaged by the fund manager and generally acts as a middleman between the fund manager and various other stakeholders.
Open-Ended
Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. Unit trust trades do not have any commission.
BidOffer Spread
The trust manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bidoffer spread. The bidoffer spread will vary depending on the type of assets held and can be anything from a few basis points on very liquid assets like UK/US government bonds, to 5% or more on assets that are harder to buy and sell such as property. The trust deed often gives the manager the right to vary the bidoffer spread to reflect market conditions, with the purpose of allowing the manager to control liquidity. In some jurisdictions the bidoffer spread is referred to as the "bidask spread". To cover the cost of running the investment portfolio the manager will collect an annual management charge or AMC. Typically this is 1 to 2 percent of the market value of the fund. In addition to the annual management charge, costs incurred in managing and dealing the underlying assets will often be born by the trust. If this is the case, the provider will extract revenue equal to the AMC without incurring any expenses managing the fund. This makes the
Unit trust charges in such vehicles lack transparency.
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Mechanics
A unit is created when money is invested and cancelled when money is divested. The creation price and cancellation price do not always correspond with the offer and bid price. Subject to regulatory rules these prices are allowed to differ and relate to the highs and lows of the asset value throughout the day. The trading profits based on the difference between these two sets of prices are known as the box profits.
OEIC conversion
In the UK many unit trust managers have converted to Open-Ended Investment Companies (OEICs) in recent years. OEICs normally have a single price for purchase and sale, although recent regulatory change now permits dual pricing too, in line with unit trusts. The motivation for conversion is often cited as a simplification and pre-cursor to offering funds Europe-wide under EU rules. More cynical observers may have noted that there is increased latitude to hide charges in the OEIC Dilution Adjustment(more commonly referred to as "Swinging Single Price") whilst maintaining the veneer of simplification .
History
The first unit trust was launched in the UK in 1931 by M&G under the inspiration of Ian Fairbairn. The rationale behind the launch was to emulate the comparative robustness of US mutual funds through the 1929 Wall Street crash. The first trust called the 'First British Fixed Trust' held the shares of 24 leading companies in a fixed portfolio that was not changed for the fixed lifespan of 20 years. The trust was relaunched as the M&G General Trust and later renamed as the Blue Chip Fund (Source M&G). By 1939 there were around 100 trusts in the UK, managing funds in the region of 80 million. (Source M&G) For details of the trust origin of the unit trust and its relationship with American mutual funds, see Sin, Kam Fan (1998) The Legal Nature of the Unit Trust. Clarendon Press ISBN 0-19-876468-5
Ways To Invest
Units can be bought direct from the fund manager, held through a nominee account or through a PEP (Personal Equity Plan ) or ISA (Individual Savings Account).
Further reading
Sin, Kam Fan (1998) The Legal Nature of the Unit Trust. Clarendon Press ISBN 0-19-876468-5
References
[1] Lee, Boon Keng and Ong, Andy. Personal Financial Planning in Singapore. INS communications PTE LTD, 1997. pg. 120, ISBN 981-00-9422-1.
External links
The FSA (http://www.fsa.gov.uk) regulates unit trusts in the UK under their CIS (Collective Investment Scheme) rules.
Voting trust
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Voting trust
A voting trust is a trust whereby the shares in a company of one or more shareholders and the voting rights attached thereto are legally transferred to a trustee, usually for a specified period of time (the "trust period"). In some voting trusts, the trustee may also be granted additional powers (such as to sell or redeem the shares). At the end of the trust period, the shares would ordinarily be re-transferred to the beneficiary(ies), although in practice many voting trusts contain provisions for them to re-vested on the voting trusts with identical terms. Voting trusts were made popular in Delaware corporate law, but they have since been adopted widely by other states in the U.S.A. They have also been extensively adopted in offshore jurisdictions.
Purposes
There are several reasons why shareholders may wish to put a voting trust arrangement in place. Several shareholders may wish to create a unified block of votes, which together gives them more power than the collective sum of their fragmented interests. In many countries, in order to call general meetings, shareholders need to hold a certain percentage of the issued shares of the company. By aggregating their shares, the shareholders can confer this power on themselves collectively where they might not have it individually. Locking shares up in voting trusts can in some countries help deter a hostile takeover. Voting trusts are also sometimes used to resolve conflicts of interest. By putting the shares in a trustee who can vote them at arm's-length from the beneficiary(ies) of the trust, this can in some circumstances mitigate or absolve the original shareholder from what might otherwise constitute a conflict of interest (although in practice, to resolve conflicts of interest the trust will ordinarily be "blind trust"; while all blind trusts are necessarily voting trusts, not all voting trusts are blind trusts). Shares are sometimes aggregated into a voting trust to facilitate a corporate reorganisation. Promoters of companies sometimes aggregate their shares in a voting trust to safeguard control of the company.
Sample
Sample Voting trust agreement [1]
References
[1] http:/ / contracts. onecle. com/ talk/ aol. vote. 1997. 02. 22. shtml
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General statutes & case law

Family Health Care Decisions Act
The Family Health Care Decisions Act is a statute adopted in New York state in 2010 that had been pending before the legislature since 1994.[1] The statute was approved by the New York State Senate in July, 2009. The legislation was introduced by state senator Thomas Duane of Manhattan. It was signed into law by Gov. David Paterson on March 16, 2010. [2] The law adds new Articles 29-CC and 29-CCC to the Public Health Law and amends other existing sections of the laws of the State. It allows the relatives of incapacitated patients to make medical decisions for their family members in the absence of a living will or health care proxy.[3] Currently, all other states except for Missouri permit such surrogacy. Advocates have called the bill "most important piece of medical legislation since lawmakers legalized health care proxies in 1990."[4]
Purposes and scope

Before this law went into effect, the only legal rights that a husband or wife had in New York regarding a spouse who cannot make medical decisions is to choose whether he or she should be resuscitated after a cardiac arrest.[4] The goal of this FHCDA is to guarantee that family members have increased control over their relatives' health.[4] Among the safeguard provided in the bill are rules that require the capacity of the patient must be assessed and reassessed by two physicians, that spouses rely upon the stated wishes of the incapacitated patient and that life-sustaining care be curtailed only when a patient is either terminally ill, won't regain consciousness, or has an irreversible medical condition that will result in great suffering.[4]
Controversy
Two features of the legislation have proven controversial. One allows domestic partners to act as surrogates, a provision that has been opposed by those concerned that it will butress the claims of those who favor gay marriage. Another is the absence of any provision guaranteeing that the welfare of fetuses will be considered when making surrogacy decisions for incapacitated pregnant women.[4] Dr. Jacob Appel, a backer of the legislation, argued that it "would give New Yorkers a right that many believe they already possess."[4] Supporters of the law include the Healthcare Association of New York State[5] and Compassion & Choices. The New York State Right to Life Committee had opposed early proposed versions of the Family Health Care Decisions Act, alleging that they did not protect the rights of a surrogate who decides to choose life-saving medical treatment for the patient she or he represents, instead allowing the patients health care provider to deny the requested treatment based on quality of life factors.[6] However, in 2007 the bill was revised to require health care providers who disagree with a surrogate choice for life-saving treatment nevertheless to provide it, pending either transfer to a willing health care provider or judicial review; thereafter, the Right to Life Committee endorsed and lobbied for the legislation.[7]
Family Health Care Decisions Act
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References
[1] Long-ignored legislation would ease suffering (http:/ / www. buffalonews. com/ 149/ story/ 441121. html), The Buffalo News, Sept. 17, 2008 [2] (http:/ / www. state. ny. us/ governor/ press/ 031610FHCDA. html), Press Release, March 17 2010. [3] State needs Family Health Care Decisions Act (http:/ / www. timesunion. com/ AspStories/ story. asp?storyID=599056& category=OPINION& newsdate=6/ 19/ 2007), Albany Times-Union, June 19, 2007 [4] Finally give N.Y. families end-of-life decisionmaking power (http:/ / www. nydailynews. com/ opinions/ 2009/ 09/ 06/ 2009-09-06_finally_give_ny_families_endoflife_decisionmaking_power. html), New York Daily News, September 6, 2009. [5] HANYS Advocates for Family Health Care Decisions Act (http:/ / www. hanys. org/ news/ index. cfm?storyid=943) [6] New York Pro-Life Group Opposes Involuntary Euthanasia Bill (http:/ / www. lifenews. com/ state1702. html) [7] March 16, 2010: NYSRTLC Hails Signing Into Law of Family Health Care Decisions Act (http:/ / www. nysrighttolife. org/ position_papers_and_press_statements) ; Law Dictates Who Decides on Care for the Incapable (http:/ / www. nytimes. com/ 2010/ 03/ 18/ health/ policy/ 18decisions. html?_r=1) , New York Times, March 17, 2010.
Howe v Earl of Dartmouth

Howe v Earl of Dartmouth (1802) 7 Ves 137 is an English trusts law case. It laid down the rule of equity in relation to the duties of a trustee in relation to a trust fund where there are successive interests in relation to the trust fund, and seeks to strike a fair balance between the rights of the life tenant and the remainderman. It is one of a number of highly technical common law rules which causes considerable angst where wills and trusts have not been professionally prepared. The general rule in relation to any trust fund is that the life tenant is entitled to all of the income, and the remainderman then takes all of the capital on the death of the life tenant. Under the rule in Howe v Earl of Dartmouth there may be duty to convert and reinvest authorised investments in the trust fund to maintain fairness between the life tenant and the remainderman.[1] There are two limbs to the rule: 1. investment; and 2. apportionment.
Investment
The first limb of the rule establishes that, subject to any contrary provision in the will, there is a duty to convert where residuary personalty is settled by will in favour of persons who are to enjoy it in succession. The trustees should convert all such parts of the residuary fund which are wasting, or which are future or reversionary in nature[2] or consist of unauthorised securities[3] into a property of a permanent or income bearing character. So property such as speculative investments,[4] royalties, copyrights,[5] and, in some jurisdictions, leaseholds, should be converted in the interest of the remainderman. These are considered to be non-permanent investments, and may be of significantly reduced or no value by the time of the death of the life tenant. On the other hand "future" property, such as a remainder or a reversionary interest, or other property[6] which at present produces no income, is of no immediate benefit to the life tenant. In the interest of the life tenant, such property should be converted into income bearing properties. In practical terms, the rule is of relatively limited application. It does not apply to property settled inter vivos. It does not apply to specific residuary bequests.[7]
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Apportionment
Where there is a duty to convert under the rule in Howe v Earl of Dartmouth, there is, in the absence of an intention that the life tenant shall enjoy the income until sale, the second limb of the rule is that the trustee is under a duty also to apportion the property fairly between the life tenant and the remainderman until conversion. The specific rules relating to apportionment are often considered overly technical.
Wasting, hazardous or unauthorised investments

The law assumes that wasting, hazardous or unauthorised investments produce income which exceeds what a life tenant ought reasonably to receive, and that it does so at the expense of the security of the capital. Accordingly, the apportionment is made that: the life tenant receives an income which represents the current yield on authorised investments,[8] and the excess is added to the capital, but, subject to the proviso that: if the interest received is less than 4 per cent., the balance should be made up out of subsequently accruing income, or from the proceeds of the unauthorised investments when sold.[9]
Future, reversionary or other non-income producing property

The law assumes that future property is of no benefit to the life tenant, and thus must be sold to obtain income producing investments. The proceeds of sale are apportioned between the life tenant and the remainderman by using the formulae set out in Re Earl of Chesterfield's Trusts (1883) 24 Ch D 643. This provides that the sum which is reserved for the remainderman is the sum "which, put out at 4 per cent. per annum ... and accumulating at compound interest at that rate with yearly rests,[10] and deducting income tax at the standard rate, would, with accumulation of interest, have produced, at the respective dates of receipt, the amounts actually received; and that the aggregate of the sums so ascertained ought to be treated as principal and be applied accordingly, and the residue should be treated as income." Or, put another way, the principal (which goes to capital for the remainderman) is the sum which, if invested at 4 per cent. at the date of the testator's death, would have produced the sum now received, and the income is assumed to be everything else (which goes to the life tenant).
Contrary intention
All the rules above are subject to any contrary intention being expressed by the testator. The onus is upon the person asserting that the equitable rules are excluded to establish that this is so.[11]
Modern application
The duty to apportion is, in practice, nearly always excluded in any professionally drafted will, both in respect of income from unauthorised securities and in respect of reversionary interests. In modern times, the rules of conversion and apportionment are generally considered to be out of step with modern investing practice. The problem with speculative and wasting securities is still the same today, but the rule requires that unauthorised investments[12] to be sold in order to "protect" the capital for the benefit of the remainderman, and it deprives the life tenant of the higher income to be earned from such investments. However, as the Law Commission of England and Wales has noted: "At a time when investment in equities may be the only way in which the capital value of the fund can in fact be maintained the traditional theory that re-investment is necessary to protect those interested in the capital no longer holds good."[13]
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Reform
Most common law jurisdictions have considered reform of one or both of the limbs of the rule in Howe v Earl of Dartmouth but in practice most have not done so. In the United Kingdom the Law Reform Committee recommended replacing the rule (together with other highly technical common law rules, such as the rule in Re Atkinson and the rule in Allhusen v Whittell) with a general statutory duty to hold a fair balance between the tenant for life and the remainderman, with an express power to convert income into capital and vice versa, and a duty to convert and apportion to the extent necessary to maintain an even hand and in a manner consistent with the whole investment policy of the reversionary trust fund. Such recommendations have not been implemented to date.
Notes
[1] This is not the only reason that a duty to convert may arise; it may also arise under the terms of the trust instrument, or by statute (for example, in the United Kingdom see the Administration of Estates Act 1925). [2] ie. property which will only form part of the residuary estate after the death of the life tenant [3] ie. not authorised by either the terms of will, or the statute governing trustee investments in the relevant jurisdiction [4] As in Howe v Earl of Dartmouth itself [5] Which will expire after a certain period of time in most legal systems; see Re Evan's Will Trusts [1921] 2 Ch 309; Re Sullivan [1930] 1 Ch 84 [6] Examples from the cases include debts bearing no interest (Re Duke of Cleveland's Estate [1895] 2 Ch 542); a right to compensation under planning legislation (Re Chance's Will Trusts [1962] Ch 593; future instalments on the sale of a business (Re Hollebone [1919] 2 Ch 93; but no reversionary interests in land, which are outside the rule (Re Woodhouse [1941] Ch 332) [7] It being assumed that the testator intended in such cases for the specific property to be enjoyed successively, for better or worse. [8] Being investments authorised either by the terms of the trust instrument, or by statute in the relevant jurisdiction [9] Re Fawcett [1940] Ch 402 [10] ie. capitalising such interest [11] MacDonald v Irvine (1878) 8 Ch D 101 [12] Which, in many countries, includes stocks and shares [13] 23rd Report, at para 3.31
Rule in Dearle v Hall
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The rule in Dearle v Hall (1828) 3 Russ 1 is an English common law rule to determine priority between competing equitable claims to the same asset. The rule broadly provides that where the equitable owner of an asset purports to dispose of his equitable interest on two or more occasions, and the equities are equal between claimants, the claimant who first notifies the trustee or legal owner of the asset shall have a first priority claim. Although the original decisions related to interests under a trust, most modern applications of the rule relate to the factoring of receivables[1] or multiple grants of equitable security interests. The rule has been subject to some scathing criticism,[2] and has been abrogated in a number of common law countries in the Commonwealth.
History
The rule in Dearle v Hall has been controversial almost since its inception. In 1893, Lord Macnaghten said "I am inclined to think that the rule in Dearle v Hall has on the whole produced at least as much injustice as it has prevented."[3] But this has not stopped it from being extended from a rule regulating the priority of interests in trusts to the regulation of the priority of proprietary interests in debts and other similar intangibles, such as rights under contracts, which is considerably more important in terms of modern commerce. The actual decision in Dearle v Hall, on its facts, is relatively uncontroversial. The beneficial owner of a trust fund assigned it first by way of security to A, and then outright to B, in each case for valuable consideration. A had not given notice of his assignment to the trustees of the fund and, accordingly, when B made enquiries of them, he did not discover the existence of the assignment to A because the trustees were not aware of it. B did give notice of the assignment to the trustees, and then A subsequently also gave notice to them. Plumer MR and, on appeal, Lord Lyndhurst LC each decided that B took priority over A. Judgment was given in favour of B for two reasons. The first was based on the general proposition, that, as between two equitable interests, the first in time will only take priority "if the equities are equal". In this case, by failing to give notice to the trustees, A had allowed the beneficiary of the trust to be able to hold himself out as being the unencumbered owner of the beneficial interest and had therefore enabled the beneficiary to hoodwink B into thinking he had not encumbered it. This is a perfectly straightforward application of the principle that the first in time will only prevail if the equities are equal and is not considered controversial. The second ground for the decision was that A's failure to give notice had left the beneficiary of the trust in apparent possession of the trust fund, and A could not, therefore, rely on this assignment in a dispute with B. This latter ground has been criticised as it appears to be based on the concept of reputed ownership in bankruptcy law, which had never previously been employed in determining priority between competing equitable claims. Nevertheless, on the facts of the case most commentators feel that justice was done; A had allowed the beneficiary to commit a fraud on B, and therefore A should rank behind B.
Development
However, it was in subsequent that the rule was turned from an example of the principle that the first in time rule will not apply if the equities are not equal into an absolute rule that the first to give notice will take priority unless the later assignee was a volunteer[4] or was aware of the earlier assignment at the time he obtained his assignment.[5] The rule applies even if the later assignee made no enquiries of the trustees[6] and even if the first assignee was not negligent in failing to give notice, for instance because he was not aware of it[7] or because there was no one to whom notice could be given.[8] In Ward v Duncombe [1893] AC 369, the House of Lords decided that the rule that notice determines priority of dealings applied regardless of the conduct of the competing assignees.
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Criticisms
In spite of the criticisms of the way in which the rule in Dearle v Hall has developed, there is much to be said for the concept that the priority of assignments or charges over debts should, as a general rule, depend on the date notice is given to the person who owes the debt. Not least, this is because the person who owes the debt will get a good discharge by paying the debtor unless he has been notified of the assignment or charge. Once a debt has been paid, it ceases to exist, and the priority rule recognises this fact. That is not to say that, in appropriate cases, it would not be possible for one creditor to trace the proceeds of the debt into the hands of another. But a simple rule that both priority and discharge depend on notice has much to recommend it. Most of the academic criticism of the rule is to the effect that it has been carried too far. Whilst it is generally accepted for a subsequent assignee for value to take priority over an earlier assignee by giving notice before he becomes aware of the earlier assignment, it seems harsh for the earlier assignee to lose priority where the notice is given by the subsequent assignee after he is aware of the earlier assignment. The net result is the priority depends upon the subsequent speed of response of the parties once one or both of them becomes aware of the problem.
Reform
The Law Commission of England & Wales, as part of a wider view of priority rules relating to security interests has recommended the abolition of the rule in Dearle v Hall in relation to security interests and assignments of receivables only, and its replacement with a system of registration.[9] To date, such recommendations have not been implemented.
Notes
[1] A common scenario is where a company grants a floating charge over all its assets, including its book debts, to a bank, and then the company also purports to factor the book debts to an independent factor. As between the bank and the factor, the person who will have a priority claim to the receivables will generally be the person who first notifies the legal title holder (ie. the debtor) of their claim. [2] See for example, Legal Aspects Receivable Financing (2000), Fidelis Oditah; and Commercial Law (2nd ed), Roy Goode, in which the author indicates: "It is high time that the rule in Dearle v Hall was abolished" at page 705. [3] Ward v Duncombe [1893] AC 369 [4] Re General Horticultural Company (1886) 32 Ch D 512 [5] Re Holmes (1885) 29 Ch D 786 [6] Foster v Cockerell (1835) 3 Cl & Fin 456 [7] Re Lake [1903] 1 KB 151 [8] Re Dallas [1904] 2 Ch 385 [9] The Law Commission Consultation Paper No.164
Settled Land Acts
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Settled Land Acts

The Settled Land Acts were a series of English land law enactments concerning the limits of creating a "settlement". A settlement is a conveyancing device used by a property owner who wants to ensure that future generations of his family are provided for.
Two main types of settlement

Under a trust for sale, the property, which can be real or personal (land or goods), is transferred by the owner by deed or will to trustees who are obliged to sell the property and hold the proceeds of sale for the beneficiaries. A strict settlement can only be created over land and it was a device which was used by a landowner to keep the land within his family. By using the device of the strict settlement the ownership of the property was divided over time by using limited freehold estates.
The limited freehold estates

A fee tail is a limited estate with succession confined to the direct descendants of the original holder of the estate descendent determined according to ancient heirship rules which leaned in favour of the eldest son. A life estate is an estate to last someones lifetime, either the grantees lifetime or the lifetime of someone else a life estate pur autre vie. These estates were used in the creation of a strict settlement. The most common example of strict settlement occurs where a landowner provides in his will that the land is to go to his eldest son for life and then the remainder is to pass to his sons eldest son in fee tail. Settlement would often provide for payment of an annuity to the widow (jointure). Provision could be made for the younger children of the landowner by giving them a capital sum on reaching a certain age or getting married (portions). These were capital sums designed to set them up for life. They were secured by charging them on the land. The strict settlement meant that the land was effectively inalienable.
Disadvantages of strict settlements

The eldest son could not sell the land. It was not feasible to grant a long lease of the property. He often could not even open and work any mines on the land himself as the laws of waste apply to life estates and they provide that you cannot open new mines unless you are unimpeachable for waste. Even if he was unimpeachable for waste he would often not have the money to open them. This meant that the optimum benefit could not be obtained from the land and meant that many landowners became impoverished. The life tenant would have to pay the widow her annuity and the other children their portions. It was difficult to mortgage the land. Land would very often be mismanaged and fell into severe disrepair. These difficulties were compounded by the fact that very often the settlement would continue on ad infinitum through the process of resettlement. The sons eldest son who was entitled to the fee tail could by barring the entail create a fee simple and bring the settlement to an end. He was not entitled to his interest in possession until his father died. While his father lived he could not bar the entail unless his father consented to it. His father would be reluctant to give his consent as this would mean the land would pass outside the family. Obviously the son would be in need of money to sustain him until he became entitled in possession. A compromise would be reached which would enable the land to remain in the family but at the same time satisfy the sons need for cash.
Settled Land Acts The father and son would bar the entail but there would be a resettlement of the land which usually took the form of a conveyance to the father for life, to the eldest son for life remainder to his eldest son in tail. Ie the fee tail was passed back another generation. As part of the settlement the eldest son would be granted an immediate annuity on the land or a lump sum. These resettlements meant that the deterioration of the land and the impoverishment of the landowners continued for generation after generation.
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Legislation
Mining Leases Act 1723 The Incumbered Estates Ireland Act 1849 Settled Land Acts 18821890 The primary aim of this legislation was as Lord Halsbury stated in Bruce v Ailesbury 1862 AC "to release the land from the fetters of the settlement to render it a marketable article not withstanding the settlement". The legislation achieved this by giving the tenant for life statutory powers to deal with the land which far exceeded the powers he had previously under common law. The most important of these powers was the power of the tenant for life to sell the fee simple interest in the land and not just a life estate pur autre vie. Second aim of the legislation was to protect the interests of the beneficiaries under the settlement. Their interests were overreached i.e. they detached from the land and became attached to the proceeds of sale instead, their interests shifted to the money i.e. the settlement now applied to the proceeds of sale. The Acts apply whenever there is a settlement. A settlement is defined by s2(1) of the 1882 Act as "any land or any estate or interest in land, which stands for the time being limited to or in trust for any persons by way of succession". Basically whenever a document creates a succession of interests in land the Settled Land Acts will apply. Generally there must be an element of succession. Section 59 creates one situation of settled land where there is no element of succession where an infant is entitled in possession to land it is deemed to be settled land even though it may not be limited by way of succession i.e. he might he entitled to a fee simple. This was to ensure the commerciability of land owned by a minor as a purchaser would be reluctant to sign a contract with him given that it was voidable once the minor reached the age of majority. Generally it is the tenant for life who exercises the powers created by the Acts The Acts ensures that the powers created are available whenever there is a settlement by designating in every possible case one person to be the tenant for life. Section 25 of the 1882 Act defines the tenant for life as "the person who is for the time being, under a settlement, beneficially entitled to possession of settled land, for his life" - usually the person entitled to the life estate in possession or entitled to the fee tail in possession.
Where powers conferred do not apply

There are two scenarios where the tenant for life does not exercise the powers conferred by the Act. Where the person entitled in possession is an infant in which case under s.60 the trustees of the settlement exercise the powers. The other exception is where the tenant wishes to exercise his power of sale but he wishes to buy the fee simple(so he wishes to buy it from himself) under S12 of the 1890 Act the trustees of the settlement step into his shoes and exercise the power of sale on his behalf. Under s.50(1) the powers of the tenant for life cannot be assigned to another and s.50(2) renders void any contract under which the tenant for life agrees not to exercise his statutory powers. Also, the settlor cannot through the provisions of the settlement curtail either directly or indirectly the powers of the tenant for life under the Acts. Any
Settled Land Acts provision attempting to do so will be void under s.51 of the 1882 Act An example of an indirect attempt to curtail the exercise of the powers is found In re Fitzgerald 1902 IR 162 Section 56(1) provides that where there is a conflict between the provisions of a settlement and the provisions of the Act in relation to his powers where the settlement is more restrictive, the provisions of the Act will prevail. Note s.57 provides that nothing in the Acts prevent a settlor from conferring on the tenant for life any powers additional to those conferred by the act.
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Controls
Three controls were incorporated into the legislation to prevent the tenant for life abusing his powers:
Regard to interests of other parties

A s.53 tenant for life must "have regard to the interests of all parties entitled under the settlement." He is required to have regard to the interests of the beneficiaries but he is not the same as the usual trustee since he is always one of the beneficiaries. In Re Earl of Stamford and Warrington (1916) 1 Ch Younger J described the tenant for life as a "highly interested" trustee. "He may legitimately exercise his powers with some, but not of course, an exclusive regard for his own personal interests" per Vaisey J in Re Bostons Will Trusts 1956 Ch 395. He is entitled to a certain measure of discretion. Wheelwright v Walker no 1 1883 23 Ch. 752 . - Wheelwright v Walker no 2 1883 Weekly Reporter 912. Under s.37 of the 1882 Act the tenant for life has the power to sell heirlooms so long as he gets a court order - Re Earl of Radnors Will Trusts 1890 45 Ch D402 Where land is involved the court will only intervene if the exercise of the power would financially affect the beneficiaries e.g. Re Earl Somers 1895 11 TLR 567 However where the financial loss is only speculative the court will not intervene as in Thomas v Williams 1883 24 Ch D 558. One other situation where the courts will intervene is where the transaction is not bona fide or seems to involve an element of fraud. In Middlemas v Stevens (1901) 1 Ch
Role of Trustees
The role played by the trustees of the settlement.
Powers not equivalent to ownership

The powers are not equivalent to the powers of an absolute owner. Limits and restrictions are put on them by the legislation.
Specific powers
Sell/exchange
Under s.3 of the 1882 act the life tenant has the power to sell or exchange land or any part of it or any interest right or privilege of any kind over or in relation to it. A restriction is imposed by s 4 which provides that in selling "he must obtain the best price that can be reasonably obtained".
Settled Land Acts Also certain procedures must be followed. Once these procedures are followed, on a sale by the tenant for life the purchaser receives the fee simple absolute in the land freed from all the interests attaching to it under the settlement. The interests under the settlement are overreached i.e. shifted to the proceeds of sale. Under s.45(3) the purchaser, if he is dealing in good faith with the tenant for life, is not required to satisfy himself that the requisite notice has been given to the trustees. Overreaching will still apply so long as the purchaser is acting in good faith even if this procedural requirement is not followed. In Hughes v Fanagan(1891) 30 LR IR the court held that when a lessee under a 35 year lease granted by the tenant for life knew that there were not trustees of the settlement he was not granted the protection of S45(3). Another of the procedural requirements is that the sale proceeds or the capital money must be paid to the trustees of the settlements or into court s22 of the 1882 Act. Under s.54 on a sale, exchange, lease or mortgage a bona fide purchaser/lessee/ mortgagee shall if dealing in good faith with the tenant for life, be conclusively taken, as against the beneficiaries of the settlement, as having paid the best price that could reasonably be obtained and to have complied with all requisitions under the acts. See obiter comments made by Black J in Gilmore v The OConor Don 1947 IR 462
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To lease the land

Section 6 allows a tenant for life to lease the land or any part of it. The lease will last for the full term even if the tenant for life dies before its termination. There are certain conditions and restrictions - There are maximum limits on the lengths of such leases Building leases could only be granted for 99 years. Mining leases could only be granted for 60 years. Other leases could only be granted for 35 years. Section 7 laid out certain requirements the lease had to be made by deed and must come into effect in possession within 12 months of its date Every lease must reserve the best rent that can reasonably be obtained Every lease must contain a covenant by the lessee for payment of the rent and a condition for re-entry in the event of the rent remaining unpaid for a period not exceeding 30 days. A counterpart of the lease had to executed by the lessee and delivered to the tenant for life Notice must be given to the trustees of the settlement before the lease is granted s.45. However under S7 of the 1890 Act the tenant for life can grant a lease for under 21 years provided a fine is not payable, the lessee is not exempted for liability for waste and it reserves the best rent that can reasonably be obtained without giving notice and notwithstanding the fact that there are no trustees of the settlement. The general rule laid down in Re Wix 1916 1Ch is that the rent reserved in leases is to be treated as part of the tenants income from the land. It is never capitalized i.e. put by for the other beneficiaries. The 1882 Act makes an exception in the case of mining leases as the capital value of the land will be diminished by the mining s 11 provides that unless a contrary intention is expressed in the settlement part of the rent is to be set aside as capital money and the rest is goes to the tenant as income. If the tenant for life is impeachable for waste of the rent is capitalized if he is unimpeachable of the rent is capitalized.
To Mortgage
The Settled Land Acts did not radically change the tenant for lifes power to mortgage. Under s.18 he can mortgage the land if money is required for equality of exchange, to buy out the ground rent or to raise money to discharge incumbrances of a permanent nature. Any money raised by the mortgage is treated as capital money and under s.22 must be paid to the trustees or into court. Even in these instances s.53 still applies. See: Hampden v Earl of Buckinghamshire 1893 CH 53.
Settled Land Acts
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To carry out improvements

Improvements are expenditures over and above day to day expenses e.g. repairs which he must pay for himself. See s.25 of the 1882 Act and s.13 of the 1890 Act. The improvements can only be made out of capital money and cannot become a charge on the settlement. - Standing v Grey 1903 1 IR 49
Other miscellaneous powers

Other miscellaneous powers conferred on the tenant are more restrictive e.g. under s.10(2) of the 1890 Act the Principal Mansion house and its grounds cannot be sold, exchanged or leased by the tenant for life without the consent of the trustees of the settlement or an order of the court. Under s.37 of the 1882 Act heirlooms such as family pictures, antiques cannot be sold without an order of the court.
Trustees of the Settlement

The role of the trustees is mainly supervisory. They generally have no powers to actively deal with the land as these powers are vested in the tenant for life. The trustees of the settlement have a more active role in two scenarios Where the tenant for life is an infant, in which case the trustees can exercise that role for him until he reaches the age of majority- s.60 1882 Actor Where the tenant for life wishes to buy the fee simple the trustees must step into his shoes and exercise the power of sale for him s.12 1890 Act Section 2(8) of the 1882 Act as supplemented by s.16 of the 1890 Act identifies 5 categories of persons who qualify as trustees of the settlement: Trustees identified with a power of sale or a power to consent to the sale of settled land. Persons named in the settlement as trustees of the settlement "for the purposes of the Settled land Acts 1882-1890" s2(8) Categories provided by s16 of the 1890 Act: Section 16(1) -the trustees will be the trustees with a power of sale of other land which is subject to the same limitations as the settled land in question e.g. if a settlement includes two farms but trustees are only given a power to sell one then they will be the trustees of the settlement in relation to the other farm. Section 16(2) the trustees who have a future power of sale. The court may appoint trustees of the settlement under s.38(1) of the 1882 Act
Powers of the trustees of the settlement

The role of the trustees of the settlement was created to ensure that the tenant for life in exercising his statutory powers does not harm the interests of the other beneficiaries under the settlement. Hughes v Fanagan 1891 30 LR IR: the main aim of the trustees of the settlement is to protect the interests of those entitled in remainder. To enable them to achieve this aim the legislation imposed 3 statutory requirements - they are required to receive the capital money, they are required to receive notice and to consent Under s 22(2) the capital money paid to the trustees must be invested or applied by them in accordance with the direction of the tenant for life or if no direction is given at their own discretion. S21 lists the various ways in which the money can be invested or applied. Court will only intervene if the investment plan clearly harms the financial interests of other beneficiaries under the settlement Re Hunts Settled estates 1906 2 Ch 11. Notice under s45 the major powers conferred by the acts on the tenant for life can only be exercised by him if he gives one months notice to the trustees. It is usually sent by registered post.
Settled Land Acts Note the trustees are under no obligation to bring an action. Under S42 they can not be held liable for failing to give a consent or failing to bring an action. Consents some transactions such as the sale of the principal mansion house will require the consent of the trustees sale of the mansion house s.10(2). This can be given informally without the need for writing as per Gilbey v Rush 1 Ch 11.
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Notes
Statute of Wills
323
Statute of Wills
Statute of Wills
Parliament of England Long title The Act of Wills, Wards, and Primer Seisins, whereby a Man may devise Two Parts of his Land.
Statute book chapter Hen. 8 32, c.1 Territorial extent England and Wales Dates Royal Assent Commencement Repeal date 1540 1540 1 January 1838 Other legislation Amendments Related legislation Statute of Uses
Repealing legislation Wills Act 1837, s.2 Status: Repealed
The Statute of Wills (32 Hen. 8, c. 1 - enacted in 1540) was an Act of the Parliament of England. It made it possible, for the first time in English history, for landholders to determine who would inherit their land upon their death by permitting bequest by will. Prior to the enactment of this statute, land could be passed by descent only if and when the landholder had competent living relatives who survived him, and it was subject to the harsh rules of primogeniture. When a landholder died without any living relatives, his land would escheat to the Crown. The statute was something of a political compromise between Henry VIII and English landowners, who were growing increasingly frustrated with primogeniture and royal control of land. The Statute of Wills created a number of requirements for the form of a will, many of which, as of 2008, survive in common law jurisdictions. Specifically, most jurisdictions still require that a will must be in writing, signed by the testator, the person making the will, and witnessed by at least two other persons. In England and Wales, the Statute of Wills was repealed and superseded by the Wills Act 1837.
Statute of Wills
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References
Dukeminier, Jesse and Krier, James E. Property, Fifth Edition, pp.284, 637. Aspen Publishers, 2002. ISBN 0-7355-2437-8
Related links
Statute of Uses Cestui que Legal history of wills
External links
Thomson-Gale legal encyclopedia entry, courtesy of Jrank [1]
References
[1] http:/ / law. jrank. org/ pages/ 10505/ Statute-Wills. html
Thomas v Times Book Company
325

Court High Court, Chancery Division Full case name Thomas v Times Book Company Limited, Cox and Cleverdon Citation(s) [1966] 1 WLR 911
Judge(s) sitting Plowman J Keywords Gift
Thomas v Times Book Company [1966] 1 WLR 911 is an English law case, in which the legal requirements of making gifts were explored.
Facts
On Monday 19 October 1953, writer Dylan Thomas told BBC producer Donald Cleverdon that he could keep the original manuscript of the play Under Milk Wood - if he could find it. Thomas had lost the manuscript a few days earlier in a London pub, but Cleverdon had made copies. Thomas made the promise to Cleverdon as he handed over three copies in Londons Victoria Station, from where Thomas was due to journey to America to promote the play. Thomas suggested a number of likely locations for the manuscript, and a day or two later, Cleverdon successfully found it. Unfortunately Thomas died whilst still abroad. His wife claimed the manuscript back, originally from the Times Book Company who had possession of it. Mr Cleverdon and another party were later added as defendants to the claim. The overall issue was the question of what is required to make a gift. The judge analysed this into what is required to deduce intention to make a gift, and what is required to make effective delivery of the manuscript as a gift.
Judgment
Plowman J found that there was intention to make a gift and there was satisfactory delivery, and therefore a valid gift made was made. Because Mr Thomas had told Mr Cleverdon that the manuscript was his to keep, there was intention to make a gift and because Mr Thomas had told Mr Cleverdon where he might find the manuscript, and as Mr Cleverdon succeeded in finding it from one of those locations within two days, there was effective delivery. Although there were evidential difficulties about who said what at a railway station over twelve years before, and one of the parties was now dead, the judge did not dismiss the claim as being out of time under the Limitation Act 1980. The judge followed the advice of Brett MR in Re Garnett that he should be suspicious of claims made against dead men, as they are unable to argue for themselves, yet need not place any undue corroborative burden on the evidence of those still alive. He did however give more weight to Mr Cleverdons statements than those of Ruthven Todd, who Mr Thomas met shortly on arriving in America, in finding that Mr Todds evidence was second hand. The judge accepted Mr Cleverdons evidence through logical inference. The day after the promise was made at Victoria Station, Mr Cleverdon told his secretary the story, even though Mr Thomas was still alive and due back in a few days. The judge reasoned that Mr Cleverdon would have not lied, as such a lie would have been quickly exposed if, as expected, Mr Thomas had returned safe and well.
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Significance
Plowman J did not give a wide ratio. It is not clear whether a gift would had been made if Mr Thomas had not listed locations, or if the manuscript was not at those locations, or if it took much longer to find.
Notes
Trusts of Land and Appointment of Trustees Act 1996

The Trusts of Land and Appointment of Trustees Act 1996 (abbreviated as 'TOLATA') is an Act of Parliament of the United Kingdom, which altered the law in relation to trusts of land in England, Wales, Scotland and Northern Ireland.
Background
TOLATA 1996 came into force on 1 January 1997 and was a result of a recognised need for reform in the part of the Law of Property Act 1925 which dealt with trusts. Some problems included the fact that it was hard to establish a trust without it coming under the auspices of the Settled Land Act 1925, which brought with it a range of problems. In particular, the co-owners of property were regarded as having beneficial interests in money and not in the land. Problems arose where partners disagreed over when they wanted to sell a property - usually in the case of separation, and this led to situations where spouses and children might find themselves homeless. One of the key features of TOLATA was to try and redress the problem above by the imposition of statutory considerations which had to be taken into account when dealing with the disposition of trusts and ordering a sale of the family home.
Contents
Particularly notable requirements come from two parts of the legislation, firstly section 14 and more importantly 15, where the requirements for consideration in determining applications are dealt with. Secondly, the imposition of section 335a in the Insolvency Act 1986. Section 15 1. The matters to which the court is to have regard in determining an application for an order under section 14 include a. the intentions of the person or persons (if any) who created the trust. b. the purposes for which the property subject to the trust is held, c. the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home, and d. the interest of any secured creditor of any beneficiary. Insolvency Act 1986, S. 335a (3) Where such an application is made after the end of the period of one year beginning with the first vesting under chapter IV of this part of the bankrupt's estate in a trustee, the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt's creditors outweigh all other considerations.
Trusts of Land and Appointment of Trustees Act 1996
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Case Law
In 2001, in the Case of Re Shaire, Neuberger J assessed the requirements of TOLATA in the light of the case before him and stated that the statute had intended "to tip the balance somewhat more in favour of families and against banks and other charges", when assessing a claim.
Notes External links

Official text of the Trusts of Land and Appointment of Trustees Act 1996 (http://www.legislation.gov.uk/ ukpga/1996/47/contents) as amended and in force today within the United Kingdom, from the UK Statute Law Database Official text of the Trusts of Land and Appointment of Trustees Act 1996 (http://www.legislation.gov.uk/ ukpga/1996/47/contents/enacted) as originally enacted within the United Kingdom, from the UK Statute Law Database Commentary by Roger Horne (http://www.number7.demon.co.uk/acts/trusts/land/indexes/toc.htm)
Uniform Gifts to Minors Act

The Uniform Gifts to Minors Act, commonly known as UGMA, is an act in some states of the United States that allows assets such as securities, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special trust fund. This allows a minor in the United States to have property set aside for the minor's benefit and may achieve some income tax benefit for the child's parents. Once the child reaches the age of maturity (18 or 21 depending on the state), the assets become the property of the child and the child can use them for any purpose. Contributing money to an UGMA account on another person's behalf could be subject to gift tax however the Internal Revenue Code of the United States allows persons to give up to the annual gift tax exclusion to another person without any gift tax consequences as long as total gifts are below the lifetime limits. In the majority of states that have adopted the Uniform Transfers To Minors Act (UTMA), the assets are treated similarly. The assets are held in the custodian's name until the child reaches age of majority. States that adopted UTMA also repealed UGMA; UTMA specifically provides that contracts in UTMA states which reference UGMA are governed by UTMA. Thus, UGMA is often still referred to in contracts designed for use in multiple states, even though it may actually mean UTMA in a particular state. Under the UGMA or UTMA, the ownership of the funds works like it does with any other trust and the donor must appoint a custodian (the trustee) to look after the account for the benefit of the beneficiary. A UGMA or UTMA account allows the assets to be taxed at the minor's income tax bracket. With the increase in the age from 18 to 24 where the kiddie tax is imposed, the tax advantage of a UGMA or UTMA is decreased. For the 2009 tax year, only approximately $1,900 of the child's unearned income can avoid being taxed at the child's parent's tax rate. Minors can also invest in the stock market.
Uniform Probate Code
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The Uniform Probate Code (commonly abbreviated UPC) is a uniform act drafted by National Conference of Commissioners on Uniform State Laws (NCCUSL) governing inheritance and the decedents' estates in the United States. The primary purposes of the act were to streamline the probate process and to standardize and modernize the various state laws governing wills, trusts, and intestacy.
History of the Uniform Probate Code

Drafting of the Uniform Probate Code began in 1964. The final version of the original UPC was promulgated in 1969 as a joint project between NCCUSL and the Real Property, Probate and Trust Law Section of the American Bar Association. Richard V. Wellman served as Chief Reporter on the project. The UPC has been revised several times, most recently in 2006.[1]
Adoption by the states

Although the UPC was intended for adoption by all 50 states, the original 1969 version of the code was adopted in its entirety by only sixteen states[2] : Alaska, Arizona, Colorado, Florida, Hawaii, Idaho, Maine, Michigan, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Carolina, South Dakota, and Utah. The remaining states have adopted various portions of the code in a piecemeal fashion. In any case, even among the adopting jurisdictions, there are variations from state to state, some of which are significant. A person attempting to determine the law in a particular state should check the code as actually adopted in that jurisdiction and not rely on the text of the UPC as promulgated by NCCUSL. In general, the UPC has not been as successful a standardization of the law as the Uniform Commercial Code has been. In Payne v. Stalley, 672 So. 2d 822 (Fla. 2d DCA 1995), a lawyer relied on the official text of the Uniform Probate Code and failed to check the statute as it had been adopted in Florida. As a result, the lawyer missed a filing deadline on a $3,760,909.49 claim. As the Florida appellate court pointed out, "[w]e cannot rewrite Florida probate law to accommodate a Michigan attorney more familiar with the Uniform Probate Code." Id. at 823.
Basic outline of the Uniform Probate Code

The UPC has seven articles, each covering a different set of rules for this area of the law:
ART. 1 TITLE General Provisions, Definitions, and Probate Jurisdiction of Court Intestacy, Wills, and Donative Transfers CONTENTS Definitions; rules of interpretation; jurisdiction and venue
Intestate succession of property; procedures for making, interpretation, and revocation of wills (includes Statutory rule against perpetuities and Uniform Simultaneous Death Act) Procedural rules for the probate process Rules governing personal representatives outside the decedent's domiciliary state
3 4
Probate of Wills and Administration Foreign Personal Representatives and Ancillary Administration Protection of Persons under Disability and their Property Nonprobate Transfers on Death
Power of attorney and rules for guardianship of minors and incapacitated persons
Rules governing nonprobate transfers, such as joint bank accounts, life insurance policies, and transfer-on-death (TOD) securities Provisions governing management of trusts; fiduciary duties of trustees
Trust Administration
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Notes
[1] Uniform Probate Code (http:/ / www. law. upenn. edu/ bll/ archives/ ulc/ upc/ final2005. htm) [2] Thomson West reports that only 16 states adopted the UPC in its form, while NCCUSL and LII report this number at 18.
External links
Summary of the Uniform Probate Code, from NCCUSL (http://www.nccusl.org/Update/ uniformact_summaries/uniformacts-s-upcabo.asp) Thomson-West Legal Encyclopedia entry, courtesy of Jrank (http://law.jrank.org/pages/10999/ Uniform-Probate-Code.html) Guide to the various versions of the UPC (http://www.law.cornell.edu/uniform/probate.html) from Legal Information Institute Guide to the Richard V. Wellman Papers at the University of Pennsylvania Law School (http://www.law. upenn.edu/bll/archives/ulc/collections/wellman.html)
Uniform Simultaneous Death Act

The Uniform Simultaneous Death Act is a uniform act enacted in some U.S. states to alleviate the problem of simultaneous death in determining inheritance. The Act specifies that, if two or more people die within 120 hours of one another, and no will or other document provides for this situation explicitly, each is considered to have predeceased the others. The Act was promulgated in 1940, when it was adopted by all 48 then-existing states. It was last amended in 1993. As of 2010, 19 states (Alaska, Arizona, Arkansas, Colorado, Hawaii, Kansas, Kentucky, Massachusetts, Montana, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Utah, Virginia, and Wisconsin) and the District of Columbia have explicitly adopted the Act in its current version. A number of other states have indirectly adopted the Act as part of the Uniform Probate Code. The Virgin Islands adopted the Act in 2010.
Inheritance
The Act primarily helps to determine the heirs of a person who has died intestate. For example, Alice and Bob are a married, retired couple with no offspring. They die in a plane crash, and it cannot be determined which person died first. Neither had executed a will, so both Alice's and Bob's families claim inheritance of the couple's estate. The court uses the Uniform Simultaneous Death Act to resolve the dispute. In accordance with the Act, Alice is considered to have predeceased Bob, but Bob is also considered to have predeceased Alice. The inheritance is divided equally among their closest living relatives, according to degree of kinship. The 120-hour period is intended to simplify estate administration by preventing an inheritance from being transferred more times than necessary. For example, assume that the Act does not exist. Alice dies immediately, but Bob dies in the hospital the next day. Because Bob outlives Alice, he would inherit her estate, and Bob's heirs would inherit the combined estate the next day. This would increase the legal costs involved, and cause Alice's estate to be subject to tax twice: once alone, and once as part of Bob's. However, if tax was paid in Alice's estate, Bob's would receive a Federal Estate Tax credit for the same property transferred by Alice (state death and inheritance tax provisions may differ). Under the Act, neither inherits the other's estate, each is taxed separately, and their heirs inherit both estates once.
Uniform Simultaneous Death Act
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Insurance
The Act may also help to resolve a life insurance case where the insured and beneficiary die in a common disaster. Different rules apply for insurance. For example, Carol has a life insurance policy through her employer. Her husband Dave is its beneficiary. They are both killed in a car crash, dying at or near the same time. If Carol has named a secondary beneficiary in her policy, that person will receive the life insurance benefit. If Carol has not named a secondary beneficiary, then it is assumed that she outlived Dave, and the benefit is inherited through Carol's estate.
External links
Uniform Law Commissioners information on the Act [1] The Act as enacted in the Kentucky Revised Statutes [2]
References
[1] http:/ / www. nccusl. org/ nccusl/ uniformact_factsheets/ uniformacts-fs-usda. asp [2] http:/ / www. lrc. ky. gov/ krs/ 397-00/ CHAPTER. HTM
Wills Acts 1837 & 1918 (Soldiers and Sailors)
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Wills Act 1837
Parliament of the United Kingdom Long title Statute book chapter Introduced by Territorial extent An Act for the Amendment of the Laws with respect to Wills. 1 Vict. c 26 [1]
Attorney General Sir John Campbell England and Wales, Northern Ireland Dates
Royal Assent Commencement
3 July 1837 1 January 1838 Other legislation
Amendments
Family Law Reform Act 1969 Administration of Justice Act 1982 Family Law Act 1986 Law Reform (Succession) Act 1995 Wills (Soldiers and Sailors) Act 1918 Status: Amended Text of statute as originally enacted [2]
Related legislation
Official text of the statute
[3]
as amended and in force today within the United Kingdom, from the UK Statute Law Database
The Wills Act 1837 (1 Vict. c 26 [1]) is an Act of the Parliament of the United Kingdom that confirms the power of every adult to dispose of their real and personal property, whether they are the outright owner or a beneficiary under a trust, by will on their death (s.3). The act extends to all testamentary dispositions or gifts, where "a person makes a disposition of his property to take effect after his decease, and which is in its own nature ambulatory and revocable during his life."[4] As of 2010, much of it remains in force in England and Wales.
Background
Under ecclesiastical law, common law and equity, various customary rules had long existed for disposing of personal property by will. However, the power to gift real property by will had been first granted by the Statute of Wills (1540). Various rules grew up around the formalities necessary to create a valid will and the Statute of Frauds (1677) created the requirement that a will of real property must be in writing.[5] By the early nineteenth century, the rules had become complex, with different rules for formalising wills of real and personal property. The 4th report of the Commissioners for Inquiring into the Law of Real Property recommended a simplified and unified scheme. As the Commissioners observed "Any scrap of paper, or memorandum in ink or in pencil, mentioning an intended disposition of his property, is admitted as a will and will be valid, although written by another person, and not read over to the testator, or even seen by him, if proved to be made in his lifetime according to his instructions." A bill
Wills Acts 1837 & 1918 (Soldiers and Sailors) was introduced by the Attorney General Sir John Campbell, one of the Commissioners, in 1834 though it was much delayed for want of parliamentary time.[6] The bill was introduced in the House of Lords by Lord Langdale.[7] Though the requirement that a will be in writing stems from an attempt to frustrate fraud, an apparent exception to the requirements for the formal execution of the Act under section 9 is a secret trust.[8] [9]
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Provisions of the Act currently in force

Capacity
A minor, as of 2008 a person under the age of 18, cannot make a valid will (s.7), unless they are a member of the armed forces on active service or a mariner at sea (s.11). These provisions were clarified by the Wills (Soldiers and Sailors) Act 1918 (see below).
Requirements of a valid will

A will is only valid if (s.9): It is made in writing; It is signed by the testator, or at his direction and in his presence; The testator intends that the signature give effect to the will; The will is made or acknowledged in the presence of two or more witnesses, present at the same time; and Each witness attests and signs, or acknowledges, his signature in the presence of the testator. There is no requirement to publish a will (s.13). If any of the witnesses was, or subsequently becomes, incapable of proving the will, that alone will not make it invalid (s.14). Alterations must be executed in the same manner as a will (s.21).
Revocation of a will
Section 18 revokes the will in the event of the marriage of the testator. However, this section was amended in 1982 so that where the testator makes the will in the expectation of marriage to a particular person, the will is not revoked by such a marriage.[10] Section 18A was added in 1982 to the effect that divorce and annulment have the same effect as the death of a spouse.[11] A will or codicil cannot be revoked by any presumption of the intention of the testator or on the grounds of any alteration in his circumstances (s.19). A will can only be revoked by (s.20): Another properly executed will or codicil; A document executed under the same formalities as a will, declaring an intention to revoke the will; or Destruction of the will by the testator, or some person in his presence, with the intention of revoking the will. A revoked will or codicil cannot be revived other than by its re-execution or by a formally executed codicil (s.22).
Gifts to witnesses
Gifts under the will to an attesting witness, or their spouse, are null and void. However, such a witness can still prove the will (s.15). There is no bar on a creditor of the testator or the executor of the will being a witness (ss.16-17).
Gifts to children
Where the testator makes a gift to one of his children or a remoter descendant, and that child dies before the testator, the gift will not lapse so long as the deceased descendant himself leaves children surviving at the death of the testator. The surviving descendants receive the gift (s.33). The rule also applies to illegitimate children (s.33(4)(a)) and a person conceived before the death of the testator is deemed to have been living at the testator's death (s.33(4)(b)).
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Interpretation
The will is interpreted in respect of the testator's property immediately before his death (s.24). Where the testator makes a gift of all his real property, it is deemed to include property over which he has a power of appointment (s.27).
Ireland and Northern Ireland

The Act was in force in Ireland until partition. It consequently became the law of the Irish Free State on 6 December 1922, and then of its successor states. When the autonomous region of Northern Ireland seceded from the Irish Free State and rejoined the United Kingdom on 7 December 1922, the Act became the law of Northern Ireland. However, all save sections 1 and 11 were repealed and re-enacted, with amendments, in Northern Ireland in 1995[12] following the recommendations of the Land Law Working Group.[13] [14]
Provisions repealed by the Act

Statute of Wills ...
Provisions of the Act, since repealed

Sections 4 to 6 addressed various technicalities of land law since rendered obsolete. The Act did not extend to estates pur autre vie and various manorial rights were preserved over the land devised. Where land was held subject to a Lord of the Manor, for example under a copyhold, the Act required that the will was recorded in the Court Roll of the manor and that various fees and duties were paid. These provisions became irrelevant following the demise of the manorial system with the Law of Property Act 1925. Section 8 maintained the earlier incapacity of a feme covert to make a will.
Wills (Soldiers and Sailors) Act 1918

Wills (Soldiers and Sailors) Act 1918 Parliament of the United Kingdom Long title: Statute book chapter: Introduced by: Territorial extent: England and Wales, Northern Ireland Dates Date of Royal Assent: Commencement: 6 February 1918 6 February 1918 Other legislation Amendments: Related legislation: Family Law Reform Act 1969 Wills Act 1837 Status: Current legislation Official text of the statute Database
[15]
An Act to amend the Law with respect to Testamentary Dispositions by Soldiers and Sailors. 7 & 8 Geo. 5, c. 58
as amended and in force today within the United Kingdom, from the UK Statute Law
Wills Acts 1837 & 1918 (Soldiers and Sailors) The Wills (Soldiers and Sailors) Act 1918 clarifies and extends the Wills Act 1837. Section 1 makes if clear that a soldier on active service or sailor at sea, can make, and always could have made, a valid will, even though under 18 years of age. Section 2 extends the provision to sailors not at sea but who are employed in similar service to a soldier on active service. "Soldier" include a member of the Air Force (s.5). This Act is in force in Scotland, but this may be to no effect as it acts only by reference to the Wills Act 1837, which is not in effect there but is in effect, in modified form, in Northern Ireland.[16]
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References
[1] http:/ / www. legislation. gov. uk/ ukpga/ Will4and1Vict/ 7/ 26/ contents [2] http:/ / www. opsi. gov. uk/ acts/ acts1837/ pdf/ ukpga_18370026_en. pdf [3] http:/ / www. statutelaw. gov. uk/ content. aspx?activeTextDocId=1032973 [4] Jarman (1951) vol.I, p.26 [5] Mirow (1994) [6] The Times, February 21, 1835, p.3, col D [7] The Times, March 12, 1836 p.4, col F [8] Critchley (1999) [9] Wilde (1995) [10] Administration of Justice Act 1982, s.18(1) [11] Administration of Justice Act 1982, s.18(2) [12] Wills and Administration Proceedings (Northern Ireland) Order 1994, SI 1994/1899 (http:/ / www. opsi. gov. uk/ SI/ si1994/ Uksi_19941899_en_1. htm) [13] Final Report of the Land Law Working Group (HMSO 1990) Part 5 [14] "Explanatory note to SI 1994/1899" (http:/ / www. opsi. gov. uk/ SI/ si1994/ Uksi_19941899_en_9. htm#exnote). Office for Public Sector Information. 1995. . Retrieved 2008-03-16. [15] http:/ / www. statutelaw. gov. uk/ content. aspx?activeTextDocId=1072265 [16] Annotations at Statute Law Database, retrieved 16 March 2008
External links
Official text of the Wills Act 1837 (http://www.statutelaw.gov.uk/content.aspx?activeTextDocId=1032973) as amended and in force today within the United Kingdom, from the UK Statute Law Database Official text of the Wills (Soldiers and Sailors) Act 1918 (http://www.statutelaw.gov.uk/content. aspx?activeTextDocId=1072265) as amended and in force today within the United Kingdom, from the UK Statute Law Database
Bibliography
Critchley, P. (1999). "Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts". Law Quarterly Review 115: 631654. Jarman, T. (1844). A Treatise on Wills (http://books.google.com/?id=pDQ9AAAAIAAJ&dq=jarman+ treatise+on+wills). London: Sweet. (Google Books) (ed. Jennings, R.) (1951) A Treatise on Wills, 8th ed., London:Sweet & Maxwell, vol.I, p.26 Mirow, M. C. (1994) "Last wills and testaments in England 1500-1800", in Vanderlinden, J. (ed.) Actes cause de mort: Acts of last will, Brussels: De Boeck Universit, pp47-84 ISBN 2804115615 Wilde, D. (1995). "Secret and semi-secret trusts: justifying distinctions between the two". Conveyancer and Property Lawyer: Sep-Oct, 366378.
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Probate, wills & intestacy

Abatement of debts and legacies
Abatement of debts and legacies is a common law doctrine of wills that holds that when the equitable assets of a deceased person are not sufficient to satisfy fully all the creditors, their debts must abate proportionately, and they must accept a dividend. In the case of legacies when the funds or assets out of which they are payable are not sufficient to pay them in full, the legacies abate in proportion, unless there is a priority given specially to any particular legacy. Annuities are also subject to the same rule as general legacies. The order of abatement is usually: 1. Intestate property (property not disposed of in the will itself) will abate first 2. The residuary estate will abate next 3. General devises (gifts of cash) will abate next 4. Demonstrative devises (gifts of stock, or orders to sell property and give the proceeds to the beneficiary) will abate next 5. Specific devises (gifts of tangible property) will abate last
Definitions
A specific devise, is a specific gift in a will to a specific person other than an amount of money. For example, if James's will states that he is leaving his $500,000 yacht to his brother Mike, the yacht would be a specific devise. A general devise, is a monetary gift to a specific person to be satisfied out of the overall estate. For example, if James's will states that he is leaving $500,000 to his son Sam then the money would be a general devise. A residual devise is one left to a devisee after all specific and general devices have been made. For example James's will might say: "I give all the rest, residue and remainder of my estate to my daughter Lilly." Lilly would be the residual devisee.
References
Acts of independent significance
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Acts of independent significance

The doctrine of acts of independent significance at common law permits a testator to effectively change the disposition of his property without changing a will, if acts or events changing the disposition have some significance beyond avoiding the requirements of the will. The doctrine is frequently applied under the following two circumstances: 1. The testator devises assets to a class of beneficiaries where the testator controls membership. For example, Joey leaves the contents of his bank account "to my employees." If Joey then fires some of old employees and hires new ones, the new employees will inherit the contents of the bank account under this provision. 2. The testator devises a general type of property, and then changes the specific items of property within that category. For example, Joey writes in his will, "I leave my car to Rachel". Joey drives a 1974 AMC Gremlin at the time of the testamentary instrument, but later sells the Gremlin and purchases a 2009 Rolls-Royce Phantom Drophead Coup with suicide doors and teak paneling. Because Joey bought a new car to get a more comfortable ride, rather than to change a will without going through the testamentary formalities, the gift to Rachel remains enforceable.
Ademption
Ademption is a term used in the law of wills to determine what happens when property bequeathed under a will is no longer in the testator's estate at the time of the testator's death. For a devise (bequest) of a specific item of property (a specific gift), such property is considered adeemed, and the gift fails. For example, if a will bequeathed the testator's car to a specific beneficiary, but the testator owned no car at the time of his or her death, the gift would be adeemed and the aforementioned beneficiary would receive no gift at all. General bequests or general gifts - gifts of cash amounts - are never adeemed. If the cash in the testator's estate is not sufficient to satisfy the gift, then other assets in the residuary estate will need to be sold to raise the necessary cash. Some property lies in a "gray" area, in which the testator's specific intent must be determined. For example, where the testator bequeathes "500 shares of stock" in a company, this may be read as a general bequest (that the estate should purchase and convey the particular stocks to the beneficiary), or it may be read as a specific bequest, particularly if the testator used a possessive ("my 500 shares"). Such a gift is deemed to be a demonstrative gift. Such demonstrative gifts are deemed to be a hybrid of both specific and general gifts. If one were to bequeath "500 shares of stock," most states would deem that to be a demonstrative gift. The resultant gift to the heir receiving "500 shares," would be the date of death value of 500 shares of that particular stock. Ademption may be waived if the property leaves the estate after the testator has been declared incompetent. Furthermore, in some cases the beneficiary will be entitled to the proceeds from the sale of property, or to the insurance payout for property that is lost or destroyed. To avoid confusion as to what may or may not be adeemed, sometimes the phrase "if owned by me at my death" is placed into the articles of a will in which property is being bequeathed. As for the sale of land under an executory contract, traditional case law agrees that ademption occurs upon the death of the testator and that the proceeds of sale, when the closing, occurs should not pass to the specific devisee of the property. However, the more modern view and the Uniform Probate Code, which has been adopted by some states, disagrees. These jurisdictions find that when property subject to specific devise is placed under contract of sale before the decedent's death, the proceeds of the sale will pass to the specific devisee.
Ademption
338
Statutory variations
Many jurisdictions have ameliorated the effects of the common law doctrine by statute. In Wisconsin, state law (854.08) attempts to abolish the common law doctrine of ademption by extinction, by, for example, awarding beneficiaries the balance of the purchase price of the item sold (subject to some limitations). In Virginia, ademption occurs with respect to most forms of property, but if the property at issue is stock certificates, then the fact that the issuer of the stock has been bought out by another company, and that the stocks have been swapped for a new issue by that company, will not adeem the gift of stock. Similarly, if the shares of stock that existed at the time the gift was made have split (for example, where the holder of 500 shares receives a reissue of 1,000 shares each having half the value of the original), then the beneficiary of that gift will be entitled to the number of shares that exist after the split.
Administrator of an estate
The Administrator of an estate is a legal term referring to a person appointed by a court to administer the estate of a deceased person who left no will. Where a person dies intestate, i.e., without a will, the court may appoint a person to settle their debts, pay any necessary taxes and funeral expenses, and distribute the remainder according to the procedure set down at law. Such a person is known as the administrator of the estate and will enjoy similar powers to those of an executor under a will. A female administrator may be referred to as an administratrix, although this sex-specific term is widely considered archaic, obsolete under modern presumptions about equality between sexes, and/or potentially insulting.
Administration of an estate on death

In English law, Administration of an estate on death arises if the deceased is legally intestate. In United States law, the term Estate Administration is used. Where a person dies leaving a will appointing an executor, and that executor validly disposes of the property of the deceased within England and Wales, then the estate will go to probate. However, if no will is left, or the will is invalid or incomplete in some way, then administrators must be appointed. They perform a similar role to the executor of a will but, where there are no instructions in a will, the administrators must distribute the estate of the deceased according to the rules laid down by statute and the common trust. Certain property falls outside the estate for administration purposes, the most common example probably being houses jointly owned that pass by survivorship on the first death of a couple into the sole name of the survivor. Other examples include discretionary death benefits from pension funds, accounts with certain financial institutions subject to a nomination and the proceeds of life insurance policies which have been written into trust. Trust property will also frequently fall outside of the estate but this will depend on the terms of the trust. Since the Land Transfer Act 1897, the administrator (sometimes known as the administratrix, if female) acts as the personal representative of the deceased in relation to land and other property. Consequently, when the estate under administration consists wholly or mainly of land, the court will grant administration to the heir to the exclusion of the next of kin. In the absence of any heir or next of kin, the Crown has the right to property (other than land) as bona vacantia, and to the land by virtue of the historic land rights of the Crown (and the Duchy of Cornwall and Duchy of Lancashire in their respective areas). If a creditor claims and obtains a Grant of Administration, the court compels him or her to enter into a bond with two sureties that he or she will not prefer his or her own debt to those of other creditors.
Administration of an estate on death
339
Letter of Administration
Letter of administration: Upon the death of a person intestate, but leaving a will without appointing executors, or when the executors appointed by the will cannot or will not act, the Probate Division of the High Court of Justice or the local District Probate Registry will appoint an administrator who performs similar duties to an executor. The court does this by granting letters of administration to the person so entitled. Grants of administration may be either general or limited. A general grant occurs where the deceased has died intestate. The order in which the court will make general grants of letters follows the sequence: 1. 2. 3. 4. 5. The surviving spouse, or civil partner, as the case may be; The next of kin; The Crown; A creditor; A stranger.
Where, under the rules for distribution of estates without a will (the Intestacy Rules), a child under 18 would inherit or a life interest would arise, then the Court or District Probate Registry would normally appoint a minimum of two administrators. On some estates, even under an intestate, it is not clear who are the next-of-kin, and probate research may be required to find the entitled beneficiaries.
Letters of administration
The more important cases of grants of special letters of administration include the following: Administration cum testamento annexo, where the deceased has left a will but has appointed no executor to it, or the executor appointed has died or refuses to act. In this case the court will make the grant to the person, usually the residuary legatee, with the largest beneficial interest in the estate. Administration de bonis non administratis occurs in two cases: 1. Where the executor dies intestate after probate without having completely administered the estate 2. Where an administrator dies. In the first case the principle of administration cum testamento is followed, in the second that of general grants in the selection of the person to whom letters are granted. Administration durante minore aetate, when the executor or the person entitled to the general grant is under age. Administration durante absentia, when the executor or administrator is out of the jurisdiction for more than a year. Administration pendente lite, where there is a dispute as to the person entitled to probate or a general grant of letters the court appoints an administrator till the question has been decided.
Advance health care directive
340

An advance health care directive, also known as living will, personal directive, advance directive, or advance decision, are instructions given by individuals specifying what actions should be taken for their health in the event that they are no longer able to make decisions due to illness or incapacity, and appoints a person to make such decisions on their behalf. A living will is one form of advance directive, leaving instructions for treatment. Another form authorizes a specific type of power of attorney or health care proxy, where someone is appointed by the individual to make decisions on their behalf when they are incapacitated. People may also have a combination of both. It is often encouraged that people complete both documents to provide the most comprehensive guidance regarding their care.[1] One example of a combination document is the Five Wishes advance directive in the United States.
Background
Advance directives were created in response to the increasing sophistication and prevalence of medical technology.[2] [3] Of U.S. deaths, 25%-55% occur in health care facilities.[4] Numerous studies have documented critical deficits in the medical care of the dying; it has been found to be unnecessarily prolonged,[5] painful,[6] expensive,[7] [8] and emotionally burdensome to both patients and their families.[9] [10] Aggressive medical intervention leaves nearly two million Americans confined to nursing homes,[11] and over 1.4 million Americans remain so medically frail as to survive only through the use of feeding tubes.[12] As many as 30,000 persons are kept alive in comatose and permanently vegetative states.[12] [13] Cost burdens to individuals and families are considerable. A national study found that: In 20% of cases, a family member had to quit work; 31% lost all or most savings (even though 96% had insurance); and 20% reported loss of [their] major source of income.[14] Yet, studies indicate that 70-95% of people would rather refuse aggressive medical treatment than have their lives medically prolonged in incompetent or other poor prognosis states.[15] [16] As more and more Americans experienced the burdens and diminishing benefits of invasive and aggressive medical treatment in poor prognosis states either directly (themselves) or through a loved one pressure began to mount to devise ways to avoid the suffering and costs associated with treatments one did not want in personally untenable situations.[3] The first formal response was the living will.
Living will
The living will is the oldest form of advance directive. It was first proposed by an Illinois attorney, Luis Kutner, in a law journal in 1969.[17] Kutner drew from existing estate law, by which an individual can control property affairs after death (i.e., when no longer available to speak for themselves) and devised a way for an individual to speak to his or her health care desires when no longer able to express current health care wishes. Because this form of will was to be used while an individual was still alive (but no longer able to make decisions) it was dubbed the living will.[18]
Refusal of treatment form
A living will usually provides specific directives about the course of treatment that is to be followed by health care providers and caregivers. In some cases a living will may forbid the use of various kinds of burdensome medical treatment. It may also be used to express wishes about the use or foregoing of food and water, if supplied via tubes or other medical devices. The living will is used only if the individual has become unable to give informed consent or refusal due to incapacity. A living will can be very
Advance health care directive specific or very general. An example of a statement sometimes found in a living will is: If I suffer an incurable, irreversible illness, disease, or condition and my attending physician determines that my condition is terminal, I direct that life-sustaining measures that would serve only to prolong my dying be withheld or discontinued. More specific living wills may include information regarding an individual's desire for such services such as analgesia (pain relief), antibiotics, hydration, feeding, and the use of ventilators or cardiopulmonary resuscitation. However, studies have also shown that adults are more likely to complete these documents if they are written in everyday language and less focused on technical treatments.[19] Living wills proved to be very popular, and by 2007, 41% of Americans had completed a living will.[20] In response to public needs, state legislatures soon passed laws in support of living wills in virtually every state in the union.[21] However, by the late 1980s public advocacy groups became aware that many people remained unaware of advance directives[22] and even fewer actually completed them.[23] [24] In part, this was seen as a failure of health care providers and medical organizations to promote and support the use of these documents.[25] The publics response was to press for further legislative support. The most recent result was the Patient Self-Determination Act of 1990,[26] which attempted to address this awareness problem by requiring health care institutions to better promote and support the use of advance directives.[21] [27] However, as living wills began to be better recognized, key deficits were soon discovered. Most living wills tended to be limited in scope[28] and often failed to fully address presenting problems and needs.[29] [30] Further, many individuals wrote out their wishes in ways that might conflict with quality medical practice.[31] Ultimately, it was determined that a living will alone might be insufficient to address many important health care decisions. This led to the development of what some have called second generation advance directives[28] the health care proxy appointment or medical power of attorney. Living wills also reflect a moment in time, and may therefore need regular updating to ensure that the correct course of action can be chosen. Mangal Kapoor has recently written an article for the Mail Online discussing his experiences with his mother's living will and his concerns [32] On July 28, 2009, Barack Obama became the first United States President to announce publicly that he had a living will and to encourage others to do the same. He told an AARP town meeting, "So I actually think it's a good idea to have a living will. I'd encourage everybody to get one. I have one; Michelle has one. And we hope we don't have to use it for a long time, but I think it's something that is sensible."[33] The announcement followed controversy surrounding proposed health care legislation that included language that would permit the payment of doctors under Medicare to counsel patients regarding living wills, sometimes referred to as the "infamous" page 425.[34] Shortly afterwards, liberal bioethicist Jacob Appel issued a call to make living wills mandatory.[35]
341
Durable power of attorney and health care proxy

Second Generation Advance Directives
As before, the next generation advance directive was drawn from existing law specifically from business law. Power of attorney statutes have existed in the United States since the days of common law (e.g., laws brought from England to the United States during the colonial period).[36] These early powers of attorney allowed an individual to name someone to act in their stead. Drawing upon these laws, durable powers of attorney for health care and health care proxy appointment documents were created and codified in law, allowing an individual to appoint someone to make health care decisions in their behalf if they should ever be rendered incapable of making their wishes known.[37] The appointed health care proxy has, in essence, the same rights to request or refuse treatment that the individual would have if still capable of making and communicating health care decisions.[38] The primary benefit of second-generation advance directives is that the appointed representative can make real-time decisions in actual circumstances, as opposed to advance decisions framed in hypothetical situations, as recorded in a
Advance health care directive living will. This new advance directive was heartily endorsed by the American public, and supporting legislation soon followed in virtually all states.[38] Eventually, however, deficits in second-generation advance directives were also soon noted. Primarily, individuals faced problems similar to those that handicapped living wills - knowing what to tell the proxy decision-maker about ones wishes in a meaningful way. Studies found most of what appointed proxies are told is too vague for meaningful interpretation.[39] [40] [41] [42] [43] In the absence of meaningful information, family and physician guesswork is found to be inaccurate as much as 76% of the time.[44] [45] [46] [47] [48] [49] [50] [51] This continuing problem led to the development of what might be called third generation advance directives.
342
Third Generation Advance Directives

Third generation advance directives were designed to contain enriched content to assist individuals and their appointed agents, families, and physicians to better understand and honor their wishes. The first of the third-generation advance directives was the Values History by Doukas and McCullough, created at the Georgetown University School of Medicine, first published in 1988, and then more widely cited in an article in 1991.[52] [53] The Values History is a two-part advance directive instrument that elicits patient values about terminal medical care and therapy-specific directives. The goal of this advance directive is to move away from a focus on specific treatments and medical procedures to a focus on patient values and personal goals. Another values-based project was later published by Lambert, Gibson, and Nathanson at the Institute of Public Law, University of New Mexico School of Law in 1990.[54] [55] It continues to be made available via the Hospice and Palliative Care Federation.[56] One persistent challenge of third generation-based values documents is to show a linkage between the elicited values and goals with medical care wishes, although studies have demonstrated that values regarding financial and psychological burden are strong motivators in not wanting a broad array of end-of-life therapies.[57] The next widely recognized third generation advance directive is the Medical Directive,[58] [59] created by Emanuel and Emanuel of Massachusetts General Hospital and Harvard Medical School. Also still available, [or not..] [60] it is a six-page document that provides six case scenarios for advance medical decision-making. The scenarios are each associated with a roster of commonly considered medical procedures and interventions, allowing the individual to decide in advance which treatments are wanted or not wanted under the circumstances. Several criticisms regarding this advance directive have been expressed.[59] [61] [62] Primarily, it prompts individuals to make medical treatment decisions, which they are typically not equipped to make.[61] Perhaps the best known third generation advance directive is the Five Wishes directive.[63] This document was developed in collaboration with multiple experts with funding from the Robert Wood Johnson foundation,[64] and is distributed by the organization Aging with Dignity. The document was endorsed by Mother Teresa of the Sisters of Calcutta and by the Chief Justice of the Florida state supreme court. The document meets statutory criteria in 42 states.[63] Criticisms include: 1) the document records wishes or preferences rather than directives, which some see as less compelling;[65] 2) the appointed agent authorities are less complete than those found in other directives;[66] 3) some of its definitions used have been criticized as inadequate;[67] 4) its address of pain management appears insufficient to meet American Medical Association standards;[68] and 5) it is not a valid directive in 8 states;.[63] The most recent Third-Generation advance directive is the Lifecare Advance Directive.[66] [69] In creating this document, researchers reviewed more than 6,500 articles from medical, legal, sociological, and theological sources. The conclusion was that advance directives needed to be based more on "health outcome states" than on rosters of medical treatments and legal jargon. Building upon the insights gleaned from the literature review, an advance directive document created, tested in a study involving nearly 1,000 participants, and then comparison tested against other popular advance directive forms. The results indicated greater patient/proxy decision-making accuracy, and superior comprehensive content as compared with other documents tested.[70] The primary criticism has been that it is very lengthy and tedious to complete.
Advance health care directive While some commentators suggest that any recording of ones wishes is problematic,[61] [71] the preponderance of experts recommend the completion of an advance directive document especially one that includes both a living will and a proxy designation.[72] [73] While most of the public continue to rely upon their states standard directive format, research demonstrates that many of these documents are too jargon laden and vague,[62] [74] [75] [76] confusing,[77] [78] [79] [80] [81] and incomplete to adequately capture an individuals wishes, and that they focus too much on the needs of medical and legal practitioners to the exclusion of the needs of patients.[82] [83] [84] Some legal commentators have suggested that using a non-statutory advance directive will leave the user with a document that may not be honored. However, legal counsel for the Hastings Center for Bioethics[85] refute this assertion.[86] To make the best choice, individuals should consider reviewing several document styles to ensure that they complete the document that best meets their personal needs.
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Legal situation by country

The Netherlands
In the Netherlands, patients and potential patients can specify the circumstances under which they would want euthanasia for themselves. They do this by providing a written euthanasia directive. This helps establish the previously expressed wish of the patient even if the patient is no longer able to communicate. However, it is only one of the factors that is taken into account. Apart from the will in writing of the patients, at least two physicians, the second being totally unrelated to the first physician in a professional matter (e.g. working in another hospital, no prior knowledge of the medical case at hand), have to agree that the patient is terminally ill and that no hope for recovery exists.
Germany
On 18 June 2009 the Bundestag passed a law on advanced directives, applicable since 1 September 2009. Such law, based on the principle of the right of self-determination, provides for the assistance of a fiduciary and of the physician.
Italy
Italy currently lacks living will legislation, though there are laws that allow patients to refuse life-sustaining medical treatment.[87] [88] [89] Controversy over end-of-life care emerged in Italy in 2006, when a terminally ill patient suffering from muscular dystrophy, Piergiorgio Welby, petitioned the courts for removal of his respirator. Debated in Parliament, no decision was reached. A doctor eventually honored Welby's wishes by removing the respirator under sedation.[90] The physician was initially charged for violating Italy's laws against euthanasia, but was later cleared. Further debate ensued after the father of a 38 year-old woman, Eluana Englaro, petitioned the courts for permission to withdraw feeding tubes to allow her to die. Englaro had been in a coma for 17 years, following a car accident. After petitioning the courts for 10 years, authorization was granted and Englaro died in February 2009.[91] In May 2008, apparently as a result of the recent Court of Cassations holding in the case of Englaro, a guardianship judge in Modena, Italy used relatively new legislation[92] to work around the lack of the advance directive legislation. The new law permitted a judicially appointed guardian (amministratore di sostegno) to make decisions for an individual. Faced with a 70-year old woman with end-stage Lou Gehrigs Disease who was petitioning the court (with the support of her family) to prevent any later use of a respirator, the judge appointed her husband as guardian with the specific duty to refuse any tracheotomy and/or respirator use if/when the patient became unable to refuse such treatment herself.[93] The continuing issues suggest that advance directive legislation will eventually be produced.
344
Switzerland
In Switzerland, there are several organizations which take care of registering patient decrees, forms which are signed by the patients declaring that in case of permanent loss of judgement (e.g., inability to communicate or severe brain damage) all means of prolonging life shall be stopped. Family members and these organizations also keep proxies which entitle its holder to enforce such patient decrees. Establishing such decrees is relatively uncomplicated. However, in Switzerland, a patient decree has, as of November 2008, no legally binding effects, whether concerning civil nor criminal aspects. Such a decree is today merely viewed as representing the supposed will of the person with the incapability. There is, however, a revision of the Swiss Civil Code under way that aims to change this situation (intended to be article 360 of the Swiss Civil Code) by making the patient decree a legally binding document.[94]
England & Wales

In England and Wales, people may make an advance directive or appoint a proxy under the Mental Capacity Act 2005. This is only for an advanced refusal of treatment for when the person lacks mental capacity and must be considered to be valid and applicable by the medical staff concerned.[95] In June 2010, the Wealth Management Solicitors, Moore Blatch, announced that research showed demand for Living Wills had trebled in the two years previous, indicating the rising level of people concerned about the way in which their terminal illness will be managed.[96] According to the British Government, every adult with mental capacity has the right to agree to or refuse medical treatment. In order to make their advance wishes clear, people can use a living will, which can include general statements about wishes, which are not legally binding, and specific refusals of treatment called advanced decisions or advanced directives.[97]
United States
In the United States, most states recognize living wills or the designation of a health care proxy.[98] For example California does not recognize a living will but instead uses an Advanced Health Care Directive.[99] However, a "report card" issued by the Robert Wood Johnson Foundation in 2002 concluded that only seven states deserved an "A" for meeting the standards of the model Uniform Rights of the Terminally Ill Act.[100] Surveys show that one-third of Americans say they've had to make decisions about end-of-life care for a loved one.[101] In Pennsylvania on Nov. 30, 2006, Governor Edward Rendell signed into law Act 169, which provides a comprehensive statutory framework governing advance health care directives and health care decision-making for incompetent patients.[102] As a result, health care organizations make available a "Combined Living Will & Health Care Power of Attorney Example Form from Pennsylvania Act 169 of 2006." [103] Several states offer living will "registries" where citizens can file their living will so that they are more easily and readily accessible by doctors and other health care providers. However, in recent years some of these registries, such as the one run by the Washington State Department of Health, have been shuttered by the state government because of low enrollment, lack of funds, or both.[104]
345
References
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Decisions at the end of life: guided by communities of patients. Hastings Center Report. 1993;23(5):6-14. [46] Hare, J; etal. Agreement between patients and their self-selected surrogates on difficult medical decisions. Archives of Internal Medicine. 1992;152(5):1049-54. [47] Ouslander, J; etal. Health care decisions made by frail elderly and their potential proxies. Gerontologist. 1988;28:103A-104A. [48] Seckler AB, Meier DE, Mulvihill M, Cammer Paris BE. Substituted judgment: how accurate are proxy predictions? Annals of Internal Medicine. 1991;115:92-98. [49] Tomlinson, T; Howe, K; Notman, M; Rossmiller, D. An empirical study of proxy consent for elderly persons. Gerontologist. 1990;30:54-61. [50] Uhlmann, R; Pearlman, R; Cain, K. Understanding elderly patients' resuscitation preferences by physicians and nurses. Western Journal of Medicine. 1989;150:705-44. [51] Zweibel, NR; Cassel, CK. Treatment choices at the end of life: a comparison of decisions by older patients and their physician-selected proxies. Gerontologist. 1989;29:615-21. [52] Doukas DJ, McCullough LB, Assessing the Values History of the Aged Patient Regarding Critical and Chronic Care, in The Handbook of Geriatric Assessment. Eds. Gallo JJ, Reichel W, Andersen LM, Rockville, MD: Aspen Press, 1988:111-124. [53] Doukas, DJ; McCullough, LB. The values history: the evaluation of the patient's values and advance directives. Journal of Family Practice. 1991;32:145-53. [54] Lambert P, Gibson, JM, Nathanson, P. The Values History: An Innovation in Surrogate Medical Decision-Making, Med. & Health Care, 202-212 (1990) [55] "Values History Form" (http:/ / www. hospicefed. org/ hospice_pages/ valuesform. htm). Hospicefed.org. . Retrieved 2010-06-23. [56] "Values History" (http:/ / www. hospicefed. org/ hospice_pages/ values. htm). Hospicefed.org. . Retrieved 2010-06-23. [57] Eisendrath, S; Jonsen, A. (1983). The living will help or hindrance? Journal of the American Medical Association. 249:2054-58. [58] Emanuel, LL; Emanuel, E. The medical directive: A new comprehensive advance care document. Journal of the American Medical Association, 1989;261(22), 3288-93. [59] Sachs, GA; Cassell, CK. The medical directive. Journal of the American Medical Association. 1990;267(16):2229-33. [60] http:/ / www. medicaldirective. org/ [61] Brett, AS. Limitations of listing specific medical interventions in advance directives. Journal of the American Medical Association. 1991;266:825-28. [62] Silverman, H; Vinicky, J; Gasner, M. Advance directives: implications for critical care. Critical Care Medicine. 1992;20(7):1027-1031. [63] "Aging With Dignity Five Wishes" (http:/ / www. agingwithdignity. org/ 5wishes. html). Agingwithdignity.org. . Retrieved 2010-06-23. [64] "The Robert Wood Johnson Foundation: Health and Health Care Improvement" (http:/ / www. rwjf. org/ ). RWJF. . Retrieved 2010-06-23. [65] Annas, George J. The Health Care Proxy and the Living Will. New England Journal of Medicine. 1991;324(17 25 Apr):1210 [66] Strengthening Advance Directives: Overcoming Past Limitations Through Enhanced Theory, Design, and Application. Lifecare Publications. 2008 [67] "Five Wishes Living Will" (http:/ / www. livingwills-freelegal. org/ Five-Wishes-Living-Will. html). Livingwills-freelegal.org. . Retrieved 2010-06-23. [68] American Medical Association. (1988). Council on Ethical and Judicial Affairs. Euthanasia: Report C. In: Proceedings of the House of Delegates of the AMA; June 1988: Chicago, Ill. pp. 258-60. [69] "Lifecare Advanced Directives" (http:/ / www. lifecaredirectives. com). Lifecaredirectives.com. . Retrieved 2010-06-23. [70] Strengthening Advance Directives: Overcoming Past Limitations Through Enhanced Theory, Design, and Application. Lifecare Publications. 2008 [71] Lynn, J. Why I don't have a living will. Law, Medicine & Health Care. 1991;19(1-2):101-04. [72] Annas, George J. The Health Care Proxy and the Living Will. New England Journal of Medicine. 1991;324(17 25 Apr):1210. [73] Silverman H, Vinicky J, Gasner M. Advance directives: implications for critical care. Critical Care Medicine. 1992;20(7):1027-1031. [74] Bok, S. Personal directions for care at the end of life. New England Journal of Medicine. 1976:295;367. [75] Colin, BD. Living Choice. Health. November 1986. p. 72. [76] Colvin, ER; Hammes, BJ. If only I knew: a patient education program on advance directives. American Nephrology Nurses Association Journal. 1991;18)6)557-560. [77] Annas, GJ. The Health Care Proxy and the Living Will. New England Journal of Medicine. 1991;324(17 25 Apr):1210. [78] Emanuel, LL; Emanuel, EJ. Decisions at the end of life: guided by communities of patients. Hastings Center Report. 1993;23(5):6-14. [79] Ewer, MS; Taubert, JK. Advance directives in the intensive care unit of a tertiary cancer center. Cancer. 1995;76:1268-74.
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[80] Joos, SK; Reuler, JB; Powell, JL; Hickam, DH. Outpatients' attitudes and understanding regarding living wills. Journal of General Internal Medicine. 1993;8:250-63. [81] Schneiderman, LJ; etal. Relationship of general advance directive instructions to specific life-sustaining treatment preferences in patients with serious illness. Archives of Internal Medicine. 1992(10):2114-22. [82] Gamble, ER; etal. Knowledge, attitudes and behavior of elderly persons regarding living wills. Archives of Internal Medicine. 1991;151:277-80. [83] High, DM. All in the family: extended autonomy and expectations in surrogate health care decision-making. Gerontologist. 1988;28(suppl):S46-S51. [84] Tyminski MO. The current state of advance directive law in Ohio: more protective of provider liability than patient rights. Journal of Law and Health. 2004-2005;19(2):411-49. [85] "Bioethics and Public Policy" (http:/ / www. thehastingscenter. org/ ). The Hastings Center. . Retrieved 2010-06-23. [86] Wolf, SM. Honoring broader directives. Hastings Center Report. 1991;21(5):S8-S9. [87] The Italian Constitution which provides a basic right to self-determination in Arts. 13 and 30 of the Constitution of the Italian Republic. [88] Italy is a signator to the Convention of the European Council on Human Rights and Biomedicine (signed in Oviedo, Spain on April 4, 1997; ratified by Italy on March 28, 2001 by Law No. 145). This convention states that a patients previously expressed wishes must be considered in making medical decisions. (Art. 9) [89] The Italian Code of Medical Ethics (Codice Deontologico Medico) recognizes the principle of informed consent and the duty to a patients previously expressed wishes. Article 30 stipulates that physicians must fully inform patients about proposed treatments. Article 32 specifies that physicians are to stop diagnostic testing and/or medical treatment upon receipt of a patients documented refusal. Article 14 specifies that physicians must not provide futile treatment (i.e., treatment that fails to improve health or quality of life). [90] New York Times. Dec. 21, 2006 [91] London Times. Feb. 10, 2009 [92] Law No. 6 of January 9, 2004 [93] Decree of Dr. Guido Stanziani, Guardianship Judge of the Tribunal of Modena, 13 May 2008. [94] "Site of the Swiss government on the intended new law" (http:/ / www. ejpd. admin. ch/ ejpd/ en/ home/ themen/ gesellschaft/ ref_gesetzgebung/ ref_vormundschaft. html). Ejpd.admin.ch. . Retrieved 2010-06-23. [95] Johnston, Carolyn; Liddle, Jane (2007). "The Mental Capacity Act 2005: a new framework for healthcare decision making" (http:/ / jme. bmj. com/ cgi/ reprint/ 33/ 2/ 94). Journal Medical Ethics 33 (2): 9497. doi:10.1136/jme.2006.016972. PMC2598235. PMID17264196. . [96] LONDON (June 10, 2010) (2010-06-10). "Demand for Living Wills trebles in the last two years" (http:/ / www. jlns. com/ legal-wire/ 2010/ 06/ 10/ demand-living-wills-trebles-last-two-years). JLNS. . Retrieved 2010-06-23. [97] "How to make a living will : Directgov - Government, citizens and rights" (http:/ / www. direct. gov. uk/ en/ governmentcitizensandrights/ death/ preparation/ dg_10029429). Direct.gov.uk. . Retrieved 2010-06-23. [98] "publicagenga.org" (http:/ / www. publicagenda. org/ charts/ state-laws-advance-directives). Publicagenda.org. 2010-06-17. . Retrieved 2010-06-23. [99] "WAISdocID=83225218909+0+0+0&WAISaction=retrieve" (http:/ / info. sen. ca. gov/ cgi-bin/ waisgate). Info.sen.ca.gov. . Retrieved 2010-06-23. [100] "Means to an End FIDELITY FINAL" (http:/ / www. rwjf. org/ files/ publications/ other/ meansbetterend. pdf) (PDF). . Retrieved 2010-06-23. [101] "publicagenda.org" (http:/ / www. publicagenda. org/ charts/ one-third-americans-say-theyve-had-make-decision-about-whether-keep-loved-one-alive-using-extraordinary-means). publicagenda.org. 2010-06-17. . Retrieved 2010-06-23. [102] "Facts on Act 169 (Advance Directives) - Pennsylvania Medical Society" (http:/ / www. pamedsoc. org/ MainMenuCategories/ Government/ LawsAffectingPhysicians/ AdvanceDirectives/ Act169facts. aspx). Pamedsoc.org. . Retrieved 2010-06-23. [103] http:/ / www. myfamilywellness. org/ MainMenuCategories/ FamilyHealthCenter/ EndofLifeDecisions. aspx [104] "Washington state ends living will registry" (http:/ / www. multiurl. com/ s/ 0tuA). Seattle Post-Intelligencer. 7/1/2011. . Retrieved 7/24/2011.
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http://www.tc.umn.edu/~parkx032/P-AD.html http://www.tc.umn.edu/~parkx032/B-AD.html
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External links
Patient Guide: Advance Health Care Directives (http://www.myfamilywellness.org/MainMenuCategories/ FamilyHealthCenter/EndofLifeDecisions/PatientGuideAdvanceHealthCareDirectives.aspx), from the Institute for Good Medicine (http://www.goodmedicine.org) at the Pennsylvania Medical Society (http://www. pamedsoc.org) (http://www.advancedirectives.eu) World Collaboratory on Advance Directives. Andalusian School of Public Health. Spain. Issue Guide on the Right to Die (http://www.publicagenda.org/citizen/issueguides/right-to-die) from Public Agenda Online Means to a Better End, Robert Wood Johnson Foundation, 2002 (http://www.rwjf.org/files/publications/ other/meansbetterend.pdf) National Resource Center on Psychiatric Advance Directives (http://www.nrc-pad.org) R. Andorno, Report to the Council of Europe's Steering Committee on Bioethics: The previously expressed wishes relating to health care. Common principles and differing rules in national legal systems (http://www. coe.int/t/dg3/healthbioethic/Activities/09_Euthanasia/CDBI_2008_29 Andorno e.pdf), September 2008.
Advancement (inheritance)
Advancement is a common law doctrine of intestate succession that presumes that gifts given to a person's heir during that person's life are intended as an advance on what that heir would inherit upon the death of the parent. For example, suppose person P had two children, A and B. Suppose also that P had $100,000, and gave $20,000 to child A before P's death, leaving $80,000 in P's estate. If P died without a will, and A and B were P's only heirs, A and B would be entitled to split P's estate evenly. If the doctrine of advancement were not applied, then each child would receive half of the remaining $80,000, or $40,000. However, if the doctrine of advancement is applied, then the $20,000 already given to A would be considered part of P's estate advanced to A. Thus, the estate would still be valued at $100,000, and each heir would be entitled to $50,000, with the $20,000 already given to A being counted as part of his share. Of the remaining $80,000, A would take $30,000 and B would take $50,000. A number of jurisdictions have enacted statutes which ameliorate the doctrine of advancement by requiring, for example, that the person giving the gift must indicate in writing that it is intended to be counted as an advancement against the estate. The Uniform Probate Code, which has been adopted in whole or in part by a number of states, limits the doctrine by requiring a writing from either the deceased or the recipient of the property indicating that the property was intended to be treated as an advance upon the estate.[1] Where a valid will exists, gifts made during lifetime are analyzed under a different doctrine, that of satisfaction of legacies.
References
[1] < Uniform Probate Code (http:/ / www. law. upenn. edu/ bll/ archives/ ulc/ upc/ final2005. htm) hosted at the University of Pennsylvania, 2-109 (accessed June 9, 2009).
Ancillary administration
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Ancillary administration
Ancillary administration is "the administration of a decedent's estate in a state other than the one in which she lived, for the purpose of disposing of property she owned there."[1] Another definition is the "administration of an estate's asset's in another state."[2] This is often a necessary procedure in probate, because the decedent may own property in a state other than his domicile, which is subject to the law of the state in which it sits. An ancillary administrator is the personal representative who handles the property in the other state under ancillary administration.[3] Most major court systems will have forms and checklists for ancillary administrators to use.[4]
References
[1] [2] [3] [4] Ballentine's Law Dictionary, p. 26. From the Free dictionary (http:/ / legal-dictionary. thefreedictionary. com/ ancillary+ administration) See note 2. See, e.g., a New York court form:[Ancillary Administration Proceeding Checklist: http:/ / www. nycourts. gov/ courts/ 6jd/ delaware/ surrogate/ checklists/ ancillaryadm. htm]
Apertura tabularum
Apertura tabularum, in ancient law books, signifies the breaking open of a last will and testament.
References
This article incorporates content from the 1728 Cyclopaedia, a publication in the public domain. [1]
References
[1] http:/ / digicoll. library. wisc. edu/ cgi-bin/ HistSciTech/ HistSciTech-idx?type=turn& entity=HistSciTech000900240155& isize=L
Bequest
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Bequest
A bequest is the act of giving (not the act of receiving) property by will.[1] Strictly, "bequest" is used of personal property, and "devise" of real property. In legal terminology, "bequeath" is a verb form meaning "to make a bequest." (From Old English becwethan, to declare or express in words; cf. "quoth")
Interpreting bequests
Part of the process of probate involves interpreting the instructions in a will. Some wordings that define the scope of a bequest have specific interpretations. "All the estate I own" would involve all of the decedent's possessions at the moment of death.[2] A conditional bequest is a bequest that will be granted only if a particular event has occurred by the time of its operation. For example, a testator might write in the will that "Mary will receive the house held in trust if she is married" or "if she has children," etc. An executory bequest is a bequest that will be granted only if a particular event occurs in the future. For example, a testator might write in the will that "Mary will receive the house held in trust set when she marries" or "when she has children".
Ballet dress rehearsal on stage (Rptition gnrale du ballet sur la scne), by Edgar Degas is a bequest of Count Isaac de Camondo, (Muse d'Orsay)
Explaining bequests
In microeconomics theorists have engaged the issue of bequest from the perspective of consumption theory, in which they seek to explain the phenomenon in terms of a bequest motive.
US Tax Consequences
For the recipient
In order to calculate a taxpayer's income tax obligation, the gross income of the taxpayer must be determined. Under Section 61 of the U.S. Internal Revenue Code gross income is "all income from whatever source derived".[3] On its face, the receipt of a bequest would seemingly fall within gross income and thus be subject to tax. However, in other sections of the code, exceptions are made for a variety of things that do not need to be included in gross income. Section 102(a) of the Code makes an exception for bequests stating that "Gross income does not include the value of property acquired by gift, bequest, or inheritance." [4] In general this means that the value or amount of the bequest does not need to be included in a taxpayer's gross income. This rule is not exclusive, however, and there are some exceptions under Section 102(b) of the code where the amount of value must be included.[4] There is great debate about whether or not bequests should be included in gross income and subject to income taxes, however there has been some type of exclusion for bequests in every Federal Income Tax Act.[5]
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For the donor

One reason that the recipient of a bequest is usually not taxed on the bequest is because the donor may be taxed on it. Donors of bequests may be taxed through other mechanisms such as federal wealth transfer taxes.[5] Wealth Transfer taxes, however, are usually imposed against only the very wealthy.[5]
References
[1] [2] [3] [4] Black's Law Dictionary 8th ed, (West Group, 2004) Law.com (http:/ / dictionary. law. com/ default2. asp?selected=2389& ), Law Dictionary: all the estate I own] US CODE: Title 26,61. Gross income defined (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000061----000-. html) US CODE: Title 26,102. Gifts and inheritances (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000102----000-. html) [5] Samuel A. Donaldson (2007). Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition, St. Paul: Thomson/West, 93
Codicils
A codicil is a document that amends, rather than replaces, a previously executed will.[1] Amendments made by a codicil may add or revoke small provisions (e.g., changing executors), or may completely change the majority, or all, of the gifts under the will. Each codicil must conform to the same legal requirements as the original will, such as the signatures of the testator and, typically, two or three (depending on the jurisdiction) disinterested witnesses. When confronted with testamentary writings executed after the date of the original will, a probate court may need to decipher whether the document is a codicil or a new will. As a rule of thumb, if the second document neither expressly revokes the prior will in its entirety nor supersedes it for all purposes by making a complete disposition of the testators property, it will be presumed to be a codicil, leaving the validity of the earlier will unchanged with respect to the property whose disposition the codicil does not address. In some jurisdictions, acting as a witness to the execution of the codicil may invalidate a gift to a beneficiary under the original will. This rule extends such a jurisdiction's "disinterested-witnesses" requirement to those subsequent documents that might affect what a beneficiary receives from the probate process. For example, if a codicil revokes a bequest in a prior will or adds one not in the prior will, it thereby increases or decreases the value of the residuum of the estate, and it thereby affects any residuary beneficiaries' interest in the estate, such that a residuary beneficiary in a will is an interested party with respect to any codicil. As an alternative to a codicil, a testator may modify a Last Will & Testament by writing a new, dated will revoking any previous wills and codicils. With the advent of word-processors this is now becoming recommended practice (as suggested by the international specialist body in this field, STEP) even for relatively minor changes to avoid the difficulties of interpretation which can arise from a chain of (possibly mutually inconsistent) codicils. Particular difficulties in interpreting chains of codicils arise in jurisdictions such as England and Wales which do not require wills or codicils to be dated (although this is common practice). In completion of a codicil, a form must be created specifying the modifications to the existing last will and testament. As with a last will and testament, it is necessary to witness amendments to the will since they may override the relevant sections of the original will.
Codicils
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References
[1] Rocchi, Rosanne (1978), Guide to Wills and Estate Planning in Canada, Toronto: Coles Publishing Company Limited, p.14
Dukeminier & Johanson (2005, Apr 29) Wills, trusts, and estates, Aspen Publishers, Inc.; 7th edition (April 29, 2005)
Digital inheritance
Digital inheritance is the process of handing over (personal) digital assets to (human) beneficiaries.
History
The Roman law introduced the concept of universal succession, which means that e.g. in inheritance law the heirs enter into the legal position regarding property rights (includes duties and rights) of the testator by law.[1]
Unique Characteristics of Digital Assets

Digital assets are (in contrast to physical assets) more dynamic in appearance and fugacity. Data sets that can be inherited can include passwords, instructive memos, digital contracts, digital receipts, pictures, medical information (e.g. about inheritable diseases). Today, more and more values are resting on media that are not owned by the data owner but by service provider (e.g. Google, Apple, Microsoft etc.). Also in contrast to physical values, electronic values can be copied indefinitely, which could be problematic if the asset represents intellectual properties. On the other hand it poses a challenge for many data heirs to receive or to create copies for all interestees when they have limited IT skills themselves. A further challenge comes with the extreme proliferation of digital data. 5-10 Gigabytes new digital assets per year per family (if one takes digital pictures into account), is rather common. Data heirs that are faced with an un-sorted data flood are often unable to separate the nice-to-have assets from crucial and core assets. Yet another problem is posed by the fact that contracts with service providers most often are automatically terminated (by the terms of service) as soon as the customer ceases to exist. Meaning that there is no right for the heirs to access that data.[2]
Handing over Digital Assets

In contrast to conventional inheritance of physical assets, digital inheritance also needs to cope with the fact that the digital heirs may only be known by their email addresses or mobile numbers. Handing over digital assets requires additional instructions that may be crucial for an heir to further treat the digital assets.
Application
Digital Inheritance should be set up wherever important data needs to be handed over in case of an event that renders the owner incapable of caring for those assets. The data owner hence has an interest to list (or centrally store) his or her assets and decide who will need which data. The data owner will also need to specify the circumstances under which the data shall be handed over to heirs (generally this is simply the death of the owner) but it can be difficult to prove the death in an international setup where heirs, data sources and last residence of the owner are internationally spread. The data owner will also need to have a way for secure and guaranteed notifications of data heirs even if they are only reachable via electronic channels. Other applications can be to simply document the digital essence of a person, meaning to fulfill one of the oldest and deepest human wishes, to leave traces and become remembered.
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Legal perspective
From a legal point of view, digital inheritance requires that digital data takes part of the descendant's estate. As mentioned earlier, the concept of universal succession means, that heirs enter into the legal position regarding property rights of the testator by law. Such property rights as elements of the descendants estate are under several national laws, e.g. in Switzerland[3] so called subjective rights (like outstanding debits, property, intellectual property rights and others) as well as possession-based rights of the testator. Digital data can constitute subjective rights (e.g. copyright regarding a manuscript of the testator). However, the majority of digital data won't be a subjective property right (e.g. passwords, personal images or notes). In order that such data falls into the descendants estate, the testator must have possessed these data. Possession again is usually related to objects, which leads to the question, if digital data are objects in the legal sense. Today, it is commonly assumed that digital data does not comply with basic characteristics of objects such as physicalness. As far as digital data is saved on a data medium of the testator, such digital data is adducted by the possession of the medium as an objective. Of course this is not the case if the testator has transferred his digital data to a service provider to archive it on the service's server. In such a case, it is crucial, that the testator has had access to the digital data e.g. online with a password. In such a case the password analog a key for the good old save box is an aid for access, which creates possession in a legal sense. Then the access to the digital data (and aligned with this the notice of the data) falls into the descendants' estate. It is currently assumed that theres no reason why e.g. photographs in a photo album should be treated differently than photos archivated as digital data. As a result it can be declared, that digital data, archivated on a medium of the service provider, falls into the descendant's estate, as far as the testator has had access and the digital data isnt cleared with the testators death. If the testator doesnt want the ordinary inheritance of his digital data to all of his heirs, but instead wants to pass it exclusively to one or more specific persons, they are reuired to make certain dispositions in their lifetime. Of course, if they are the only one who knows about the digital data, he can pass the access keys to his assignee and all the other heirs won't know about it. Different national law representatives do not agree whether the testator can by means of testamentary disposition assure, that only the assignee does notice of his digital data. The problem here is, that with the opening of the will at the latest, the other heirs should get knowledge of the existence of digital data and will be authorized (under many national laws, e.g. in Switzerland) to get to know the digital data based on their information right as heirs. Not even a declared will of confidentiality of the testator is preferential to the information right of the heirs. This is understandable in a way, as it protects the minimum legal portion of each heir if the digital data has monetary value. All the same the testator can partially assure that his will is going to be respected by downgrading those who do not respect his declared confidentiality will to the minimum legal portion.
Limitations and alternatives

In absence of solutions that can provide the above application the probably simplest approach to digital inheritance is to create regularly a backup of the most important assets and deposit it offsite (e.g. a bank vault) and consequently determine a single person (lawyer, partner, children) that will post-mortem distribute the data. This should also include a list of passwords to online (and local) accounts. Obvious challenges are here in the area of security, data readability (are there still readers for the media, are there still programs for the files) and manageability (uptodateness of the backup as well as assignments to heirs).
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External links
Digital Inheritance; Patent application by Philips [4] Last will service; Patent application by NEC [5] Digital Inheritance Raises Legal Questions; Article [6] Italian article by Ugo Bechini, from CNN (Consiglio Nazionale del Notariato), national organization of Italian Civil Law Notaries [7] IEEE Conference presentation by Hong, Li [8] Unconference about digital death and digital estate planning [9] The Digital Beyond is a blog about digital existence and what happens to it after death [10]
Digital inheritance web services

DataInherit [11] CloudSafe [12] My Webwill [13] Legacy Locker [14] E-Z-Safe [15]
References
[1] http:/ / www. rechtslexikon-online. de/ Universalsukzession. html [2] http:/ / home. tiscalinet. ch/ ugobechini/ password_morto. pdf [3] http:/ / www. admin. ch/ ch/ d/ sr/ c210. html [4] http:/ / www. wipo. int/ pctdb/ en/ wo. jsp?wo=2007010427 [5] http:/ / www. freepatentsonline. com/ y2002/ 0019744. html [6] http:/ / www. uslegalwills. com/ news_972_050104. aspx [7] http:/ / home. tiscalinet. ch/ ugobechini/ password_morto. pdf [8] http:/ / www. ieee-ccnc. org/ 2007/ conference/ workshops/ pdfs/ 05%20Hong_Li. ppt [9] http:/ / digitaldeathday. com [10] http:/ / www. thedigitalbeyond. com [11] http:/ / www. datainherit. com [12] https:/ / secure. cloudsafe. com [13] https:/ / www. mywebwill. com [14] http:/ / legacylocker. com/ [15] http:/ / www. e-z-safe. com/
Exempt property
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Exempt property
Exempt property, under the law of property in many jurisdictions, is property that can neither be passed by will nor claimed by creditors of the deceased in the event that a decedent leaves a surviving spouse or surviving descendants. Typically, exempt property includes a family car, and a certain amount of cash (perhaps $10,000-$20,000), or the equivalent value in personal property.
Forced heirship
Forced heirship is a form of partible inheritance whereby a deceased's estate is separated into (1) an indefeasible portion, the forced estate, passing to those the deceased is survived by, and (2) a discretionary portion, or free estate, to be freely disposed of by will. Forced heirship is generally a feature of Civil law legal systems which do not recognize total freedom of testation. Normally, the deceased's estate is in-gathered and wound up without discharging liabilities, which means accepting inheritance includes accepting the liabilities attached to inherited property. The forced estate is divided into shares which include the share of issue (legitime or child's share) and the spousal share. This provides a minimum protection that cannot be defeated by will. The free estate, on the other hand, is at the discretion of a testator to be distributed by will on death to whomsoever he or she chooses.[1] Takers in the forced estate are known as forced heirs. Forced heirship laws are most prevalent among Civil law jurisdictions and in Islamic countries; these include major countries such as France, Saudi Arabia, Japan, and most other countries in the world. Reckoning shares in instances of multiple or no children and lack of surviving spouse vary from country to country. Advocates of forced heirship contend that it is perfectly proper for testators to be required to make adequate provision for their dependents, and that most countries in the world permit wills to be varied where they would leave dependents destitute. Critics suggest that there is a great difference between varying wills to the minimum degree to provide sufficient financial support for dependents and prohibiting the testator from distributing the estate or a proportion of the estate to any female children, or younger male children, and that it cannot be any less repugnant to force a deceased person to distribute their assets in a certain manner on their death than it would be to tell them how they may do so during their lifetime.
History
The institution began as a Germanic custom for intestate inheritance according to which all of a deceased's personalty was divided into thirds - the widow's part, child's part, and dead's part - the last of which, consisting of clothes, weapons, farm animals and implements, was usually buried with the deceased. With the adoption of Christian funerary practices, it became common to gift away the dead's part, and after the revival of the will, and consequently of testation, the dead's part came to be freely disposable. Realty, or heritable property, on the other hand, was originally inherited in joint tenancy, termed gavelkind, and passed on to the kin group as a whole. However, after the household superseded the kin group in importance in the late Middle Ages, preference was given to the deceased's immediate family, specifically any surviving sons, and none could be favored over his siblings. However, gavelkind inheritance gave rise to inter-family rivalries, so primogeniture laws arose in some areas of feudal Europe giving preference to the eldest son in order to stem feuding. Nevertheless, under medieval communal society, family land could not be sold except for cause, and the family essentially had a right of first refusal in any such sale; in some places, this restriction also applied to gifts. Widows were universally disinherited, though they were varyingly entitled to a dower and/or a terce (or curtesy in the case of widowers), that is, one third of the heritable marital estate. The terce was earliest known as tertia
Forced heirship collaborationis and first appears in the Ripuarian law code, making it also a localized Germanic institution. Eventually, these elements were all consolidated into the modern form of forced heirship most notably in Revolutionary France, which treated personalty and realty in the same way and applied gavelkind inheritance and the system of thirds to both forms of property. After abandoning dowries and dowers in the 20th century, many European countries created or increased the spousal share to be on par with the share of issue.
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Louisiana
In Louisiana, Civil Code article 1493 dictates that children under 24 at the time of death and interdicts (individuals permanently incapable of caring for themselves) who are not disinherited (LCC art. 1494) qualify as forced heirs. The legitime is equal to 25% of the patrimony (if one forced heir); or 50% (if more than one); and each forced heir will receive the lesser of an equal proportion of the legitime or what they would have received through intestacy (LCC art. 1495, Succession of Greenlaw). If a person who would have otherwise qualified as a forced heir dies before the parent, rights to that share may pass to that person's children, although how that share is distributed among them if one or more is an interdict remains unsettled law. Forced heirs may demand collation, whereby certain gifts received by a forced heir within three years of the death of the parent may be subtracted from their share. Louisiana does not have a forced heirship provision for spouses, however at death the spouse's interest in any community property is converted to his or her separate property; and a usufruct is granted over the remaining community (with the forced heirs as naked owners of their respective shares). That usufruct terminates at death or remarriage. Wealthy individuals in the U.S. sometimes seek to circumvent forced heirship laws by transferring assets into an offshore company and seeking to settle the shares in the offshore company in a trust governed by the laws of a jurisdiction outside their domicile.[2]
Footnotes
[1] http:/ / books. google. com/ books?id=2D9ff7T028oC& pg=PA54& lpg=PA54& dq=forced+ heirship& source=web& ots=0yfaccEvOs& sig=1Z-9RdQ2UGLvLhOgGxjB98p2eCU#PPA53,M1 [2] http:/ / www. clarkskatoff. com/ general. php?category=avoiding+ forced+ heirship
Freedom of testation
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Freedom of testation
Freedom of testation, is the power of a person to choose the heir(s) of her/his properties upon her/his death. This especially implies the freedom of making provision for charity. After the Norman Conquest of England, The Church succeeded in allowing a person to leave part of his property to the church to use them as funds for its activities. This was a turning point in its history, which took a long time to develop to its present day form.[1]
References
[1] http:/ / bequestguide. org/ chrono2_test. htm
Holographic will
A holographic will is a will and testament that has been entirely handwritten and signed by the testator. Normally, a will must be signed by witnesses attesting to the validity of the testator's signature and intent, but in many jurisdictions, holographic wills that have not been witnessed are treated equally to witnessed wills and need only to meet minimal requirements in order to be probated: There must be evidence that the testator actually created the will, which can be proved through the use of witnesses, handwriting experts, or other methods. The testator must have had the intellectual capacity to write the will, although there is a presumption that a testator had such capacity unless there is evidence to the contrary. The testator must be expressing a wish to direct the distribution of his estate to beneficiaries. Holographic wills are common and are often created in emergency situations, such as when the testator is alone, trapped and near death. Jurisdictions that do not generally recognize unwitnessed holographic wills will accordingly grant exceptions to members of the armed services who are involved in armed conflicts and sailors at sea, though in both cases the validity of the holographic will expires at a certain time after it is drafted. Holographic wills often show that the requirements for making a valid will are minimal. The Guinness Book of World Records lists the shortest will in the world as "All to wife," written on the bedroom wall of a man who realized his imminent demise and made a swift attempt to distribute his chattels before expiring. It clearly meets the minimum requirements, being his own work and no one else's. On June 8, 1948 in Saskatchewan, Canada, a farmer named Cecil George Harris who had become trapped under his own tractor carved a will into the tractor's fender. It read "In case I die in this mess I leave all to the wife. Cecil Geo. Harris" The fender was probated and stood as his will. The fender is currently on display at the law library of the University of Saskatchewan College of Law.[1]
Law in various jurisdictions

In the United States, unwitnessed holographic wills are valid in around 19 out of the 50 states.[2] Many states, for example New York, place tight restrictions on who may use a holographic will.[3] Jurisdictions that do not themselves recognize such holographic wills may nonetheless accept them under a "foreign wills act" if drafted in another jurisdiction in which it would be valid.Wisconsin "foreign wills act" [4] Under the Louisiana Civil Code, such a will is known as "olographic" [sic].[5] Utah recognizes a holographic will as a valid Will, whether or not it is witnessed, as long as the signature and material provisions of the Will are in the handwriting of the testator. (Section 75-2-503) In the United Kingdom, unwitnessed holographic wills were valid in Scotland until the Requirements of Writing Scotland Act 1995 which abolished the provision; such wills written after 1st August 1995 are now invalid in
Holographic will England, Wales, Scotland, and Northern Ireland.[6] Holographic wills need not be signed, when subscription to the writing appearing on the last page of such sheet is "your loving mother," or words to the effect which designates the family or personal relationship, if it is a material consideration, the signature is sufficient. This is most commonly found in documents written in emergency situations, or those prepared by individuals who have not consulted legal advice. In Germany, a will needs to be handwritten and signed in order to be valid. The holographic will therefore is the standard form for wills under German law.
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References
[1] On Campus News, January 23, 2009: The Last Will and Testament of Cecil George Harris (http:/ / news. usask. ca/ archived_ocn/ 09-jan-23/ see_what_we_found. php) [2] Laws on holographic wills by State (http:/ / www. lawchek. com/ Library1/ _books/ probate/ qanda/ holographic. htm) [3] NY state Assembly web site (http:/ / www. assembly. state. ny. us) [4] http:/ / law. justia. com/ wisconsin/ codes/ 2010/ 853/ 853. 05. html [5] MEOCPA web site page on Louisiana wills (http:/ / www. meocpa. com/ lawills. html) [6] Wills and Probate: a consumer publication. London: Consumers' Association; p. 72
Further reading
Keating, Albert (2002) The Law of Wills. Dublin: Round Hall ISBN 1858003024 (Republic of Ireland)
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies. The rules of inheritance differ between societies and have changed over time.
Terminology
In jurisdictions, an heir is a person who is entitled to receive a share of the decedent's property, via the rules of inheritance in the jurisdiction where the decedent died or owned property at the time of death. Strictly speaking, one becomes an heir only upon the death of the decedent. It is improper to speak of the "heir" of a living person, since William Hogarth's plate 1 from A Rake's Progress, "The Young Heir Takes the exact identity of the persons entitled to Possession Of The Miser's Effects" as his inheritance. inherit are not determined until the time of death. In a case where an individual has such a position that only her/his own death before that of the decedent would prevent the individual from becoming an heir, the individual is called an heir apparent. There is a further concept of jointly inheriting, pending renunciation by all but one, which is called coparceny.
Inheritance In modern legal use, the terms inheritance and heir refer only to succession of property from a decedent who has died intestate. It is a common mistake to refer to the recipients of property through a will as heirs when they are properly called beneficiaries, devisees, or legatees.
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History
Detailed studies have been made in the Anthropological and sociological customs of patrilineal succession, is also known as gavelkind, where only male children can inherit. Some cultures also employ matrilineal succession only passing property along the female line. Other practices include primogeniture, under which all property goes to the eldest child, specifically it is often the eldest son, or ultimogeniture, in which everything is left to the youngest child. Some ancient societies and most modern states employ partible inheritance, under which every child inherits (usually equally). Historically, there were also mixed systems: According to Islamic inheritance jurisprudence, sons inherit twice as much as daughters. The complete laws governing inheritance in Islam are complicated and take into account many kinship relations, but in principle males inherit twice as much as females with some exceptions. However, the Indonesian Minangkabau people (from western Sumatra), despite being Muslim, employ only complete matrilineal succession with property and land passing down from mother to daughter. Among ancient Israelites, the inheritance is patrilineal. It comes from the father, who bequeaths only to his male descendants (daughters don't inherit). The eldest son received twice as much as the other sons. The father gives his name to his children; for example: the sons of Israel are called Israelites, because the land belonged to the father, and every one of his twelve sons gave his name to his descendants. Example: the sons of Judah are called Yehudi (which is translated into Latin as Judaeus and into English as Jew.) In Galicia (Spain) it was typical that all children (both men and women) had a part of the inheritance, but one son (the one who inherited the house) inherited one-third of all the inheritance. This son was called the mellorado (literally, "improved upon"). In some villages the mellorado even received two-thirds of all the inheritance. This two-thirds would be all the family's lands, while other children received their part in money. In eastern Swedish culture, from the 13th century until the 19th century, sons inherited twice as much as daughters. This rule was introduced by the Regent Birger Jarl, and it was regarded as an improvement in its era, since daughters were previously usually left without. Employing differing forms of succession can affect many areas of society. Gender roles are profoundly affected by inheritance laws and traditions. Primogeniture has the effect of keeping large estates united and thus perpetuating an elite. With partible inheritance large estates are slowly divided among many descendants and great wealth is thus diluted, leaving higher opportunities to individuals to make a success. (If great wealth is not diluted, the positions in society tend to be much more fixed and opportunities to make an individual success are lower.) Inheritance can be organized with bbc in a way that its use is restricted by the desires of someone (usually of the decedent).[1] An inheritance may have been organized as a fideicommissum, which usually cannot be sold or diminished, only its profits are disposable. A fideicommissum's succession can also be ordered in a way that determines it long (or eternally) also with regard to persons born long after the original descendant. Royal succession has typically been more or less a fideicommissum, the realm not (easily) to be sold and the rules of succession not to be (easily) altered by a holder (a monarch). In more archaic days, the possession of inherited land has been much more like a family trust than a property of an individual. Even in recent years, the sale of the whole of or a significant portion of a farm in many European countries required consent from certain heirs, and/or heirs had the intervening right to obtain the land in question with same sales conditions as in the sales agreement in question.
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Islamic Laws of Inheritance

The Quran introduced a number of different rights and restrictions on matters of inheritance, including general improvements to the treatment of women and family life compared to pre-Islamic societies.[2] The Quran also presented efforts to fix the laws of inheritance, and thus forming a complete legal system. This development was in contrast to pre-Islamic societies where rules of inheritance varied considerably.[2] Furthermore, the Quran introduced additional heirs that were not entitled inheritance in pre-Islamic times, mentioning nine relatives specifically of which six were female and three were male. In addition to the above changes, the Quran imposed restrictions on testamentary powers of a Muslim in disposing his or her property. In their will, a Muslim can only give out a maximum of one third of their property. The Quran contains only three verses that give specific details of inheritance and shares, in addition to few other verses dealing with testamentary. But this information was used as a starting point by Muslim jurists who expounded the laws of inheritance even further using Hadith, as well as methods of juristic reasoning like Qiyas. Nowadays, inheritance is considered an integral part of Shariah Law and its application for Muslims is mandatory.
In the Bible
The inheritance is patrilineal. The fatherthat is, the owner of the landbequeaths only to his male descendents, so the Promised Land passes from one Jewish father to his sons. The Promised Land is called "The Land of Israel" because it belongs to Israel, and his sons are called Israelites denoting their connection with the land of their father. There was one exception. In Numbers 27:1-4, the daughters of Zelophehad (Mahlah, Noa, Hoglah, Milcah, and Tirzah) of the tribe of Manasseh come to Moses and ask for their father's inheritance, as they have no brothers. In Numbers 27:7-11, Jehovah grants that if a man has no sons, then his daughters may inherit, and lays down the order of inheritance: a man's sons inherit first, daughters if no sons, brothers if he has no children, and so on. Later, in Numbers 36, some of the heads of the families of the tribe of Mannasseh come to Moses and point out that, if a daughter inherits and then marries a man not from her paternal tribe, her land will pass from her birth-tribe's inheritance into her marriage-tribe's. So a further rule is laid down: if a daughter inherits land, she must marry someone within her father's tribe. (The daughters of Zelophehad marry the sons' of their father's brothers. There is no indication that this was not their choice.)
Inheritance Inequality
The distribution of inherited wealth is unequal. The majority receive little while only a small number inherit larger amounts.[3] Arguments for eliminating the disparagement of inheritance inequality include the right to property and the merit of individual allocation of capital over government wealth confiscation and redistribution. In terms of inheritance inequality, some economists and sociologists focus on the inter generational transmission of income or wealth which is said to have a direct impact on one's mobility (or immobility) and class position in society. Nations differ on the political structure and policy options that govern the transfer of wealth.[4] According to the American federal government statistics compiled by Mark Zandi, currently of "Moody's Economy.com", back in 1985, the average inheritance was $39,000. In subsequent years, the overall amount of total annual inheritance was more than doubled, reaching nearly $200 billion. By 2050, there is an estimated $25 trillion average inheritance transmitted across generations.[5] Some researchers have attributed this rise to the baby boomer generation. Historically, the baby boomers were the largest influx of children conceived after WW2. For this reason, Thomas Shapiro suggests that this generation "is in the midst of benefiting from the greatest inheritance of wealth in history."[6]
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Inheritance and Race

Inheritances are transfers of the unconsumed material accumulations of previous generations. Inheritances therefore take on a special meaning with respect to black and white Americans: they directly link the disadvantaged economic position and prospects of today's blacks to the disadvantaged positions and outright slavery of their ancestors.[7] Depending on one's race, one inherits an inevitable amount of privilege or disadvantage at the time of their birth. A number of possible explanations for this gap have been suggested, particularly differences in income and various socio-economic characteristics between black and white households.[8] Research reveals that race could be serving as a proxy for other, more fundamental, determinants of differences in inheritance. Among the findings, it was stated that a "father's education and variables indicating the economic conditions of childhood were the most important in predicting the size of inheritances."[9] Based on samples of households in 1976 and 1989, researchers found that white households are at least twice as likely to receive an inheritance (than black households). White households are almost three times as likely to expect to receive an inheritance in the future. Hence, controlling for other factors, these researchers found that race is important in explaining whether or not a household has received an inheritance and the size of the inheritance.[10] Whites average both better health and inheritance than minority groups in the United States. Blacks and Hispanics are disadvantaged with respect to financial and human capital resources, more specifically, lower educational attainment, income, inheritances, and great concentrations in lower-skilled occupations.[11] Additionally, due to employment discrimination and residential segregation, minority households "have historically been denied the opportunity to accumulate wealth" and thus, acquire inheritance.[5]
Inheritance and Social Stratification

Inheritance inequality has a significant effect on stratification. Inheritance is an integral component of family, economic, and legal institutions, and a basic mechanism of class stratification. It also affects the distribution of wealth at the societal level. The total cumulative effect of inheritance on stratification outcomes takes three forms. The first form of inheritance is the inheritance of cultural capital (i.e. linguistic styles, higher status social circles, and aesthetic preferences).[12] The second form of inheritance is through familial interventions in the form of inter vivos transfers (i.e. gifts between the living), especially at crucial junctures in the life courses. Examples include during a child's milestone stages, such as going to college, getting married, getting a job, and purchasing a home.[12] The third form of inheritance is the transfers of bulk estates at the time of death of the testators, thus resulting in significant economic advantage accruing to children during their adult years.[13] The origin of the stability of inequalities is material (personal possessions one is able to obtain) and is also cultural, rooted either in varying child-rearing practices that are geared to socialization according to social class and economic position. Child-rearing practices among those who inherit wealth may center around favoring some groups at the expense of others at the bottom of the social hierarchy.[14]
Sociological and Economic Effects of Inheritance Inequality

The degree to which economic status and inheritance is transmitted across generations determines one's life chances in society. Although many have linked one's social origins and educational attainment to life chances and opportunities, education cannot serve as the most influential predictor of economic mobility. In fact, children of well-off parents generally receive better schooling and benefit from material, cultural, and genetic inheritances.[15] Likewise, schooling attainment is often persistent across generations and families with higher amounts of inheritance are able to acquire and transmit higher amounts of human capital. Lower amounts of human capital and inheritance can perpetuate inequality in the housing market and higher education. Research reveals that inheritance plays an important role in the accumulation of housing wealth. Those who receive an inheritance are more likely to own a home than those who do not regardless of the size of the inheritance.[16]
Inheritance Oftentimes, minorities and individuals from socially disadvantaged backgrounds receive less inheritance and wealth. As a result, minorities are more likely to rent homes or live in poorer neighborhoods, as well as achieve lower educational attainment compared whites in America. Individuals with a substantial amount of wealth and inheritance often intermarry with others of the same social class to protect their wealth and ensure the continuous transmission of inheritance across generations; thus perpetuating a cycle of privilege. For this reason, it can even be argued that one's inheritance places them in a specific social class position that requires a level of participation in certain activities that promote the oppression of lower-class individuals in terms of the social hierarchy and system of stratification. Nations with the highest income and wealth inequalities often have the highest rates of homicide and disease (such as obesity, diabetes, and hypertension). A New York Times article reveals that the U.S. is the world's wealthiest nation, but "ranks 29th in life expectancy, right behind Jordan and Bosnia." This is highly attributed to the significant gap of inheritance inequality in the country.[17] For this reason, it is clear that when social and economic inequalities centered on inheritance are perpetuated by major social institutions such as family, education, religion, etc., these differing life opportunities are transmitted from each generation. As a result, this inequality becomes part of the overall social structure.[18]
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Taxation
Many states have inheritance taxes or death duties, under which a portion of any estate goes to the government.
References
[1] A decedent is a person who owned the property before this death. The term decedent should not be confused with the term descendant. [2] C.E. Bosworth et al, ed (1993). "Mrth". Encylopaedia of Islam. 7 (second ed.). Brill Academic Publishers. ISBN90-04-09419-9. [3] Davies, James B. "The Relative Impact of Inheritance and Other Factors on Economic Inequality". The Quarterly Journal of Economics, Vol. 97, No. 3, pp. 471 [4] Angel, Jacqueline L. Inheritance in Contemporary America: The Social Dimensions of Giving across Generations. p. 35 [5] Marable, Manning. "Letter From America: Inheritance, Wealth and Race." Google pages.com (http:/ / frontierweekly. googlepages. com/ inheritance-38-48. pdf) [6] Shapiro, Thomas M. The Hidden Cost of Being African American: How Wealth Perpetuates Inequality. Oxford University Press. 2004. p. 5 [7] Avery, Robert; Rendall, Michael S. "Lifetime Inheritances of Three Generations of Whites and Blacks", The American Journal of Sociology, Vol. 107, No. 5 pp. 1300 [8] Menchik, Paul L., Jianakoplos, Nancy A. "Black-White Wealth Inequality: Is Inheritance the Reason?" Economic Inquiry. Volume XXXV, April 1997, p. 428 [9] Menchik, Paul L., Jianakoplos, Nancy A. "Black-White Wealth Inequality: Is Inheritance the Reason?" Economic Inquiry. Volume XXXV, April 1997, p. 432 [10] Menchik, Paul L., Jianakoplos, Nancy A. Black-White Wealth Inequality: Is Inheritance the Reason? Economic Inquiry. Volume XXXV, April 1997, p. 441 [11] Flippen, Chenoa A. "Racial and Ethnic Inequality in Homeownership and Housing Equity." The Sociological Quarterly, Volume 42, No. 2 p. 129 [12] (Edited By) Miller, Robert K., McNamee, Stephen J. Inheritance and Wealth in America. p. 2 [13] (Edited By) Miller, Robert K., McNamee, Stephen J. Inheritance and Wealth in America. p. 4 [14] Clignet, Remi. Death, Deeds, and Descendants: Inheritance in Modern America. p. 3 [15] Bowles, Samuel; Gintis, Herbert, "The Inheritance of Inequality." Journal of Economic Perspectives Vol. 16, No. 3, 2002, p. 4 [16] Flippen, Chenoa A. "Racial and Ethnic Inequality in Homeownership and Housing Equity." The Sociological Quarterly, Volume 42, No. 2 p. 134 [17] Dubner, Stephen. "How Big of a Deal Is Income Inequality? A Guest Post". The New York Times. August 27, 2008. [18] Rokicka, Ewa. "Local policy targeted at reducing inheritance of inequalities in European countries." May 2006. Lodz.pl (http:/ / www. profit. uni. lodz. pl/ pub/ dok2/ 6ca34cbaf07ece58cbd1b4f24371c8c8/ PROFIT_dissemination_ER_16th_IC_of _IT& FA. pdf) (Polish)
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External links
USA Today article on dilemma the rich face when leaving wealth to children (http://www.usatoday.com/ money/2006-07-25-heirs-usat_x.htm)
Intestacy
Intestacy is the condition of the estate of a person who dies owning property greater than the sum of their enforceable debts and funeral expenses without having made a valid will or other binding declaration; alternatively where such a will or declaration has been made, but only applies to part of the estate, the remaining estate forms the "Intestate Estate." Intestacy law, also referred to as the law of descent and distribution or intestate succession statutes, refers to the body of law that determines who is entitled to the property from the estate under the rules of inheritance.
History and the common law

Intestacy has a limited application in those jurisdictions that follow civil law or Roman law because the concept of a will is itself less important; the doctrine of legitime automatically gives a deceased person's relatives title to all or a large part of the estate's property by operation of law, beyond the power of the deceased person to alter by legacy. This share can often only be decreased on account of some very specific misconduct by the heir. When referring to the devolution of estates generally in an international context, the "laws of succession" is the commonplace term covering testate and intestate estates in common law jurisdictions together with forced heirship rules typically applying in civil law and Sharia law jurisdictions. After the Statute of Wills, 32 Henry VIII c. 1, Englishmen (and unmarried or widowed women) could dispose of their lands and property by a will. Their personal property could formerly be disposed of by a "testament," hence the hallowed legal merism "Last Will and Testament." Common law sharply distinguished between real property and chattels. Real property for which no disposition had been made by will passed by the law of kinship and descent; chattel property for which no disposition had been made by testament was escheat to the Crown, or given to the Church for charitable purposes. This law became obsolete as England moved from being a feudal to a mercantile society, and chattels more valuable than land were being accumulated by townspeople.
Current law
In most contemporary common-law jurisdictions, the law of intestacy is patterned after the common law of descent. Property goes first or in major part to a spouse, then to children and their descendants; if there are no descendants, the rule sends you back up the family tree to the parents, the siblings, the siblings' descendants, the grandparents, the parents' siblings, and the parents' siblings' descendants, and usually so on further to the more remote degrees of kinship. The operation of these laws varies from one jurisdiction to another.
England and Wales

In England and Wales the Intestacy Rules have been uniform since 1925 and strikingly similar rules apply in Northern Ireland, the Republic of Ireland and many Commonwealth countries and Crown dependencies. These rules have been supplemented by the discretionary provisions of the Inheritance (Provision for Family and Dependants) Act 1975 so that fair provision can be made for a dependent spouse or other relative where the strict divisions set down in the intestacy rules would produce an unfair result, for example by providing additional support for a dependent minor or disabled child vis-a-vis an adult child who has a career and no longer depends on their parent.
Intestacy If a person dies intestate with no identifiable heirs, the person's estate generally escheats (i.e. is legally assigned) to the Crown (via the Bona Vacantia division of the Treasury Solicitor) or to the Duchies of Cornwall or Lancaster when the deceased was a resident of either; in limited cases a discretionary distribution might be made by one of these bodies to persons who would otherwise be without entitlement under strict application of the rules of inheritance.[1]
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United States and Canada

In the United States intestacy laws vary from state to state under the American practice of federalism. Likewise, in Canada the laws vary from province to province. As in England, most jurisdictions apply rules of intestate succession to determine next of kin who become legal heirs to the estate. Also, as in England, if no identifiable heirs are discovered, the property may escheat to the government. Attempts in the United States to make the law with respect to intestate succession uniform from state to state have met with limited success. The distribution of the property of an intestate decedent is the responsibility of the administrator (or personal representative) of the estate: typically the administrator is chosen by the court having jurisdiction over the decedent's property, and is frequently (but not always) a person nominated by a majority of the decedent's heirs. Federal law controls intestacy of Native Americans.[2] [3] Many states have adopted all or part of the Uniform Probate Code, but often with local variations,[4] In Ohio, the law of intestate succession has been modified significantly from the common law, and has been essentially codified.[5] The state of Washington also has codified its intestacy law.[6] New York has perhaps the most complicated law of descent of distribution,[7] having been for many years.[8] [9] Florida's intestacy statute permits the heirs of a deceased spouse of the decedent to inherit, in the event that the decedent has no other heirs.[10] In Alberta, under the current law which gives unmarried couples most of the same rights as married couples,[11] the deceaseds family may discover that the surviving husband or wife might receive no part of the estate. Under Alberta's intestacy legislation, the deceaseds family may discover that a former or "ex" common-law partner may be given the entire estate; ahead of the deceaseds own legally married spouse, parents, or even children.[12]
Rules
Where a person dies without leaving a will, the rules of succession of the person's place of habitual residence or of their domicile apply. In certain jurisdictions such as France, Switzerland and much of the Islamic world, entitlements arise whether or not there was a will. These are known as forced heirship rights and are not typically found in common-law jurisdictions, where the rules of succession without a will (intestate succession) play a back-up role where an individual has not (or has not fully) exercised his or her right to dispose of property in a will. In England and Wales, the rules of succession are the Intestacy Rules set out in the Administration of Estates Act and associated legislation. The Act sets out the order for distribution of property in the estate of the deceased. For persons with surviving children and a wealth below a certain threshold (250,000 as from February 2009), the whole of the estate will pass to the deceased's spouse or also, from December 2005, their registered civil partner. For persons with no surviving children but surviving close relatives (such as siblings or parents), the first 450,000 goes to the spouse or civil partner (as from February 2009).[13] Such transfers below the threshold are exempt from UK inheritance tax. In larger estates, the spouse will not receive the entire estate where the deceased left other blood relatives and left no will. They will receive the following: all property passing to them by survivorship (such as the deceased's share in the jointly owned family home); all property passing to them under the terms of a trust (such as a life insurance policy); a statutory legacy of a fixed sum (being a larger sum where the deceased left no children); and
Intestacy a life interest in half of the remaining estate. The children (or more distant relatives if there are no children) of the deceased will be entitled to half of the estate remaining immediately and the remaining half on the death of the surviving spouse. Where no beneficiaries can be traced, see bona vacantia. In the United States, each of the separate states uses its own intestacy laws to determine the ownership of its resident's intestate property.
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Notes
[1] THE TREASURY SOLICITOR BONA VACANTIA DIVISION Guide to Discretionary Grants in Estates Cases (http:/ / www. bonavacantia. gov. uk/ output/ discretionary-grants-in-estates-cases. aspx) [2] USC from altlaw.org (http:/ / www. altlaw. org/ v1/ codes/ us/ 598709). Accessed September 2, 2008. [3] 25 U.S.C. 2206, found at Cornell law School website (http:/ / www4. law. cornell. edu/ uscode/ html/ uscode25/ usc_sec_25_00002206----000-. html). Accessed September 2, 2008. [4] Excerpt from Record of Passage of Uniform and Model Acts, as of September 30, 2010* especially with respect to administration. (http:/ / www. nccusl. org/ Shared/ Docs/ UPC/ UPC Chart. pdf) [5] Ohio Codes from the official government website (http:/ / codes. ohio. gov/ orc/ 2105). Accessed September 2, 2008. [6] RCW 11.04.015, found at Revised Code of Washington from the official government website (http:/ / apps. leg. wa. gov/ RCW/ default. aspx?Cite=11. 04. 015). Accessed September 2, 2008. [7] N.Y. EPTL 4-1.1. Descent and distribution of a decedent's estate, found at MyStateWill link (http:/ / www. mystatewill. com/ statutes/ ny_law. htm), Public Administrator of Queens website (http:/ / www. queenscountypa. com/ documents/ article4_sec411. asp) and the official Assembly government website (http:/ / public. leginfo. state. ny. us/ menugetf. cgi?COMMONQUERY=LAWS) (Click on EPT - Estates, Powers and Trusts, then Part 1 - RULES GOVERNING INTESTATE SUCCESSION, then 4-1.1 Descent and distribution of a decedent's estate, see 4-1.2 - Inheritance by non-marital children; 4-1.4 - Disqualification of parent to take intestate share; 4-1.5 - Other disqualifications; 4-1.6 - Disqualification of joint tenant in certain instances). Accessed September 2, 2008. [8] Samuel Watkins Eager, Descent and distribution : intestate succession in the state of New York, (Albany, N.Y. ; New York City : M. Bender & Co., 1926) found at WorldCat website (http:/ / www. worldcat. org/ oclc/ 5514327?tab=details). Accessed September 2, 2008. [9] Links to NEW YORK PROBATE, TRUSTS, WILLS & ESTATES LAW at MegaLaw.com (http:/ / www. megalaw. com/ ny/ top/ nyprobate. php). Accessed September 2, 2008. [10] Florida Intestacy Law (http:/ / www. floridaprobatetrustlaw. com/ 2009/ 12/ articles/ probate/ florida-inheritance-laws-no-will/ ) [11] http:/ / www. canlii. org/ en/ ab/ laws/ stat/ sa-2002-c-a-4. 5/ latest/ sa-2002-c-a-4. 5. html [12] http:/ / www. canlii. org/ en/ ab/ laws/ stat/ rsa-2000-c-i-10/ latest/ rsa-2000-c-i-10. html [13] Family Provision (Intestate Succession) Order 2009 (S.I. 2009 No. 135)
References
"Descent and distribution" from Answers.com (http://www.answers.com/topic/descent-and-distribution) "Descent and distribution" from The Free Dictionary (http://legal-dictionary.thefreedictionary.com/descent and distribution) Wills and Trusts outline by Professor Jenkins, South Texas College of Law (http://www.stcl.edu/faculty-dir/ jenkins/wills-and-trusts/sld001.htm) Laws of Intestacy in the UK (http://www.makingawill.org.uk/why-make-a-will.htm#8) "Descent and distribution" from law.jrank.org (http://law.jrank.org/pages/6105/Descent-Distribution.html) A sample "intestate will" from Proylaw.com (http://www.proylaw.com/intestate.html)
Joint wills and mutual wills
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Joint wills and mutual wills

Joint wills and mutual wills are closely related terms used in the law of wills to describe two types of testamentary writing that may be executed by a married couple to ensure that their property is disposed of identically. Neither should be confused with mirror wills which means two separate, identical wills, which may or may not also be mutual wills. A joint will is a single document executed by more than one person (typically husband and wife), making which has effect in relation to each signatory's property on his or her death (unless he or she revokes (cancels) the will during his or her lifetime).[1] Although a single document, the joint will is a separate distribution of property by each executor (signatory) and will be treated as such on admission to probate. Mutual wills are any two (or more) wills which are mutually binding, such that following the first death the survivor is constrained in his or her ability to dispose of his or her property by the agreement he or she made with the deceased. Historically such wills had an important role in ensuring property passed to children of a marriage rather than a widow or widower's spouse on a remarriage. The recognition of these forms varies widely from one jurisdiction to the next. Some permit both, some will not recognize joint wills, and many have established a presumption that one or both of these forms creates a will contract. A joint will differs substantively from a mutual will in that the former is not intended to be irrevocable or to express a mutual intention; it is merely an administrative convenience. A will may be both joint (on one document) and mutual (see below). Mutual wills have four basic requirements and a strict standard for enforceability: 1. The agreement must be made in a particular form. 2. The agreement must be contractual in effect. (Contrast Re Goodchild [1996] 1 WLR and Lewis v Cotton [2001] 2 NZLR) 3. The agreement must be intended to be irrevocable. 4. The surviving party must have intended the will to reflect the agreement. Mutual wills are rare, and often another form of constructive trust is imposed (See Healey v Browne [2002] 2 WTLR 849). It is also noted (see Carnwath J in Re Goodchild ibid) that a mutual will is a technical legal device requiring an intention to form a binding agreement and that this often differs from the "loose moral obligation" presupposed as binding by the layman.
Common law authority

The major common law authority in this area is Re Oldham [1925] Ch. 75. This discussed the 18th century case of Dufour v Pereira which first evinced the doctrine, in which Lord Camden remarked "he, that dies first, does by his death carry the agreement on his part into execution". Astbury J in Oldham distinguished mutual wills from mirror wills - that they are made in identical terms "does not go nearly far enough". There must be "an arrangement proved to the satisfaction of the court" and this must be a binding, irrevocable agreement. In Re Cleaver [1981] 1 WLR Nourse J took a less strict approach in finding that identical wills went towards proving the existence of an agreement, however this approach was rejected in Re Goodchild [1996] 1 WLR where Carnwath J stated the importance of having specific evidence as to the testator's mutual intentions at the time of execution of the wills. Carnwath J approved the "floating trust" analogy, first proposed by Dixon J in Birmingham v Renfrew [1937] CLR, which holds that the law will give effect to the intention (to create a mutually binding will) by imposing a floating trust which becomes irrevocable after the death of the first testatot and crystallises after the death of the second.
Joint wills and mutual wills In the Court of Appeal decision in Goodchild Legatt LJ approved the dicta of Carnwath J and added that "for the doctrine to apply there must be a contract". This approach raises problems as will be seen below. However, the contractual requirement has been rejected in other decisions, or at least diluted. Dixon J in Birmingham, commenting on Dufour v Pereira, noted that it is the trust arising from the course of conduct which is enforced, not the contract itself. This approach has received further credence in the decision of Blanchard J in Lewis v Cotton. "A formal legal contract is not needed. A contract made without formality is enough...The crucial factor must be that the terms of the mutual engagement... are sufficiently certain that the Court can see its way to enforce them." The importance of this approach is, as Blanchard J notes, that the focus is on the obligation not to deal with property contrary to the agreement rather than on non-revocation. This therefore covers situations such as that in Healey v Browne where there has been an inter vivos transfer to avoid the will. In Healey v Browne a husband transferred assets jointly to himself and his son after the death of his wife. Although there was found to be no mutual will (Donaldson QC adopted the contractual requirement), he considered that where there was a valid mutual will the second testator is free to use the assets for his own beneficial interest as long as it is not calculated to defeat the agreement: "Where the fiduciary duty is breached by such a voluntary disposition inter vivos of the property in question, the "crystallisation" of the floating obligation must occur at the moment of that disposition." (Note that Donaldson QC imposed a secret trust in the circumstances which reduced the son's interest to 50%, that being the interest held by the husband) In Olins v Walters [2009] 2 WLR 1 C.A. the Court of Appeal has held that although it is a necessary condition for mutual wills that there is clear and satisfactory evidence of a contract between the testators, it is a legally sufficient condition that the contract provide that, in return for one testator agreeing to make a will in a particular form and not to revoke it without notice to the other testator, the latter would also make a will in a particular form and agree not to revoke it without notice to the first testator. Once a contract of that kind is established, equity will impose on the surviving testator a constructive trust not to dispose of the property in any other way. There did not have to be more detailed terms of the contract because the remedy was not founded on specific performance of contractual obligations but upon implementation of the trust, and the intentions of the parties had only to be expressed sufficiently to lay the foundations for that equitable obligation. The case also held that, where established, the equitable obligation under the trust became immediately binding upon the surviving testator upon the death of the first and was not postponed to take effect only after the death of the second or last testator when the property, or what was left of it, came into the hands of his personal representatives.
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Revocability
Another issue as regards mutual wills is the question of revocability. In Re Hobley Charles Aldous QC held that there could be either unilateral or mutual revocation provided it occurred during the lifetime of both testators. However, the problem with this approach is that unilateral revocation is against the general principle of contract. Several explanations for this could be proffered. Firstly, there could be an implicit term that the agreement is revocable. Secondly, it could be conceptually viewed that the agreement takes on the revocable nature of the will to which it relates. Thirdly, as the doctrine is based on detrimental reliance, the agreement only concretized on the death of the other party. Fourthly, one could apply the unconscionability rationale that unjust enrichment could only be complete when one party takes a benefit under the will of the other party. Re Hobley adopts the unconscionability rationale such that the imposition of a constructive trust is only justified by unconscionability, therefore there must be detrimental reliance. This would appear to be analogous to the doctrine of estoppel. Another consequence of this approach is that the trust must come into existence before the death of the first testator as otherwise the subject matter of the trust would be uncertain and could possible be avoided by inter vivos dispositions. Another point of controversy was whether or not the second testator had to benefit from the initial disposition. Commentators had argued that this was the case as if the second testator did not benefit the unjust enrichment
Joint wills and mutual wills argument would be untenable. However, Re Dale [1994] Ch held that no benefit was necessary. Morritt J reasoned that although the aim of the doctrine was to prevent fraud on the first testator this did not require a corresponding benefit for the second testator. Friel (1996 1 CPLJ) argued against this saying that the trust should not be imposed on the property but rather on the implementation of the contract between the parties. An excellent rebuke to this approach and support for the view in Re Dale is to be found in the judgment of Rowles JA in the Court of Appeal (British Columbia) decision in University of Manitoba v Sanderson [1998]. Rowles contended that the doctrine imposes a constructive trust on the survivor because the first to die is considered to have carried out the agreement by her death in reliance on the survivor's promise to act in accordance with the agreement. It is also important to note that these cases do not use the fraud rationale in the conventional sense of deceptive receipt of property. Instead an estoppel argument based on representation, reliance, detriment and irrevocability is utilised. Re Hagger [1930] 2 Ch held that the constructive trust comes into existence on the death of the first testator, however this approach was revised in Re Hobley which decided that it must come into existence before the death of the first testator to satisfy the requirement of certainty of subject matter. In the case of Ottaway v Norman [1972] Ch., Brightman J held that a floating obligation attaches to secret trusts: "A valid trust is created in favour of the secondary donee which is in suspense during the lifetime of the donee, but attaches to the estate of the primary donee at the moment of the latter's death." Edward Nugee QC sitting as deputy High Court judge in Re Basham [1986] 1 WLR applied a comparable test in relation to proprietary estoppel. He held that the belief, for detrimental reliance, need not relate to a clearly identified piece of property. Following Cleaver and Birmingham, if it is established by cogent evidence that the intention was to leave the entire estate, proprietary estoppel will enforce that intention. (It is interesting to recall that Edward Nugee was counsel in Ottaway v Norman and that Brightman J adopted his floating obligation theory)
[1] http:/ / testatewill. com/ trusts/ joint-trust/
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Laughing heir
A laughing heir in the law of inheritance, is an heir who is legally entitled to inherit the property of a person who has died, even though that heir is only distantly related to the deceased, and therefore has no personal connection or reason to feel bereaved over the death. In most jurisdictions, the law of intestacy requires that the property of a person who died without leaving a will must first go to that person's immediate family, such as a spouse, descendants, ascendants, or persons descended from the same parents or grandparents. Under the common law, if no such persons exist, the property passes to the nearest living person who can demonstrate some degree of kinship with the deceased, no matter how distant the relation. Some jurisdictions have a laughing heir statute, which cuts off the right of inheritance when the remaining relatives become too remote. In such jurisdictions, if no relative falls within the limitation set by the statute, then the property escheats to the state. 2-103 of the Uniform Probate Code, which has been adopted by a number of states, sets the outer limits of the right to inheritance with grandparents, aunts and uncles, and first cousins. Under the code, heirs that are farther removed from the deceased are left with no claim to the estate at all. By contrast, some states (such as Florida and Virginia) have extended the principle to cover the family of a predeceased spouse. In those states, if the decedent had been married, and their spouse had died before the decedent, and if the decedent had no blood relatives at all, then the decedent's property would pass to any living relatives of the spouse, no matter how remote.
Laughing heir
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Jurisdictions with no "laughing heir" statute

Africa
South Africa
North America
Florida (also extends inheritance rights to relatives of a predeceased spouse) Texas Virginia (also extends inheritance rights to relatives of a predeceased spouse)
Jurisdictions with a "laughing heir" statute

North America
Alabama (cuts off inheritance with descendants of the grandparents of the deceased)
External links
Quizlaw page listing links to probate codes of all 50 states [1]
References
[1] http:/ / www. quizlaw. com/ trusts_and_estates/ where_can_i_find_my_states_pro. php
Legatee
A legatee, in the law of wills, is any individual or organization bequeathed any portion of a testator's estate.
Usage
Depending upon local custom, legatees may be called "devisees." Traditionally, "legatees" took personal property under will and "devisees" took land under will. Brooker v. Brooker, (Tex. Civ.App., 76 S.W.2d 180, 183) asserts that "devisee" may refer to "those who take under will without any distinction between realty and personalty...though commonly it refers to one who takes personal property under a will."
References
Black's Law Dictionary 6th edition (West Publishing, St. Paul, MN: 1997), 453, 897.
Letters of Administration
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Letters of Administration
Letters of Administration are granted by a Surrogate Court or probate registry to appoint appropriate people to deal with a deceased person's estate where property will pass under Intestacy Rules or where there are no executors living (and willing and able to act) having been validly appointed under the deceased's will. Traditionally, letters of administration granted to a representative of a testate estate are called "letters of administration with the will annexed" or "letters of administration cum testamentio annexio" or "c.t.a.".
Missing heir
A missing heir is a person related to a decedent (dead person), or testator of a will, but whose residence, domicile, Post office, or other address is not known. A missing heir may be an orphan or other person under a disability, who may need a guardian or custodian of funds. Missing heirs often come up in the context of legal actions involving wills, title to real property, or a Quiet title action. A Private investigator, probate research firm or forensic genealogist may be hired by the Executor, Trustee, or Administrator to find the missing heirs. A Probate court or surrogate judge may require the service of a Citation, Notice of Petition, Summons, or Subpoena to the relevant persons who may be missing persons, or may know the whereabouts of such person. Some courts, such as Suffolk County Probate Court in Boston, actively solicit missing heris.[1] Probate research companies specialize in locating missing and unknown heirs.
See Also
Probate research
References
[1] Suffolk County Probate Court (http:/ / www. probatecourtiannella. com/ MissingHeirs. htm)
No-contest clause
371
No-contest clause
A no-contest clause, also called an in terrorem clause, is a clause in a legal document, such as a contract or a will, that is designed to threaten someone, usually with litigation or criminal prosecution, into acting, refraining from action, or ceasing to act. The phrase is typically used to refer to a clause in a will that threatens to disinherit a beneficiary of the will if that beneficiary challenges the terms of the will in court. Many states[1] in the United States allow for a Will to have a no contest clause, so long as the person challenging the will doesn't have probable cause to do so.[2]
No-contest clause in wills

The Uniform Probate Code (UPC) 2-517 and 3905 allow for no contest clauses so long as the person challenging the will doesn't have probable cause to do so.[2] The full wording is: A provision in a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings. UPC 2-517 and 3905 [2] The UPC has been adopted in several smaller states, including Alaska, Idaho, Montana, and New Mexico, but also by Florida, one of the larger states in population.[1] Some states allow for "living probate" and "ante mortem" probate, which are statutory provisions which authorize testators to institute an adversary proceeding during their life to declare the validity of the will, in order to avoid later will contests.
No-contest clauses by state

California
In California, no-contest clauses are completely effective, and will divest any party that unsuccessfully contests a will containing such a clause. California's statutory scheme governing the enforceability of no-contest clauses was revised, effective January 1, 2010, with the enactment of new Prob.C. 2131021315. As of that date, the predecessor statutes are repealed.
Florida
In Florida no-contest clauses in wills are specifically unenforceable, irrespective of probable cause, pursuant to statute. See Fla. Stat. 732.517 (2009) which states: A provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable.[3]
No-contest clause
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Massachusetts
Massachusetts General Laws allow for Penalty Clause for Contest language in wills. See M.G.L. Ch. 190B, Art. II, Sec. 2-517. A provision in a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is enforceable.[4]
Nevada
Nevada law specifically directs the court to enforce no-contest clauses.[5] These statutes recognize that a beneficiary may, without penalty, seek enforcement of the will or trust, seek a judicial ruling as to the meaning of the will or trust. The statutes also recognize an exception where legal action challenging the validity of the document is "instituted in good faith and based on probable cause that would have led a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the trust or other trust-related instrument was invalid."
New York
New York has rejected the "probable cause" defense to enforcement of such clauses. Such clauses are given full effect upon challenge. Some exceptions apply, e.g. election against the will by a minor, contest on ground of forgery or revocation by later Will.[6] N.Y. EPTL specifically states: A condition, designed to prevent a disposition from taking effect in case the will is contested by the beneficiary, is operative despite the presence or absence of probable cause for such contest, subject to [exceptions] N.Y. EPTL 3-3.5 [6]
Virginia
Virginia has generally rejected the "probable cause" defense.
References
[1] Cornell Law School website page on Uniform Probate Code (http:/ / www. law. cornell. edu/ uniform/ probate. html). Accessed October 5, 2009. [2] Uniform Probate Code (UPC) 2-517. Penalty Clause for Contest, replicated at 3905. Penalty Clause for Contest. Both found at University of Pennsylvania Law School website page on Uniform Probate Code (http:/ / www. law. upenn. edu/ bll/ archives/ ulc/ upc/ final2005. htm). Accessed October 5, 2009. [3] Fla. Stat. 732.517 (2009). [4] http:/ / www. malegislature. gov/ Laws/ GeneralLaws/ PartII/ TitleII/ Chapter190B/ ArticleII/ Section2-517 [5] See NRS 137.005 (http:/ / www. leg. state. nv. us/ NRS/ NRS-137. html#NRS137Sec005) as to wills and NRS 163.00195 (http:/ / www. leg. state. nv. us/ NRS/ NRS-163. html#NRS163Sec00195) as to trusts. [6] N.Y. EPTL 3-3.5 Conditions qualifying dispositions; conditions against contest; limitations thereon, found at New York state Assembly website, go to EPT Estates, Powers & Trusts (http:/ / public. leginfo. state. ny. us/ menugetf. cgi?COMMONQUERY=LAWS). Accessed October 5, 2009.
Oral will
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Oral will
An oral will (or nuncupative will) is a will that has been delivered orally (that is, in speech) to witnesses, as opposed to the usual form of wills, which is written and according to a proper format. A minority of U.S. states (approximately 20 as of 2009), permit nuncupative wills under certain circumstances. Under most statutes, such wills can only be made during a person's "last sickness," must be witnessed by at least three persons, and reduced to writing by the witnesses within a specified amount of time after the testator's death. Some states also place limits on the types and value of property that can be bequeathed in this manner. A few U.S. states permit nuncupative wills made by military personnel on active duty. Under the law in England and Wales oral wills are permitted to military personnel and merchant seamen on duty (see law report below) and it is common practice for in Commonwealth countries. An analogy can be drawn to the concept of last donations (donatio mortis causa) established by Roman law and still in effect in England and Wales.
References
Dukeminier, Jesse, Johansen, Stanley M., Lindgren, James, and Sitkoff, Robert. Wills, Trusts, and Estates, 8th Edition, p.226. Aspen Publishers, 2009. ISBN13: 978-0-7355-7996-5
Personal representative
In common law jurisdictions, a personal representative is the generic term for an executor for the estate of a deceased person who left a will or the administrator of an intestate estate.[1] In either case, a Surrogate Court of competent jurisdiction issues a finding of fact, including that a will has or has not been filed, and that an executor or administrator has been appointed. These are often referred to as "letters testamentary", "letters of administration" or "letters of representation", as the case may be. These documents, with the appropriate death certificate are often the only license a person needs to do the banking, stock trading, real estate transactions and other actions necessary to marshal and dispose of the decedent's estate in the name of the estate itself. As a fiduciary, a personal representative has the duties of: 1. loyalty 2. candor or honesty 3. good faith. In the U.S., punctilio of honor, or the highest standard of honor, is the term used to describe the level of scrupulousness that a fiduciary must abide by.[2] Types of personal representatives include: Executor or Executrix (term for females) Alternate executor Administrator Ancilllary administrator Administrator de bonis non - one acting without complete authority Public administrator Guardian
Conservator
Personal representative
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U.S. Department of Defense

In the U.S., the Office for the Administrative Review of the Detention of Enemy Combatants appointed a Personal Representative (CSRT) to meet with each captive who was still being held in extrajudicial detention in the United States Guantanamo Bay detention camps, in Cuba, in August 2004, when the Supreme Court forced the Department of Defense to start convening Combatant Status Review Tribunals. Such a personal representative is more like a guardian ad litem.
References
[1] Hayton & Marshall (2005) 1-127-1-128 [2] Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928).
Bibliography
Hayton , D. & Marshall, C. (2005). Commentary and Cases on the Law of Trusts and Equitable Remedies. London: Sweet & Maxwell. ISBN0-421-90190-X.
Pour-over will
A pour-over will is a testamentary device wherein the writer of a will creates a trust, and decrees in the will that the property in his or her estate at the time of his or her death shall be distributed to the Trustee of the trust. Such device was always void at English common law, because it was not deemed as a binding trust, in that the testator can change the disposition of the trust at any time and therefore essentially execute changes to the will without meeting the formalities required for the change. More recently, however, a number of jurisdictions have recognized the validity of a pour-over will. In the jurisdictions in the U.S. which allows a pour-over will, testators do not usually put all of their assets into trusts for the reasons of liquidity, convenience, or simply because they did not get around to do so before they died. A pour-over clause in a will gives probate property to a trustee of the testator's separate trust and must be validated either under incorporation by reference by identifying the previously existing trust which the property will be poured into, or under the doctrine of acts of independent significance by referring to some act that has significance apart from disposing of probate assets, namely, the revocable living trust (inter vivos trust). The testator's property is subject to probate until such time as the pour-over clause is applied, and the estate assets "pour" into the trust. Although the trust instrument must be in existence at the time when the will with the pour-over clause is executed, the trust need not be funded inter vivos. The pour-over clause protects property not previously placed in a trust by pouring it into the previously established trust through the vehicle of the will.
Probate
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Probate
Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will. A surrogate court decides the validity of a testator's will. A probate interprets the instructions of the deceased, decides the executor as the personal representative of the estate, and adjudicates the interests of heirs and other parties who may have claims against the estate.
Probate Administration
Probate is a process by which a will of a deceased person is proved to be valid, such that their property can in due course be retitled (US terminology) or transferred to beneficiaries of the will. As with any legal proceeding, there are technical aspects to probate administration: Creditors need to be notified and legal notices published. Executors of the Will need to be guided in how and when to distribute assets and how to take creditors' rights into account. A Petition to appoint a personal representative may need to be filed and Letters of Administration obtained. Homestead property, which follows its own set of unique rules in states like Florida, must be dealt with separately from other assets. In many common law jurisdictions such as Canada, parts of the US, the UK, Australia and India, jointly owned property will pass automatically to the surviving joint owner separately from any will, unless the equitable title is held as tenants in common. There are time factors involved in filing and objecting to claims against the estate. There may be a lawsuit pending over the decedent's death or there may have been pending suits that are now continuing. There may be separate procedures required in contentious probate cases. Real estate or other property may need to be sold to effect correct distribution of assets pursuant to the will or merely to pay debts. Estate taxes, gift taxes or inheritance taxes must be considered if the estate exceeds certain thresholds. Costs of the administration including ordinary taxation such as income tax on interest and property taxation will be deducted from assets in the estate before distribution by the executors of the will. Other assets may simply need to be transferred from the deceased to his or her beneficiaries.
Etymology
The etymology of "probate" stems from Latin, old French, and old English words with somewhat different meanings. The earliest definition, dated to 1463, means the "official proving of a will," and originates from the Classical Latin word probatus, meaning "proven" or "a thing proven."[1] This is the past participle of probre, which means "to try, test, prove" or "prove to be worthy".[1] It also traces its roots to the old French word prouwe, dated circa 1175, or prover, and is related to the English word "prove", and the Welsh word "profi" (to test).[2] The term "probative," used in the law of evidence, comes from the same Latin root but has a different English usage.
Probate
376
Commonwealth
In England and Wales, Northern Ireland, Commonwealth countries (common law jurisdictions), Ireland and in the U.S., probate ("official proving of a will") is obtained by executors of a will while Letters of Administration are granted where there are no executors.[3]
United States
In any jurisdictions in the U.S. that recognize a married couple's property as tenancy by the entireties, if a person dies intestate (owning property without a will), the portion of his/her estate so titled passes to a surviving spouse without a probate. If the estate is not automatically devised to the surviving spouse in this manner or through a joint tenancy, and is not held within a trust, it is necessary to "probate the estate", whether or not the decedent had a valid will. A court having jurisdiction of the decedent's estate (a probate court) supervises probate, to administer the disposition of the decedent's property according to the law of the jurisdiction and the decedent's intent as manifested in his testamentary instrument. In order to dispose of certain assets in the estate, it is necessary to sell the illiquid assets including real estate. There are exceptions for smaller estates. If the decedent died without a will, known as intestacy, the estate will be distributed according to the laws of the state where the decedent resided or held by the court. If the decedent died with a will, the will usually names an executor (personal representative), a person tasked with carrying out the instructions laid out in the will. The executor marshals the decedent's assets. If there is no will, or if the will does not name an executor, the probate court can appoint one. Traditionally, the representative of an intestate estate is called an administrator. If the decedent died with a will, but only a copy of the will can be located, many states will allow the copy to be probated, subject to the rebuttable presumption that the testator destroyed the will before death. In some cases, where the person named as executor cannot administer the probate, or wishes to have someone else do so, another person will be named as administrator. An executor or an administrator may receive compensation for his service. The probate court may require that the executor provide a fidelity bond, an insurance policy in favor of the estate to protect against possible abuse by the executor.[4] The representative of a testate estate who is someone other than the executor named in the will is an administrator with the will annexed, or administrator c.t.a. (from the Latin cum testamento annexo.) The generic term for executors or administrators is personal representative.
Steps of probate
Some of the decedent's property may never enter probate because it passes to another person contractually, such as the death proceeds of an insurance policy insuring the decedent or bank or retirement account that names a beneficiary or is owned as "payable on death", and property (sometimes a bank or brokerage account) legally held as "jointly owned with right of survivorship". Property held in a revocable or irrevocable trust created during the grantor's lifetime also avoids probate. In these cases in the U.S. no court action is involved and the property is distributed privately, subject to estate taxes. After opening the probate case with the court, the personal representative inventories and collects the decedent's property. Next, he pays any debts and taxes, including estate tax in the United States, if the estate is taxable at the federal or state level, or the Pennsylvania inheritance tax. Finally, he distributes the remaining property to the beneficiaries, either as instructed in the will, or under the intestacy laws of the state. A party may challenge any aspect of the probate administration, such as a direct challenge to the validity of the will, known as a will contest, a challenge to the status of the person serving as personal representative, a challenge as to the identity of the heirs, and a challenge to whether the personal representative is properly administering the estate.
Probate Issues of paternity can be disputed among the potential heirs in intestate estates, especially with the advent of inexpensive DNA profiling techniques. In some situations, however, even biological heirs can be denied their inheritance rights, while non-biological heirs can be granted inheritance rights. The personal representative must understand and abide by the fiduciary duties, such as a duty to keep money in interest bearing account and to treat all beneficiaries equally. Not complying with the fiduciary duties may allow interested persons to petition for the removal of the personal representative and hold the personal representative liable for any harm to the estate.
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Avoiding probate
Probate generally lasts several months, and often over a year before all the property is distributed, and can incur substantial court and attorney costs in large estates. One of the many ways used in the US to avoid probate is to execute a living trust. Alternatively property can be passed outside probate by setting up P.O.D (paid on death) designations on bank accounts and T.O.D (transfer on death) on brokerage accounts, 401ks and IRAs that pass automatically to designated beneficiaries, or placing property in joint tenancies with the right of survivorship. As for real estate, a testator may add a named beneficiary to a deed by executing a life estate deed. The property can be passed several generations. The cost of such measures to avoid probate should be weighed against probate court fees, as the administration of a living trust or other arrangement will also incur legal and administrative charges, and as with all trusts is ultimately subject to the supervision of the court. Avoiding probate does not eliminate estate taxes. Under the federal estate tax law as modified, property held in a living trust, life insurance, payable on death or transfer on death financial instruments, and other property a party receives upon decease of the decedent is included in the definition of a taxable estate.
England and Wales

When someone dies, the term "Probate" usually refers to the legal process whereby the deceased's assets are collected together and, following various legal and fiscal steps and processes, eventually distributed to the beneficiaries of the estate. Technically the term "Probate" has a particular legal meaning but it is generally used within the English legal profession as a term to cover all procedures concerned with the administration of a deceased person's estate. As a legal discipline the subject is vast and it is only possible in an article such as this to cover the most common situations, but even that only scratches the surface. All legal procedures concerned with Probate (as defined above) come within the jurisdiction of the Family Division of the High Court of Justice by virtue of Section 25 of the Senior Courts Act 1981. The High Court is therefore the only body that is able to issue the documents which give persons the ability to actually deal with a deceased person's estate, such as to enable them to close bank accounts or sell property or shares. It is the production and issuing of these documents, known collectively as "Grants of Representation" that is the primary function of the Probate Registries, which are part of the High Court, to which the general public and probate professionals alike apply to for the Grants of Representation.[5] There are many different types of Grants of Representation, each one designed to cover a particular circumstance. The most common ones are those which cover the two most common situations - either the deceased died leaving a valid Will or they did not. If someone left a valid Will then it is more than likely that the Grant will be a "Grant of Probate". If there was no Will then the Grant required is likely to be a "Grant of Administration". There are many other Grants which can be required in certain circumstances and many have technical Latin names but the general public is most likely to encounter these two - the Grant of Probate and the Grant of Administration. If an estate has a value of less than 5,000.00 or if all assets are held jointly and therefore pass by survivorship, for example to a surviving spouse, a Grant will not usually be required.[6]
Probate The general public can apply to a local probate registry for a Grant themselves but most people use a probate practitioner such as a solicitor. If an estate is small some banks and building societies will allow accounts to be closed by the deceased's immediate family without a Grant, but there usually needs to be less than about 15,000 in the account for them to allow this. The persons who are actually given the job of dealing with the deceased's assets are called "personal representatives" or "PR's". If the deceased left a valid Will then the PR's will be the "Executors" who are appointed by the Will - "I appoint X and Y to be my Executors etc." If there is no Will or if the Will does not contain a valid appointment of Executors (for example if they are all dead) then the PR's are called "Administrators". So, Executors obtain a Grant of Probate which enables them to deal with the estate and Administrators obtain a Grant of Administration which enables them to do the same. Apart from that distinction the function of Executors and Administrators is exactly the same. For an explanation of the intestacy probate process in England and Wales, see Administration of an estate on death.
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References
[1] Harper, Douglas. "probate" (http:/ / www. etymonline. com/ index. php?term=probate). Online Etymology Dictionary. . Retrieved 2007-01-05. [2] Harper, Douglas. "prove" (http:/ / www. etymonline. com/ index. php?term=prove). Online Etymology Dictionary. . Retrieved 2007-01-05. [3] [4] [5] [6] Probate faq (http:/ / www. ohiobar. org/ pub/ lawfacts/ index. asp?articleid=17) Warren County, New Jersey Surrogate's office (http:/ / www. co. warren. nj. us/ surrogate/ probate. html) (http:/ / www. hmcourts-service. gov. uk/ infoabout/ civil/ probate/ registries. htm) "Probate Info" (http:/ / www. tmjlegal. co. uk/ wills-trusts-and-probate/ probate. php). .
External links
The Quinnipiac Probate Law Journal - the official scholarly publication of the National College of Probate Judges (http://law.quinnipiac.edu/x202.xml) The Connecticut Probate Court Website - providing good state-specific information as well as a link to a widely applicable overview of most Probate Courts' jurisdiction (http://www.jud.state.ct.us/probate) List of English and Welsh Regional Probate Registries - Regional Offices for probate information and to register the location of a Will and/or Executor (http://www.hmcourts-service.gov.uk/HMCSCourtFinder/CourtFinder. do?court_work_type_desc=probate)
Probate court
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Probate court
A probate court (also called a surrogate court) is a specialized court that deals with matters of probate and the administration of estates. Probate courts administer proper distribution of the assets of a decedent (one who has died), adjudicates the validity of wills, enforces the provisions of a valid will (by issuing the grant of probate), prevents malfeasance by executors and administrators of estates, and provides for the equitable distribution of the assets of persons who die intestate (without a valid will), such as by granting a grant of administration giving judicial approval to the personal representative to administer matters of the estate). In contested matters, a probate court examines the authenticity of a will and decides who is to receive the deceased person's property. In a case of an intestacy, the court determines who is to receive the deceased's property under the law of its jurisdiction. The probate court will then oversee the process of distributing the deceaseds assets to the proper beneficiaries. In some jurisdictions, such courts are also referred to as orphans courts, or courts of ordinary. Not all jurisdictions have probate courts, in many places, probate functions are performed by a chancery court or another court of equity. Probate courts may also deal with other matters, including conservatorships, guardianships, name changes, marriages, and adoptions; although in some jurisdictions these issues are dealt with by family courts. The surrogate court can be petitioned by interested parties in an estate, such as when a beneficiary feels that an estate is being mishandled. The court has the authority to compel the executor to give an account of his actions.
The Orphan's Court

The orphan's court was an organization established in the Chesapeake Bay colonies during colonization. The major goal of the organization was to protect orphaned children and their right to their deceased family's estate from against claims and abuses by stepparents and others. Modern-day orphan's courts are surrogate courts, hearing matters involving wills of decedents' estates which are contested and supervising estates which are probated judicially.
List of probate courts

England and Wales Prerogative court - former Court of Probate - former High Court of Justice Family Division - current United States (state courts) California Superior Court Connecticut - Connecticut Probate Courts (a system of 54 probate court districts) District of Columbia - Superior Court of the District of Columbia, Probate Division Georgia - Court of Ordinary (judge known as ordinary) (former) Missouri - conducted by Circuit Courts, some of which have separate probate divisions New Hampshire - New Hampshire Probate Court New Jersey - New Jersey Superior Court, Chancery Division, Probate Part New York - New York Surrogate's Court (judges known as surrogates) Ohio - conducted by Courts of Common Pleas, Family and Probate Divisions
Vermont - Probate Courts (one in each of Vermont's 14 counties)
Probate court
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References
Probate sale
Probate sale is the term used to describe the process executed at a county court in the USA where the executor for the estate of a deceased person sells property from the estate (typically real estate) in order to divide the property among the beneficiaries.
Pretermitted heir
A pretermitted heir is a term used in the law of property to describe a person who would likely stand to inherit under a will, except that the testator (the person who wrote the will) did not know, or did not know of, the party at the time the will was written. The most common category of pretermitted heir is the pretermitted child, born after the execution of the will.
Rights of a pretermitted child

Many jurisdictions have enacted statutes that permit a pretermitted child to demand an inheritance under the will. Some allow the child to claim their intestate share, while others limit the inheritance to an amount that is comparable to devises made in the will for the children who were alive when the will was written. This may be accomplished by proportionally reducing the gift under the will to the other children, or by reducing gifts under the will to non-family members. An exception common to many jurisdictions prohibits a pretermitted child from claiming an inheritance if the will devised substantially all of the testator's estate to the surviving spouse, and the surviving spouse is the other parent of the pretermitted child. Some jurisidictions provide the same rights for a child who was pretermitted because, although born before the will was executed, he was not known of at the time the will was made. This may be because the child was incorrectly believed to be dead, or was later adopted by the testator. A will may contain a clause, however, which explicitly disinherits any heirs unknown at the time that the will is executed, or any heirs not named in the will. A pretermitted heir may also be denied the right to take under the will if they received an advancement against their inheritance - an inter vivos gift from the testator of an amount equivalent to what the pretermitted child might take under the will.
Pretermitted spouse
Another party for whom the state might provide is the pretermitted spouse, whom the testator does not marry until after the execution of the will. Many jurisdictions provide that a pretermitted spouse will receive either her intestate share (what she would have received had the testator died with no will), or the elective share (a set amount or formula provided by law for spouses who are disinherited in the will). Like a pretermitted child, a pretermitted spouse may be explicitly disinherited in the will, or may be excluded from taking under the will if they received an advancement on their inheritance in anticipation of the marriage. A pretermitted spouse may also disclaim any interest in the testator's estate through an antenuptial or prenuptial agreement.
Residuary estate
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Residuary estate
A residuary estate, in the law of wills, is any portion of the testator's estate that is not specifically devised to someone in the will, or any property that is part of such a specific devise that fails. [1][2] It is also known as a residual estate or simply residue. The will may identify the taker of the residuary estate through a residuary clause or residuary bequest. The person identified in such a clause is called the residuary taker, residuary beneficiary, or residuary legatee. If no such clause is present, however, the residuary estate will pass to the testator's heirs by intestacy. At common law, if the residuary estate was divided between two or more beneficiaries, and one of those beneficiaries was unable to take, the share that would have gone to that beneficiary would instead pass by intestacy, under the doctrine that there was no residuary of a residuary. The modern rule, however, is that the failure of a residuary gift to one beneficiary causes that beneficiary's share to be divided among the remaining residuary takers.
References
[1] http:/ / www. nolo. com/ definition. cfm/ Term/ DB9F6C78-01F8-4A95-8B7DC729C0CEE3D4/ alpha/ R/ [2] http:/ / definitions. uslegal. com/ w/ wills-residuary-estate/
Satisfaction of legacies
Satisfaction of legacies is a common law doctrine that affects the disposition of property under a will. Under the doctrine, any gift that the maker of the will (the testator) gives during his lifetime to a named beneficiary of the will is presumptively treated as a satisfaction of that beneficiary's inheritance. After the death of the testator, the amount of the gift would then be deducted from the amount that the beneficiary would otherwise have received, even if it operates to entirely cancel out the inheritance. The presumption applies only when the gift is made after the will has already been executed. Many jurisdictions have repealed the satisfaction of legacies doctrine by statute. Even in those jurisdictions, however, a gift may still be treated as a satisfaction of legacy if such an intention is expressed in a written document made close to the time of the gift and signed by either the testator or the beneficiary. Jurisdictions that have enacted such a statute include Virginia. A similar common law doctrine operates regarding inheritance by intestacy (i.e., without a will); such a gift is then called an advancement. The concepts work similarly, but are independent of one another; jurisdictions that have repealed the doctrine of satisfaction of legacies may still have the traditional doctrine of advancement in place. This may be because the law presumes that a person who was possessed of enough sophistication to make a will would know how to amend that will or otherwise document their desire that the gift be deemed satisfied.
Simultaneous death
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Simultaneous death
Simultaneous death is a problem of inheritance which occurs when two people, at least one of whom is entitled to part or all of the other's estate on their death (usually a husband and wife) die at the same time. This is usually the result of an accident, but in some cases may occur as a result of homicide. Under the common law, if there was any evidence whatsoever that one party had survived the other, even by a few moments, then the estates would be distributed in that order, though the decedents could write (or have written) a clause in the will that requires their property to be distributed as though each had predeceased the other. In order to alleviate problems of proving simultaneous death, many states in the United States have enacted the Uniform Simultaneous Death Act, which provides that each spouse will be treated as though they predeceased the other if they die within 120 hours of one another. Some wills now include Titanic clauses (named for the RMS Titanic, which caused many simultaneous deaths among testators and executors). These clauses lay out explicit instructions for dealing with simultaneous death.
England and Wales

The common law of England and Wales (also Australia) does not accept the possibility of simultaneous death. Where there is no satisfactory medical evidence as to the order of death, the elder of the two is deemed to have died first. This can cause difficulties where for example the elder person had children prior to marriage. The rules can be ousted if inappropriate by an explicit provision in a will. Wills generally have a survivorship clause, typically of 30 days, so that both partner's estates are dealt with as though they were already widowed at the point of death; in cases of intestacy, the survivorship clause is set at 28 days. However it is Her Majesty's Revenue and Customs's longstanding practice to apply a concessionary treatment for inheritance tax purposes in such cases which reduces the burden on surviving family members.
References
Slayer rule
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Slayer rule
The slayer rule, in the common law of inheritance, is a doctrine that prohibits inheritance by a person who murders someone from whom he or she stands to inherit: i.e., you don't inherit your parents money if you kill them. The effect of the slaying was that the slayer would be treated as though he or she had died before the person who had been murdered. While convicting someone of the crime of murder requires proof beyond a reasonable doubt, the slayer rule applies to civil law, not criminal law, so it is only necessary to prove the wrongful killing by a preponderance of the evidence, as in a wrongful death claim. This means that even a slayer who is acquitted of the murder in criminal court can still be divested of the inheritance by the civil court administering the estate. In the United States, most jurisdictions have enacted a slayer statute, which codifies the rule and supplies additional conditions.
Maryland Slayer Rule

The Maryland Slayer Rule is harsher than most other states. In addition to prohibiting murderers from inheriting from their victims, Maryland's slayer rule prohibits anyone else from inheriting from murder victims through their murderers; Maryland's Slayer Rule is thus similar in structure to Corruption of Blood.[1] Example: A mother leaves her son $50,000, and leaves her son's child (her grandchild) $100,000. She leaves her residuary estate (i.e., whatever else is left of the estate) to her daughter. If the son kills his mother, then under Maryland law, the son's child will inherit the $100,000; however the son's $50,000 (which is also the indirect inheritance of the grandchild through his father), is not available under Maryland law to either the son, or his child. The $50,000 becomes part of the grandmother's residuary estate and goes to the daughter.
References
[1] COOK v. GRIERSON, 380 Md. 502 (2004) (http:/ / www. loislaw. com/ ogpc/ login. htp?WSRet=12& dockey=16830391@MDCASE& OLDURL=/ gpc/ index. htp& OLDREFURL=http:/ / news. google. ca/ archivesearch?q=maryland+ %22slayer+ rule%22+ intestacy& btnG=Search& um=1& ned=ca& hl=en& scoring=a)
Succession conflicts
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In the conflict of laws, the subject of succession deals with all procedural matters relevant to estates containing a "foreign element" whether that element consists of the identity of the deceased, those who may inherit or the location of property. The relevant choice of law rules often distinguish both between the administration of the estate and the succession to it, and between the succession to movable and immovable property.
Definitions
In civil law systems, there are two types of property. Out of comity, the conflict of laws has adopted the terminology of civil law: Immovables is the equivalent of "real property" in common law systems, i.e. it is land or any permanent feature or structure above or below the surface. All other property is considered movables, the equivalent of personal property or personalty in common law systems. This property is either tangible or intangible, in that it is either physical property that can be touched like a computer. Alternatively, it is an enforceable right like a patent, other types of intellectual property, or a chose in action such as shares and bank accounts.
Connecting factors
Domicile
In common law jurisdictions, every person acquires a domicile of origin which, if the individual is legitimate, is that of their father. During their minority, children have a domicile of dependency which follows the domicile of the controlling parent. After reaching the age of majority, a young adult can choose a new domicile, but establishing a legal domicile requires long-term residence accompanied by an intention to remain in the new state indefinitely. As such, changing a domicile of origin is not easy. Hence, the lex domicilii is favored as the connecting factor for all aspects of status and capacity for parties who are involved in resolving disputes over the distribution of the property in the estate.
Nationality
Civil law states use either the concept of nationality or habitual residence as the connecting factor, i.e. the principles are the same as for domicile but the way in which they are applied is less rigorous so it a nationality can be changed by naturalization and a new habitual residence established with fewer delays and technical difficulties. As above, the lex patriae determines status and capacity.
Lex successionis
As with a choice of law clause or forum selection clause in contract, a testator may nominate a law or laws by which both to interpret and test the validity of the will, and to govern administration and succession, but there must be a real connection between the choice(s) and the location of assets or beneficiaries, and the choices must invoke provisions of law that are consistent with any mandatory provisions either in the lex fori or the lex situs. If a choice of law is made in respect of part of an estate, it is assumed that the deceased wishes that law to apply to the whole of the estate unless there is clear evidence to the contrary or mandatory principles of law are relevant to cover the residual assets and their inheritance.
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Lex situs
The general rule is that the lex situs applies to determine all issues relating to title to immovable property and some issues relating to movables, that is, the law of the jurisdiction where the property is applied.
Lex fori
The courts in which lawsuits are initiated will tend to prefer the application of the lex fori, applying the laws at the court jurisdiction, because the fact of the litigation suggests that some aspect of the administration is to be effected within the jurisdiction. There may also be some claims arising from public policy if the forum court considers the application of the lex causae is going to produce a significantly unjust result.
Administration
In most states, the lex fori regulates the administration by Personal Representatives appointed to act within the jurisdiction of forum irrespective of the deceased's lex domicilii but the rights of beneficiaries is a matter for the lex successionis.
Testamentary capacity
Laws differ in their treatment of the ability of youths to own property and to dispose of that property by a will. It is now generally agreed that it is not rational to set the age at which full capacity is achieved. Hence, if one is old enough to get married, he should be old enough to provide for spouse and children. Many states also permit writing a will by a mouth or a foot, or by a tool that enables the disabled to write down a testamentary intent. It is still being debated whether videotape, digital, and electronic wills should be admissible to probate. Testators may not have the physical ability to write, for example, because they are hospitalised and close to death, but there is concern that digital and electronic forms may be manipulated and altered. Hence, unless there is adequate evidence to exclude forgery, the courts are reluctant to admit such wills to probate.
Succession
In some states, there is complete freedom for testators to leave their assets to whomever or whatever purpose they wish to promote. But the majority of states allow surviving spouses, children and dependents of a locally-based deceased to claim against the estate if the will fails to make adequate provision for them. Some proactively limit the testator's capacity by imposing minimum provisions for surviving dependents. Although these rules are relatively clear in their operation during the subsistence of the marriage, determining the effect of either a divorce or nullity decree is more problematic if, by its existence or the terms of any order made, it purports to adjust the property entitlements of the other spouse. For example, suppose that a husband obtains a nullity decree in a state declaring the marriage to have been void Ab initio. If that decree is recognized across state boundaries, the effect would be to remove any claim that the supposed "wife" would otherwise have had. As to the testator, all questions of status and capacity should be determined by the personal law at the time the decree is granted. Thus, if the decree is recognized, either the status will be modified so that the testator was never married and this will retrospectively validate or invalidate previous dispositions, or the testator is now single and able to dispose of his assets in any way permitted by his personal law. But as to the putative wife, any entitlement she will have will be determined by whether the lex situs of any "matrimonial" assets recognizes the decree. If the decree is not recognized, she will remain a wife for the purposes of succession protected by the local system of mandatory heirship or community property laws.
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Immovables
Generally, the lex situs governs the succession to immovables regardless of the deceased's personal law, lex domicilii, lex patriae, or habitual residence. For example, land in France belonging to an English domiciliary will pass according to the French law on forced heirship, but complications may arise because some states apply renvoi to succession cases. Hence, English law would apply the lex situs to immovables located outside the jurisdiction but if that foreign law (say. as in Spain) applies the deceased's lex patriae and rejects any renvoi, English law would be applied if, under Spanish law, the deceased had an English nationality.
Movables
Generally, the deceased's personal law will determine succession to movables no matter where they are located unless a lex situs provides otherwise. Thus, for example, succession to the estate of a French testator leaving movables situated in England would be governed by French law and the French rules of forced heirship would apply given that English law does not limit the application of the lex domicilii on this point.
Formal validity
A will is generally considered valid if properly executed according to the law of the place where: it was executed; the testator was domiciled either when the will was executed or at the time of death (since the policy in most laws is to uphold the validity of wills to respect the demonstrated intention of the testator, if validity is established under either law, it will be deemed valid); the testator was a national either at the time of execution or death; or the testator was habitually resident either at the time of execution or death.
Essential validity
Even though a will may be formally valid, it may not be essentially valid as above, the succession to movables will be governed by the deceased's personal law, and if there is a limitation on testamentary capacity, the terms of a will breaching that law will be invalid even if validly executed. Similarly, a will validly executed in one state cannot override mandatory provisions in the lex situs. The doctrine of evasion applies because otherwise a husband who wishes to evade laws imposing community property can defeat the claims of a wife by the simple expedient of executing a formally valid will in a state that does not have such law.
Intestacy
If there is no will, the appointment and duties of personal representatives will be determined by the deceased's personal law. Succession to an intestate's estate will also be governed by his or her personal law and the lex situs of the assets.
Harmonization
The Hague Convention of 1 August 1989 on the Law Applicable to Succession to the Estates of Deceased Persons [1], if it ever comes into force, would apply to: a) the form of dispositions of property upon death; b) capacity to dispose of property upon death; c) issues relating to matrimonial property; d) property rights, interests or assets created or transferred otherwise than by succession, such as in joint ownership with right of survival, pension plans, insurance contracts, or arrangements of a similar nature. It nominates as the lex causae for succession the law of habitual resident if that was also the deceased's nationality. If the deceased had been resident in a state for at least five years and no other state has a better claim, the law of residence applies. In all other cases, the personal law with
Succession conflicts the best claim applies. See also the "European Commission's Green Paper Consulting on Succession with an International Dimension" by David Hayton [2]
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Australia
It is noted that the rules in South Australia differ from those applying in the other federated states, but it is proposed that a uniform system should be developed. See Issues Paper 21 (2002) - "Uniform Succession Laws: Recognition of interstate and foreign grants of probate and letters of administration." [3]
References
[1] http:/ / www. hcch. net/ index_en. php?act=conventions. pdf& cid=62 [2] http:/ / ec. europa. eu/ justice_home/ news/ consulting_public/ successions/ contributions/ contribution_ls_appb_en. pdf [3] http:/ / www. lawlink. nsw. gov. au/ lrc. nsf/ pages/ ip21iss
Swynfen will case

The Swynfen (or Swinfen) will case was a series of English trials over the will of Samuel Swynfen that ran from 1856 to 1864 and raised important questions of ethics in the legal profession.
The case
Samuel Swynfen of Swinfen Hall, Staffordshire, died in 1854 and, in his will, left 60,000 (4.1million in present-day terms[1] ) to his widowed daughter-in-law Patience Swynfen. However, Samuel possessed another large estate that was not mentioned in his will. Patience claimed that too.[2] However, Frederick Hay Swynfen, Samuel's nephew, also claimed the estate. Litigation followed with eminent barristers Sir Frederick Thesiger representing Patience, and Sir Alexander Cockburn, the nephew. However, contrary to Patience's instructions, Thesiger negotiated a settlement with Cockburn and put it to the judge. Patience was furious and succeeded in having the agreement set aside and a new trial listed. Dismissing Thesiger, Patience instructed a young and little known barrister named Charles Rann Kennedy, promising to pay him 20,000 (1.4million in present-day terms[1] ) if he succeeded in her cause.[2] No doubt spurred by the incentive, and the fact that he was engaged in a sexual relationship with Patience, Kennedy won the estate. However, she went on to marry a Charles Broun and then to declare that she had no intention of paying Kennedy. Kennedy sued and won, but his claim was overturned on appeal on the grounds that, what was effectively a contingency fee agreement, offended ancient prohibitions on champerty and maintenance.[3] In the case of Kennedy v. Broun, Sir William Erle CJ held that the relationship between client and barrister was not a contract.[4] Patience now sued Thesiger over his original professional misconduct.[5] Further, she alleged that Sir Cresswell Cresswell, the judge in the original trial, had induced Thesiger's agreement to a settlement by suggesting that he had formed an unfavourable opinion of Patience's case. Her claim was unsuccessful.[6]
Swynfen will case
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References
[1] UK CPI inflation numbers based on data available from Lawrence H. Officer (2010) " What Were the UK Earnings and Prices Then? (http:/ / www. measuringworth. org/ ukearncpi/ )" MeasuringWorth. [2] Kingston (1923) [3] Pue (1990) pp103-108 [4] (1863) 13 CBN S 677 [5] Swinfen v. Lord Chelmsford (1860) 5 H&N 890 [6] Pue (1990) pp63-75
Bibliography
Kingston, C. (1923). Famous Judges and Famous Trials. London: Stanley Paul & Co.. pp.pp167168. ISBN0837723361. Pue, W. W. (1990). "Moral panic at the English Bar: Paternal vs. commercial ideologies of legal practice in the 1860s". Law and Social Inquiry 15 (1): 49118. doi:10.1111/j.1747-4469.1990.tb00275.x.
In the common law tradition, testamentary capacity is the legal term of art used to describe a person's legal and mental ability to make or alter a valid will. This concept has also been called sound mind and memory or disposing mind and memory.
Presumption of capacity
Adults are presumed to have the ability to make a will. Litigation about testamentary capacity typically revolves around charges that the testator, by virtue of senility, dementia, insanity, or other unsoundness of mind, lacked the mental capacity to make a will. In essence, the doctrine requires those who would challenge a validly executed will to demonstrate that the testator did not know the consequence of his conduct when he executed the will. Certain people, such as minors, are usually deemed to be conclusively incapable of making a will by the common law; however, minors who serve in the military are conceded the right to make a will by statute in many jurisdictions. In South Africa, however, one acquires testamentary capacity at the age of 16 years.
Requirements
The requirements for testamentary capacity are minimal. Some courts have held that a person who lacked the capacity to make a contract can nevertheless make a valid will. While the wording of statutes or judicial rulings will vary from one jurisdiction to another, the test generally requires that the testator was aware of: 1. 2. 3. 4. The extent and value of their property The persons who are the natural beneficiaries The disposition he is making How these elements relate to form an orderly plan of distribution of property.[1] [2] [3] [4] [5]
The legal test implies that a typical claimant in a will contest is a disgruntled heir who believes he or she should have received a larger share than they did under the will. Once the challenging party meets the burden of proof that the testator did not possess the capacity, the burden subsequently shifts to the party propounding the will to show by clear and convincing evidence that the testator did have the requisite capacity.
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Proof of testamentary capacity

Those who contest a will for lack of testamentary capacity must typically show that the decedent suffered from mental unsoundness that left them unable to remember family members or caused them to hold insane delusions about them. Dead Man's Statutes sometimes restrict evidence which can be admitted concerning transactions with the decedent. Lawyers for people whose testamentary capacity might be called into question often arrange for a will execution to be video taped. On video, they ask the testator about his property and about his family, and go over the contents of the testator's will. Along with resolving an examinee's testamentary capacity, a forensic specialist [6] observes for signs of undue influence by a concerned party that exploits an emotionally vulnerable individual who might otherwise be cognitively intact. The testamentary capacity matter is most frequently raised posthumously, when an aggrieved heir contests the will entered into probate. For this reason, the forensic psychiatrist or forensic psychologist studies the testatrix cognition through videotape record of the drafting of the will, or by reviewing email, letters and other records. Even when a testator are found to have lacked testamentary capacity due to senility, loss of memory due to the aging process, infirmity or insanity, courts will sometimes rule that the testator had a "temporary period of lucidity" or a "lucid moment" at the time of the execution of the testamentary instrument. Such finding will validate a will that would otherwise be denied probate. A way to forestall a will contest would be to have a self-proving will, in which an affidavit of the witnesses to the will specifically swear or affirm that the will was prepared under the supervision of an attorney.
Foonotes
[1] Jesse Dukeminier & Stanley M. Johanson, Wills, Trusts & Estates, Sixth Edition, Aspen Publishers, 2005 [2] "Sound Mind and Memory - What Does this Phrase Mean?" from The Calhoun County, Michigan state government website (http:/ / courts. co. calhoun. mi. us/ quest030. htm). Retrieved September 17, 2008. [3] See also "sound mind and memory" at The Free Dictionary (http:/ / legal-dictionary. thefreedictionary. com/ sound+ mind+ and+ memory). Retrieved September 17, 2008. [4] See also "disposing mind and memory" at The Free Dictionary (http:/ / legal-dictionary. thefreedictionary. com/ disposing+ mind+ and+ memory). Retrieved September 18, 2008. [5] Legal help mate website (http:/ / www. legalhelpmate. com/ legal-dictionary-term. aspx?legal=disposing-mind-and-memory). Retrieved September 18, 2008. [6] http:/ / www. forensicpanel. com/ expert_services/ psychiatry/ civil_law/ competency_in_testamentary. html/
References
Addington v. Wilson, 5 Blackf. (Ind.) 137, 61 Am.Dec. 81 (Sup. Ct. Ind. 1854) Allman v. Malsbury, 224 Ind. 177, 65 N.E.2d 106 (Sup. Ct. Ind. 1946) Hays v. Harmon, 809 N.E.2d 460 (Ind. Ct. App., 2004)
Testamentary disposition
390
Testamentary disposition
A testamentary disposition is any gift of any property by a testator under the terms of a will.
Types
Types of testamentary dispositions include: Gift (law), assets that have been legally transferred from one person to another Legacy, testamentary gift of personal property, traditionally of money but may be real or personal property Life estate, a concept used in common and statutory law to designate the ownership of land for the duration of a person's life Demonstrative legacy, a gift of a specific sum of money with a direction that is to be paid out of a particular fund
References
Testator
A testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death.[1] It is any "person who makes a will."[2]
Related terms
A female testator is sometimes referred to as a testatrix, particularly in older cases.[2] The adjectival form of the word is testamentary, as in: 1. Testamentary capacity, or mental capacity or ability to execute a will and 2. Testamentary disposition, or gift made in a will (see that article for types). A will is also known as a last will and testament. Testacy means the status of being testate, that is, having executed a will. The property of such a person goes through the probate process. Intestacy means the status of not having made a will, or to have died without a valid will. The estate of a person who dies intestate, undergoes administration, rather than probate. The attestation clause of a will is where the witnesses to a will attest to certain facts concerning the making of the will by the testator, and where they sign their names as witnesses.
References
[1] Law dictionary on line (http:/ / dictionary. law. com/ default2. asp?typed=testator& type=1& submit1. x=72& submit1. y=6) [2] Gordon Brown, Administration of Wills, Trusts, and Estates, 3d ed. (2003), p. 556. ISBN 0-7668-5281-4.
Undue influence
391
Undue influence
Undue influence (as a term in jurisprudence) is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible.
Undue influence in contract law

If undue influence is proved in a contract, in U.S. law, the contract is voidable by the innocent party, and the remedy is rescission. There are two categories to consider: Presumed undue influence Actual undue influence
Presumed undue influence

First subgroup In the first subgroup, the relationship falls in a class of relationships that as a matter of law will raise a presumption of undue influence. Such classes include: Government/People Parent/child Guardian/ward Priest/member of parish Solicitor (attorney)/client Doctor/patient
In such cases, the burden of proof lies on the first of said parties (e.g. the government, parent, or doctor) to disprove undue influence on the second party. Second subgroup The second subgroup covers relationships that do not fall into the first subgroup, but on the facts of case, there was an antecedent relationship between the parties that led to undue influence. The test is one of whether there was a relationship of such trust and confidence that it should give rise to such a presumption (see Johnson v. Buttress (1936) 56 CLR 113). In Garcia v National Australia Bank (1998) 194 CLR 395, the High Court of Australia distinguished between cases of actual undue influence and situations where the transaction is set aside because the guarantor does not understand the nature of the transaction. Although there is no presumption of undue influence, a "lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet... did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."
Undue influence
392
Actual undue influence

An innocent party may also seek to have a contract set aside for actual undue influence, where there is no presumption of undue influence, but there is evidence that the power was unbalanced at the time of the signing of the contract.
Undue influence in probate law

"Undue influence" is the most common ground for will contests and are often accompanied by a capacity challenge. In probate law, it is generally defined as a testator's loss of free agency regarding property disposition through contemporaneous psychological domination by an advisor which results in an excessive benefit to the advisor. It is important to note that "undue influence" is only an issue when the advisor is benefiting, not when advisor is getting a benefit for someone else; in that case it would be considered fraud. In litigation most jurisdictions place the burden of proving undue influence on the party challenging the will.
Wills
A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his/her estate and provides for the transfer of his/her property at death. For the devolution of property not disposed of by will, see inheritance and intestacy. In the strictest sense, a "will" has historically been limited to real property while "testament" applies only to dispositions of personal property (thus giving rise to the popular title of the document as "Last Will and Testament"), though this distinction is seldom observed today. A will may also create a testamentary trust that is effective only after the death of the testator.
Requirements for creation

Any person over the age of majority and of sound mind (having appropriate mental capacity) can draft his or her own will with or without the aid of a lawyer. Additional requirements may vary, depending on the jurisdiction, but generally include the following requirements: The testator must clearly identify himself or herself as the maker of the will, and that a will is being made; this is commonly called "publication" of the will, and is typically satisfied by the words "last will and testament" on the face of the document. The testator should declare that he or she revokes all previous wills and codicils. Otherwise, a subsequent will revokes earlier wills and codicils only to the extent to which they are inconsistent. However, if a subsequent will is completely inconsistent with an earlier one, the earlier will is considered completely revoked by implication. The testator may demonstrate that he or she has the capacity to dispose of his or her property ("sound mind"), and does so freely and willingly. The testator must sign and date the will, usually in the presence of at least two disinterested witnesses (persons who are not beneficiaries). There may be extra witnesses, these are called "supernumerary" witnesses, if there is a question as to an interested-party conflict. Some jurisdictions, notably Pennsylvania, have long abolished any requirement for witnesses. In the United States, Louisiana requires both attestation by two witnesses as well as notarization by a notary public. "Holographic" or handwritten wills generally require no witnesses to be valid. If witnesses are designated to receive property under the will they are witnesses to, this has the effect, in many jurisdictions, of either (i) disallowing them to receive under the will, or (ii) invalidating their status as a witness. In a growing number of states in the United States, however, an interested party is only an improper witness as to the clauses that benefit him or her (for instance, in Illinois).
Wills The testator's signature must be placed at the end of the will. If this is not observed, any text following the signature will be ignored, or the entire will may be invalidated if what comes after the signature is so material that ignoring it would defeat the testator's intentions. One or more beneficiaries (devisees, legatees) must generally be clearly stated in the text, but some jurisdictions allow a valid will that merely revokes a previous will, revokes a disposition in a previous will, or names an executor. There is no legal requirement that a will be drawn up by a lawyer, although there are pitfalls into which home-made wills can fall. The person who makes a will is not available to explain him or herself, or to correct any technical deficiency or error in expression, when it comes into effect on that person's death, and so there is little room for mistake. A common error (for example) in the execution of home-made wills in England is to use a beneficiary (typically a spouse or other close family members) as a witness although this has the effect in law of disinheriting the witness regardless of the provisions of the will. Some jurisdictions recognize a holographic will, made out entirely in the testator's own hand, or in some modern formulations, with material provisions in the testator's hand. The distinctive feature of a holographic will is less that it is handwritten by the testator and often that it need not be witnessed. In England, the formalities of wills are relaxed for soldiers who express their wishes on active service; any such will is known as a serviceman's will. A minority of jurisdictions even recognize the validity of nuncupative wills (oral wills), particularly for military personnel or merchant sailors. However, there are often constraints on the disposition of property if such an oral will is used. A will may not include a requirement that an heir commit an illegal, immoral, or other act against public policy as a condition of receipt. In community property jurisdictions, a will cannot be used to disinherit a surviving spouse, who is entitled to at least a portion of the testator's estate. In the United States, children may be disinherited by a parent's will, except in Louisiana, where a minimum share is guaranteed to surviving children. Many civil law countries follow a similar rule. In England and Wales from 1933 to 1975, a will could disinherit a spouse but since 1975 such an attempt can be defeated by a court order if it leaves the surviving spouse (or other entitled dependent) without reasonable financial provision.[1] Types of wills generally include: nuncupative (non-culpatory) - oral or dictated; often limited to sailors or military personnel holographic- written in the hand of the testator; in many jurisdictions, the signature and the material terms of the holographic will must be in the handwriting of the testator.[2] self-proved- in solemn form with affidavits of subscribing witnesses to avoid probate notarial - will in public form and prepared by a civil-law notary (civil-law jurisdictions and Louisiana, United States) mystic- sealed until death serviceman's will - will of person in active-duty military service and usually lacking certain formalities, particularly under English law reciprocal/mirror/mutual/husband and wife wills - wills made by two or more parties (typically spouses) that make similar or identical provisions in favor of each other unsolemn will - will in which the executor is unnamed will in solemn form - signed by testator and witnesses
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Wills
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Probate
After the testator has died, a probate proceeding may be initiated in court to determine the validity of the will or wills that the testator may have created, i.e., which will satisfy the legal requirements, and to appoint an executor. In most cases, during probate, at least one witness is called upon to testify or sign a "proof of witness" affidavit. In some jurisdictions, however, statutes may provide requirements for a "self-proving" will (must be met during the execution of the will), in which case witness testimony may be forgone during probate. If the will is ruled invalid in probate, then inheritance will occur under the laws of intestacy as if a will were never drafted. Often there is a time limit, usually 30 days, within which a will must be admitted to probate. Only an original will can be admitted to probate in the vast majority of jurisdictions even the most accurate photocopy will not suffice. It is a good idea that the testator give his executor the power to pay debts, taxes, and administration expenses (probate, etc.). Warren Burger's will did not contain this, which wound up costing his estate thousands. This is not a consideration under English law, which provides that all such expenses will fall on the estate in any case.
Revocation
Methods and effect
Intentional physical destruction of a will by the testator will revoke it, through deliberately burning or tearing the physical document itself, or by striking out the signature. In most jurisdictions, partial revocation is allowed if only part of the text or a particular provision is crossed out. Other jurisdictions will either ignore the attempt or hold that the entire will was actually revoked. A testator may also be able to revoke by the physical act of another (as would be necessary if he is physically incapacitated), if this is done in his presence and in the presence of witnesses. Some jurisdictions may presume that a will has been destroyed if it had been last seen in the possession of the testator but is found mutilated or cannot be found after his or her death. A will may also be revoked by the execution of a new will. Most wills contain stock language that expressly revokes any wills that came before them, however, because normally a court will still attempt to read the wills together to the extent they are consistent. In some jurisdictions, the complete revocation of a will automatically revives the next most recent will, while others hold that revocation leaves the testator with no will so that his or her heirs will instead inherit by intestate succession. In England and Wales, marriage will automatically revoke a will as it is presumed that upon marriage, a testator will want to review the will. A statement in a will that it is made in contemplation of forthcoming marriage to a named person will override this. Divorce, conversely, will not revoke a will, but in many jurisdictions, will have the effect that the former spouse is treated as if they had died before the testator and so will not benefit. Where a will has been accidentally destroyed, on evidence that this is the case, a copy will or draft will may be admitted to probate.
Dependent relative revocation

Many jurisdictions exercise an equitable doctrine known as dependent relative revocation ("DRR"). Under this doctrine, courts may disregard a revocation that was based on a mistake of law on the part of the testator as to the effect of the revocation. For example, if a testator mistakenly believes that an earlier will can be revived by the revocation of a later will, the court will ignore the later revocation if the later will comes closer to fulfilling the testator's intent than not having a will at all. The doctrine also applies when a testator executes a second, or new will and revokes his old will under the (mistaken) belief that the new will would be valid. However, for some reason the new will is not valid and a court may apply the doctrine to reinstate and probate the old will, as the court holds that the testator would prefer the old will to intestate succession.
Wills Before applying the doctrine, courts may require (with rare exceptions) that there have been an alternative plan of disposition of the property. That is, after revoking the prior will, the testator could have made an alternative plan of disposition. Such a plan would show that the testator intended the revocation to result in the property going elsewhere, rather than just being a revoked disposition. Secondly, courts require either that the testator have recited his mistake in the terms of the revoking instrument, or that the mistake be established by clear and convincing evidence. For example, when the testator made the original revocation, he must have erroneously noted that he was revoking the gift "because the intended recipient has died" or "because I will enact a new will tomorrow." DRR may be applied to restore a gift erroneously struck from a will if the intent of the testator was to enlarge that gift, but will not apply to restore such a gift if the intent of the testator was to revoke the gift in favor of another person. For example, suppose Tom has a will that bequeaths $5,000 to his secretary, Alice Johnson. If Tom crosses out that clause and writes "$7,000 to Alice Johnson" in the margin, but does not sign or date the writing in the margin, most states would find that Tom had revoked the earlier provision, but had not effectively amended his will to add the second; however, under DRR the revocation would be undone because Tom was acting under the mistaken belief that he could increase the gift to $7,000 by writing that in the margin. Therefore, Alice will get 5,000 dollars. However, the doctrine of relative revocation will not apply if the interlineation decreases the amount of the gift from the original provision (e.g., "$5,000 to Alice Johnson" is crossed out and replaced with "$3,000 to Alice Johnson" without Testator's signature or the date in the margin; DRR does not apply and Alice Johnson will take nothing). Similarly, if Tom crosses out that clause and writes in the margin "$5,000 to Betty Smith" without signing or dating the writing, the gift to Alice will be effectively revoked. In this case, it will not be restored under the doctrine of DRR because even though Tom was mistaken about the effectiveness of the gift to Betty, that mistake does not affect Tom's intent to revoke the gift to Alice. Because the gift to Betty will be invalid for lack of proper execution, that $5,000 will go to Tom's residuary estate.
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Election under the will

Also referred to as "electing to take against the will." In the United States, many states have probate statutes which permit the surviving spouse of the decedent to choose to receive a particular share of deceased spouse's estate in lieu of receiving the specified share left to him or her under the deceased spouse's will. As a simple example, under Iowa law (see Code of Iowa Section 633.238 (2005) [3]), the deceased spouse leaves a will which expressly gifts the marital home to someone other than the surviving spouse. The surviving spouse may elect, contrary to the intent of the will, to live in the home for the remainder of his/her lifetime. This is called a "life estate" and terminates immediately upon the surviving spouse's death. The historical and social policy purposes of such statutes are to assure that the surviving spouse receives a statutorily set minimum amount of property from the decedent. Historically, these statutes were enacted to prevent the deceased spouse from leaving the survivor destitute, thereby shifting the burden of care to the social welfare system.
Wills
396
In history
Charles Vance Millar's will was notorious for offering the bulk of his estate to the Toronto woman who had the greatest number of children in the ten years after his death (the Great Stork Derby). Attempts to invalidate it by his would-be heirs were unsuccessful, and the bulk of Millar's fortune eventually went to four women. The Thellusson Will Case was fictionalized by Charles Dickens as Jarndyce and Jarndyce in Bleak House, and led to Parliament legislating against such accumulation of money for later distribution. According to Consumer Reports, as many as 56% of Americans don't Nobel prize. have a will. Among the notables who died either without a valid will or no will at all are Ross Alexander, Fatty Arbuckle, Anura Bandaranaike, Madhav Prasad Birla, Sonny Bono, George Brent, Lenny Bruce, Jacob A. Cantor, Kurt Cobain, Russ Columbo, Sam Cooke, James Dean, Sandy Dennis, John Denver, Divine, Duke Ellington, Cass Elliot, Chris Farley, Bobby Fischer, Redd Foxx, Mary Frann, James A. Garfield, Marvin Gaye, Ulysses S. Grant, Billie Holiday, Buddy Holly, Shemp Howard, Howard Hughes, Andrew Johnson, Florence Griffith-Joyner, Martin Luther King, Jr., Ernie Kovacs, Harry Langdon, Bruce Lee, Abraham Lincoln, Peter Lorre, Jayne Mansfield, Rocky Marciano, Karl Marx, Steve McNair, Sal Mineo, Carmen Miranda, Keith Moon, Rosa Parks, Pablo Picasso, Mihajlo Idvorski Pupin, Tupac Shakur, Don Simpson, Anna Nicole Smith, William Desmond Taylor, Sharon Tate, Tiny Tim, Ritchie Valens, Herv Villechaize, Barry White, and Jimmy Witherspoon. The longest known legal will is that of Englishwoman Frederica Evelyn Stilwell Cook. Probated in 1925, it was 1,066 pages, and had to be bound in 4 volumes; her estate was worth $100,000. The shortest known legal wills are those of Bimla Rishi of Delhi, India ("all to son") and Karl Tausch of Hesse, Germany, ("all to wife") both containing only three words.[4]
Alfred Nobel's will, in which he endows the
Wills
397
Freedom of disposition
The conception of the freedom of disposition by will, familiar as it is in modern England and the United States, both generally considered common law systems, is by no means universal. In fact, complete freedom is the exception rather than the rule. Civil law systems often put some restrictions on the possibilities of disposal; see for example "Forced heirship". Advocates for gays and lesbians have pointed to the inheritance rights of spouses as desirable for same-sex couples as well, through same-sex marriage or civil unions. Opponents of such advocacy rebut this claim by pointing to the ability of same-sex couples to disperse their assets by will. Historically, courts have been more willing to strike down wills leaving property to a same-sex partner for reasons such as incapacity or undue influence. See, for example, In Re Kaufmanns Will, 20 A.D.2d 464, 247 N.Y.S.2d 664 (1964), affd, 15 N.Y.2d 825, 257 N.Y.S.2d 941, 205 N.E.2d 864 (1965)
Terminology
Last will and testament of Tennessee Williams Administrator - person appointed or who petitions to administer an estate in an intestate succession. The antiquated English term of administratrix was used to refer to a female but is generally no longer in standard legal usage.
Beneficiary - anyone receiving a gift or benefitting from a trust Bequest - testamentary gift of personal property, traditionally other than money. codicil - (1) amendment to a will; (2) a will that modifies or partially revokes an existing or earlier will. Decedent - the deceased (U.S. term) Demonstrative Legacy - a gift of a specific sum of money with a direction that is to be paid out of a particular fund. Descent - succession to real property. Devise - testamentary gift of real property. Devisee - beneficiary of real property under a will. Distribution - succession to personal property. Executor/executrix or personal representative [PR] - person named to administer the estate, generally subject to the supervision of the probate court, in accordance with the testator's wishes in the will. In most cases, the testator will nominate an executor/PR in the will unless that person is unable or unwilling to serve. Inheritor - a beneficiary in a succession, testate or intestate. Intestate - person who has not created a will, or who does not have a valid will at the time of death. Legacy - testamentary gift of personal property, traditionally of money. Note: historically, a legacy has referred to either a gift of real property or personal property. Legatee - beneficiary of personal property under a will, i.e., a person receiving a legacy. Probate - legal process of settling the estate of a deceased person. Specific legacy (or specific bequest) - a testamentary gift of a precisely identifiable object. Testate - person who dies having created a will before death. Testator - person who executes or signs a will; that is, the person whose will it is. The antiquated English term of Testatrix was used to refer to a female and is still in use in the US .
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References
[1] Inheritance (Provision for Family and Dependents) Act 1975 [2] Azestatelawyers.com (http:/ / www. azestatelawyers. com/ article/ statutory-requirements/ holographic-hand-written-wills/ ) [3] http:/ / nxtsearch. legis. state. ia. us/ NXT/ gateway. dll/ 2007%20Iowa%20Code/ 2007code/ 1/ 23320/ 24523/ 24525/ 24716?f=templates$fn=document-frameset. htm$q=%5Bfield,633. 238%3A%5D$x=server$3. 0#LPHit1 [4] Administration of Wills, Trusts, and Estates, p. 5
Books
Administration of Wills, Trusts, and Estates by Gordon W. Brown, Delmar Cengage Learning (ISBN 0-7668-5281-4) (ISBN 978-0-7668-5281-5)
External links
Citizens Advice Bureau (UK) (http://www.adviceguide.org.uk/index/family_parent/family/wills.htm) Wills of the Rich and Famous (http://www.livingtrustnetwork.com/information-center/last-will-and-testament/ wills-of-the-rich-and-famous.html) Living Trust Network Prerogative Court of Canterbury wills (1384 - 1858) (http://www.nationalarchives.gov.uk/documentsonline/ wills.asp) Download the wills of famous people (http://www.nationalarchives.gov.uk/documentsonline/PROB1wills. asp) UK National Archives William Shakespeare's Will (http://www.nationalarchives.gov.uk/museum/item.asp?item_id=21) "Wills Frequently Asked Questions" - GB Legal (http://www.gb-legal.com/Making A Will FAQ..htm) Jane Austen's Will (http://www.nationalarchives.gov.uk/museum/item.asp?item_id=33) List of UK Regional Probate Registries - Regional Offices for probate information and to register the location of a Will and/or Executor (http://www.hmcourts-service.gov.uk/HMCSCourtFinder/CourtFinder. do?court_work_type_desc=probate) Prepping digital assets for the great off-line (http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/ 20100207/digital_death_100207/20100207?hub=TopStoriesV2) CTV News 2010-02-09
Will contest
399
Will contest
A will contest, in the law of property, is a formal objection raised against the validity of a will, based on the contention that the will does not reflect the actual intent of the testator (the party who made the will). Will contests generally focus on the assertion that the testator lacked testamentary capacity, was operating under an insane delusion, or was subject to undue influence or fraud. A will may be challenged in its entirety, or only in part. In many states, a legal presumption of undue influence arises where a beneficiary under the will stands in a confidential relationship with the testator. For example, where a testator leaves property to the attorney who drew up the will. However, this is dependent of the circumstances of such a relationship and the burden is initially on the person contesting to show undue influence. A will may include an in terrorem clause, with language along the lines of "any person who contests this will shall forfeit his legacy", which operates to disinherit any person who challenges the validity of the will. However, since this clause is within the will itself, a successful challenge to the will renders the clause meaningless. Many states consider such clauses void as a matter of public policy.
Standing to contest a will

Typically, standing to contest the validity of a will is limited to two classes of persons: 1. Those who are named on the face of the will (i.e. any beneficiary); 2. Those who would inherit from the testator if the will was invalid The following example is instructive: Monica makes a will leaving $5,000 each to her husband, Chandler, her brother, Ross, her neighbor, Joey, and her best friend, Rachel. Chandler tells Monica that he will divorce her if she does not disown Ross, which would humiliate her; later, Ross tells Monica (untruthfully) that Chandler is having an affair with Phoebe, which Monica believes. Distraught, Monica rewrites her will, disowning both Chandler and Ross. The attorney who drafts the will accidentally writes the gift to Rachel as $500 instead of $5,000; and also accidentally leaves Joey out entirely. Under these facts, Chandler can contest the will as the product of fraud in the inducement, because if the will is invalid, he will inherit Monica's property, as the surviving spouse. Ross can contest the will as the product of Chandlers undue influence, because Ross will inherit Monica's property if Chandlers behavior disqualifies Chandler from inheriting (note, however, that many jurisdictions do not consider a threat of divorce to be undue influence). Rachel has standing to contest the will, because she is named in the document but she will not be permitted to submit any evidence as to the mistake because it is not an ambiguous term. Instead, she will have to sue Monica's lawyer for legal malpractice to recover the difference. Finally, Joey is neither someone who stands to inherit from Monica, nor named in the will, and therefore is barred from contesting the will altogether.
Grounds for contesting a will

The most common grounds, or reasons, for contesting a Will are: Lack of disposing mind and memory or Testamentary capacity Insane delusion Duress Fraud
Undue influence. Undue influence typically involves a trusted friend, relative or caregiver who actively procures a new will. For example, Florida law gives a list of the types of active procurement that will be considered in invalidating a will: (a) presence of the beneficiary at the execution of the will; (b) presence of the beneficiary on those occasions when the testator expressed a desire to make a will; (c) recommendation by the beneficiary of an
Will contest attorney to draw the will; (d) knowledge of the contents of the will by the beneficiary prior to execution; (e) giving of instructions on preparation of the will by the beneficiary to the attorney drawing the will; (f) securing of witnesses to the will by the beneficiary; and (g) safekeeping of the will by the beneficiary subsequent to execution.[1] In most states, including Florida, if the challenger of a will is able to establish that it was actively procured, the burden of proof shifts to the person seeking to uphold the will to establish that the will is not the product of undue influence.[2] Some jurisdictions permit an election against the will by a widowed spouse or orphaned children. This is not a contest against the will itself (the validity of the will is irrelevant), but an alternate procedure established by statute to contest the disposition of property.
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Practicability of contests
Courts will not necessarily look to "fairness" during will contests. In other words, just because the provisions of a will may seem "unfair" does not mean that the will is invalid. Therefore, wills cannot be challenged simply because they seem unfair. The decedent has a legal right to dispose of his or her property in any way that is legal. Due to a large number of will contests, judges are often wary of contests especially when involving the willing of property to charitable organizations .
Consequences
Depending on the grounds, the result may be 1. Invalidity of the entire Last Will and Testament, resulting in an intestacy. 2. Invalidity of a clause or gift, requiring the court to decide which charity receives the charitable bequest, using the equitable doctrine of cy pres. 3. Diminution of certain gifts, and increase of other gifts to the widowed spouse or orphaned children, who would now get their elective share.
External links
Information on Contesting a Will in Australia [3] Information on Contesting a Will in Florida [4]
References
[1] In Re Estate of Carpenter (Fla. 1971) (http:/ / www. floridaprobatetrustlaw. com/ uploads/ file/ Carpenter. pdf) [2] Undue Influence in Florida:Presumptions & Burden of Proof (http:/ / www. floridaprobatetrustlaw. com/ 2009/ 12/ articles/ probate-litigation/ undue-influence-in-florida-presumptions-burden-of-proof/ ) [3] http:/ / www. theestatelawyers. com. au/ contest-a-will. htm [4] http:/ / www. clarkskatoff. com/ files/ Florida%20Will%20Contest%20Guide. pdf
Will contract
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Will contract
A will contract is a term used in the law of wills describing a contract to exchange a current performance for a future bequest. In such an agreement, one party (the promisee) will provide some performance in exchange for a promise by the other party (the testator, because they must draft a will) to make a specific bequest to the promisee party in the testator's will. Most jurisdictions recognize such contracts as valid, although a few hold them as void against public policy. Some jurisdictions will not recognize an oral contract for such a purpose, requiring instead that the contract be executed in writing and signed by both parties. The general rule, where such contracts are recognized, is that the promisee can not specifically enforce the contract if the testator later revokes or supersedes the will making the promised bequest, but can only sue the testator's estate for breach of contract. This protects the testator's very strong freedom to dispose of his property however he sees fit. For example, suppose Joey agrees to execute a will bequeathing his house to Rachel in exchange for services provided by Rachel. If Joey later revokes that will, Rachel can not force Joey's estate to convey the house to her, but can only sue for the value of the house. Typically, will contracts are made between people who have different heirs to whom they wish to leave their property at death, but they may wish for the other person to have the use of until all of their combined assets until the death of the second to die. A married couple with children from an earlier marriage is a good example. The husband may leave his separate estate to his wife at his death, instead of directly to his children from his earlier marriage and in exchange, she may agree to combine his separate estate with her separate estate at her death and split the combined estate up between all of their children. It would work the same if she died first. A will contract only becomes irrevocable only at the first party's death. Because of differences in state laws regarding will contracts, an estate planning attorney should be consulted before use of this planning device. The law behind wills becomes tedious when many parties are not present, typically in cases with limited family members. This mainly occurred after World War Two where many wills had no possible recipients so the assets went to the government.Wills are often confused with trust funds, but wills are only present at death where as trust funds can be accessed during the time that the creator of the fund is still alive.
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Finance
The high net worth individual
A high-net-worth individual (HNWI) is a person with a high net worth. In the private banking business, these individuals typically are defined as having investable assets (financial assets not including primary residence) in excess of US$1 million.[1] [2] As explained below, the U.S. Securities and Exchange Commission has promulgated a different definition of "high net worth individual" for regulatory purposes.
Millionaires
See Also: Millionaire According to a study conducted by the Deloitte Center for Financial Services in New York City, that as of May 2011, there are currently almost 38 million people around the globe who are classified as U.S.-dollar millionaires. There are currently 496,000 US Households that fall into the UHNW Category, and over 871,000 UHNW Households around the world.[3]
Ultra high net worth individuals

Ultra high net worth individuals (UHNWIs) are individuals or families who have, by one definition, at least US$30 million in investable assets,[2] or with a disposable income of more than US$20 million.[4] The exact dividing lines depend on how a bank wishes to segment its market; for example, the term "very high net worth individuals"[5] can refer to those with assets between $5 million and $50 million, with ultra high net worth individuals only those with above $50 million.
Banking and finance

Most global banks, such as Credit Suisse, Barclays, BNP Paribas, Citibank, Deutsche Bank, HSBC, JPMorgan Chase and UBS, have a separate business unit with designated teams consisting of client advisors and product specialists exclusively for UHNWI. Because of their extreme high net worth and the way their assets were generated, these clients are often considered to have characteristics similar to institutional investors.
Retail
Brands in various sectors, such as Bentley, Maybach and Rolls-Royce in motoring, actively target UHNWI and HNWI to sell their products. Figures gathered by Rolls-Royce suggest there are 80,000 people around the world with disposable income of more than $20 million.[4] They have, on average, eight cars and three or four homes. Three-quarters own a jet aircraft and most have a yacht.
SEC regulations
The U.S. Securities and Exchange Commission requires all SEC-registered investment advisers to periodically file a report known as Form ADV.[6] Among other things, Form ADV requires each investment adviser to state how many of his clients are "high net worth individuals." The Form ADV Glossary of Terms explains that a "high net worth individual" is an individual with at least $750,000 managed by the reporting investment adviser, or whose net worth the investment adviser reasonably believes exceeds $1,500,000 (or who is a "qualified purchaser" as defined in section 2(a)(51)(A) of the Investment Company Act of 1940). The net worth of an individual for SEC purposes may
The high net worth individual include assets held jointly with his or her spouse. Unlike the definitions used in the financial and banking trade, the SEC's definition of HNWI would include the value of a person's verifiable non-financial assets, such as a primary residence or art collection.
403
Academic studies of asset management trends

The Wharton Global Family Alliance whitepaper was released in 2008 to study the investment strategies of single family offices in the United States and in Europe.[7] The research was segregated into sub-groups representing those with less than $1 billion in assets and those with assets above $1 billion. The study found that U.S. families reported a more aggressive attitude toward investment objectives than their counterparts in Europe. One recommendation of the WGFA study advised the advisors and family offices serving this niche to avoid complexity in the structure of portfolios. The authors cite that the more complex the portfolio and number of holdings, the more difficult the job of performing adequate governance, reporting, and education. The Institute for Private Investors, a peer networking organization for wealthy families and their advisors, suggested a similar theme to its membership in 2008 with a conference themed, "The Return to Simplicity".[8] Kotak Wealth Management and CRISIL Research, published a report on the Ultra High Net Worth Individuals in India titled Top of the Pyramid Report.[9] Author and portfolio manager Niall Gannon suggested in Investing Strategies for the High Net Worth Investor: Maximize Returns on Taxable Portfolios [10] that asset management for the ultra high net worth individual must be approached from a perspective which acknowledges the role of taxes in reducing portfolio returns. His research studied the S&P 500 index on an after-tax basis and found the return to be 6.63% after paying taxes at the top prevailing federal tax rate and a constant average of 6% for state taxes. The study covered the period from January 1, 1957- December 31, 2010. Additional results from Gannon's research found that a portfolio of municipal bonds out-performed the re-invested S&P 500 index in 17% of the rolling 20 year periods since the inception of the index. Gannon rejects the use of historical returns for future asset allocation modeling for high net worth investors. He argues that an observation of stock portfolio earnings yields (the inverse of the p/e ratio) are more indicative of the future return potential of the portfolio when modeled with the impact of taxation on performance.
References
[1] "Capgemini 2007 World Wealth Report" (http:/ / www. us. capgemini. com/ worldwealthreport07/ State_of_the_World_Wealth_2007. pdf) (PDF). 2006-06-12. . Retrieved 2007-07-08. "World Wealth Grows to $33.3 trillion Says Merrill Lynch" [2] For A Few Dollars More (http:/ / timesofindia. indiatimes. com/ OPINION/ Editorial/ LEADER_ARTICLE_For_A_Few_Dollars_More/ articleshow/ 1258255. cms), by Nivedita Chakravartty, The Times of India, 18 Jan 2007 [3] " (http:/ / www. reuters. com/ article/ domesticNews/ idUSTRE52A71B20090311)." [4] Rich spurn ultra-luxury cars (http:/ / business. timesonline. co. uk/ tol/ business/ article1086869. ece), The Sunday Times (UK), 5 Nov 2006 [5] Banking for Family Business: A New Challenge for Wealth Management, by Stefano Caselli, Stefano Gatti, Springer, 2005, ISBN 3540227989 [6] SEC Form ADV (http:/ / www. sec. gov/ answers/ formadv. htm) [7] Wharton Global Family Alliance. "Benchmarking the Single Family Office: Identifying the Performance Drivers" (http:/ / wgfa. wharton. upenn. edu/ ). [8] Institute for Private Investors. (http:/ / memberlink. net). [9] http:/ / www. indianexpress. com/ news/ ultra-hni-segment-set-to-treble-report/ 800562/ [10] {McGraw-Hill (2009) ISBN 978-0-07-162820-4}
External links
Rivkin, Annabel (2006-12-12). "How I make the rich richer" (http://www.timesonline.co.uk/tol/ life_and_style/article667593.ece). London: The Times. Retrieved 2007-07-08.
Uniform Prudent Investor Act
404

The Uniform Prudent Investor Act (UPIA), which was adopted in 1992 by the American Law Institute's Third Restatement of the Law of Trusts ("Restatement of Trust 3d"), reflects a "modern portfolio theory" and "total return" approach to the exercise of fiduciary investment discretion.
Approach
This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary's performance is measured on the performance of the entire portfolio, rather than individual investments.
Adoption
As of May 2004, the Uniform Prudent Investor Act has been adopted in 44 States and the District of Columbia. Other states may have adopted parts of the Act, but not the entire Act. According to the National Conference of Commissioners on Uniform State Laws, the most common portion of the Act excluded by states concerns the delegation of investment decisions to qualified and supervised agents.
Comparison to Prudent Man Rule

The Uniform Prudent Investor Act differs from the Prudent Man Rule in four major ways: 1. A trust account's entire investment portfolio is considered when determining the prudence of an individual investment. Under the Prudent Investor Act standard, a fiduciary would not be held liable for individual investment losses, so long as the investment, at the time of acquisition, is consistent with the overall portfolio objectives of the account. 2. Diversification is explicitly required as a duty for prudent fiduciary investing. 3. No category or type of investment is deemed inherently imprudent. Instead, suitability to the trust account's purposes and beneficiaries' needs is considered the determinant. As a result, junior lien loans, investments in limited partnerships, derivatives, futures, and similar investment vehicles, are not per se considered imprudent. However, while the fiduciary is now permitted, even encouraged, to develop greater flexibility in overall portfolio management, speculation and outright risk taking is not sanctioned by the rule either, and they remain subject to criticism and possible liability. 4. A fiduciary is permitted to delegate investment management and other functions to third parties.
Not adopted by...

As of 1995 the following states have not adopted the Uniform Prudent Investor Act or Substantially Similar Delaware, Georgia, Kentucky, and Louisiana.
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Suitability
In enacting the Uniform Prudent Investor Act, states should have repealed legal list statutes, which specified permissible investments types. (However, guardianship and conservatorship accounts generally remain limited by specific state law.) In those states which adopted part or all of the Uniform Prudent Investor Act, investments must be chosen based on their suitability for each account's beneficiaries or, as appropriate, the customer. Although specific criteria for determining "suitability" does not exist, it is generally acknowledged, that the following items should be considered as they pertain to account beneficiaries: financial situation; current investment portfolio; need for income; tax status and bracket; investment objective; and risk tolerance.
References
FDIC Trust Manual [1] Prudent Investor and TOLI: Part 1 - The Prudent Investor Act, Modern Portfolio Theory & Trust-Owned Life Insurance (TOLI) [2] Prudent Investor and TOLI: Part 2 - Factors Determining TOLI Pricing, Performance & Suitability [3] Prudent Investor and TOLI: Part 3 - Establishing a Basis for ILIT Compliance (and Best-Practices) [4]
External links
Uniform Prudent Investor Act - Final [5] List of States that have adopted UPIA [6] UPIA Fiduciary Consulting - Regent Crown [7] UPIA Fiduciary Tools for Trust-Owned Life Insurance (TOLI) - Veralytic [8] Consumer Complaints Inquiries - Trust Administration [9]
References
[1] http:/ / www. fdic. gov/ regulations/ examinations/ trustmanual/ section_3/ fdic_section_3-asset_management. html [2] http:/ / www. veralytic. com/ the-prudent-investor-and-trust-owned-life-insurance-from-american-bankers-association-trusts-and-investments. aspx#part1_prudent_investor_act [3] http:/ / www. veralytic. com/ the-prudent-investor-and-trust-owned-life-insurance-from-american-bankers-association-trusts-and-investments. aspx#part2_pricing_performance_suitability [4] http:/ / www. veralytic. com/ the-prudent-investor-and-trust-owned-life-insurance-from-american-bankers-association-trusts-and-investments. aspx#part3_ilit_compliance [5] http:/ / www. law. upenn. edu/ bll/ ulc/ fnact99/ 1990s/ upia94. pdf [6] http:/ / www. nccusl. org/ Update/ uniformact_factsheets/ uniformacts-fs-upria. asp [7] http:/ / www. regentcrown. com [8] http:/ / www. veralytic. com/ toolbox. aspx [9] http:/ / www. ots. treas. gov/ ?p=ConsumerComplaintsInquiries
406
Banking & money

Bank secrecy
Bank secrecy (or bank privacy) is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply (for example, a criminal complaint has been filed[1] ). In some cases, additional privacy is provided to beneficial owners through the use of numbered bank accounts or otherwise. Bank secrecy is prevalent in certain countries such as Switzerland, Singapore, Lebanon and Luxembourg, as well as offshore banks and other tax havens under voluntary or statutory privacy provisions. Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the principle of bank secrecy is always considered one of the main aspects of private banking. It has also been accused by NGOs and governments of being one of the main instruments of underground economy and organized crime, in particular following the class action suit against the Vatican Bank in the 1990s, the Clearstream scandal and the terrorist attacks of September 11, 2001. Former bank employees from banks in Switzerland (UBS, Julius Baer) and Liechtenstein (LGT Group) have testified that their former institutions helped clients evade billions of dollars in taxes by routing money through offshore havens in the Caribbean and Switzerland. One of these, Rudolf M. Elmer, wrote, "It is a global problem...Offshore tax evasion is the biggest theft among societies and neighbor states in this world."[2] The Swiss Parliament ratified on June 17, 2010 an agreement between the Swiss and the United States governments allowing UBS to transmit to the US authorities information concerning 4,450 American clients of UBS suspected of tax evasion.[3] [4] Advances in financial cryptography (e.g. public-key cryptography) could make it possible to use anonymous electronic money and anonymous digital bearer certificates for financial privacy and anonymous Internet banking, given enabling institutions (e.g. issuers of such certificates and digital cash) and secure computer systems.
Swiss Banking Act of 1934

Bank secrecy was codified by the 1934 Swiss Banking Act following a public scandal in France, when MP Fabien Alberty denounced tax evasion by eminent French personalities, including politicians, judges, industrialists, church dignitaries and directors of newspapers, who were hiding their money in Switzerland. He called these men of "a particularly ticklish patriotism", who "probably are unaware that the money they deposit abroad is lent by Switzerland to Germany". The Peugeot brothers and Franois Coty, of the famous perfume family, were on his list. Since then, Swiss banks have acquired worldwide celebrity due to their numbered bank accounts, which critics such as ATTAC NGO alleged only help legalized tax evasion, money laundering and more generally the underground economy.[5] Under the Swiss principle of bank secrecy, privacy is statutorily enforced, with Swiss law strictly limiting any information shared with third parties, including tax authorities, foreign governments or even Swiss authorities, except when requested by a Swiss judge's subpoena . However banking is not strictly anonymous since under its banking law all Swiss bank accounts, including numbered bank accounts, are linked to an identified individual. This law only permits a bank to share information with others in cases of severe criminal acts, such as identifying a terrorist's bank account or tax fraud, but not simple non-reporting of taxable income (called tax evasion in Switzerland). Under pressure from the G20 and the OECD, the Swiss government announced in March 2009 that it will abolish the distinction between tax fraud and tax evasion in dealings with foreign clients.[6] The distinction remains valid for domestic clients. Any bank employee violating a client's privacy could be punished quite severely
Bank secrecy by law. After signing 12 new double taxation treaties in accordance with the international standard set by the OECD, Switzerland was removed from the grey list of non-compliant tax jurisdictions.[7] UBS was caught red-handed by the United States government offering tax evasion strategies, sending undercover bankers with encrypted computers to the United States. After it was caught, UBS paid a $780 million penalty and handed over hundreds of client files to American authorities.[8] [9] In 2010, the Swiss and the United States governments negotiated an agreement allowing Swiss bank UBS to transmit to the US authorities information concerning 4,450 American clients of UBS suspected of tax evasion.[3] [10] In the aftermath of the UBS and Julius Baer banking cases, some wealthy clients who continue to use offshore accounts are turning to private banks in Singapore and Hong Kong. In addition to the local Singapore or Hong Kong banks, offices have been opened in those localities by a number of Swiss private banks. [11] The move to Singapore and Hong Kong is an alternative to the banking secrecy that Swiss banks have come under attack for. Singapore has bank secrecy provisions comparable to those in Switerland. Although Hong Kong does not have the same bank privacy laws, it offers flexibility in the creation of opaque companies that can serve as tax conduits. [12] Many offshore banks, located in tax havens such as in the Cayman Islands and Panama, also have strict privacy laws.
407
United States Legislation in Response to Bank Secrecy

U.S. Bank Secrecy Act of 1970
The United States' Bank Secrecy Act (or BSA) requires financial institutions to assist government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
USA PATRIOT Act

The 2001 USA PATRIOT Act created many new rules for American banks in an attempt to defeat bank secrecy. A list of such banks or shell banks are given to the U.S. banks who are not allowed to wire money to them. All new customers to American banks must now be asked if they are U.S. citizens. If not, they must state their occupation and whether they expect to be wired foreign monies.
Actions by European countries

European countries had long complained that banking secrecy provisions in countries such as Austria, Liechtenstein, Luxembourg, and Switzerland favored tax evasion by their citizens, particularly the citizens of countries such as Belgium, France, Germany and Italy which border one or more of those countries. In 2009 tensions reached a height and concerned countries (supported to some extent by other countries) raised the issue at the OECD and the G20. As a result, essentially all countries agreed to implement tax treaties that would facilitate the exchange of banking information in case of suspected tax evasion.[13] [14]
Bank secrecy
408
Criticisms
Tax evasion and money laundering
Jurisdiction with what other countries view are excessive protections benefitting dubious parties are sometimes known as secrecy havens, by analogy with tax havens. Numbered bank accounts, used by Swiss banks and other offshore banks located in tax havens, have been accused by NGOs such as ATTAC of being a major instrument of the underground economy, facilitating tax evasion and money laundering. After Al Capone's 1931 condemnation for tax evasion, "mobster Meyer Lansky took money from New Orleans slot machines and shifted it to accounts overseas. The Swiss secrecy law two years later assured him of G-man-proof-banking. Later, he bought a Swiss bank and for years deposited his Havana casino take in Miami accounts, then wired the funds to Switzerland via a network of shell and holding companies and offshore accounts", according to journalist Lucy Komisar. Joseph Stiglitz, 2001 Nobel laureate for economics, told Komisar: "You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks." [5] In 1999, a class action suit against the Vatican Bank criticized the role of Switzerland during World War II. Governments of developing countries accused Swiss banks of detaining most of the money stolen by corrupt dictators, which Oxfam International estimate to about $50 billion a year deposited in offshore tax havens, nearly the size of the $57 billion annual global aid budget. Also in 1999, according to Lucy Komisar, banks "orchestrated a successful e-mail campaign to Congress" to "sink a 'know your customer' regulation proposed by the Federal Deposit Insurance Corporation".[5] In 2001, the United States learned that the Swiss had protected the bank that handled finances for Osama Bin Laden. One of them, the Bahrain International Bank, had funds transiting through non-published accounts of Clearstream, which has been qualified as a "bank of banks" and was involved in one of Luxembourg's major financial scandals.
U.S. Terrorist Finance Tracking Program

A series of articles published on June 23, 2006, by The New York Times, The Wall Street Journal and the Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the Central Intelligence Agency, had a program to access the SWIFT transaction database after the September 11th attacks rendering bank privacy severely compromised.
Trusts as vehicles for tax evasion and money laundering

According to a book published in 2010 by an investigative journalist, the successful campaign to limit bank secrecy will likely lead to an increase use of trusts, mostly based in the UK or the USA.[15] Such trusts can be used for tax evasion and money laundering.[16]
Bank secrecy
409
Bank secrecy in popular culture

The notion of Swiss banks and secret numbered accounts has been widely used in post-war literature and cinema. Whether quite realistically in James Bond novels/movies or more speculatively in The DaVinci Code novel/movie, the instrument is often used by writers for villains to hide assets.
References
[1] But in some jurisdictions simple failure to declare revenue to tax authorities is not a criminal offense, so a bank would not generally be required to disclose information regarding tax evasion. [2] Browning, Lynnley. Swiss Banker Blows Whistle on Tax Evasion. (http:/ / www. nytimes. com/ 2010/ 01/ 19/ business/ 19whistle. html?hp) New York Times, January 18, 2010. [3] http:/ / www. tsr. ch/ info/ suisse/ 2123331-l-accord-ubs-est-accepte-definitivement. html [4] That agreement had been challenged in the Swiss courts, forcing the Parliamentary vote. It had initially been rejected by the lower house, see Jolly, D. Swiss Lawmakers Reject UBS Tax Deal. (http:/ / www. nytimes. com/ 2010/ 06/ 09/ business/ global/ 09ubs. html?hp), but was subsequently accepted by both houses, see (http:/ / www. tsr. ch/ info/ suisse/ 2117635-le-national-finit-par-accepter-l-accord-ubs. html) [5] Komisar, Lucy (Spring, 2003). "Offshore banking, the secret threat to America" (http:/ / www. dissentmagazine. org/ article/ ?article=505). Dissent Magazine. . [6] . Swiss Federal Department of Finance. http:/ / www. efd. admin. ch/ 00468/ index. html?lang=en& msg-id=25863. Retrieved 2010-06-11. [7] "Switzerland removed from OECD grey list" (http:/ / www. news. admin. ch/ message/ index. html?lang=en& msg-id=29205). Federal adminsitration. 2009-09-24. . Retrieved 2010-06-11. [8] "UBS exec indicted in tax evasion scheme." The Recorder (2008). General Reference Center Gold. Web. 17 June 2010. [9] Still Waiting for Those Names. New York Times. June 16, 2010. (http:/ / www. nytimes. com/ 2010/ 06/ 17/ opinion/ 17thu3. html?ref=opinion) [10] That agreement was ratified by the Swiss parliament, despite some resistance due both to opposition in principle and to political maneuvering related to other proposals, such as the taxation of executive bonuses, see (http:/ / www. tsr. ch/ info/ suisse/ 1930393-ubs-partis-et-gouvernement-sont-toujours-divises. html). [11] Paul Sullivan, [http//:www.nytimes.com/2011/02/05/your-money/taxes/05wealth.html?ref=business&src= "Hiding Money Overseas? Your're taking a Big Chance], "The New York Times", February 5, 2011] [12] Browning, Lynnley, [http//:www.nytimes.com/article_name.html "Seeking Bank Secrecy in Asia"] "The New York Times", September 22, 2010 [13] http:/ / www. swissinfo. ch/ eng/ Specials/ Swiss_banking_secrecy_under_fire/ News/ EU_ambassador_welcomes_bank_secrecy_move. html?cid=676478 [14] http:/ / www. spiegel. de/ international/ business/ 0,1518,613252,00. html [15] Zaki, Myret (2010). Le secret bancaire est mort, vive l'vasion fiscale. Editions Favre. ISBN978 2 8289 1148 5. [16] http:/ / www. lematin. ch/ actu/ -debat/ myret-zaki-suisse-fait-235019
Banking in Switzerland
410
All banks in Switzerland are regulated by Swiss Financial Market Supervisory Authority (FINMA), which derives its authority from a series of federal statutes. The country's tradition of bank secrecy, which dates to the Middle Ages, was first codified in a 1934 law.[1] As of 11 October 2008, the banking industry in Switzerland has an average leverage ratio (assets/networth) of 29 to 1, while the industry's short-term liabilities are equal to 260% of the Swiss GDP or 1,273% of the Swiss national debt.[2]
A cantonal bank near Bern
Overview
Switzerland is a prosperous nation with a per capita gross domestic product higher than that of most western European nations. In addition, the value of the Swiss franc (CHF) has been relatively stable compared with that of other currencies.[3] In 2009, the financial sector comprised 11.6% of Switzerland's GDP and employed approximately 195,000 people (136,000 of whom work in the banking sector); this represents about 5.6% of the total Swiss workforce. Furthermore, Swiss banks employ an estimated 103,000 people abroad.[4]
Swiss neutrality and national sovereignty, long recognized by foreign nations, have fostered a stable environment in which the banking sector was able to develop and thrive. Switzerland has maintained neutrality through both World Wars, is not a member of the European Union, and was not even a member of the United Nations until 2002.[5] [6] Currently an estimated one-third of all funds held outside the country of origin (sometimes called "offshore" funds) are kept in Switzerland. In 2001 Swiss banks managed US$ 2.6trillion. The following year they handled $400 billion USD less which has been attributed to both a bear market and stricter regulations on Swiss banking.[7] By 2007 this figure has risen to roughly 6.7 trillion Swiss francs (US$6.4 trillion). The Bank of International Settlements, an organization that facilitates cooperation among the world's central banks, is headquartered in the city of Basel. Founded in 1930, the BIS chose to locate in Switzerland because of the country's neutrality, which was important to an organization founded by countries that had been on both sides of World War I.[8] Foreign banks operating in Switzerland manage 870 billion Swiss francs worth of assets (as of May 2006).[9]
Interior of the Schweizerische Kreditanstalt (later Credit Suisse) main building at Paradeplatz (1876)
411
Law and regulation

The Swiss Financial Market Supervisory Authority (FINMA) is a public law institution that supervises most banking-related activities as well as securities markets and investment funds.[10] Regulatory authority is derived from the Swiss Financial Market Supervision Act (FINMASA) and Article 98 of the Swiss Federal Constitution. The office of the Swiss Banking Ombudsman, founded in 1993, is sponsored by the Swiss Banking Ombudsman Foundation, which was established by the Swiss Bankers Association. The ombudsman's services, which are offered free of charge, include mediation and assistance to persons searching for dormant assets. The ombudsman handles about 1,500 complaints raised against banks yearly.[11]
Statutes
Banking law of 1934 The Swiss Parliament passed the Banking Law of 1934, which codified the rules of secrecy and criminalizes violation of it. The secrecy provisions were not included in the first draft of the law, which mainly concerned administrative matters such as bank supervision. The provisions, found in Article 47(b), were added before passage of the bill due to Nazi authorities' attempts to investigate the assets of Jews and "enemies of the state" held in Switzerland.[12]
Electronic payments
Swiss banks, as well as the post office (which handles some financial transactions) use an electronic payments system known as Swiss Interbank Clearing (SIC). The system is supervised by the Swiss National Bank and is operated via a joint venture.[13] SIC handled over 250 million transactions in 2005, with a turnover value of 41 trillion Swiss francs.[14]
Major banks
As of 2008, there are 327 authorized banks and securities dealers in Switzerland,[15] ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients. UBS and Credit Suisse are respectively the largest and second largest Swiss banks and account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centres. Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission.[16]
UBS
UBS came into existence in June 1998, when Union Bank of Switzerland, founded in 1862, and Swiss Bank Corporation, founded in 1872, merged. Headquartered in Zurich and Basel, it is Switzerland's largest bank. It maintains seven main offices around the world (four in the United States and one each in London, Tokyo, and Hong Kong) and branches on five continents.[17]
UBS is one of the largest banks in the world (offices in New York City)
As of 2010, UBS had a net profit of CHF7.161 billion, a market capitalization of over CHF58.8 billion, and 64,617 employees.[18]
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Credit Suisse
Credit Suisse is the second-largest Swiss bank. Based in Zurich, it was founded in 1856; its market capitalization (as of 2007) is $95.2 billion, and the company has about 40,000 employees. Credit Suisse Group offers private banking, investment banking and asset management services. It acquired The First Boston Corporation in 1988 and merged with the Winterthur insurance company in 1997; the latter was sold to AXA in 2006.[19] The asset management services were sold to Aberdeen Asset Management in 2008 during the GFC.
Central Bank
The Swiss National Bank (SNB) serves as the country's central bank. Founded by the Federal Act on the Swiss National Bank (16 January 1906), it began conducting business on 20 June 1907. Its shares are publicly traded, and are held by the cantons, cantonal banks, and individual investors; the federal government does not hold any shares.[20] Although a central bank often has regulatory authority over the country's banking system, the SNB does not; regulation is solely the role of the Federal Banking Commission.[21] ...
Private banks - Private bankers
Swiss National Bank headquarters in Bern.
The term private bank refers to a bank that offers private banking services and in its legal form is a partnership. The first private banks were created in St. Gallen in the mid 18th century and in Geneva in the late 18th century as partnerships, and some are still in the hands of the original families such as Hottinger and Mirabaud. In Switzerland, such private banks are called private bankers (a protected term) to distinguish them from the other private banks which are typically shared corporations. Historically in Switzerland a minimum of Francs 1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to Francs 250,000 for private investors.
Cantonal banks
There are, as of 2006, 24 cantonal banks; these banks are state-guaranteed semi-governmental organizations controlled by one of Switzerland's 26 cantons that engage in all banking businesses.[22] The largest cantonal bank, the Zurich Cantonal Bank, had a 2005 net income of CHF 810 million.[23]
Banking privacy
Swiss bank secrecy does protect the privacy of bank clients; the protections afforded under Swiss law are similar to confidentiality protections between doctors and patients or lawyers and their clients. The Swiss government views the right to privacy as a fundamental principle that should be protected by all democratic countries. While privacy is protected, in practice all bank accounts are linked to an identified individual. Moreover, the bank secrecy is not absolute: a prosecutor or judge may issue a "lifting order" in order to grant law enforcement access to information relevant to a criminal investigation.[24]
413
Taxation
Swiss law distinguishes between tax evasion (non-reporting of income) and tax fraud (active deception). International legal assistance used to be granted only with respect to tax fraud. Under pressure from the OECD and the G20, the Swiss government decided in March 2009 to abolish the distinction between tax evasion and tax fraud in dealings with foreign clients. Switzerland adheres to the international OECD standards with regard to administrative assistance in tax matters (decision to take over the OECD Model Tax Convention, in particular Article 26) [25] For Swiss taxpayers the distinction remains in place. Although not considered a crime and hence not prosecuted in a penal court, tax evasion is a serious offence under Swiss tax law and hefty financial penalties apply. In domestic prosecutions, banking secrecy may be lifted by court order in cases of tax fraud or particularly severe cases of tax evasion.[26] European Union Pressure on Switzerland has been applied by several states and international organizations attempting to alter the Swiss privacy policy. The European Union, whose member countries geographically surround Switzerland, has complained about member states' nationals using Swiss banks to avoid taxation in their home countries. The EU has long sought a harmonized tax regime among its member states, although many Swiss banking officials (and, according to some polls, the public) are resisting any such changes.[28] However, Switzerland did not want to be seen as an obstacle to closer tax cooperation among EU-member states and decided to support the international efforts to adequately tax cross-border investment income. The retention tax agreed with the European Union (EU) in the taxation of savings income agreement is a suitable and efficient means of doing so. The EU is committed to eliminating existing loopholes in the system of taxation of savings income. Switzerland has expressed to the EU its willingness in principle to correspondingly adjust the taxation of savings income. Here it should be noted that Switzerland has adopted the OECD standard on administrative assistance and that the Federal Council rejects the automatic exchange of information.[29] Since July 1, 2005, Switzerland has charged a withholding tax on all interest earned in the personal Swiss accounts of European Union residents.
Swiss Capital Market in billion CHF, Data from a KPMG and Helvea [27] Study
Switzerland is not a member of the European Union but, since December 2008,[30] is a part of the Schengen agreement. United States Swiss bank accounts cannot be opened without the holder signing a legal document asserting that they have no outstanding financial obligations to the IRS. Despite this, Swiss banks have been criticized for improperly shielding tax evaders. In January 2003, the United States Department of Treasury announced a new information-sharing agreement under the already extant U.S.-Swiss Income Tax Convention;[31] the agreement was intended to facilitate more effective tax information exchange between the two countries.[32] However, Swiss policy has continued to come under international criticism, and in March 2009 Switzerland agreed to renegotiate more effective tax cooperation with the United States and other countries.[33]
414
Money laundering
There are several measures in place to counter money laundering. The Money Laundering Act sets forth requirements of account holders' identification, and requires reporting of any suspicious transactions to the Money Laundering Reporting Office.[34] According to the CIA World Factbook, Switzerland is "a major international financial center vulnerable to the layering and integration stages of money laundering; despite significant legislation and reporting requirements, secrecy rules persist and nonresidents are permitted to conduct business through offshore entities and various intermediaries..."[35] However, Switzerland's cooperation in transnational financial issues has been praised by several major U.S. officials. A Federal Bureau of Investigation anti-terrorism official noted that Switzerland was one of several countries to participate in joint task forces targeting financing of Al-Qaeda terrorist cells; a former Assistant Secretary of the Treasury praised Swiss cooperation and the country's assistance in the finding and freezing of terrorist and Iraqi assets.[36]
Numbered bank accounts

Some bank accounts are afforded an extra degree of privacy. Information concerning such accounts, known as numbered accounts, is restricted to senior bank officers, rather than being accessible to all the employees of a bank. However, the information required to open such an account is no different from that of an ordinary account; completely anonymous accounts are not allowed by law. Should a criminal investigation take place, law enforcement has access to information related to a numbered account in the same way it has access to information about any other account.[37]
Swiss Banks and World War II

Several inquiries have been made into the conduct of Swiss banks during the Nazi Germany period (19331945), especially regarding funds deposited by or allegedly stolen from victims of the Holocaust. The campaign causing the highest outlays ($1.25 billion in 1999) on the part of the Swiss banking industry as of 2009 was the World Jewish Congress lawsuit against Swiss banks launched by Edgar Bronfman, president of the World Jewish Congress, in concert with US Senator Alfonse d'Amato of New York.[38] The audit run by the Volcker commission which resulted from this lawsuit cost CHF 300 million and gave its final report in December 1999. It determined that the 1999 book value of all dormant accounts possibly belonging to victims of Nazi persecution that were unclaimed, closed by the Nazis, or closed by unknown persons was CHF 95 million. Of this total, CHF 24 million were "probably" related to victims of Nazi persecution.[39] In addition the commission found "no proof of systematic destruction of records of victim accounts, organized discrimination against the accounts of victims of Nazi persecution, or concerted efforts to divert the funds of victims of Nazi persecution to improper purposes." It also "confirmed evidence of questionable and deceitful actions by some individual banks in the handling of accounts of victims".[39] In response to the lawsuit, the Swiss government commissioned an independent panel of international scholars known as the Bergier Commission to study the relationship between Switzerland and the Nazi regime. It reached similar conclusions about the banks' conduct in its final report,[40] and found that trade with Nazi Germany did not significantly prolong the war.[40]
415
Allegations of black money

Swiss Banks are alleged[41] [42] to stash black money i.e. as that part of a nation's income or that a person or organization acquires illegally and concealed,[43] [44] by reporters and journals, and reportedly there are more Indian deposits in the Swiss banks than any other nationality.[41] Editor-in-chief for WikiLeaks, Julian Assange, noted that, as per documents of bank accounts by a former banker and whistleblower Rudolf Elmer, the "names in the documents came from "US, Britain, Germany, Austria and Asia' -- from all over".[41] [45] [46] [47] [48] [49] [50]
International competition
With recent changes in the Swiss bank secrecy regime the assets held by foreign persons in Swiss bank accounts declined according to data by the Swiss National Bank (SNB) by 28.1% between January 2008 and November 2009. Other states, such as Singapore, have attracted depositors seeking privacy and protection. Having taken steps to make its banks more attractive, Singapore strengthened penalties for violators of bank secrecy (and now imposes steeper fines and longer jail sentences for offenders), and modified its laws on trusts and inheritance. Singapore is also now the location of Credit Suisse's international banking headquarters.[51]
References
[1] Gumbel, Peter (2002-09-08). "Silence Is Golden" (http:/ / www. time. com/ time/ search/ article/ 0,8599,348968,00. html). Time Magazine. . Retrieved 2006-06-16. [2] Norris, Floyd (2008-10-11). "The Worlds Banks Could Prove Too Big to Fail or to Rescue" (http:/ / www. nytimes. com/ 2008/ 10/ 11/ business/ worldbusiness/ 11charts. html?_r=1& partner=rssnyt& emc=rss& referer=sphere_related_content& referer=sphere_related_content& oref=slogin). The New York Times. . Retrieved 2010-03-31. [3] "The World Factbook - Switzerland - Economy" (http:/ / www. odci. gov/ cia/ publications/ factbook/ geos/ sz. html#Econ). Central Intelligence Agency. . Retrieved 2006-06-16. [4] "The Economic Significance of the Swiss Finanicial Centre" (http:/ / www. swissbanking. org/ en/ 20091119-2400-factsheet_finanzplatz_schweiz_de-rva. pdf). November 2009. . Retrieved 2010-05-10. [5] "The World Factbook - Switzerland - Introduction" (https:/ / www. cia. gov/ library/ publications/ the-world-factbook/ geos/ sz. html). Central Intelligence Agency. 2006-06-13. . Retrieved 2010-06-02. [6] "Country profile: Switzerland" (http:/ / news. bbc. co. uk/ 1/ hi/ world/ europe/ country_profiles/ 1035212. stm). BBC News. 2006-03-26. . Retrieved 2006-06-17. [7] Cohn, Laura and Fairlamb, David (2003-10-27). "Swiss Banks: Paradise Lost" (http:/ / www. businessweek. com/ magazine/ content/ 03_43/ b3855183_mz035. htm). Bk. . Retrieved 2006-06-16. [8] "Origins: Why Basel?" (http:/ / www. bis. org/ about/ origins. htm). Bank of International Settlements. . Retrieved 2006-06-16. [9] "Foreign Banks In Switzerland Manage CHF870 Billion In Assets" (http:/ / story. europesun. com/ p. x/ ct/ 9/ id/ 325aca900d830bd6/ cid/ 88176adfdf246af5/ ). Dow Jones. 2006-05-29. . Retrieved 2006-06-15. [10] "About FINMA" (http:/ / www. finma. ch/ e/ finma/ Pages/ Ziele. aspx). Swiss Financial Market Supervisory Authority. . Retrieved 2009-09-04. [11] "Swiss Banking Ombudsman" (http:/ / www. bankingombudsman. ch/ english/ index. htm). Swiss Banking Ombudsman. . Retrieved 2006-06-17. [12] Mueller, Kurt (1969). "The Swiss Banking Secret: From a Legal View" (http:/ / 0-www. jstor. org. alicat. adelphi. edu/ view/ 00205893/ ap030072/ 03a00050/ 2?searchUrl=http:/ / www. jstor. org/ search/ BasicResults?hp=25& si=1& Query=bank+ secrecy+ switzerland& frame=noframe& currentResult=00205893+ ap030072+ 03a00050+ 0,FEFF07& userID=c0930c14@adelphi. edu/ 01cce44037287d10be86039bb& dpi=3& config=jstor). The International and Comparative Law Quarterly 18 (2): 361362. . [13] "Electronic payments in Switzerland" (http:/ / www. snb. ch/ e/ welt/ portrait/ banks/ 7. html). Swiss National Bank. . Retrieved 2006-06-16. [14] "SIC Statistics" (http:/ / www. sic. ch/ tkicch_htsdfio'o987edtyjiutfnicch_news_statistics_sic. htm). Swiss Interbank Clearing. . Retrieved 2006-06-16. [15] "Figures on Switzerland as a location for financial services" (http:/ / www. sif. admin. ch/ dokumentation/ 00514/ 00515/ 00516/ index. html?lang=en). Federal Department of Finance. 2009-12-31. . Retrieved 2010-05-20. [16] "Supervision of large banking groups" (http:/ / www. ebk. admin. ch/ e/ ebk/ taetigkeit/ taetigkeit3. html). Swiss Federal Banking Commission. . Retrieved 2006-06-17. [17] "UBS-Locations" (http:/ / www. ubs. com/ 1/ e/ about/ locations. html). UBS AG. . Retrieved 2006-06-19. [18] (http:/ / www. ubs. com/ 1/ ShowMedia/ about/ ourprofile?contentId=167848& name=UBS_Factsheet_ENG. pdf) [19] "Company Profile" (http:/ / www. creditsuisse. com/ who_we_are/ doc/ company_profile_en. pdf) (PDF). Credit Suisse. . Retrieved 2006-06-17.
[20] "The National Bank as a joint-stock company" (http:/ / web. archive. org/ web/ 20020808031909/ http:/ / www. snb. ch/ e/ snb/ aufsicht/ aufsicht. html). Swiss National Bank. Archived from the original (http:/ / www. snb. ch/ e/ snb/ aufsicht/ aufsicht. html) on August 8, 2002. . Retrieved 2006-06-16. [21] "Players" (http:/ / www. swissbanking. org/ en/ home/ akteure. htm). Swiss Bankers Association. . Retrieved 2006-06-17. [22] "Bank groups" (http:/ / www. swissbanking. org/ en/ home/ fs-allgemein. htm). Swiss Bankers Association. . Retrieved 2006-06-17. [23] "ZKB Company Profile 2005" (http:/ / www. zkb. com/ privatebank/ aaa/ pdf/ cp-en. pdf) (PDF). Zrich Cantonal Bank. . Retrieved 2006-06-17. [24] "Swiss Bank Secrecy" (http:/ / web. archive. org/ web/ 20060524133835/ http:/ / www. swissemb. org/ legal/ BankingSecrecyFact. pdf) (PDF). Embassy of Switzerland in Washington, D.C.. Archived from the original (http:/ / www. swissemb. org/ legal/ BankingSecrecyFact. pdf) on May 24, 2006. . Retrieved 2006-06-16. [25] "Switzerland to adopt OECD standard on administrative assistance in fiscal matters" (http:/ / www. efd. admin. ch/ 00468/ index. html?lang=en& msg-id=25863). Federal Department of Finance. . Retrieved 2010-05-20. [26] Locher, Peter; Blumenstein, Ernst (2002) (in German). System des schweizerischen Steuerrechts (6th. ed.). Zrich: Schulthess. pp.476. ISBN3-7255-4342-9. [27] Swiss Television (in german): 880 billion illegal money in Switzerland (http:/ / www. tagesschau. sf. tv/ Nachrichten/ Archiv/ 2010/ 02/ 08/ Schweiz/ Streit-um-Kundendaten/ 880-Milliarden-Schwarzgeld-aus-der-Schweiz?WT. zugang=front_na1#Formular) from 08.02.2010 [28] Gumbel, Peter (2002-09-08). "Silence Is Golden" (http:/ / www. time. com/ time/ search/ article/ 0,8599,348968,00. html). Time Magazine. . Retrieved 2006-06-16. [29] "taxation of saving income" (http:/ / www. efd. admin. ch/ dokumentation/ zahlen/ 00579/ 00608/ 00634/ index. html?lang=en). Federal Department of Finance. . Retrieved 2010-05-10. [30] "Switzerland To Open Bank Secrets to Russia" (http:/ / english. pravda. ru/ world/ europe/ 22-09-2009/ 109442-switzerland-0). Pravda.ru. 2009-10-02. . Retrieved 2009-09-21. [31] "Treasury Announces Mutual Agreement with Switzerland Regarding Tax Information Exchange" (http:/ / www. treas. gov/ press/ releases/ kd3795. htm). U.S. Dept. of Treasury (KD-3795). 2003-01-24. . Retrieved 2008-06-20. [32] "U.S., Switzerland Agree to Facilitate Exchange of Tax Information" (http:/ / web. archive. org/ web/ 20060717203642/ http:/ / useu. usmission. gov/ Article. asp?ID=3E4C7E04-37D9-4BA3-8668-D7B30918B2AB). The United States Mission to the European Union. 2003-01-24. Archived from the original (http:/ / useu. usmission. gov/ Article. asp?ID=3E4C7E04-37D9-4BA3-8668-D7B30918B2AB) on July 17, 2006. . Retrieved 2006-06-18. [33] Swiss to negotiate tax cooperation with US. The Associated Press, Wednesday, March 25, 2009; 12:49 PM (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2009/ 03/ 25/ AR2009032501661. html) [34] "Effective Legislation for Combating Money Laundering and the Financing of Terrorism" (http:/ / web. archive. org/ web/ 20060528021441/ http:/ / www. swissemb. org/ legal/ EffMoneyLaundTerrorFact. pdf) (PDF). Embassy of Switzerland in Washington, D.C.. Archived from the original (http:/ / www. swissemb. org/ legal/ EffMoneyLaundTerrorFact. pdf) on May 28, 2006. . Retrieved 2006-06-16. [35] "World Factbook - Switzerland - Transnational Issues" (https:/ / www. cia. gov/ library/ publications/ the-world-factbook/ geos/ sz. html#Issues). Central Intelligence Agency. . Retrieved 2006-06-16. [36] "U.S. Testimonials on Swiss Leadership in Combating Money Laundering and the Financing of Terrorism" (http:/ / web. archive. org/ web/ 20060526111045/ http:/ / www. swissemb. org/ legal/ USTestSwiLead. pdf) (PDF). Embassy of Switzerland in Washington, D.C.. Archived from the original (http:/ / www. swissemb. org/ legal/ USTestSwiLead. pdf) on May 26, 2006. . Retrieved 2006-06-16. [37] "Swiss Banking Secrecy" (http:/ / web. archive. org/ web/ 20060524133835/ http:/ / www. swissemb. org/ legal/ BankingSecrecyFact. pdf) (PDF). Embassy of Switzerland in Washington, D.C.. Archived from the original (http:/ / www. swissemb. org/ legal/ BankingSecrecyFact. pdf) on 2006-05-24. . Retrieved 2006-06-16. [38] Finkelstein, Norman. The Holocaust Industry. Verso, New York, Second paperback edition 2003, p. 90c.f. [39] Report on Dormant Accounts of Victims of Nazi Persecution in Swiss Banks (http:/ / www. crt-ii. org/ ICEP/ ICEP_Report_ToC. pdf) Annex 4; and Part I paragraph 41 [40] The Bergier Commission Final Report (http:/ / www. uek. ch/ en), page 442; and page 518 [41] http:/ / www. indianexpress. com/ news/ black-money-indian-names-in-swiss-bank-data-list-says-assange/ 781752/ [42] http:/ / election. rediff. com/ interview/ 2009/ mar/ 31/ inter-swiss-black-money-can-take-india-to-the-top. htm [43] http:/ / dictionary. reference. com/ browse/ black+ money [44] http:/ / www. thefreedictionary. com/ black+ money [45] "Former Banker Gives Data on Taxes to WikiLeaks" (http:/ / dealbook. nytimes. com/ 2011/ 01/ 18/ ex-banker-gives-data-on-taxes-to-wikileaks/ ). The New York Times. 2011-01-18. . [46] http:/ / news. in. msn. com/ national/ article. aspx?cp-documentid=5139581& page=2 [47] http:/ / www. thestatesman. net/ index. php?option=com_content& view=article& show=archive& id=367434& catid=35& year=2011& month=04& day=26& Itemid=66 [48] (http:/ / www. businessworld. in/ bw/ 2011_04_26_Indian_Names_In_Swiss_Bank_Data_List_Assange. html) [49] http:/ / www. business-standard. com/ india/ news/ indian-names-in-swiss-bank-data-listassange/ 133166/ on [50] http:/ / news. outlookindia. com/ item. aspx?720057 [51] Taylor, Edward and Prystay, Cris (2006-02-06). "Singapore tax policy attracts Swiss account money" (http:/ / www. post-gazette. com/ pg/ 06037/ 651083. stm). The Wall Street Journal. . Retrieved 2006-06-16.
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External links
/ Swiss banking consultants (http://www.swiss-bank-accounts247.com) The Swiss banking law, as amended (http://www.kpmg.ch/library/pdf/ 20040608_Law_Banks_and_Savings_Banks.pdf), from KPMG Offshore Banking, Directory resource (http://www.onlinetaxhavens.com), from OTH (http://www. onlinetaxhavens.com) The Swiss Financial Center (http://www.swissworld.org/en/economy/swiss_financial_centre), from swissworld.org (http://www.swissworld.org) swissbanking.org (http://www.swissbanking.org/en/home/home.htm) Swiss Private Banking News (http://www.egeneva.ch/private-banking-geneva/) http:/ / 124. 153. 80. 136/ Economy/ Featured-Reports/ The-Swiss-Bank-Syndrome-Big-Booming-Black-Economy/ 715484
Barclays Bank Ltd v Quistclose Investments Ltd
418

Court Citation(s)
House of Lords [1970] AC 567 Keywords Quistclose trust, resulting trust
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (sub nom Quistclose Investments v Rolls Razor) is a leading property, unjust enrichment and trusts case, which invented a new species of proprietary interest. What is now known as a "Quistclose trust" means that when an asset is given to somebody for a specific purpose and for whatever reason the purpose for the transfer fails, the transferor may take back the asset. Suppose a debtor undertakes to use the loan in a particular way, and segregates the creditor's money from his general assets. Consequently, if the debtor becomes insolvent, the creditor's money is refundable, and not available to pay the debtor's other creditors, i.e. if the trust fails (because the purpose is not, or cannot, be fulfilled), then the sums become subject to a resulting trust in favour of the person who originally advanced the credit, and the person to whom the sums were advanced holds them as trustee.
Facts
Rolls Razor was deeply indebted to Barclays. It needed further additional sums to be able to pay a dividend which it had declared. Rolls Razor borrowed funds from Quistclose in order to satisfy the dividend declared. The terms of the loan were such that the funds would only be used for the sole purpose of paying the dividend. The loan was paid into an account with Barclays, and Barclays was given notice of the arrangement. However, between the time that the loan was advanced and the dividend being paid, Rolls Razor went into liquidation. Barclays Bank claimed that they were entitled to exercise a set-off of the money in the account against the debts that Rolls Razor owed with respect of Barclays. Quistclose claimed that the moneys had to be returned to them, as the purpose for which they had been lent had now failed and were incapable of being fulfilled (as Rolls Razor was now in liquidation).[1]
Judgment
The House of Lords (with the leading judgment being given by Lord Wilberforce) unanimously held that the money was held by Rolls Razor on trust for the payment of the dividends; that purpose having failed, the money was held on trust for Quistclose. The fact that the transaction was a loan did not exclude the implication of a trust. The legal rights (to call for repayment) and equitable rights (to claim title) could co-exist. Barclays, having notice of the trust, could not retain the money as against Quistclose. Similarly, the liquidator of Rolls Razor could not claim title to the money, as the assets did not form part the beneficial estate of Rolls Razor.
419
Significance
The conceptual analysis underpinning Quistclose trusts was the source of some debate. Shortly after the decision, an article appeared in the Law Quarterly Review[2] written by Peter Millett QC suggesting how the traditional trust need for certainty of objects (beneficiary) could be squared with the decision of the House of Lords, and the refusal to accept new categories of purpose trust in equity. In Twinsectra v Yardley[3] the House of Lords reviewed the law and the leading judgment was given by Lord Millett, whose judicial analysis, unsurprisingly, closely mirrored that which he suggested twenty years previously. The key issue, according to Lord Millett, in upholding the trust concept is ascertaining where the beneficial interest in the money lies. Lord Millett suggests that there are four possible answers: (1) the lender, (2) the borrower, (3) the ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense". Lord Millett then analysed all of the foregoing, and determined that the beneficial interest remains with the lender, until the purpose for which the funds are lent is fulfilled. The only other reasoned decision was Lord Hoffmann, who agreed with Lord Millett, though disagreed as to whether it was an express or resulting trust. Some have suggested that this means a Quistclose trust, whilst it is indubitably a trust, it would not be a resulting trust as the beneficial interest never 'results back' to the lender; it was with him all the time. However, others point out that there are many resulting trusts where the beneficial interest never leaves the donor: the classic example of a trust failing for uncertain objects, for example.
Requirements
It is sometimes argued that Quistclose trusts are not a separate species of trust at all, but merely a simple trust, which has certain characteristics. However, Quistclose trusts are often regarded as somewhat special and distinct. The English Court of Appeal in Twinsectra v Yardley [1999] Lloyd's Rep 438 suggested, obiter dictum, that it was in fact a 'quasi-trust' which is not required to satisfy "the usually strict requirements for a valid trust so far as 'certainty of object[s]' is concerned. However, the House of Lords, on appeal, declined to endorse those comments.
Purpose
However, what differentiates the Quistclose trust from other trusts, is the existence of the specific purpose for which the sums on credit must be applied, and the failure of which gives rise to the trust. It must also be clear that, if that specific purpose fails, the sums will revert to the person who originally advanced them. The situations in which Quistclose trusts have been upheld are varied. They have been upheld in cases of: sums advanced for the specific payment of a dividend;[4] sums advanced for the specific payment of a creditor;[5] sums advanced on the basis of an undertaking for a specific project;[6] and advance payments made on credit for the purchase of specific goods.[7]
One issue that has escaped notice in the judicial consideration of Quistclose trusts to date is how narrowly the purpose has to be defined. Suggestions have been made to the effect that the general law in relation to powers would apply (such that if the purpose is sufficiently well defined to be a power, a Quistclose trust may arise), but others have argued that to take tests from one branch of the law and apply it to another may not be appropriate. The lower courts in Twinsectra suggested that the purpose must be sufficiently well defined, but Lord Millett distanced himself from that position, claiming that "uncertainty works in favour of the lender, not the borrower."[8]
420
Certainty of intention
In Twinsectra v Yardley, Lord Millett spent some time considering the necessary intention. It has long been settled law that a person need not have a specific intention to create an express trust, so long as the court can determine from the person's intention that a beneficial entitlement should be conferred which the law (or equity) will enforce.[9] So in Twinsectra where there was a solicitor's undertaking that the money should only be used for one purpose, this was held to be sufficient intent. In Quistclose itself and in Carreras Rothmans v Freeman Mathews Treasure where loans were made for a specific purpose, this may also amount to sufficient intention.[10] Where a loan is advanced for the borrower to use as he will, no Quistclose trust can arise.
Criticisms
In the early stages of development of the Quistclose trust, it was suggested that the concept was unambiguously good. In Re Kayford it was suggested that a segregated account for customers' money to be placed in to guard against the insolvency of the company was a proper and responsible thing to do. However, more recently criticism has been mounted that giving a proprietary claim to a lender which enables the lender to reclaim the loan ahead of unsecured creditors has the effect of putting the lender in the position of a secured creditor, but without the need to register any security interest against the borrower (and thus meaning that other creditors would not be aware of the preferential status of the lender's claim). Quistclose trusts still remain relatively uncommon, and as yet there has been no clamour for legislation or regulation (Quistclose trusts were not even addressed under English law when the insolvency law was last revised in the Enterprise Act 2002). However, should the courts start finding them with increasing frequency,[11] it may be that regulation, or judicial revision, follows.
Notes
[1] [2] [3] [4] [5] [6] [7] [8] [9] [1970] AC 567, 568 101 (1985) LQR 269 [2002] UKHL 12 (http:/ / www. publications. parliament. uk/ pa/ ld200102/ ldjudgmt/ jd020321/ yardle-1. htm) Barclays Bank v Quistclose Investments Carreras Rothmans v Freeman Mathews Treasure [1985] Ch 207 Twinsectra v Yardley Re Kayford (in liquidation) [1975] 1 WLR 279 and Re EVTR Ltd. [1987] BCLC 647 Implying that a lack of certainty over the purpose makes it more likely that a trust will be found in favour of the lender. The most commonly cited example is Paul v Constance [1977] 1 WLR 527, where one party said "this money is as much yours as mine", and this was held to amount to a trust at law. [10] Not by coincidence, shortly after Quistclose bank loan documents in England began to include clauses covenanted to use the loan for a stated purpose. [11] For example, in the way that judicial findings of undue influence became prevalent in mortgage lending.
References
William Swadling, "The Quistclose trust" (2004) ISBN 1-84113-412-0 For a description (in French) from a civil lawyer point of view, see "Le controle de l'entreprise par ses fournisseurs de credit dans les droits francais et anglais", These, Universite Paris II Pantheon-Assas, 2007
Bearer bond
421
Bearer bond
A bearer bond is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered no records are kept of the owner, or the transactions involving ownership. Whoever physically holds the paper on which the bond is issued owns the instrument. This is useful for investors who wish to retain anonymity. Recovery of the value of a bearer bond in the event of its loss, theft, or destruction is usually impossible. Some relief is possible in the case of United States public debt.[1]
History
The bearer bond most possibly has its origins in the post Civil War United States. In many respects the Reconstruction (18651885) was funded on these bonds. Their use in avoiding taxation became more popular after World War I. Europe and the remainder of the Americas adapted the use of these bonds in their own finance systems for similar reasons of utility. Bearer bonds have historically been the financial instrument of choice for money laundering, tax evasion, and concealed business transactions in general. In response, new issuances of bearer bonds were banned in the United States in 1982.[2] In the United States all the bearer bonds issued by the U.S. Treasury have matured. They no longer pay interest to the holders. As of May 2009, the approximate amount outstanding is $100 million.[3] In June 2009, Italian financial police and custom guards seized documents purporting to be U.S. bearer bonds, totaling $134.5 billion. The bonds were in $500 million and $1 billion denominations, although the highest denomination ever issued by the U.S. Treasury was $10,000. It was unclear what the purpose of the fake bonds was; the two men carrying them were not detained after the bonds were seized.[4] [5]
National policy and practice

In the United States, with the passage of the Tax Equity and Fiscal Responsibility Act of 1982, debt issued in bearer form has been discouraged. The interest on any such bonds issued after 1982 would be taxable to the issuer in the case of corporate bonds, and taxable to the holder in the case of municipal bonds. In contrast, registered bonds retain favorable tax treatment.[6] In Central America, issuance of bearer bonds is typically the standard procedure for financing corporate and government debt. Bearer bonds have been used in this region in this way for a very long time.
Bearer bonds in popular culture

Since bearer bonds can have extremely high values, a physically manageable number of them can represent a very large amount of cash. For this reason, many movies and TV shows use bearer bonds when characters are on the hunt for very large sums of money (e.g., $10 million) (see also MacGuffin). In paper currency, this amount of money would be unwieldy, filling up several suitcases. But with bearer bonds, this sum can be represented in a small, convenient package. Several popular films and the television series that feature bearer bonds in this role include the films Goldfinger, Wall Street, License to Kill, Beverly Hills Cop, Rogue Trader, Lethal Weapon 2 , Die Hard, Fun with Dick and Jane, Heat, Mission Impossible, Panic Room, Steal (aka Riders), Triple Tap, The Da Vinci Code, and the TV series The Rockford Files, 24, The Flash, Lois and Clark: The New Adventures of Superman, Law & Order: Criminal Intent, Monk, Burn Notice, Terriers, Alias, Standoff, White Collar, Smallville and Archer.[7]
Bearer bond
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References
[1] "LOSS, THEFT, OR DESTRUCTION OF UNITED STATES BEARER OR REGISTERED SECURITIES ASSIGNED AS PAYABLE TO BEARER" (http:/ / www. treasurydirect. gov/ forms/ sec3987. pdf). U.S. Treasury. February 2007. . [2] "Bearer Bonds: From Popular to Prohibited" (http:/ / www. investopedia. com/ articles/ bonds/ 08/ bearer-bond. asp). Investopedia. . [3] "Bearer and Registered Securities Balances as of May 31, 2009" (http:/ / www. treasurydirect. gov/ govt/ reports/ pd/ pd_bearregsec. pdf). U.S. Treasury. . [4] Elisabetta Povoledo (June 26, 2009). "Italy Intercepts Billions in Fake Treasuries". New York Times. [5] Povoledo, Elisabetta (June 26, 2009). "Mystery of Fake U.S. Bonds Fuels Web Theories" (http:/ / www. nytimes. com/ 2009/ 06/ 26/ business/ global/ 26fake. html). NYTimes.com. . [6] "Role Of The Transfer Agent" (http:/ / www. fdic. gov/ regulations/ examinations/ trustmanual/ section_11/ rta_manualroleoftransferagent. html). Federal Deposit Insurance Corporation. . [7] "Archer Season 2 Episode Guide" (http:/ / www. fxnetworks. com/ shows/ originals/ archer/ episode. php?season=2). FX Networks. 2011. .
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank, and represent the amount owed by the bank to the customer. Some banks charge a fee for this service, while others may pay the customer interest on the funds deposited.
Major types
Checking accounts: A deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts. Savings accounts: Accounts maintained by retail banks that pay interest but can not be used directly as money (for example, by writing a cheque). Although not as convenient to use as checking accounts, these accounts let customers keep liquid assets while still earning a monetary return. Money market account: A deposit account with a relatively high rate of interest, and short notice (or no notice) required for withdrawals. In the United States, it is a style of instant access deposit subject to federal savings account regulations, such as a monthly transaction limit. Time deposit: A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term' or period of time. When the term is over it can be withdrawn or it can be rolled over for another term. Generally speaking, the longer the term the better the yield on the money.
Legal framework
Although restrictions placed on access depend upon the terms and conditions of the account and the provider, the account holder retains rights to have their funds repaid on demand. The customer may or may not be able to pay the funds in the account by cheque, internet banking, EFTPOS or other channels depending on those provided by the bank and offered or activated in respect of the account. The banking terms "deposit" and "withdrawal" tend to obscure the economic substance and legal essence of transactions in a deposit account. From a legal and financial accounting standpoint, the term "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds (whether cash or checks) themselves, which are shown an asset of the bank. For example, a depositor opening a checking account at a bank in the United States with $100 in currency surrenders legal title to the $100 in cash, which becomes an asset of the bank. On the bank's books, the bank debits its currency and coin on hand account for
Deposit account the $100 in cash, and credits a liability account (called a demand deposit account, checking account, etc.) for an equal amount. (See double-entry bookkeeping system.) In the audited financial statements of the bank, on the balance sheet, the $100 in currency would be shown as an asset of the bank on the left side of the balance sheet, and the deposit account would be shown as a liability owed by the bank to its customer, on the right side of the balance sheet. The bank's financial statement reflects the economic substance of the transaction -- which is the bank has actually borrowed $100 from its depositor and has contractually obliged itself to repay the customer according to the terms of the demand deposit account agreement. To offset this deposit liability, the bank now owns the actual, physical funds deposited, and shows those funds as an asset of the bank. Typically, an account provider will not hold the entire sum in reserve, but will loan the money at interest to other clients, in a process known as fractional-reserve banking. It is this process which allows providers to pay out interest on deposits. By transferring the ownership of deposits from one party to another, they can replace physical cash as a method of payment. In fact, deposits account for most of the money supply in use today. For example, if a bank in the United States makes a loan to a customer by depositing the loan proceeds in the customer's checking account, the bank typically records this event by debiting an asset account on the bank's books (called loans receivable or some similar name) and credits the deposit liability or checking account of the customer on the bank's books. From an economic standpoint, the bank has essentially created economic money (although obviously not legal tender). The customer's checking account balance has no dollar bills in it, as a demand deposit account is simply a liability owed by the bank to its customer. In this way, commercial banks are allowed to increase the money supply (without printing currency, or legal tender).
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Regulatory protection
Banks are normally subject to prudential regulation which has the purpose of reducing the risk of failure of the bank. It may also have the purpose of reducing the extent of depositor losses in the event of bank failure. Bank deposits may also be insured by a deposit insurance scheme, if applicable.
Financial privacy
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Financial privacy
Financial Privacy is a blanket term for a multitude of privacy issues: Financial Institutions ensuring that their customers information remains private to those outside the institution. Issues include the Patriot Act, and other debates of privacy vs. security. The term is also used to describe the issue of financial institutions selling customer information to other companies so that those companies may use that for marketing, and especially telemarketing purposes. This issue however is mixed with the issue of financial institutions sharing information within themselves, which could be considered "sharing information between companies" or "affiliate sharing" since a financial institution is not allowed to be one company for regulatory reasons, but instead must assume a holding company structure. This sense of the word has been the main issue debated in the United States during the 21st century. Debates on the first sense of the phrase have many different points of view, from crypto anarchists who want to create a completely decentralized and anonymous banking system, to others who support enhancing the power of the government to find financial information in order to fight terrorism. However, the majority of the debate in the United States involves the second sense of the phrase. The same anger against telemarketers which led to the United States National Do Not Call Registry also was focused on what some alleged to be the source of many of the telemarketers leads: financial institutions selling things like balances and transaction information to telemarketers. Financial services companies, those that offer both banking, insurance, and investment products however say that the issue and attempted legislation on the topic was brought on by smaller financial institutions who simply focused on one type of product or business. The reason for this is that combining all those products with one company creates a Wal Mart style economies of scale and other synergies which are difficult to compete against as a single product line company. By putting forth legislation which forbids financial institutions from sharing information with other companies, single-product-line financial institutions could cripple integrated financial services companies because of the technicality that the banking, investments, and insurance parts of the business had to be operated under separate company affiliates within a holding company. Most financial services companies claim that they never had sold information to non financial services companies. Some critics of financial institutions agreed with this analysis but continued to press for the legislation because they believed that the financial services integrated business model was fundamentally wrong; however the vast majority of critical articles focused on the issue of selling information to outside telemarketers.
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Global asset allocation or Global assets under management consists of pension funds, insurance companies and mutual funds. Other funds under management include private wealth and alternative assets such as hedge funds and private equity. Institutional clients generate the majority of funds. Assets of the global fund management industry increased 10% in 2010 to reach a record $79.3 trillion [1]. Growth in recent years has largely been due to rising net flow of investment and strong performance of equity markets. Part of the reason for the increase, in dollar terms, has also been the decline in the value of the dollar against a number of currencies.
Rank 1 2 3 4 5 6 7 8 9 Fund type Private wealth Pension funds Mutual funds Insurance companies Real estate billions USD $ 32,800 1 $ 29,937 $ 24,699 $ 24,634 $ 10,000 [2] [3] Figures as of 2008 2010 2010 2010 2006 February 2008 2011 2010 2009 2007
[4] [4] [5] [6] [7]
Foreign exchange reserves $ 7,341 [8] Sovereign wealth funds Hedge funds Private equity funds REITs $ 3,980 $ 1,800 $ 1,600 $ 764 [9] [10] [11] [12]
[13]
Global assets under management. 1Around one third of private wealth is incorporated in conventional investment management (Pension funds, Mutual funds and Insurance assets). 2 Many surveys systematically overestimate the global wealth pool. This is because they fail to separate out assets that are inaccessible for wealth management services (e.g. pension assets, real estate, dedicated liquidity, etc.)[14]
References
[1] http:/ / www. thecityuk. com/ assets/ Uploads/ Fund-Management-2011. pdf [2] As world wealth increased to $37.2 trillion in 2006 (http:/ / www. us. capgemini. com/ worldwealthreport07/ State_of_the_World_Wealth_2007. pdf) [3] (http:/ / www. thecityuk. com/ assets/ Uploads/ Fund-management-2010. pdf) [4] TheCityUK - Fund Management 2011 (http:/ / www. thecityuk. com/ assets/ Uploads/ Fund-Management-2011. pdf) [5] TheCityUK - Fund Management 2011 (http:/ / www. thecityuk. com/ assets/ Uploads/ Fund-Management-2011. pdf) [6] The Future Size of the Global Real Estate Market (https:/ / www. rreef. com/ cps/ rde/ xchg/ glo_en/ hs. xsl/ 2598. html) [7] The global real estate market is on pace to grow by nearly one half to $13.7 trillion (http:/ / retailtrafficmag. com/ investments/ trends/ retail_rally_2012/ ) [8] Foreign exchange reserves of the world [9] Sovereign wealth funds grow to $3,980bn (http:/ / www. prequin. com/ docs/ press/ SWF_assets_hit_$4tn. pdf) [10] 13th Annual Hennessee Hedge Fund Manager Survey (http:/ / www. hennesseegroup. com/ releases/ release20070501. html) [11] TheCityUK - Hedge funds (http:/ / www. thecityuk. com/ assets/ Uploads/ Hedge-funds-2011. pdf) [12] Preqin calculates horizon IRRs using cash flow data for over 1,700 private equity funds, comprising partnerships valued at more than $1.6 trillion in total. (http:/ / www. prequin. com/ docs/ newsletters/ PE/ April 2009. pdf)

[13] The total market capitalization of publicly-listed REITs around the world reached US$764 billion, up 25% from the previous year (http:/ / www. ey. com/ global/ content. nsf/ International/ Real_Estate_Library_Global_REIT_Report_2007) [14] Regaining momentum in wealth management - Roland Berger Strategy Consultants, page 15 (http:/ / www. rolandberger. com/ media/ pdf/ Roland_Berger_Wealth_management_Long_20090302. pdf)
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Source
IMF - Global asset allocation (http://www.imf.org/external/pubs/ft/GFSR/2005/02/pdf/chp3.pdf) TheCityUK - Fund management (http://www.thecityuk.com/assets/Uploads/Fund-management-2010.pdf) Morgan Stanley - World's $165 trillion worth of traded securities (http://www.economist.com/finance/ displaystory.cfm?story_id=10533428) http://www.sovereigninvestor.org The Sovereign Investment Council, a trade group for sovereign investors and financial firms that serve sovereign investment funds.
Investor relations
See also: Public relations (PR). Investor Relations (IR) is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation. (Adopted by the NIRI Board of Directors, March 2003.) The term describes the department of a company devoted to handling inquiries from shareholders and investors, as well as others who might be interested in a company's stock or financial stability. Typically investor relations is a department or person reporting to the Chief Financial Officer (CFO) or Treasurer. In some companies, investor relations is managed by the public relations or corporate communications departments, and can also be referred to as "financial public relations" or "financial communications". Investor relations is considered a specialty of public relations by the U.S. Department of Labor. [1] Many larger publicly-traded companies now have dedicated IR officers (IROs), who oversee most aspects of shareholder meetings, press conferences, private meetings with investors, (known as "one-on-one" briefings), investor relations sections of company websites, and company annual reports. The investor relations function also often includes the transmission of information relating to intangible values such as the company's policy on corporate governance or corporate social responsibility. Recently, the field has trended toward an increasingly popular movement for "interactive data", and the management of company filings through streaming-data solutions such as XBRL or other forms of electronic disclosure have become prevalent topics of discussion amongst leading IROs worldwide. The investor relations function must be aware of current and upcoming issues that an organization or issuer may face, particularly those that relate to fiduciary duty and organizational impact. In particular, it must be able to assess the various patterns of stock-trading that a public company may experience, often as the result of a public disclosure (or any research reports issued by financial analysts). The investor relations department must also work closely with the Corporate Secretary on legal and regulatory matters that affect shareholders. While most IROs would report to the Chief Financial Officer, they will usually also have access to the Chief Executive Officer (CEO) and Chairman or President of the corporation. This means that as well as being able to understand and communicate the company's financial strategy, they are also able to communicate the broader strategic direction of the corporation and ensure that the image of the corporation is maintained in a cohesive fashion.
Investor relations Due to the potential impact of legal liability claims awarded by courts, and the consequential impact on the company's share price, IR often has a role in crisis management of, for example, corporate downsizing, changes in management or internal structure, product liability issues and industrial disasters. In a difficult time such as the bear market of 2008-09, IROs will want to stay visible and build relationships, be factual in tone and not too quick to make promises, focus on the long-term story and balance sheet strength (as opposed to short-term earnings growth), aggressively refute rumors and answer concerns of investors, and coordinate media relations and investor communications. Finally, IROs should remember: The story is the business, not the stock price. [2] The most highly-regarded professional member organization for Investor Relations in the United States is the National Investor Relations Institute, or NIRI. In the United Kingdom, the recognized industry body is The Investor Relations Society, while in Canada, the professional association is called the Canadian Investor Relations Institute, or CIRI. Australia's professional organization is known as the Australian Investor Relations Association (AIRA).
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The Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 significantly increased the importance of investor relations in the financial markets. The act established new requirements for corporate compliance and regulatory governance, with an increased emphasis on accuracy in auditing and public disclosure. Notable provisions of the act which apply to investor relations include enhanced financial disclosures and accuracy of financial reports, real-time disclosures, off-balance-sheet transaction disclosures, pro forma financial disclosures, management assessment of internal controls, and corporate responsibility for financial reports.[3] More specifically, Sarbanes-Oxley sections 301, 302, 404, and 802 have been of particular interest to companies improving corporate compliance. Similar to Sarbanes-Oxley are Bill 198 in Canada, Financial Security Law of France in France, and J-SOX in Japan. The European MiFID Directive, although principally concerned with investor protection, also covers regulation and compliance for listed European companies.
International IR organizations
AERI: Asociacin Espaola para las Relaciones con Inversores, AIRA : Australasian Investor Relations Association (AIRA), AIRP: Association of Investor Relations Professionals (Russia), CIRA: Cercle Investor Relations Austria, CIRI: Canadian Investor Relations Institute, CLIFF: Cercle de Liaison des Informateurs Financiers en France, DIRF: Danish Investor Relations Forening, DIRK: Deutscher Investor Relations Verband e.V., Deutscher Berufsverband fr Investor Relations, FIRS: Finnish Investor Relations Society, IBRI: Instituto Brasileiro de Relaes com Investidores, IIRF: International Investor Relations Federation, IR Society The Investor Relations Society [4] (UK), NEVIR: Nederlandse Vereniging voor Investor Relations, NIRF: Norwegian Investor Relations Society, NIRI: National Investor Relations Institute (USA), JIRA: Japan Investor Relations Association, SIRA: Swedish Investor Relations Association
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Notes
[1] Public Relations Specialists (http:/ / www. bls. gov/ oco/ ocos086. htm) [2] IR Cafe blog post on bear market investor relations (http:/ / www. IRcafe. com/ 2008/ 10/ 06/ bear-market-ir-is-it-different) [3] Edited by Benjamin Mark Cole (2004). The New Investor Relations: Expert Perspectives on the State of the Art. Bloomberg Press. ISBN1-57660-135-8. [4] http:/ / www. irs. org. uk/ index. asp?pageid=1
WIRI is a web investor relations index, elaborated in 2010 by Cacia C.. The author suggests that the role of web investor relations in the value creation process be in motion by the relationship with each system operating in the market In particular, through a communication flow the investor relation manager should modify the perceptions of financial system, which at the same time is influenced by the others elements.
External links
http://www.niri.org (http://www.niri.org) - National Investor Relations Institute (US) http://www.ir-soc.org.uk (http://www.ir-soc.org.uk) - The Investor Relations Society (UK) http://www.ciri.org/ (http://www.ciri.org/) - The Canadian Investor Relations Institute http://www.aira.org.au (http://www.aira.org.au) - Australian Investor Relations Association http://www.insideinvestorrelations.com (http://www.insideinvestorrelations.com) - IR magazine
http://irwebreport.com (http://irwebreport.com) - IR Web Report http://www.nevir.nl (http://www.nevir.nl) - Netherlands IR Society
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money,[1] or money earned by deposited funds.[2] When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money. Interest is compensation to the lender, for a) risk of principal loss, called credit risk; and b) forgoing other investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. In economics, interest is considered the price of credit. Interest is often compounded, which means that interest is earned on prior interest in addition to the principal. The total amount of debt grows exponentially, and its mathematical study led to the discovery of the number e.
History of interest
In ancient biblical Israel, it was against the Law of Moses to charge interest on private loans.[3] During the Middle Ages, time was considered to be the property of God. Therefore, to charge interest was considered to be commerce with God's property. Also, St. Thomas Aquinas, the leading theologian of the Catholic Church, argued that the charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. The church regarded this as a sin of usury; nevertheless, this rule was never strictly obeyed and eroded gradually until it disappeared during the industrial revolution.
Interest Usury has always been viewed negatively by the Roman Catholic Church. The Second Lateran Council condemned any repayment of a debt with more money than was originally loaned, the Council of Vienna explicitly prohibited usury and declared any legislation tolerant of usury to be heretical, and the first scholastics reproved the charging of interest. In the medieval economy, loans were entirely a consequence of necessity (bad harvests, fire in a workplace) and, under those conditions, it was considered morally reproachable to charge interest. It was also considered morally dubious, since no goods were produced through the lending of money, and thus it should not be compensated, unlike other activities with direct physical output such as blacksmithing or farming.[4] As Jewish citizens were ostracized from most professions by local rulers, the church and the guilds, they were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending. Natural tensions between creditors and debtors were added to social, political, religious, and economic strains. ...financial oppression of Jews tended to occur in areas where they were most disliked, and if Jews reacted by concentrating on moneylending to non-Jews, the unpopularity and so, of course, the pressure would increase. Thus the Jews became an element in a vicious circle. The Christians, on the basis of the Biblical rulings, condemned interest-taking absolutely, and from 1179 those who practiced it were excommunicated. Catholic autocrats frequently imposed the harshest financial burdens on the Jews. The Jews reacted by engaging in the one business where Christian laws actually discriminated in their favor, and became identified with the hated trade of moneylending. Interest has often been looked down upon in Islamic civilization as well for the same reason for which usury was forbidden by the Catholic Church, with most scholars agreeing that the Qur'an explicitly forbids charging interest. Medieval jurists therefore developed several financial instruments to encourage responsible lending. In the Renaissance era, greater mobility of people facilitated an increase in commerce and the appearance of appropriate conditions for entrepreneurs to start new, lucrative businesses. Given that borrowed money was no longer strictly for consumption but for production as well, interest was no longer viewed in the same manner. The School of Salamanca elaborated on various reasons that justified the charging of interest: the person who received a loan benefited, and one could consider interest as a premium paid for the risk taken by the loaning party. There was also the question of opportunity cost, in that the loaning party lost other possibilities of using the loaned money. Finally and perhaps most originally was the consideration of money itself as merchandise, and the use of one's money as something for which one should receive a benefit in the form of interest. Martn de Azpilcueta also considered the effect of time. Other things being equal, one would prefer to receive a given good now rather than in the future. This preference indicates greater value. Interest, under this theory, is the payment for the time the loaning individual is deprived of the money.
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Of Usury, from Brant's Stultifera Navis (the Ship of Fools); woodcut attributed to Albrecht Drer
Economically, the interest rate is the cost of capital and is subject to the laws of supply and demand of the money supply. The first attempt to control interest rates through manipulation of the money supply was made by the French Central Bank in 1847. The first formal studies of interest rates and their impact on society were conducted by Adam Smith, Jeremy Bentham and Mirabeau during the birth of classic economic thought. In the early 20th century, Irving Fisher made a major breakthrough in the economic analysis of interest rates by distinguishing nominal interest from real interest. Several perspectives on the nature and impact of interest rates have arisen since then.
Interest The latter half of the 20th century saw the rise of interest-free Islamic banking and finance, a movement that attempts to apply religious law developed in the medieval period to the modern economy. Some entire countries, including Iran, Sudan, and Pakistan, have taken steps to eradicate interest from their financial systems entirely. Rather than charging interest, the interest-free lender charges a "fee" for the service of lending. As any such fee can be shown to be mathematically identical to an interest charge, the distinction between "interest-free" banking and "for-interest" banking is merely semantic.
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Types of interest
Simple interest
Simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains unpaid. The amount of simple interest is calculated according to the following formula:
where r is the period interest rate (I/m), B0 the initial balance and m the number of time periods elapsed. To calculate the period interest rate r, one divides the interest rate I by the number of periods m. For example, imagine that a credit card holder has an outstanding balance of $2500 and that the simple interest rate is 12.99% per annum. The interest added at the end of 3 months would be,
and they would have to pay $2581.19 to pay off the balance at this point. If instead they make interest-only payments for each of those 3 months at the period rate r, the amount of interest paid would be,
Their balance at the end of 3 months would still be $2500. In this case, the time value of money is not factored in. The steady payments have an additional cost that needs to be considered when comparing loans. For example, given a $100 principal: Credit card debt where $1/day is charged: 1/100 = 1%/day = 7%/week = 365%/year. Corporate bond where the first $3 are due after six months, and the second $3 are due at the year's end: (3+3)/100 = 6%/year. Certificate of deposit (GIC) where $6 is paid at the year's end: 6/100 = 6%/year. There are two complications involved when comparing different simple interest bearing offers. 1. When rates are the same but the periods are different a direct comparison is inaccurate because of the time value of money. Paying $3 every six months costs more than $6 paid at year end so, the 6% bond cannot be 'equated' to the 6% GIC. 2. When interest is due, but not paid, does it remain 'interest payable', like the bond's $3 payment after six months or, will it be added to the balance due? In the latter case it is no longer simple interest, but compound interest. A bank account that offers only simple interest, that money can freely be withdrawn from is unlikely, since withdrawing money and immediately depositing it again would be advantageous.
Interest
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Composition of interest rates

In economics, interest is considered the price of credit, therefore, it is also subject to distortions due to inflation. The nominal interest rate, which refers to the price before adjustment to inflation, is the one visible to the consumer (i.e., the interest tagged in a loan contract, credit card statement, etc.). Nominal interest is composed of the real interest rate plus inflation, among other factors. A simple formula for the nominal interest is:
Where i is the nominal interest, r is the real interest and
is inflation.
This formula attempts to measure the value of the interest in units of stable purchasing power. However, if this statement were true, it would imply at least two misconceptions. First, that all interest rates within an area that shares the same inflation (that is, the same country) should be the same. Second, that the lenders know the inflation for the period of time that they are going to lend the money. One reason behind the difference between the interest that yields a treasury bond and the interest that yields a mortgage loan is the risk that the lender takes from lending money to an economic agent. In this particular case, a government is more likely to pay than a private citizen. Therefore, the interest rate charged to a private citizen is larger than the rate charged to the government. To take into account the information asymmetry aforementioned, both the value of inflation and the real price of money are changed to their expected values resulting in the following equation:
Here, loan,
is the nominal interest at the time of the loan,
is the real interest expected over the period of the is the representative value for the risk
is the inflation expected over the period of the loan and
engaged in the operation.
Cumulative interest or return

The calculation for cumulative interest is (FV/PV)-1. It ignores the 'per year' convention and assumes compounding at every payment date. It is usually used to compare two long term opportunities.
Other conventions and uses

Exceptions: US and Canadian T-Bills (short term Government debt) have a different calculation for interest. Their interest is calculated as (100-P)/P where 'P' is the price paid. Instead of normalizing it to a year, the interest is prorated by the number of days 't': (365/t)*100. (See also: Day count convention). The total calculation is ((100-P)/P)*((365/t)*100). This is equivalent to calculating the price by a process called discounting at a simple interest rate. Corporate Bonds are most frequently payable twice yearly. The amount of interest paid is the simple interest disclosed divided by two (multiplied by the face value of debt). Flat Rate Loans and the Rule of .78s: Some consumer loans have been structured as flat rate loans, with the loan outstanding determined by allocating the total interest across the term of the loan by using the "Rule of 78s" or "Sum of digits" method. Seventy-eight is the sum of the numbers 1 through 12, inclusive. The practice enabled quick calculations of interest in the pre-computer days. In a loan with interest calculated per the Rule of 78s, the total interest over the life of the loan is calculated as either simple or compound interest and amounts to the same as either of the above methods. Payments remain constant over the life of the loan; however, payments are allocated to interest in progressively smaller amounts. In a one-year loan, in the first month, 12/78 of all interest owed over the life of the loan is due; in the second month, 11/78; progressing to the twelfth month where only 1/78 of all interest is due. The practical effect of the Rule of 78s is to make early pay-offs of term loans more expensive. For a one year loan, approximately 3/4 of all interest due is collected by the sixth month, and pay-off of the principal then will
Interest cause the effective interest rate to be much higher than the APY used to calculate the payments. [5] In 1992, the United States outlawed the use of "Rule of 78s" interest in connection with mortgage refinancing and other consumer loans over five years in term.[6] Certain other jurisdictions have outlawed application of the Rule of 78s in certain types of loans, particularly consumer loans.[5] Rule of 72: The "Rule of 72" is a "quick and dirty" method for finding out how fast money doubles for a given interest rate. For example, if you have an interest rate of 6%, it will take 72/6 or 12 years for your money to double, compounding at 6%. This is an approximation that starts to break down above 10%.
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Market interest rates

There are markets for investments (which include the money market, bond market, as well as retail financial institutions like banks) set interest rates. Each specific debt takes into account the following factors in determining its interest rate:
Opportunity cost
Opportunity cost encompasses any other use to which the money could be put, including lending to others, investing elsewhere, holding cash (for safety, for example), and simply spending the funds.
Inflation
Since the lender is deferring consumption, they will wish, as a bare minimum, to recover enough to pay the increased cost of goods due to inflation. Because future inflation is unknown, there are three ways this might be achieved: Charge X% interest 'plus inflation'. Many governments issue 'real-return' or 'inflation indexed' bonds. The principal amount or the interest payments are continually increased by the rate of inflation. See the discussion at real interest rate. Decide on the 'expected' inflation rate. This still leaves the lender exposed to the risk of 'unexpected' inflation. Allow the interest rate to be periodically changed. While a 'fixed interest rate' remains the same throughout the life of the debt, 'variable' or 'floating' rates can be reset. There are derivative products that allow for hedging and swaps between the two. However interest rates are set by the market, and it happens frequently that they are insufficient to compensate for inflation: for example at times of high inflation during e.g. the oil crisis; and currently (2011) when real yields on many inflation-linked government stocks are negative.
Default
There is always the risk the borrower will become bankrupt, abscond or otherwise default on the loan. The risk premium attempts to measure the integrity of the borrower, the risk of his enterprise succeeding and the security of any collateral pledged. For example, loans to developing countries have higher risk premiums than those to the US government due to the difference in creditworthiness. An operating line of credit to a business will have a higher rate than a mortgage loan. The creditworthiness of businesses is measured by bond rating services and individual's credit scores by credit bureaus. The risks of an individual debt may have a large standard deviation of possibilities. The lender may want to cover his maximum risk, but lenders with portfolios of debt can lower the risk premium to cover just the most probable outcome.
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Default Interest
Default interest is the interest that a borrower would pay if the borrower will not fulfill the loan covenants. The default interest is usually much higher than the original interest since it is reflecting the aggravation in the financial risk of the borrower. The default interest compensates the lender for the added risk. Banks tend to add default interest to the loan agreements in order to separate between different scenarios.
Deferred consumption
Charging interest equal only to inflation will leave the lender with the same purchasing power, but they would prefer their own consumption sooner rather than later. There will be an interest premium of the delay. They may not want to consume, but instead would invest in another product. The possible return they could realize in competing investments will determine what interest they charge.
Length of time
Shorter terms often have less risk of default and exposure to inflation because the near future is easier to predict. In these circumstances, short term interest rates are lower than longer term interest rates (an upward sloping yield curve).
Government intervention
Interest rates are generally determined by the market, but government intervention - usually by a central bank - may strongly influence short-term interest rates, and is one of the main tools of monetary policy. The central bank offers to borrow (or lend) large quantities of money at a rate which they determine (sometimes this is money that they have created ex nihilo, i.e. printed) which has a major influence on supply and demand and hence on market interest rates.
Open market operations in the United States

The Federal Reserve (Fed) implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds. Federal funds are the reserves held by banks at the Fed. Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates. Using the power to buy and sell treasury securities, the Open Market Desk at the The effective federal funds rate charted over more than fifty years. Federal Reserve Bank of New York can supply the market with dollars by purchasing T-notes, hence increasing the nation's money supply. By increasing the money supply or Aggregate Supply of Funding (ASF), interest rates will fall due to the excess of dollars banks will end up with in their reserves. Excess reserves may be lent in the Fed funds market to other banks, thus driving down rates.
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Interest rates and credit risk

It is increasingly recognized that the business cycle, interest rates and credit risk are tightly interrelated. The Jarrow-Turnbull model was the first model of credit risk that explicitly had random interest rates at its core. Lando (2004), Darrell Duffie and Singleton (2003), and van Deventer and Imai (2003) discuss interest rates when the issuer of the interest-bearing instrument can default.
Money and inflation

Loans and bonds have some of the characteristics of money and are included in the broad money supply. National governments (provided, of course, that the country has retained its own currency) can influence interest rates and thus the supply and demand for such loans, thus altering the total of loans and bonds issued. Generally speaking, a higher real interest rate reduces the broad money supply. Through the quantity theory of money, increases in the money supply lead to inflation. This means that interest rates can affect inflation in the future.
Interest in mathematics
It is thought that Jacob Bernoulli discovered the mathematical constant e by studying a question about compound interest. He realized that if an account that starts with $1.00 and pays say 100% interest per year, at the end of the year, the value is $2.00; but if the interest is computed and added twice in the year, the $1 is multiplied by 1.5 twice, yielding $1.001.5=$2.25. Compounding quarterly yields $1.001.254=$2.4414, and so on. Bernoulli noticed that if the frequency of compounding is increased without limit, this sequence can be modeled as follows: , where n is the number of times the interest is to be compounded in a year.
Formulae
The balance of a loan with regular monthly payments is augmented by the monthly interest charge and decreased by the payment so , where i = loan rate/100 = annual rate in decimal form (e.g. 10% = 0.10 The loan rate is the rate used to compute payments and balances.) r = period rate = i/12 for monthly payments (customary usage for convenience)[7] B0 = initial balance (loan principal) Bk = balance after k payments k = balance index p = period (monthly) payment By repeated substitution one obtains expressions for Bk, which are linearly proportional to B0 and p and use of the formula for the partial sum of a geometric series results in
Interest A solution of this expression for p in terms of B0 and Bn reduces to
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To find the payment if the loan is to be paid off in n payments one sets Bn = 0. The PMT function found in spreadsheet programs can be used to calculate the monthly payment of a loan:
An interest-only payment on the current balance would be . The total interest, IT, paid on the loan is . The formulas for a regular savings program are similar but the payments are added to the balances instead of being subtracted and the formula for the payment is the negative of the one above. These formulas are only approximate since actual loan balances are affected by rounding. To avoid an underpayment at the end of the loan, the payment must be rounded up to the next cent. The final payment would then be (1+r)Bn-1. Consider a similar loan but with a new period equal to k periods of the problem above. If rk and pk are the new rate and payment, we now have . Comparing this with the expression for Bk above we note that and . The last equation allows us to define a constant that is the same for both problems,
and Bk can be written as . Solving for rk we find a formula for rk involving known quantities and Bk, the balance after k periods,
Since B0 could be any balance in the loan, the formula works for any two balances separate by k periods and can be used to compute a value for the annual interest rate. B* is a scale invariant since it does not change with changes in the length of the period. Rearranging the equation for B* one gets a transformation coefficient (scale factor), (see binomial theorem) and we see that r and p transform in the same manner,
The change in the balance transforms likewise,
Interest which gives an insight into the meaning of some of the coefficients found in the formulas above. The annual rate, r12, assumes only one payment per year and is not an "effective" rate for monthly payments. With monthly payments the monthly interest is paid out of each payment and so should not be compounded and an annual rate of 12r would make more sense. If one just made interest-only payments the amount paid for the year would be 12rB0. Substituting pk = rk B* into the equation for the Bk we get, Since Bn = 0 we can solve for B*, . Substituting back into the formula for the Bk shows that they are a linear function of the rk and therefore the k,
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This is the easiest way of estimating the balances if the k are known. Substituting into the first formula for Bk above and solving for k+1 we get, 0 and n can be found using the formula for k above or computing the k recursively from 0 = 0 to n. Since p=rB* the formula for the payment reduces to,
and the average interest rate over the period of the loan is , which is less than r if n>1.
References
Specific references
[1] Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action (http:/ / www. pearsonschool. com/ index. cfm?locator=PSZ3R9& PMDbSiteId=2781& PMDbSolutionId=6724& PMDbCategoryId=& PMDbProgramId=12881& level=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.261. ISBN0-13-063085-3. . [2] Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action (http:/ / www. pearsonschool. com/ index. cfm?locator=PSZ3R9& PMDbSiteId=2781& PMDbSolutionId=6724& PMDbCategoryId=& PMDbProgramId=12881& level=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.506. ISBN0-13-063085-3. . [3] Deuteronomy 23:19 Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: (http:/ / scripturetext. com/ deuteronomy/ 23-19. htm) [4] No. 2547: Charging Interest (http:/ / www. uh. edu/ engines/ epi2547. htm) [5] Rule of 78 - Watch out for this auto loan trick (http:/ / www. bankrate. com/ brm/ news/ auto/ 20010827a. asp) [6] 15 U.S.C. 1615 (http:/ / www. law. cornell. edu/ uscode/ 15/ 1615. html) [7] http:/ / www. fdic. gov/ regulations/ laws/ rules/ 6500-1650. html#6500226. 14
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General references
Duffie, Darrell and Kenneth J. Singleton (2003). Credit Risk: Pricing, Measurement, and Management. Princeton University Press. ISBN13 978-0691090467. Kellison, Stephen G. (1970). The Theory of Interest. Richard D. Irwin, Inc.. Library of Congress Catalog Card No. 79-98251. Lando, David (2004). Credit Risk Modeling: Theory and Applications. Princeton University Press. ISBN13 978-0691089294. van Deventer, Donald R. and Kenji Imai (2003). Credit Risk Models and the Basel Accords. John Wiley & Sons. ISBN13 978-0470820919. Deepak Tiwari(Rizvi college)BBI student
External links
White Paper: More than Math, The Lost Art of Interest calculation (http://www.margill.com/ white-paper-interest.htm) Mortgages made clear (http://www.moneymadeclear.fsa.gov.uk/products/mortgages/mortgages.html) Financial Services Authority (UK) OECD interest rate statistics (http://stats.oecd.org/Index.aspx?QueryId=579) You can see a list of current interest rates at these sites: World Interest Rates (http://www.worldinterestrates.info) Forex Motion (http://www.forexmotion.com/index.php/en/exchange-rates.html) "Which way to pay" (http://www.whichwaytopay.com/world-interest-rates.asp)
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. So, there are just three types of negotiable instruments such as promissory note, bill of exchange and cheque. Cheque also includes Demand Draft [Section 85A]. More specifically, it is a document contemplated by a contract, which (1) warrants the payment of money, the promise of or order for conveyance of which is unconditional; (2) specifies or describes the payee, who is designated on and memorialized by the instrument; and (3) is capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instruments face value (known as discounting). Under United States law, Article 3 of the Uniform Commercial Code as enacted in the applicable State law governs the use of negotiable instruments, except banknotes (Federal Reserve Notes, aka "paper dollars").
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Negotiable instruments distinguished from other types of contracts

A negotiable instrument can serve to convey value constituting at least part of the performance of a contract, albeit perhaps not obvious in contract formation, in terms inherent in and arising from the requisite offer and acceptance and conveyance of consideration. The underlying contract contemplates the right to hold the instrument as, and to negotiate the instrument to, a holder in due course, the payment on which is at least part of the performance of the contract to which the negotiable instrument is linked. The instrument, memorializing (1) the power to demand payment; and, (2) the right to be paid, can move, for example, in the instance of a 'bearer instrument', wherein the possession of the document itself attributes and ascribes the right to payment. Certain exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a holder, but not necessarily a holder in due course. Negotiation requires a valid endorsement of the negotiable instrument. The consideration constituted by a negotiable instrument is cognizable as the value given up to acquire it (benefit) and the consequent loss of value (detriment) to the prior holder; thus, no separate consideration is required to support an accompanying contract assignment. The instrument itself is understood as memorializing the right for, and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as a holder in due course being the touchstone for the right to, and power to demand, payment. In some instances, the negotiable instrument can serve as the writing memorializing a contract, thus satisfying any applicable Statute of Frauds as to that contract.
The holder in due course

The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts: The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque) No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. [U.C.C. 3-602(b)] Transfer free of equitiesthe holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course) Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignees own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.
History
Common prototypes of bills of exchanges and promissory notes originated in China. Here, in the 8th century during the reign of the Tang Dynasty they used special instruments called feitsyan for the safe transfer of money over long distances.[1] Later such document for money transfer used by Arab merchants, who had used the prototypes of bills of exchange suftadja and hawala in 1013th centuries, then such prototypes had used by Italian merchants in the 12th century. In Italy in 1315th centuries bill of exchange and promissory note obtain their main features and further phases of its development have been associated with France (1618th centuries, where the endorsement had appeared) and Germany (19th century, formalization of Exchange Law). In England (and later in the U.S.) Exchange Law was different from continental Europe because of different legal systems.
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Classes
Promissory notes and bills of exchange are two primary types of negotiable instruments.
Promissory note
A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, certain in money, to order or to bearer. (see Sec.194) Bank note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand.
Bill of exchange
A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. (Sec.126) It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three partiesthe drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. (Sec.62) The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. (see Sec. 8) A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. In some cases a bill is marked "not negotiable" see crossing of cheques. In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.
Bill of exchange, 1933
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In the Commonwealth
In the commonwealth almost all jurisdictions have codified the law relating to negotiable instruments in a Bills of Exchange Act, e.g. Bills of Exchange Act 1882 in the UK, Bills of Exchange Act 1908 in New Zealand, The Negotiable Instrument Act 1881 in India and The Bills of Exchange Act 1914 in Mauritius. The Bills of Exchange Act: 1. defines a bill of exchange as: 'an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer. 2. defines a cheque as: 'a bill of exchange drawn on a banker payable on demand' 3. defines a promissory note as: 'an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.' Additionally most commonwealth jurisdictions have separate Cheques Acts providing for additional protections for bankers collecting unendorsed or irregularly endorsed cheques, providing that cheques that are crossed and marked 'not negotiable' or similar are not transferable, and providing for electronic presentation of cheques in inter-bank cheque clearing systems. The 1911 Encyclopdia Britannica Eleventh Edition has a comprehensive article on the Bill of Exchange, detailing its history and operation, as understood at the time of its publication.
In the United States

In the United States, Article 3 and Article 4 of the Uniform Commercial Code govern the issuance and transfer of negotiable instruments. The various State law enactments of Uniform Commercial Code 3-104(a) through (d) set forth the legal definition of what is and what is not a negotiable instrument:
3-104. NEGOTIABLE INSTRUMENT. (a) Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. (b) "Instrument" means a negotiable instrument. (c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise falls within the definition of "check" in subsection (f) is a negotiable instrument and a check. (d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article.
Thus, for a writing to be a negotiable instrument under Article 3,[2] the following requirements must be met: 1. 2. 3. 4. The promise or order to pay must be unconditional; The payment must be a specific sum of money, although interest may be added to the sum; The payment must be made on demand or at a definite time; The instrument must not require the person promising payment to perform any act other than paying the money specified;
Negotiable instrument 5. The instrument must be payable to bearer or to order. The latter requirement is referred to as the "words of negotiability": a writing which does not contain the words "to the order of" (within the four corners of the instrument or in endorsement on the note or in allonge) or indicate that it is payable to the individual holding the contract document (analogous to the holder in due course) is not a negotiable instrument and is not governed by Article 3, even if it appears to have all of the other features of negotiability. The only exception is that if an instrument meets the definition of a cheque (a bill of exchange payable on demand and drawn on a bank) and is not payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable instrument.
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Negotiation and endorsement

Persons other than the original obligor and obligee can become parties to a negotiable instrument. The most common manner in which this is done is by placing one's signature on the instrument (endorsement): if the person who signs does so with the intention of obtaining payment of the instrument or acquiring or transferring rights to the instrument, the signature is called an endorsement. There are five types of endorsements contemplated by the Code, covered in UCC Article 3, Sections 204206 [3]: An endorsement which purports to transfer the instrument to a specified person is a special endorsement for example, "Pay to the order of Amy"; An endorsement by the payee or holder which does not contain any additional notation (thus purporting to make the instrument payable to bearer) is an endorsement in blank or blank endorsement; An endorsement which purports to require that the funds be applied in a certain manner (e.g. "for deposit only", "for collection") is a restrictive endorsement; and, An endorsement purporting to disclaim retroactive liability is called a qualified endorsement (through the inscription of the words "without recourse" as part of the endorsement on the instrument or in allonge to the instrument). An endorsement purporting to add terms and conditions is called a conditional endorsement for example, "Pay to the order of Amy, if she rakes my lawn next Thursday November 11th, 2007". The UCC states that these conditions may be disregarded.[4] If a note or draft is negotiated to a person who acquires the instrument 1. in good faith; 2. for value; 3. without notice of any defenses to payment, the transferee is a holder in due course and can enforce the instrument without being subject to defenses which the maker of the instrument would be able to assert against the original payee, except for certain real defenses. These real defenses include (1) forgery of the instrument; (2) fraud as to the nature of the instrument being signed; (3) alteration of the instrument; (4) incapacity of the signer to contract; (5) infancy of the signer; (6) duress; (7) discharge in bankruptcy; and, (8) the running of a statute of limitations as to the validity of the instrument. The holder-in-due-course rule is a rebuttable presumption that makes the free transfer of negotiable instruments feasible in the modern economy. A person or entity purchasing an instrument in the ordinary course of business can reasonably expect that it will be paid when presented to, and not subject to dishonor by, the maker, without involving itself in a dispute between the maker and the person to whom the instrument was first issued (this can be contrasted to the lesser rights and obligations accruing to mere holders). Article 3 of the Uniform Commercial Code as enacted in a particular State's law contemplate real defenses available to purported holders in due course. The foregoing is the theory and application presuming compliance with the relevant law. Practically, the obligor-payor on an instrument who feels he has been defrauded or otherwise unfairly dealt with by the payee may nonetheless refuse to pay even a holder in due course, requiring the latter to resort to litigation to recover on the instrument.
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Usage
While bearer instruments are rarely created as such, a holder of commercial paper with the holder designated as payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being honored by most banks unless the original payee has signed a notarized document stating such. Alternatively, an individual or company may write a check payable to "Cash" or "Bearer" and create a bearer instrument. Great care should be taken with the security of the instrument, as it is legally almost as good as cash.
Exceptions
Under the Code, the following are not negotiable instruments, although the law governing obligations with respect to such items may be similar to or derived from the law applicable to negotiable instruments: Bills of lading and other documents of title, which are governed by Article 7 of the Code Deeds and other documents conveying interests in real estate, although a mortgage may secure a promissory note which is governed by Article 3 IOUs Letters of credit, which are governed by Article 5 of the Code Securities, such as stocks and bonds, which are governed by Article 8 of the Code
References
[1] Moshenskyi, Sergii (2008). History of the Weksel (http:/ / books. google. co. nz/ books?id=8UBDndXgNIYC& lpg=PA51& dq=feitsyan& pg=PA50#v=onepage& q=feitsyan& f=false). Xlibris Corporation. ISBN978-1-4363-0693-5. . [2] Uniform Commercial Code - Article 3 (http:/ / www. law. cornell. edu/ ucc/ 3/ article3. htm#s3-104) [3] http:/ / www. law. cornell. edu/ ucc/ 3/ article3. htm#s3-204 [4] Article 3, Sections 206(b) (http:/ / www. law. cornell. edu/ ucc/ 3/ article3. htm#s3-206)
External links
Bill of Exchange FAQ on TheBenche.com (https://www.thebenche.com/faq.php?faq=exchang1#faq_bill1)
Numbered bank account
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Numbered bank account

A numbered bank account is a type of bank account where the name of the account holder is kept secret, and he identifies himself to the bank by means of a code word known only by the account holder and a restricted number of bank employees, thus providing the holder with a degree of bank privacy in their financial transactions. Numbered bank accounts are frequently associated in the public mind with a desire by the account holder to either minimize governmental scrutiny and taxation, perhaps to conceal an illegal or unethical origin of the money in the account or to avoid arbitrary government interference in the affairs of a political dissident. For this reason, numbered bank accounts are illegal in most banking jurisdictions, but are available (subject to heavy international regulations) in some Western European countries with a long tradition of specializing in international banking, such as Switzerland and Austria; the holder has to be fully identified but there is no law that enforces the bank to fix the name of the holder in the title of the account.[1] Modern numbered bank accounts are not fully "anonymous", but they do serve to provide the account holder with a greater degree of protection from scrutiny while minimizing the exposure of the account holder's name in public settings. For example, the Swiss banking system (in contrast to banks in other countries) will not reveal information about an account (whether "numbered" or not) to any governmental agency unless proof of deliberate fraud is established, not merely the non-reporting of assets in order to avoid taxation. However, bilateral treaties negotiated in 2009 between Switzerland and a number of countries may weaken this type of protection from scrutiny,[2] as did a special agreement negotiated in 2009 between the USA and Switzerland concerning clients of the bank UBS SA.[3] In order to restrict the use of numbered accounts for money laundering and other forms of financial fraud, the Council of Europe mandated in 1980 that numbered bank accounts be subject to international and domestic regulations pertaining to the verification of the identities of account holders and their activities.[4] [5] Under these regulations, banks which operate numbered accounts may be required by a court order to reveal the owner's name and financial details, and the identity of the holder or beneficial owner must be examined for obvious fraudulent intentions at the start of the banking relationship.[6] [7] Since July 1, 2005, Switzerland (as the largest holder of European numbered bank accounts) has also charged a withholding tax on all interest earned in the personal Swiss accounts of European Union residents, a measure designed to satisfy EU tax requirements while still preserving account holder anonymity. As important as the actual bank account would be the possibility to anonymously fund a company to generate money flow.[8]
References
[1] [2] [3] [4] [5] [6] [7] [8] Identification rules for swiss banks (http:/ / www. swissbanking. org/ 1116_e. pdf) http:/ / www. efd. admin. ch/ aktuell/ medieninformation/ 00462/ index. html?lang=en& msg-id=30378 http:/ / www. admin. ch/ ch/ f/ rs/ 0_672_933_612/ index. html Switzerland: Bundesgesetz zur Bekmpfung der Geldwscherei im Finanzsektor (Geldwschereigesetz, GwG) (http:/ / www. admin. ch/ ch/ d/ sr/ 955_0/ index. html) (Money Laundering Act) Austria: Bundesgesetz ber das Bankwesen (Bankwesengesetz BWG) 40ff (http:/ / www. fma. gv. at/ cms/ site/ / attachments/ 7/ 6/ 8/ CH0217/ CMS1139493009549/ bwg_bgbl__108_2007. pdf) (Federal Law on Banking) Switzerland: Agreement on the Swiss banks' code of conduct with regard to the exercise of due diligence (CDB 03) (http:/ / www. swissbanking. org/ en/ 1116_e. pdf) Austria: FMA, Austrian Financial Market Authority Circular on Identification and Verification of Identity (http:/ / www. fma. gv. at/ cms/ site/ / attachments/ 3/ 0/ 0/ CH0217/ CMS1234795727448/ circular_identification_03_07_2008. pdf) trials to founding a company anonymously (http:/ / www. taxresearch. org. uk/ Blog/ 2009/ 03/ 27/ new-study-britain-and-the-us-may-be-the-dirtiest-tax-havens/ )
Offshore bank
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Offshore bank
An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include: greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra. Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements,[1] the personal income tax of many countries[2] makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accountswhich may or may not be numbered bank accountsthey may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows. Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.
Advantages of offshore banking

Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.
Offshore bank Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.
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Disadvantages of offshore banking

Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid [3], although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009 [4]. Both offshore and onshore banking centres often have depositor compensation schemes. For example The Isle of Man compensation scheme [5] guarantees 50,000 of net deposits per individual depositor or 20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated [6] thus banking offshore is historically riskier than banking onshore. Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[7] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy [8]. The Laffer curve demonstrates this tendency. Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggera
European Savings Tax Directive

In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.
Offshore bank Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.
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Banking services
It is possible to obtain the full spectrum of financial services from offshore banks, including: deposit taking credit wire- and electronic funds transfers foreign exchange letters of credit and trade finance investment management and investment custody fund management trustee services corporate administration
Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.
Statistics concerning offshore banking

Offshore banking is an important part of the international financial system. Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. According to Merrill Lynch and Gemini Consulting's World Wealth Report for 2000, one third of the wealth of the world's high net-worth individualsnearly $6 trillion out of $17.5 trillionmay now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts. The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world's drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world's poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. "These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption" commented Lucy Komisar quoting these statistics.[1] Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits.[9] However, recent data by the Swiss National Bank show that the assets held by foreign persons in Swiss bank accounts declined by 28.1% between January 2008 and November 2009.[10]
Offshore bank
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Terrorist Finance Tracking Program

A series of articles published on June 23, 2006, by The New York Times, The Wall Street Journal and The Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the CIA, had a program to access the SWIFT transaction database after the September 11th attacks (see the Terrorist Finance Tracking Program) rendering offshore banking for privacy severely compromised.
Regulation of offshore banks

In the 21st century, regulation of offshore banking is allegedly increasing, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business. Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are: The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules. There is more international co-operation between police authorities. In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS. Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries. The European Union has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centres, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest. Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal: "You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks."[1] In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky had done this to launder his casino money. Changes in offshore banking regulation in the 1990s in the form of "due diligence" (a legal construct) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run.
Offshore financial centres

In terms of offshore banking centres, in terms of total deposits, the global market is dominated by two key jurisdictions: Switzerland and the Cayman Islands,[11] although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well regulated banking infrastructure. Some offshore jurisdictions have steered their financial sectors away from offshore banking, as difficult to properly regulate and liable to give rise to financial scandal.[12]
Offshore bank Weakened Bank Secrecy Since starting to survey offshore jurisdictions on April 2, 2009, the Organization for Economic Cooperation and Development ((OECD)) at the forefront of a crackdown on tax evasion, won't object to governments using stolen bank data to track down tax cheats in offshore centers. The recent sharing of confidential UBS bank details about 285 clients suspected of willful tax evasion by the United States Internal Revenue Service was ruled a violation of both Swiss law and the countrys constitution by a Swiss federal administrative court. Nevertheless, OECD has removed 18 countries, including Switzerland, Liechtenstein and Luxembourg, from a so-called "grey list" of nations that did not offer sufficient tax transparency, and has re-categorized them as white list nations. Countries that do not comply may face sanctions. A notable exception is Panama, whose canal is currently needed by all Western nations, provides it with a unique type of immunity to international pressure. Given the enlargement of the canal to accommodate larger shipping, it is unlikely in the foreseeable future that Panama would likely succumb to international pressure toward transparency.
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List of offshore financial centres

Offshore financial centres include: Antigua and Barbuda Bahamas Barbados Belize Bermuda British Virgin Islands Cayman Islands Channel Islands (Jersey, Guernsey, Alderney, Sark and Herm) Cook Islands Cyprus Dominica Gibraltar is no longer an offshore centre since 30 June 2006. No new Exempt Company certificates are being issued from that date.[13] [14] Ghana [15] [16] Hong Kong Isle of Man Labuan, Malaysia Liechtenstein Luxembourg Malta Macau Mauritius Monaco Montserrat Nauru New Zealand Panama Saint Kitts and Nevis Seychelles
Singapore Switzerland Turks and Caicos Islands
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Footnotes
[1] Such as perpetual travelers [2] For example, the United States, France and Malaysia. In other countries it makes no difference so long as you are resident and domiciled there (for example, the United Kingdom) [3] https:/ / www. dcs. im/ dcs/ dcs. nsf/ 220509 [4] http:/ / www. kaupthingsingers. co. im [5] http:/ / www. gov. im/ fsc/ investor/ dep_comp. xml [6] http:/ / news. bbc. co. uk/ 2/ hi/ business/ 7658725. stm [7] Joseph Stiglitz (2008-10-22). "A crisis of confidence - Letting financial markets run wild was risky business indeed. Transparency, oversight and fair competition are needed now" (http:/ / www. guardian. co. uk/ commentisfree/ cifamerica/ 2008/ oct/ 22/ economy-financial-crisis-regulation). The Guardian. . Retrieved 2008-11-24. [8] http:/ / www. adamsmith. org/ pdf/ flattax. pdf [9] Bank Introduction (http:/ / www. bankintroductions. com/ switzerland. html) [10] (http:/ / www. myprivatebanking. com/ article/ wealth-management-industry-analysis/ ) Wealth Management: Industry Analysis, Are Private Foreign Assets Fleeing From Switzerland, August 9th 2011 [11] A recent letter by the District Attorney of New York, Robert M. Morgenthau, published by the New York Times, states that the Cayman Islands has 1.9 trillion United States dollars on deposit in 281 banks, including 40 of the worlds top 50 banks (http:/ / www. nytimes. com/ 2008/ 03/ 11/ opinion/ lweb11morgenthau. html) [12] For example, despite being the largest offshore jurisdiction by some distance in terms of number of incorporated offshore vehicles, the British Virgin Islands has only ever licensed 7 offshore banks. This compares against hundreds in Switzerland, the Cayman Islands and (3rd in number of total banking licences) the Bahamas. [13] (http:/ / www. gibraltar. gov. gi/ gov_depts/ taxation/ tax_index. htm#Exempt Company) All previous Exempt Company certificates will be ineffective from 2010 [14] (http:/ / www. lawandtax-news. com/ html/ gibraltar/ jgilatdctx. html) [15] President Launches Ghana's Landmark Offshore Banking (http:/ / www. ghana. gov. gh/ ghana/ president_launches_ghanas_landmark_offshore_banking. jsp). Ghana government website. Accessed 2008-08-21. [16] Ghana's offshore dreams (http:/ / www. thestatesmanonline. com/ pages/ news_detail. php?newsid=3190& section=2). The Statesman. Accessed 2008-08-21.
External links
Economist Interview about Offshore Banking (http://www.economist.com/surveys/displaystory. cfm?story_id=8727748) Commentary - Washington Times (http://www.washtimes.com/commentary/20040209-090310-4341r.htm) "Offshore accounts: No longer an easy option" (http://www.worldnetdaily.com/news/article. asp?ARTICLE_ID=43349)
Offshore financial centre
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An offshore financial centre (OFC), though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds.
Definition
The term is a relatively modern neologism, first coined in the 1980s.[1] Academics Rose & Spiegel,[2] Socit Gnrale[3] and the International Monetary Fund (IMF)[4] consider offshore centres to include all economies with financial sectors disproportionate to their resident population:
Many leading offshore financial centres are located in small tropical Caribbean countries.
An OFC is a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy. Ahmed Zorom, IMF Working Paper/07/87[5] It has been remarked more than once that whether a financial centre is characterized as "offshore" is really a question of degree.[6] [7] Indeed, the IMF Working Paper cited above notes that its definition of an offshore centre would include the United Kingdom and the United States, which are ordinarily counted as "onshore" because of their large populations and inclusion in international organisations such as the G20 and OECD.[8] The more nebulous term tax haven is often applied to offshore centres, leading to confusion between the two concepts. In Tolley's International Initiatives Affecting Financial Havens[9] the author in the Glossary of Terms defines an offshore financial centre in forthright terms as a politically correct term for what used to be called a tax haven. However, he then qualifies this by adding, The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centres without being in any general sense a tax haven." A 1981 report by the IRS concludes, a country is a tax haven if it looks like one and if it is considered to be one by those who care. With its connotations of financial secrecy and tax avoidance, tax haven is not always an appropriate term for offshore financial centres, many of which have no statutory banking secrecy,[10] and most of which have adopted tax information exchange protocols to allow foreign countries to investigate suspected tax evasion.[11] Views of offshore financial centres tend to be polarised. Proponents suggest that reputable offshore financial centres play a legitimate and integral role in international finance and trade, and that their zero-tax structure allows financial planning and risk management and makes possible some of the cross-border vehicles necessary for global trade, including financing for aircraft and shipping or reinsurance of medical facilities.[12] Proponents point to the tacit support of offshore centres by the governments of the United States (which promotes offshore financial centres by the continuing use of the Foreign Sales Corporation (FSC)) and United Kingdom (which actively promotes offshore finance in Caribbean dependent territories to help them diversify their economies and to facilitate the British Eurobond market). Overseas Private Investment Corporation (OPIC), a U.S. government agency, when lending into countries with underdeveloped corporate law, often requires the borrower to form an offshore vehicle to facilitate the loan financing. One could argue that US external aid statutorily cannot even take place without the formation of offshore entities.
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Scrutiny
Offshore finance has been the subject of increased attention since 2000 and even more so since the April 2009 G20 meeting, when heads of state resolved to take action against non-cooperative jurisdictions.[13] Initiatives spearheaded by the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force on Money Laundering (FATF) and the International Monetary Fund have had a significant effect on the offshore finance industry.[14] Most of the principal offshore centres considerably strengthened their internal regulations relating to money laundering and other key regulated activities. Indeed, Jersey is now rated as the most compliant jurisdiction internationally, complying with 44 of the "40+9" recommendations.[15] In 2007 The Economist published a survey of offshore financial centres; although the magazine had historically been very hostile towards OFCs, the report represented a shift towards a very much more benign view of the role of offshore finance, concluding: Although international initiatives aimed at reducing financial crime are welcome, the broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system. The Economist, "A survey of offshore finance: Places in the sun" [16], 23 February 2007 The Channel Islands hold that funds generated offshore do indeed go through the Bank of England allowing the UK to benefit from the success of the crown dependencies as offshore centres.
Taxation
Although most offshore financial centres originally rose to prominence by facilitating structures which helped to minimise exposure to tax, tax avoidance has played a decreasing role in the success of offshore financial centres in recent years. Most professional practitioners in offshore jurisdictions refer to themselves as "tax neutral" since, whatever tax burdens the proposed transaction or structure will have in its primary operating market, having the structure based in an offshore jurisdiction will not create any additional tax burdens. A number of pressure groups suggest that offshore financial centres engage in "unfair tax competition" by having no, or very low tax burdens, and have argued that such jurisdictions should be forced to tax both economic activity and their own citizens at a higher level. Another criticism levelled against offshore financial centres is that whilst sophisticated jurisdictions usually have developed tax codes which prevent tax revenues leaking from the use of offshore jurisdictions, less developed nations, who can least afford to lose tax revenue, are unable to keep pace with the rapid development of the use of offshore financial structures.[17] [18]
Regulation
Offshore centres benefit from a low burden of regulation. An extremely high proportion of hedge funds (which characteristically employ high risk investment strategies) who register offshore are presumed to be driven by lighter regulatory requirements rather than perceived tax benefits.[19] Many capital markets bond issues are also structured through a special purpose vehicle incorporated in an offshore financial centre specifically to minimise the amount of regulatory red-tape associated with the issue. Offshore centres have historically been seen as venues for laundering the proceeds of illicit activity [20]. However, following a move towards transparency during the 2000s and the introduction of strict AML regulations, some[14] now argue that offshore jurisdictions are in many cases better regulated than many onshore financial centres.[21] [22] For example, in most offshore jurisdictions, a person needs a licence to act as a trustee, whereas (for example) in the United Kingdom and the United States, there are no restrictions or regulations as to who may serve in a fiduciary capacity.[23] The leading offshore financial centres are more compliant with the Financial Action Task Force on Money Laundering's '40+9' recommendations than many OECD countries.[24]
Offshore financial centre Some commentators have expressed concern that the differing levels of sophistication between offshore financial centres will lead to regulatory arbitrage,[25] and fuel a race to the bottom, although evidence from the market seems to indicate the investors prefer to utilise better regulated offshore jurisdictions rather than more poorly regulated ones.[26] A study by Australian academic found that shell companies are more easily set up in many OECD member countries than in offshore jurisdictions.[27] A report by Global Witness, Undue Diligence, found that kleptocrats used French banks rather than offshore accounts as destinations for plundered funds.[28]
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Confidentiality
Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions, particularly in relation to the beneficial ownership of offshore companies, and in relation to offshore bank accounts. However, banks in most jurisdictions will preserve the confidentiality of their customers, and all of the major offshore jurisdictions have appropriate procedures for law enforcement agencies to obtain information regarding suspicious bank accounts, as noted in FATF ratings.[29] Most jurisdictions also have remedies which private citizens can avail themselves of, such as Anton Piller orders, if they can satisfy the court in that jurisdiction that a bank account has been used as part of a legal wrong. Similarly, although most offshore jurisdictions only make a limited amount of information with respect to companies publicly available, this is also true of most states in the U.S.A., where it is uncommon for share registers or company accounts to be available for public inspection. In relation to trusts and unlimited liability partnerships, there are very few jurisdictions in the world that require these to be registered, let alone publicly file details of the people involved with those structures. Statutory banking secrecy is a feature of several financial centres, notably Switzerland and Singapore.[30] However, many offshore financial centres have no such statutory right. Jurisdictions including Aruba, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, the Isle of Man and the Netherlands Antilles have signed tax information exchange agreements based on the OECD model, which commits them to sharing financial information about foreign residents suspected of evading home-country tax.[31]
Effects on international trade

Offshore centres act as conduits for global trade and ease international capital flows. International joint ventures are often structured as companies in an offshore jurisdiction when neither party in the venture party wishes to form the company in the other party's home jurisdiction for fear of unwanted tax consequences. Although most offshore financial centres still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore.[32] Recently, several studies have examined the impact of offshore financial centres on the world economy more broadly, finding the high degree of competition between banks in such jurisdictions to increase liquidity in nearby onshore markets. Proximity to small offshore centres has been found to reduce credit spreads and interest rates,[33] while a paper by James Hines concluded, "by every measure credit is more freely available in countries which have close relationships with offshore centres."[34] Low-tax financial centres are becoming increasingly important as conduits for investment into emerging markets. For instance, 44% of foreign direct investment (FDI) into India came through Mauritius last year,[35] while over two thirds of FDI into Brazil came through offshore centres.[36] Blanco & Rogers find a positive correlation between proximity to an offshore centre and investment for least developed countries (LDCs); a $1 increase in FDI to an offshore centre translates to an average increase of $0.07 in FDI for nearby developing countries.[37]
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Offshore financial structures

The bedrock of most offshore financial centres is the formation of offshore structures typically: offshore company offshore partnership offshore trust private foundation[38]
Offshore structures are formed for a variety of reasons. Legitimate reasons include: Asset holding vehicles. Many corporate conglomerates employ a large number of holding companies, and often high-risk assets are parked in separate companies to prevent legal risk accruing to the main group (i.e. where the assets relate to asbestos, see the English case of Adams v Cape Industries). Similarly, it is quite common for fleets of ships to be separately owned by separate offshore companies to try to circumvent laws relating to group liability under certain environmental legislation. Asset protection. Wealthy individuals who live in politically unstable countries utilise offshore companies to hold family wealth to avoid potential expropriation or exchange control restrictions in the country in which they live. These structures work best when the wealth is foreign-earned, or has been expatriated over a significant period of time (aggregating annual exchange control allowances).[39] Avoidance of forced heirship provisions. Many countries from France to Saudi Arabia (and the U.S. State of Louisiana) continue to employ forced heirship provisions in their succession law, limiting the testator's freedom to distribute assets upon death. By placing assets into an offshore company, and then having probate for the shares in the offshore determined by the laws of the offshore jurisdiction (usually in accordance with a specific will or codicil sworn for that purpose), the testator can sometimes avoid such strictures. Collective Investment Vehicles. Mutual funds, Hedge funds, Unit Trusts and SICAVs are formed offshore to facilitate international distribution. By being domiciled in a low tax jurisdiction investors only have to consider the tax implications of their own domicile or residency. Derivatives trading. Wealthy individuals often form offshore vehicles to engage in risky investments, such as derivatives trading, which are extremely difficult to engage in directly due to cumbersome financial markets regulation. Exchange control trading vehicles. In countries where there is either exchange control or is perceived to be increased political risk with the repatriation of funds, major exporters often form trading vehicles in offshore companies so that the sales from exports can be "parked" in the offshore vehicle until needed for further investment. Trading vehicles of this nature have been criticised in a number of shareholder lawsuits which allege that by manipulating the ownership of the trading vehicle, majority shareholders can illegally avoid paying minority shareholders their fair share of trading profits. Joint venture vehicles. Offshore jurisdictions are frequently used to set up joint venture companies, either as a compromise neutral jurisdiction (see for example, TNK-BP) and/or because the jurisdiction where the joint venture has its commercial centre has insufficiently sophisticated corporate and commercial laws. Stock market listing vehicles. Successful companies who are unable to obtain a stock market listing because of the underdevelopment of the corporate law in their home country often transfer shares into an offshore vehicle, and list the offshore vehicle. Offshore vehicles are listed on the NASDAQ, Alternative Investment Market, the Hong Kong Stock Exchange and the Singapore Stock Exchange. It is estimated that over 90% of the companies listed on Hong Kong's Hang Seng are incorporated in offshore jurisdictions. 35% of companies listed on AIM during 2006 were from OFCs.[40] Trade finance vehicles. Large corporate groups often form offshore companies, sometimes under an orphan structure to enable them to obtain financing (either from bond issues or by way of a syndicated loan) and to treat the financing as "off-balance-sheet" under applicable accounting procedures. In relation to bond issues, offshore
Offshore financial centre special purpose vehicles are often used in relation to asset-backed securities transactions (particularly securitisations). Illegitimate purposes include: Creditor avoidance. Highly indebted persons may seek to escape the effect of bankruptcy by transferring cash and assets into an anonymous offshore company.[41] Market manipulation. The Enron and Parmalat scandals demonstrated how companies could form offshore vehicles to manipulate financial results. Tax evasion. Although numbers are difficult to ascertain, it is widely believed that individuals in wealthy nations unlawfully evade tax through not declaring gains made by offshore vehicles that they own. Multinationals including GlaxoSmithKline and Sony have been accused of transferring profits from the higher-tax jurisdictions in which they are made to zero-tax offshore centres.[42]
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Ship and aircraft registrations

Many offshore financial centres also provide registrations for ships (notably Bahamas and Panama) or aircraft (notably Aruba, Bermuda and the Cayman Islands). Aircraft are frequently registered in offshore jurisdictions where they are leased or purchased by carriers in emerging markets but financed by banks in major onshore financial centres. The financing institution is reluctant to allow the aircraft to be registered in the carrier's home country (either because it does not have sufficient regulation governing civil aviation, or because it feels the courts in that country would not cooperate fully if it needed to enforce any security interest over the aircraft), and the carrier is reluctant to have the aircraft registered in the financier's jurisdiction (often the United States or the United Kingdom) either because of personal or political reasons, or because they fear spurious lawsuits and potential arrest of the aircraft. For example, in 2003, state carrier Pakistan International Airlines re-registered its entire fleet in the Cayman Islands as part of the financing of its purchase of eight new Boeing 777s; the U.S. bank refused to allow the aircraft to remain registered in Pakistan, and the airline refused to have the aircraft registered in the U.S.
Insurance
A number of offshore jurisdictions promote the incorporation of captive insurance companies within the jurisdiction to allow the sponsor to manage risk. In more sophisticated offshore insurance markets, onshore insurance companies can also establish an offshore subsidiary in the jurisdiction to reinsure certain risks underwritten by the onshore parent, and thereby reduce overall reserve and capital requirements. Onshore reinsurance companies may also incorporate an offshore subsidiary to reinsure catastrophic risks. Bermuda's insurance and re-insurance market is now the third largest in the world.[43] There are also signs the primary insurance market is becoming increasingly focused upon Bermuda; in September 2006 Hiscox PLC, the FTSE 250 insurance company announced that it planned to relocate to Bermuda citing tax and regulatory advantages.[44]
Collective investment vehicles

Many offshore jurisdictions specialise in the formation of collective investment schemes, or mutual funds. The market leader is the Cayman Islands, estimated to house about 75% of worlds hedge funds and nearly half the industry's estimated $1.1 trillion of assets under management[45] ), followed by Bermuda, although a market shift has meant that a number of hedge funds are now formed in the British Virgin Islands. As at year end 2005, there were 7,106 hedge funds registered in the Cayman Islands, 2,372 hedge funds in the British Virgin Islands and 1,182 in Bermuda.[46] These figures do not include other collective investment vehicles. See also the recent survey by Deloitte in Hedgeweek.[47]
Offshore financial centre But the greater appeal of offshore jurisdictions to form mutual funds is usually in the regulatory considerations. Offshore jurisdictions tend to impose few if any restrictions on what investment strategy the mutual funds may pursue and no limitations on the amount of leverage which mutual funds can employ in their investment strategy. Many offshore jurisdictions (Bermuda, British Virgin Islands, Cayman Islands and Guernsey) allow promoters to incorporate segregated portfolio companies (or SPCs) for use as mutual funds; the unavailability of a similar corporate vehicle onshore has also helped fuel the growth of offshore incorporated funds.
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Banking
Traditionally, a number of offshore jurisdictions offered banking licences to institutions with relatively little scrutiny. International initiatives have largely stopped this practice, and very few offshore financial centres will now issue licences to offshore banks that do not already hold a banking licence in a major onshore jurisdiction. The most recent reliable figures for offshore banks indicates that the Cayman Islands has 285[48] licensed banks, the Bahamas [49] has 301. By contrast, the British Virgin Islands only has seven licensed offshore banks.
List of main offshore financial centres

The list of jurisdictions considered by the IMF to be OFCs is published online.[50] Many offshore financial centres are current or former British colonies or Crown Dependencies, and often refer to themselves simply as offshore jurisdictions. By some measures, there are more countries that are offshore financial centres than not but the following jurisdictions are considered the major destinations for offshore finance: Bermuda, which is market leader for captive insurance, and also has a strong presence in offshore funds and aircraft registration. British Virgin Islands, which has the largest number of offshore companies.[51] Cayman Islands, which has the largest value of Assets under management in offshore funds, and is also the strongest presence in the U.S. securitisation market. Jersey is the most international of the British Crown dependencies, all of which can be counted as offshore centres. Jersey has particularly strong banking and funds management sectors and a high concentration of professional advisers including lawyers and fund managers.[52] Luxembourg, which is the market leader in Undertakings for Collective Investments in Transferable Securities (UCITS, pronounced YOU-sits) and is believed to be the largest offshore Eurobond issuer, although no official statistics confirm this. Singapore has recently risen in stature as a centre for wealth management and ranked fourth in the world in the 2009 Global Financial Centres Index. The state is a hub for hedge funds and its private banking industry is growing at a rate of 30 per cent annually.[53] The following prominent offshore centres now specialise in certain niche markets: Bahamas, which has a considerable number of registered vessels. The Bahamas used to be the dominant force in the offshore financial world, but fell from favour in 1970s after independence.[54] Panama, which is a significant international maritime centre. Although Panama (with Bermuda) was one of the earliest offshore corporate domiciles, Panama lost significance in the early 1990s.[55] Panama is now second only to the British Virgin Islands in volumes of incorporations.[56] See also the list of Non-Cooperative Countries or Territories (FATF Blacklist)
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Global Financial Centres Index

Reputation and standards of regulation vary across the range of offshore centres. The 2010 Global Financial Centres Index (GFCI) gathers data on all International Financial Centres and lists the following (all British sovereign territories), in order, as the world's five leading offshore finance centres:[57] 1. 2. 3. 4. 5. Jersey Guernsey Isle of Man Bermuda Cayman Islands
In December 2009 a group of professional services firms and businesses with offices in the GFCI's leading offshore financial centres, established the International Financial Centres Forum (IFC Forum).[58] According to its website, the IFC Forum aims to provide authoritative and balanced information about the role of the small international financial centres in the global economy.
Recent developments
EU withholding tax
The European Union has recently made a large number of offshore financial centres (Barbados and Bermuda being the notable exceptions) sign up to the European Union withholding tax and exchange of information directive. Under those regulations, brought into force by local law, banks in those jurisdictions which hold accounts for EU resident nationals must either deduct a 15% withholding tax (which is split between the offshore jurisdiction and the country of the account holder's residence), or permit full exchange of information with the country of the national's residence. A number of larger jurisdictions, notably Hong Kong and Singapore refused to sign up to the directive. On implementation, the directive recouped far less money than anticipated,[59] although it is disputed whether this is because the regulations lacked effectiveness, or because the predicted amount of funds in offshore bank accounts transpired to have been greatly exaggerated. Similarly, the widely predicted capital flight to Hong Kong and Singapore appears not to have materialised. A ruling by the Special Commissioners in the United Kingdom in May 2006 permitted Revenue authorities to compel UK based banks to release information on offshore bank deposits where illegality is suspected, even where the customer had elected to pay a withholding tax rather than to exchange information.[60]
OECD List
In its 2000 report Towards Global Tax Competition,[61] the Organisation for Economic Cooperation and Development (OECD) identified 47 jurisdictions as tax havens based on the existence of preferential tax regimes for financial services and the absence of procedures for exchange of tax information. Between 2000 and April 2002, 31 jurisdictions made formal commitments to implement the OECDs standards of transparency and exchange of information and were removed from the list of tax havens. Andorra, Liechtenstein, Liberia, Monaco, the Marshall Islands, Nauru and Vanuatu did not make commitments to transparency and exchange of information at that time and were identified in April 2002 by the OECDs Committee on Fiscal Affairs as "uncooperative tax havens". All of these jurisdictions subsequently reversed this position and were no longer deemed tax havens. After G20 leaders agreed to crack down on tax havens on during 2009 G20 London Summit in April 2009, the OECD published a list of countries that still needed to implement internationally agreed tax standards.[62]
Offshore financial centre In May 2009, the OECD's Committee on Fiscal Affairs decided to remove all three remaining jurisdictions Andorra, Liechtenstein and Monaco from the list of uncooperative tax havens in the light of their commitments to implement the OECD standards of transparency and effective exchange of information and the timetable they set for the implementation. As a result, no jurisdiction is currently listed as an uncooperative tax haven by the Committee on Fiscal Affairs.[63]
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References
[1] Offshore Financial Centers, Richard Roberts, ISBN 1-85898-155-7 [2] http:/ / www. res. org. uk/ economic/ ejtoc. asp?ref=0013-0133& vid=117& iid=523& oc= [3] http:/ / csr. socgen. com/ Home-page/ Corporate-Governance-and-Organisation/ The-key-role-of-compliance/ Offshore-financial-centres-and-tax-havens [4] http:/ / www. imf. org/ external/ pubs/ ft/ wp/ 2007/ wp0787. pdf [5] Concept of Offshore Financial Centers:In Search of an Operational Definition (http:/ / www. imf. org/ external/ pubs/ ft/ wp/ 2007/ wp0787. pdf), IMF Working Paper, p.7 [6] http:/ / www. cfo. com/ article. cfm/ 8792331/ c_8771072 [7] "On or off?" (http:/ / www. economist. com/ surveys/ displaystory. cfm?story_id=8695199). The Economist. 22 February 2007. . [8] Concept of Offshore Financial Centers: In Search of an Operational Definition (http:/ / www. imf. org/ external/ pubs/ ft/ wp/ 2007/ wp0787. pdf), IMF Working Paper [9] Tim Bennett (2001) Tolley's International Initiatives Affecting Financial Havens. ISBN 0-406-94264-1. [10] "FACTBOX-Status of bank secrecy protection in Europe" (http:/ / www. reuters. com/ article/ idUSLB7396720090811). Reuters. 11 August 2009. . [11] http:/ / www. oecd. org/ dataoecd/ 50/ 0/ 43606256. pdf [12] http:/ / www. ifcforum. org/ show_article. php?id=1 [13] G20 Communiqu, 2 April 2009 http:/ / www. g20. org/ Documents/ final-communique. pdf [14] In 2000 the FATF began a policy of assessing the cooperation of all countries in programmes against money laundering. Considerable tightening up of both regulation and implementation was noted by the FATF over subsequent years (see generally FATF Blacklist). [15] http:/ / www. gov. je/ ChiefMinister/ International+ Finance/ FinanceinTopDivision. htm?printfriendly=true [16] http:/ / www. economist. com/ surveys/ displaystory. cfm?story_id=8695139 [17] http:/ / www. christianaid. org. uk/ Images/ missing-millions. pdf [18] http:/ / www. gfip. org/ index. php?option=content& task=view& id=293 [19] http:/ / www. dailyii. com/ article. asp?ArticleID=1039798& LS=EMS73445 [20] http:/ / www. gfip. org/ index. php?option=content& task=view& id=293 [21] Washington Times Commentary (http:/ / www. washtimes. com/ commentary/ 20040209-090310-4341r. htm) [22] Financial Times Financial standards under fire (http:/ / www. ft. com/ cms/ s/ 38b1ff06-f781-11db-86b0-000b5df10621. html) [23] Although such regulation has been proposed with the EU en passant in the 3rd EU Money Laundering Directive. [24] Anti-Money Laundering and Terrorism Financing: Financial Action Task Force, http:/ / www. ifcforum. org/ show_article. php?id=5 [25] http:/ / www. efinancialnews. com/ ?page=comment& contentid=1045563565 [26] Dharmapala, Dhammika and Hines Jr., James R., http:/ / ssrn. com/ abstract=952721 Which Countries Become Tax Havens? (2009) [27] The G20 and Tax: Haven hypocrisy, The Economist, March 26, 2009 http:/ / www. economist. com/ business-finance/ displaystory. cfm?story_id=13382279 [28] http:/ / www. globalwitness. org/ media_library_get. php/ 843/ en/ undue_diligence_lowres. pdf [29] http:/ / www. fatf-gafi. org/ pages/ 0,3417,en_32250379_32236963_1_1_1_1_1,00. html [30] http:/ / www. wealth-bulletin. com/ wealth-business/ private-banking/ content/ 4058445641/ [31] http:/ / www. oecd. org/ document/ 37/ 0,3343,en_21571361_43854757_44270949_1_1_1_1,00. html [32] Hines, J., 'International Financial Centers and the World Economy' 2009: 34 [33] Rose, A. & M. Spiegel, "Offshore Financial Centers: Parasites or symbionts?" http:/ / faculty. haas. berkeley. edu/ arose/ OFCPressR. pdf [34] Hines, J., 'International Financial Centers and the World Economy' 2009: 4 [35] Indian Department of Industrial Policy and Promotion, FDI Statistics, September 2009 [36] World Bank, World Investment Statistics 2009 [37] L. Blanco & C. Rodgers, 'Are tax havens good neighbors? An LDC perspective' http:/ / ssrn. com/ abstract=1432630 [38] See for example Panama Private Interest Foundation [39] Legitimate asset protection against future political or economic risk should be distinguished from unlawfully attempting to evade creditors; see below. [40] Essen, Yvette (12 March 2007). "Aim market: Offshore attractions for the 'sophisticated' investor" (http:/ / www. telegraph. co. uk/ money/ main. jhtml?xml=/ money/ 2007/ 03/ 12/ cxmktrep12. xml). The Daily Telegraph (London). . [41] In practice, such attempts are rarely effective. A trustee in bankruptcy will usually have access to all of the debtor's financial records, and will usually have little difficulty tracing where the assets were transferred to. Transfers to defraud creditors are prohibited in most jurisdictions

(offshore and onshore) and a bankruptcy trustee usually has little difficulty persuading a local court to nullify the transfer. Despite the poor prognosis for success, applications to courts in offshore jurisdictions seem to indicate that insolvent individuals still try this strategy from time to time, notwithstanding that it is usually a serious criminal offence in both jurisdictions. [42] Morais, Richard C. (28 August 2009). "Illicit Transfer Pricing Endangers Shareholders" (http:/ / www. forbes. com/ 2009/ 08/ 28/ transfer-pricing-illegal-glaxo-dodging-taxes-personal-finance-transferprice. html). Forbes. . [43] 13 of the world's top 40 reinsurers are based in Bermuda, including American International Underwriters Group, HSBC Insurance Solutions, XL Capital Limited and ACE Limited. [44] Muspratt, Caroline (12 September 2006). "Hiscox to be domiciled in 'favourable' Bermuda" (http:/ / www. telegraph. co. uk/ money/ main. jhtml?xml=/ money/ 2006/ 09/ 12/ cnhiscox12. xml). The Daily Telegraph (London). . [45] Institutional Investor, 15 May 2006, http:/ / www. dailyii. com/ article. asp?ArticleID=1039798& LS=EMS73445 , although statistics in the hedge fund industry are notoriously speculative [46] Reuters. http:/ / today. reuters. com/ investing/ financeArticle. aspx?type=fundsNews2& storyID=2006-06-20T180539Z_01_N20446345_RTRIDST_0_FINANCIAL-CAYMAN-HEDGE. XML. [47] http:/ / www. hedgeweek. com/ articles/ detail. jsp?content_id=27221 [48] Cayman Islands Monetary Authority (2006) [49] Not treating Switzerland (with 500) as an offshore financial centre for these purposes. [50] http:/ / www. internationalmonetaryfund. com/ external/ np/ mae/ oshore/ 2000/ eng/ back. htm#table1 [51] Over 700,000 offshore companies have been formed in the British Virgin Islands, although only approximately 450,000 remain active (the remainder having been dissolved or struck off). This would account for approximately 42% of the estimated 1.1 million offshore companies incorporated worldwide. [52] http:/ / www. lowtax. net/ lowtax/ html/ jjeobs. html [53] http:/ / online. barrons. com/ article/ SB120009958593085271. html [54] At about this time the jurisdiction was also rocked by a number of banking scandals. It also imposed an ill-advised practice of restricting admission to the Bahamian bar to nationals of the Bahamas, which had a diluting effect on the quality legal talent in the jurisdiction (by preventing the recruitment of expatriates), which is critical to the success of setting up sophisticated offshore structures. Not coincidentally, the rise of Cayman as the dominant force in offshore finance almost precisely mirrors the decline of the Bahamas. See generally Tolley's Tax Havens (2000), ISBN 0754504719 [55] The U.S. led invasion to oust Manuel Noriega in 1989 caused significant market shift away from the jurisdiction, from which it has only relatively recently recovered. [56] http:/ / www. ils-world. com/ newsletter/ 67/ jurisdiction. shtml [57] "The Global Financial Centres Index 8" (http:/ / www. zyen. com/ GFCI/ GFCI 8. pdf). Z/Yen. 2010. . [58] "International Financial Centres Forum Launched" (http:/ / www. compasscayman. com/ cfr/ 2010/ 01/ 05/ International-Financial-Centres-Forum-launched). Cayman Financial Review. 5 January 2010. . Retrieved 16 March 2011. [59] http:/ / www. ft. com/ cms/ s/ 2/ ae51ab84-0d9f-11db-a385-0000779e2340. html [60] Cowie, Ian (4 May 2006). "Barclays' offshore clients face 1.5bn bill" (http:/ / www. telegraph. co. uk/ money/ main. jhtml?xml=/ money/ 2006/ 05/ 04/ cntax04. xml). The Daily Telegraph (London). . [61] Towards Global Tax Competition (http:/ / www. oecd. org/ dataoecd/ 9/ 61/ 2090192. pdf) [62] http:/ / www. eubusiness. com/ news-eu/ 1238750223. 14/ [63] http:/ / www. oecd. org/ document/ 57/ 0,3343,en_2649_33745_30578809_1_1_1_37427,00. html
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External links
International Financial Centres Forum (IFC Forum) (http://www.ifcforum.org) The Economist survey on offshore financial centres (http://www.economist.com/surveys/displaystory. cfm?story_id=8695139) IMF's 2000 report on OFCs (http://www.internationalmonetaryfund.com/external/np/mae/oshore/2000/eng/ back.htm) Lax Little Islands (http://www.thenation.com/doc/20090601/johnston?rel=hp_currently) by David Cay Johnston, The Nation, May 13, 2009
Private banking
459
Private banking
Private banking concerns the high-quality provision of a range of financial and related services to wealthy clients, principally individuals and their families. Typically the services on offer combine retail banking products such as payment and account facilities plus a wide range of up-market investment related services.[1] Market segmentation and the offering of high quality service provision forms the essence of private banking and key components include:[1] tailoring services to individual client requirements anticipation of client needs a long-term relationship orientation personal contact discretion investment performance.
An important feature of the private banking market relates to client segmentation. The bottom end of the market is referred to as the mass affluent segment typically individuals who have up to $300,000 of investable assets. The top-end of the market are often referred to as ultra HNWIs with over $50 million in investable assets and in-between lie HNWIs ($300,000 to $5 million) and very high HNWIs ($5 million to $50 million). Note that these definitions are by no means precise and different banks and commentators use various definitions for their own market segmentation strategies. The level of service and the range of products on offer increases with the wealth of the respective client.[1]
Wealth management
There is no generally accepted standard definition of wealth management both in terms of the products and services provided and the constitution of the client base served but a basic definition would be financial services provided to wealthy clients, mainly individuals and their families.[2] Private banking forms an important, more exclusive, subset of wealth management. At least until recently, it largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, many clients trusted their private banking relationship manager to get on with it, and took a largely passive approach to financial decision making.[2] Private banking has a very long pedigree, stretching back at least as far as the seventeeth century in the case of some British private banks. It is, however, only really over the last 15 years or so that the term wealth management has found its way into common industry parlance. It developed in response to the arrival of mass affluence during the latter part of the twentieth century; more sophisticated client needs throughout the wealth spectrum; a desire among some clients to be more actively involved in the management of their money; a willingness on the part of some types of financial services players, such as retail banks and brokerages, to extend their offerings to meet the new demand; and, more generally, a recognition among providers that, for many clients, conventional mass-market retail financial services are inadequate. Wealth management is therefore a broader area of financial services than private banking in two main ways:[2] Product range. As in private banking, asset management services are at the heart of the wealth management industry. But wealth management is more than asset management. It focuses on both sides of the clients balance sheet. Wealth management has a greater emphasis on financial advice and is concerned with gathering, maintaining, preserving, enhancing and transferring wealth. It includes the following types of products and services:[2] 1. Brokerage.
Private banking 2. 3. 4. 5. Core banking-type products, such as current accounts, time deposits and liquidity management. Lending products, such as margin lending, credit cards, mortgages and private jet finance. Insurance and protection products, such as property and health insurance, life assurance and pensions. Asset management in its broadest sense: discretionary and advisory, financial and nonfinancial assets (such as real estate, commodities, wine and art), conventional, structured and alternative investments. 6. Advice in all shapes and forms: asset allocation, wealth structuring, tax and trusts, various types of planning (financial, inheritance, pensions, philanthropic), family-dispute arbitration even psychotherapy to children suffering from affluenza. 7. A wide range of concierge-type services, including yacht broking, art storage, real estate location, and hotel, restaurant and theatre booking. Client segments. Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking, those with more than around $1 million in investable assets. Wealth management, by contrast, targets clients with assets as low as $100 000, i.e. affluent as well as high net worth (HNW) clients.[2] Wealth management can mean different things in different geographic regions. The US and Europe have traditionally stood at two extremes in this regard. In the US, wealth management is more closely allied to transaction-driven brokerage and is typically investment-product driven. In Europe, the term is more synonymous with traditional private banking, with its greater emphasis on advice and exclusivity.[2]
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Private banking rankings

According to Scorpio Partnership's Annual Private Banking Benchmark for 2011, Bank of America still leads the pack courtesy of its rescue of Merrill Lynch in 2008.[3] Morgan Stanley follows as a result of its ownership control of the Smith Barney franchise,[4] while UBS has steadied the ship after all of its difficulties. Notably, the top four in the world are some distance from the rest of mega-players in the market. For instance, Bank of America is USD1.08 trillion clear of Credit Suisse in fifth, which itself has more than USD430 billion more AUM than Royal Bank of Canada in sixth.[5] Analysis of the AUM controlled the top 20 wealth managers by size reveals that their share of all Benchmark AUM jumped significantly from 77.1% by year-end 2009 to 81.6% at the end of 2010 and collectively manage USD11.075 trillion. Indeed, the annual ranking of the global wealth managers showed that the top 10 now collectively manage USD9.214 trillion in HNW assets, representing 67.9% of the total AUM benchmarked by Scorpio Partnership.[5] The twenty largest wealth managers in 2011 (listed by assets under management):[5]
Private banking
461
Before Lehman Brothers collapsed, UBS was the largest wealth manager.
Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12 . 13 . 14 . 15 . 16. 17 . 18 . 19 . 20 .
Firm Bank of America Merrill Lynch Morgan Stanley Smith Barney UBS Wells Fargo Credit Suisse Royal Bank of Canada HSBC Deutsche Bank BNP Paribas J.P. Morgan Pictet Goldman Sachs ABN AMRO Barclays Julius Br Crdit Agricole Bank of New York Mellon Northern Trust Lombard Odier Darier Hentsch Citi Private Bank
AuM ($bln) $1,944.74 $1,628.00 $1,559.90 $1,398.00 $865.06 $435.15 $390.00 $368.55 $340.41 $284.00 $267.66 $229.00 $220.06 $185.91 $181.68 $171.81 $166.00 $154.40 $153.10 $140.70
AuM % Chg. 4.20% 7.96% 6.6% 14.78% 11.56% 14.81% 6.27% 35.31% 45.68% 5.19% 10.05% -0.87% 23.79% 1.92% 22.46% 4.22% 7.79% 6.34% 7.83% 15.42%
Notes: AuM figures are for the high net worth wealth management divisions of these institutions. In the list, there are five Swiss companies including two private banks and eight American companies.
Private banking
462
Market overview
The worlds high net worth individuals (HNWIs) expanded in population and wealth in 2010 surpassing 2007 pre-crisis levels in nearly every region, according to the 15th annual World Wealth Report from Merrill Lynch Global Wealth Management and Capgemini.[6] Globally, HNWIs* financial wealth grew 9.7% in 2010 to reach US$42.7 trillion, surpassing the 2007 pre-crisis peak. The global population of HNWIs grew 8.3% to 10.9 million.[6] Ultra-HNWIs** posted slightly stronger-than-average gains in their numbers and wealth. The global population of Ultra-HNWIs grew by 10.2% in 2010 and its wealth by 11.5%. As a result, Ultra-HNWIs accounted for 36.1% of global HNWI wealth, up from 35.5%, while representing only 0.9% of the global HNWI population.[6] About 53 percent of the worlds millionaires, or individuals with at least $1 million in investable assets excluding primary residences and collectibles, are found in the U.S., Japan and Germany, the report showed.[6] Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, excluding real estate and property such as art. Wealth became more concentrated, with millionaire households controlling 39 percent of the worlds assets, up from 37 percent a year earlier, the Boston Consulting Group said.[7] Global assets under management rose by 8 percent to $121.8 trillion in 2010, beating the studys previous peak of $111.8 trillion in 2007, the Boston-based firm said in a study. Global wealth is defined as total assets under management (AuM) across all households.[7] Singapore will become the worlds top wealth management center by 2013, because of emerging markets growth and as new rules put pressure on Switzerland and London, according to a PricewaterhouseCoopers LLP survey of global wealth-management firms.[8] Singapore will leapfrog both European centers in the next two years with Hong Kong taking third spot behind Switzerland and ahead of London while New York will retain fith position, PwC wrote in its 2011 Global Private Banking and Wealth Management report.[8] Note 1*: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.[6] Note 2**: Ultra-HNWIs are defined as those having investable assets of US$30 million or more, excluding primary residence, collectibles, consumables, and consumer durables.[6]
Further reading
David Maude (2006). Global Private Banking and Wealth Management: The New Realities.
External Links
Michael J. Moore and David Mildenberg, "In the Battle of the Big Brokers, Merrill Is Winning" [9], Bloomberg Businessweek, September 2, 2010.
References
[1] Anna Omarini and Philip Molineux, Private Banking in Europe: Getting Clients and Keeping Them! (http:/ / 129. 3. 20. 41/ eps/ fin/ papers/ 0509/ 0509011. pdf) [2] Global Private Banking and Wealth Management: The New Realities, p. 1-2. [3] "Bank of America to Acquire Merrill as Crisis Deepens" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=a9O9JGOLdI_U), Bloomberg News, September 15, 2008. [4] "Morgan Stanley Pays $2.7 Billion to Citi in Venture" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=acVWAJ2qai_s), Bloomberg News, January 13, 2009.
Private banking
[5] Global Private Banking Benchmark 2011 (http:/ / www. scorpiopartnership. com/ uploads/ pdfs/ 110707_Scorpio Partnership_PRESS RELEASE_2011 Global Private Banking Benchmark. pdf), Scorpio Partnership, July 13, 2011. [6] World Wealth Report 2011 (http:/ / www. ml. com/ media/ 114235. pdf), Capgemini and Merrill Lynch, 22 June, 2011. [7] Global Wealth Report 2011 (http:/ / www. dasinvestment. com/ fileadmin/ images/ pictures/ 0907/ BCG_2011_0106_Global_Wealth_Report_client_version_May2011. pdf), The Boston Consulting Group, May, 2011. [8] Global Private Banking and Wealth Management Survey 2011 (http:/ / www. pwc. com/ en_GX/ gx/ private-banking-wealth-mgmt-survey/ pdf/ Global-Private-Banking-Wealth-2011. pdf), PwC, June, 2011. [9] http:/ / www. businessweek. com/ magazine/ content/ 10_37/ b4194037934749. htm
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Saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan.[1] Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher. There is some disagreement about what counts as saving. For example, the part of a person's income that is spent on mortgage loan repayments is not spent on present consumption and is therefore saving by the above definition, even though people do not always think of repaying a loan as saving. However, in the U.S. measurement of the numbers behind its gross national product (i.e., the National Income and Product Accounts), personal interest payments are not treated as "saving" unless the institutions and people who receive them save them.
Depositing change in a piggy bank is a frequently used savings strategy.
"Saving" differs from "savings." The former refers to an increase in one's assets, an increase in net worth, whereas the latter refers to one part of one's assets, usually deposits in savings accounts, or to all of one's assets. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable. Saving is closely related to investment. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth. However, increased saving does not always correspond to increased investment. If savings are stashed in a mattress or otherwise not deposited into a financial intermediary like a bank there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment. However savings kept in a mattress amount to an (interest-free) loan to the government or central bank, who can recycle this loan. In a primitive agricultural economy savings might take the form of holding back the best of the corn harvest as seed corn for the next planting season. If the whole crop were consumed the economy would deteriorate to hunting and gathering the next season.
Saving
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Interest rates
Classical economics posited that interest rates would adjust to equate saving and investment, avoiding a pile-up of inventories (general overproduction). A rise in saving would cause a fall in interest rates, stimulating investment. But Keynes argued that neither saving nor investment were very responsive to interest rates (i.e., that both were interest inelastic) so that large interest rate changes were needed. Further, it was the demand for and supplies of stocks of money that determined interest rates in the short run. Thus, saving could exceed investment for significant amounts of time, causing a general glut and a recession.
Saving in personal finance

Within personal finance, the act of saving corresponds to nominal preservation of money for future use. A deposit account paying interest is typically used to hold money for future needs, i.e. an emergency fund, to make a capital purchase (car, house, vacation, etc.) or to give to someone else (children, tax bill etc.). Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. This distinction is important as the investment risk can cause a capital loss when an investment is realized, unlike cash saving(s). Cash savings accounts are considered to have minimal risk. In the United States, all banks are required to have deposit insurance, typically issued by the Federal Deposit Insurance Corporation or FDIC. In extreme cases, a bank failure can cause deposits to be lost as it happened at the start of the Great Depression. However, since the FDIC was created, no deposits in the United States have been lost due to a bank failure. In many instances the terms saving and investment are used interchangeably. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. To help establish whether an asset is saving(s) or an investment you should ask yourself, "where is my money invested?" If the answer is cash then it is savings, if it is a type of asset which can fluctuate in nominal value then it is investment.
Notes
[1] "Random House Unabridged Dictionary." Random House, 2006
Time deposit
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Time deposit
A time deposit (also known as a term deposit, particularly in Canada, Australia and New Zealand; a bond in the United Kingdom; fixed deposits[[1]] in India and in some other countries) is a money deposit at a banking institution that cannot be withdrawn for a certain "term" or period of time (unless a penalty is paid). When the term is over it can be withdrawn or it can be held for another term. Generally speaking, the longer the term the better the yield on the money. A certificate of deposit is a time-deposit product. The opposite is a demand deposit also known as sight deposit or "on call" which can be withdrawn at any time, without any notice or penalty; e.g., money deposited in a checking account or savings account in a bank. The rate of return is higher than savings accounts because requirements to be held to term. However it is lower than investing in riskier products like stocks or bonds. A deposit of funds in a savings institution is made under an agreement stipulating that (a) the funds must be kept on deposit for a stated period of time, or (b) the institution may require a minimum period of notification before a withdrawal is made.
US time deposits regulations

The "M2" definition of money supply includes funds that can be used directly in payment, such as money market mutual funds and money market deposit accounts (MMDAs). MMDAs are considered by the United States Federal Reserve (the Fed) to be savings accounts and are thus exempt from reserve requirements. These large transaction accounts not being included in the M1 money supply suggests that the Fed does not pay much attention to ordinary deposits, and in July 2000, it announced that it was no longer setting target ranges for growth rates of the money supply.
Small-denomination time deposit

"Small" time deposits in M2 are defined as those under $100,000.
Large-denomination time deposit

"Large" time deposits are currently defined as deposits larger than $100,000. The term "jumbo CD" is commonly used in the United States. Some banks, recognizing that customers do not want more in the bank than is covered by insurance, have lowered the "jumbo CD" minimum requirement to $95,000, so with compounded interest the total falls below the insurance limit.
External links
FDIC: Your Insured Deposits [2] International Time Deposits [3]
References
[1] http:/ / en. wikipedia. org/ wiki/ Fixed_Deposits [2] http:/ / www. fdic. gov/ deposit/ deposits/ insured/ basics. html [3] http:/ / www. deposits. org
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Portfolios
Financial adviser
A financial adviser or financial advisor, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on life insurance and other insurances such as income protection insurance, critical illness insurance etc., and/or advice on mortgages.[1] Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation. Financial advisors use stock, bonds, mutual funds, real estate investment trusts (REITs), options, futures, notes, and insurance products to meet the needs of their clients. Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services industry. A further distinction should be made between "fee-based" and "fee-only" advisers. Fee-based advisers often charge asset based fees but may also collect commissions. Fee-only advisers do not collect commissions or referral fees paid by other product or service providers. Some investment advisors only charge a fee based on the assets managed for the client. Typically they charge about 1.0 to 1.5% per year to make the investment decisions for the client. They do not collect commissions.
Role
The main purpose of a financial adviser is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. To ensure ethical practices, financial advisers must understand a client's financial situation as well as their need for financial stability. Finance can be complicated and any adviser has responsibilities ethically to see that a client's risk is minimized, and monetarily, that money is maximized within the established risk boundaries.
Retirement planning
One of the major services that financial advisers offer is retirement planning. A financial adviser should have knowledge of budgeting, forecasting, taxation, asset allocation, and financial tools and products to establish realistic goals and the strategy by which to reach them. In the United States, this will include the use of several investment tools such as 401(k)/403(b) Roth account(s), Individual Retirement Accounts/Roth IRAs, mutual funds, stocks, bonds and CDs. The financial adviser determines what percentage of the available income is necessarytaking into account tax liabilities, expected inflation, and projected return on investmentto meet a minimum balance by the client's target age of retirement. This is a fairly straightforward calculation, and many automated tools do this. The financial adviser's greatest contribution is asset allocation: determining how to maximize the return on investment while satisfying the client's risk tolerance.
Financial adviser
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Investing
Financial advisers may help their clients invest for both long and short term goals. It is the financial adviser's duty to determine the clients' goals and risk tolerance and then to recommend appropriate investments. Generally, a long time horizon allows for the advisor to recommend more volatile investments with potentially greater risks and rewards. Such investments include direct investment in stocks or through collective investment products such as mutual funds and unit investment trusts/unit trusts. If the client has shorter term goals, the adviser should recommend less volatile investments with shorter time spans. Such investments could include cash deposits, certificates of deposit, and short term bonds. While these types of investment generally have lower returns there is less volatility and there is less likelihood of losing principal capital. Although short-term investments can guard against loss of capital, their value can be eroded by inflation over longer periods of time.
Compensation
Fee-only
As defined by the review materials for the Certified Financial Planner exam and the National Association of Personal Financial Advisors, fee-only financial advisors, such as an investment advisor, are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. Neither advisors nor affiliates may receive commissions, rebates, awards, finders fees, bonuses or other forms of compensation from others as a result of a clients implementation of the individuals planning recommendations.[2] The fee-only model of compensation reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies. A clear distinction should be made between brokers, who often refer to themselves as "fee-based" (receiving both fees and commissions) and "fee-only" (someone who never receives compensation or incentives from a third party.) A fee-only advisor may reduce conflicts of interest such as: advising a client to buy products and make investments when holding cash and other liquid assets may have been a more suitable recommendation at that time. an incentive to generate commissions through the unnecessary buying and/or selling of securities (also known as churning). an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the advisor can generate a commission. an incentive to make recommendations that pay higher sales commissions to the advisor when a less expensive alternative may have been available.
Commission-based
Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services industry.
Online-only
A new class of services that deliver guidance regarding financial planning are emerging, offering low cost financial advice through the sponsorship of HR department of employers. Companies like HelloWallet are offering low cost financial advice through the employer. These services are also delivered to the poor through donation of HelloWallet as well as philanthropic organizations. [3]
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History
Much of today's model for what a financial advisor is stemmed from IDS Financial Services, which later became known as American Express Financial Corporation (AEFC) after the company was sold by Alleghany Corporation, and later became Ameriprise. At IDS, a young rep named James Tausz was a top-ranked broker and served as the basis of inspiration for the company's model of "Financial Planning for a Fee," which IDS VP Vint Lewis popularized by training thousands of IDS stock brokers. Today, the concept of a "Financial Advisor" is widely popular. Before the IDS model, almost all stock brokers worked on commissions only.[4]
Qualifications
United States
There are three types of licenses for individual professionals who typically hold themselves out as Financial advisors: Investment Advisor Representative, Registered Representative (also known as a "Stock Broker"), Insurance Producer. The practice of investment advice, the sale of investment securities and the sale of insurance products are regulated and therefore an individual must pass an exam, affiliate with a firm and register with one or more states before conducting business. A Financial advisor may hold any combination of these licenses depending on the nature of their financial practice. Similar to the term Financial advisor, the terms wealth manager, financial consultant and financial planner do not refer to a specific license or designation. These terms are typically select by individuals to help describe the nature of their financial practice. The Chartered Financial Analyst (CFA) designation, the Certified Financial Planner (CFP) designation, the Chartered Life Underwriter (CLU), The Chartered Financial Consultant (ChFC), Chartered Retirement Planning Counselor (CRPC), Registered Financial Consultant (RFC) and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain. These professional designations are issued by organizations such as the Chartered Financial Analyst Institute,[5] the Certified Financial Planner Board of Standards,[6] and the College for Financial Planning.[7] In the United States, a firm registers as an investment advisor with the Security and Exchange Commission (SEC) or a state, depending on the amount of assets that receive continuous and regular supervisory or management services (Assets Under Management, or "AUM"). For a firm to register with the SEC, it must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the registration. If a firm has less than $25 million of AUM and doesnt anticipate having $25 million or more within 120 days of the effective date of the registration, then it must register with the individual state(s) as an investment advisor. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state or SEC. The SECs definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the registration process. Certain multi-state advisors may also register with the SEC, as well as certain Internet based advisors. If an advisor does not qualify for registration with the SEC, the adviser must register with the states where it maintains an office, as well as each state where its clients are located. There are de minimus exemptions in most states, typically exempting from registration those advisors with less than 6 clients, but the exemption varies from state to state.[8] Common examples of investment advisors include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations that have registered under the Act, and those who fall within certain exemptions. Stock brokers (known as "registered representatives" under U.S. federal law and licensed in the various states) are not necessarily (and normally are not) Registered Investment Advisors. In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.
Financial adviser In many cases, a Registered Investment Advisor (RIA) is a corporation or partnership while the person actually providing the advice is an investment advisor representative (IAR) of the advisor organization. Investment advisor representatives and individuals registered as investment advisors are sometimes certified as a Certified Financial Planner (CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. [9] or a Chartered Financial Analyst(CFA) holding a charter from the CFA Institute [10] after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a Registered Investment Advisor. The registration process to become an investment advisor is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisors.[8] [11] Regulation In the United States, the Financial Industry Regulatory Authority (FINRA) regulates and oversees the activities of more than 5,050 brokerage firms, approximately 172,050 branch offices and more than 663,050 registered securities representatives. A financial adviser or stock broker should be licensed to provide any consultation on investment in securities. Typical licenses needed to promote the sale of stocks are the: Series 7 (General Securities exam), Series 63 (State Securities exam), and Series 65 or 66 Uniform Investment Adviser Law Exam. Generally, any adviser who charges a fee for investment advice would need to also have the Series 65 or 66 license. Thus, anyone can call themselves a financial planner (although care must be taken not to be confused with a Certified Financial Planner), but they would still need FINRA licenses to provide advice for a fee or be registered as an investment adviser with the Securities and Exchange Commission in the USA. Anyone in the business of providing financial advice can call themselves a Financial Advisor. There currently isn't any regulation on the use of this title. To charge a fee for advice, one must pass the FINRA Series 65 testThe Uniform Investment Adviser Law Examination. To be a "Registered Investment Adviser" (RIA) or "Investment Adviser Representative" (IAR), one must pass the FINRA Series 65 exam or both of the FINRA Series 7 and Series 66 exams. Many brokerage firms still claim an exemption for their employees who sell fee based products and services.
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Canada
The financial advisor role in Canada is varied. Most financial advisors carry either a life insurance license or a securities license. The life insurance license is obtained through successful completion of the life license qualification program, except in Quebec, where licensing is completed through l'autorite des marchiers financiers [12] . There are three distinct securities licenses available. Completion of the Canadian Securities Course allows the sale of most types of securities, including stocks, bonds, and mutual funds. More advanced licensing is required for the sale of derivatives and commodities. Completion of a mutual funds course allows the advisor to sell mutual funds only, excluding certain types of very specialized funds. The third possible license is the exempt securities license. In all cases, licensing requires the support of a dealer or insurer. It is also mandatory for advisors to carry Errors and Omissions Insurance. Technically, the term financial advisor refers to a securities licensed individual who provides investment advice to retail clients. However, there is little regulatory control exercised over use of the term, and, as such, many insurance brokers, insurance agents, securities brokers, and others identify themselves as financial advisors. Many financial advisors in Canada are also financial planners. While there are numerous financial planning designations, the most common is the Certified Financial Planner designation. There is no regulation, outside of Quebec, of the term "Financial Planner".[13]
Financial adviser
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United Kingdom
There are three main bodies awarding qualifications for financial advisers in the UK. The main one is the Chartered Insurance Institute, which offers professional financial services qualifications all the way from beginner to degree levels. The IFS School of Finance offers alternative courses/qualifications in certain specialist areas such as mortgages and equity release. The Institute of Financial Planning offers the Certified Financial Planner. In the United Kingdom investment advice is given either by a financial advisor or a stock broker. Financial advisors need to pass a series of exams and receive a Certificate in Financial Planning (previously the Financial Planning Certificate) or the Certificate for Financial Advisers, and also authorised by the Financial Services Authority, a UK government qango that must be satisfied the advisor is a fit and proper person before they may practice. This is to be replaced in December 2012 with a new standard of qualification classed as Diploma and all existing advisers will have to attain the new qualifications to be able to continue to give advice going forward. Typically a diploma or higher qualified adviser will have Dip FA or Dip PFS after their name. Financial advisors are either tied, multi-tied, independent, or fee-only. As the classifications suggest, tied advisors can only recommend 'financial products' marketed by the company they represent. Typically that company employs them but in some cases they work for that organisation under a type of self-employed contract that usually precludes other paid work. Multi-tied agents perform a similar role, except they represent a number of different companies. This is sometimes referred to as the panel system. Tied and multi-tied advisors are nearly always rewarded via commission, though in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary. An Independent Financial Adviser must offer advice on all 'financial products' on the market (which carry commission) and, in addition, must offer clients the choice of paying a fee for advice about a product or products, rather than being remunerated commission from the financial institution that is promoting the product. A Fee-only financial adviser designs bespoke solutions, and often by investing directly removes marketing commissions and charges from the costs that clients would otherwise pay. Fee-only advisory firms tend to accept a professional duty of care. In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward 'financial products' that carry commission. Best advice is a concept which was never more than a heading in the FSA / PIA / NASDIM regulations (and is now withdrawn in favour of the 'appropriate' standard) and which refers to the general obligation under Contract Law (Agency) that a broker has to find the correct 'financial product' to match a client 'need'. A tied or multi-tied advisor must recommend the most appropriate financial product within their company, even if a more appropriate product is available in the market place. An Independent Financial Adviser must recommend an appropriate financial product in the market place, even if a better solution is available outside the universe of commission-paying 'financial products'. In the UK many believe impartial advice can be obtained only by consulting an independent financial advisor. Others believe it can only be obtained by consulting an advisor that never accepts commission.
Financial adviser
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Republic of Ireland
The QFA ("qualified financial adviser") designation is awarded to those who pass the Professional Diploma in Financial Advice and agree to comply with the ongoing "continuous professional development" (CPD) requirements. It is the recognised benchmark designation for financial advisers working in retail financial services. The qualification, and attaching CPD programme, meets the "minimum competency requirements" (MCR) specified by the Financial Regulator, for advising on and selling five categories of retail financial products: Savings, investments and pensions, Housing loans and associated insurances, Consumer credit and associated insurances, Shares, bonds and other investment instruments, and, Life assurance protection policies.
New Zealand
The National Certificate in Financial Services [Financial Advice] [Level 5] is currently being introduced in New Zealand. All Individuates and registered legal entities providing financial services must be registered as a RFSP [14]( Registered Financial Service Provider ) Their Directors, retail and sales staff are required to gain the national certificate.[15] The New Zealand Qualifications Authority (NZQA) in conjunction with industry groups via the ETITO administers a qualifications frame work for the qualification. Registrations and examinations are conducted by the ETITO.[16] All Financial Advisers are required to register with the ETITO by March 31, 2011 The Qualifications Framework consists of a core set of competencies sets, A B C followed by 2 electives covering specialist areas such as Insurance and Residential Property Lending. Certain NZQA approved qualifications such as an Accountancy degree may exempt student from competency set A NZQA approved training in the certificate is offered by the New Zealand Open Polytechnic [17] [18] as well as several other accredited organizations [19]
South Korea
In South Korea, the Korea Financial Investment Association oversees the licensing of investment advisors. There are a number of different professional certifications in this area, including Certified Securities Investment Advisor and Certified Derivatives Investment Advisor.[20]
References
[1] Morgan Stanley Smith Barney Website (http:/ / www. smithbarney. com/ career_center/ ) Career Description of a Career as a Financial Advisor [2] NAPFA - The National Association of Personal Financial Advisors - FAQs (http:/ / www. napfa. org/ faq/ index. asp#FAQ22) [3] http:/ / www. businessweek. com/ investor/ content/ sep2009/ pi20090929_616550. htm [4] (http:/ / www. ameriprise. com/ about-ameriprise-financial/ company-information/ ameriprise-financial-history. asp) The Ameriprise Financial History [5] http:/ / www. cfainstitute. org/ [6] http:/ / www. cfp. net/ [7] http:/ / www. cffp. edu/ index. aspx [8] (http:/ / www. seclaw. com/ docs/ RIAOverview. htm) [9] http:/ / www. cfp. net/ [10] http:/ / www. cfainstitute. org/ index. html [11] (http:/ / www. ria-compliance-consultants. com/ faq. html#3) [12] http:/ / www. lautorite. qc. ca/ en/ professionals. html [13] http:/ / www. advisor. ca/ news/ industry-news/ planning-advocates-push-professionalism-446 [14] http:/ / www. business. govt. nz/ fsp/ [15] http:/ / www. business. govt. nz/ fsp/ [16] http:/ / afacompetence. org. nz/ 1-who-is-etito/
Financial adviser
[17] http:/ / www. openpolytechnic. ac. nz/ [18] http:/ / www. openpolytechnic. ac. nz/ [19] http:/ / afacompetence. org. nz/ 1-training-providers/ [20] Korea Securities Market 2010 (http:/ / www. kofia. or. kr/ kofia/ FILE_TEMP/ store/ 470B483E-0C19-0F34-0A2A67597BFFC9A7/ CMK 2010 Final. pdf), Research and International Affairs Department, Korea Financial Investment Association, 2010, p.332, , retrieved 2011-09-11
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External links
10 Questions to Ask When Choosing a Financial Planner (http://www.pueblo.gsa.gov/cic_text/money/ financial-planner/10questions.html) AAFM (http://www.financialanalyst.org/) American Academy of Financial Management IAIA (http://www.iaia.us.com/) International Association of Investment Advisers AIFA (http://www.aifa.net/) Association of Independent Financial Advisers - UK Trade body FSA website (http://www.fsa.gov.uk) Financial Services Authority (UK) IAA (http://www.investmentadviser.org/) Investment Adviser Association NAIFA (http://www.naifa.org) National Association of Insurance & Financial Advisors SEC IA Search (http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_OrgSearch.aspx/) SEC Database of US Registered Investment Advisers SECLaw.com (http://www.seclaw.com/centers/brocent.shtml) Financial Advisor Legal Information Center FPA (http://www.efpa-europe.org) uropean Financial Planning Association
Financial independence
Financial independence is a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities [1] . In the case of many individuals whose financial circumstances fit this description, their assets generate income that is greater than their expenses. To illustrate, a person's quarterly expenses may total $4000. They receive dividends from stocks they've previously purchased totaling $5,000 quarterly, while also having an even more substantial amount of money in other assets. Under such circumstances, a person is financially independent. A person's assets and liabilities are an important factor in determining if they have achieved financial independence. An asset is anything of value that can be liquidated if a person has debt, whereas a liability is related to debt, in that it is the responsibility of one possessing it to provide compensation. (Homes and automobiles with no liens or mortgages are common assets.) The following are two approaches in achieving financial independence : Gather revenue generating assets until the generated revenue surpasses living/liability expenses. Gather enough liquid assets to then sustain all future living/liability expenses It does not matter how old or young someone is or how much money they have or make. If they can generate enough money to meet their needs from sources other than their primary occupation, then they have achieved financial independence. Age is potentially irrelevant with respect to financial independence if they are 25 years old and their expenses are only $100 per month and they have assets that generate $101 or more per month they have achieved financial independence and they are now free to do things that they enjoy without having to worry about their next meal or a roof over their head. If, on the other hand, they are 50 years old and earn a million dollars a month but still have expenses above a million dollars a month, then they are not financially independent - they still have to generate the difference each month just to stay even.
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Passive sources of income to achieve financial independence

The following is a non-exhaustive list of sources of passive income which potentially yields financial independence. Rental property Dividend from stocks, bonds and income trusts Bank fixed deposits and monthly income schemes Royalty from books, patents, music, etc. Alimony, Child Support or Child Trust Fund Renting out professional or academic qualifications [2] Interest earned from deposit accounts, money market accounts or loans Oil leases Notes Business ownership Patent licensing Trust deeds
References
[1] Cummuta, John. " The Myths & Realities of Achieving Financial Independence (http:/ / www. nightingale. com/ ae_article. aspx?a=achievingfinancialindependence& i=217)". Nightingale Conant. Retrieved on 14-Sep-2009 [2] CCIE Pursuit. " Rent Your Cisco Certification For Cash (http:/ / cciepursuit. wordpress. com/ 2007/ 09/ 27/ rent-your-cisco-certification-for-cash/ )" Retrieved on 14-Sep-2009
Financial plan
In general usage, a financial plan is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan sometimes refers to an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate. In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department.[1] A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.[2] While the common usage of the term "financial plan" often refers to a formal and defined series of steps or goals, there is some technical confusion about what the term "financial plan" actually means in the industry.[3] For example, one of the industry's leading professional organizations, the Certified Financial Planner Board of Standards, lacks any definition for the term "financial plan" in its Standards of Professional Conduct publication. This publication outlines the professional financial planner's job, and explains the process of financial planning, but the term "financial plan" never appears in the publication's text.[4] Textbooks used in colleges offering financial planning-related courses also generally do not define the term 'financial plan'. For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals[5] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards' definition of 'financial planning'.
Financial plan Because of the lack of a formal definition in industry literature, and in major textbooks on the subject, it should be noted that the term 'financial plan' is merely inferred from the defined process of 'financial planning'.
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References
[1] Meigs, Walter B. and Robert F. Financial Accounting, 4th ed. (McGraw-Hill Book Company, 1970) pp. 187-188. [2] Barron's Finance, 4th ed, 2000, p.578. [3] "What Is Financial Planning?" (http:/ / www. twintierfinancial. com/ 2011/ 04/ what-is-financial-planning. html) David C. Lewis, RFC. April 2011. Retrieved 2011-09-24. [4] "Standards Of Professional Conduct". (http:/ / www. cfp. net/ Downloads/ 2010Standards. pdf) Certified Financial Planner Board of Standards. Rev. January 2010. Retrieved 2011-09-24. [5] Sid Mittra, Anandi P. Sahu, Robert A Crane. "Practicing Financial Planning for Professionals" (Practitioners' Edition), 10th Edition. (Rochester Hills Publishing, Inc., 2007) sec. 1-3.
External links
Prospective Analysis: Guidelines for Forecasting Financial Statements (http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1026210), Ignacio Velez-Pareja, Joseph Tham , 2008 To Plug or Not to Plug, that is the Question: No Plugs, No Circularity: A Better Way to Forecast Financial Statements (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1031735&rec=1&srcabs=1026210), Ignacio Velez-Pareja, 2008 A Step by Step Guide to Construct a Financial Model Without Plugs and Without Circularity for Valuation Purposes (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1138428&rec=1&srcabs=1031735), Ignacio Velez-Pareja, 2008 Long-Term Financial Statements Forecasting: Reinvesting Retained Earnings (http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1286542), Sergei Cheremushkin, 2008
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.[1]
History of financial services

The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge.[2] Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company...
Financial services
475
Banks
A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank," a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).
Banking services
The primary operations of banks include: Keeping money safe while also allowing withdrawals when needed Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business) Issuance of credit cards and processing of credit card transactions and billing Issuance of debit cards for use as a substitute for checks Allow financial transactions at branches or by using Automatic Teller Machines (ATMs) Provide wire transfers of funds and Electronic fund transfers between banks Facilitation of standing orders and direct debits, so payments for bills can be made automatically Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account. Provide internet banking system to facilitate the customers to view and operate their respective accounts through internet. Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly. Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check. Notary service for financial and other documents
Other types of bank services

Private banking - Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.[3] Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks.[4] Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products. Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards. Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers".
Financial services
476
Foreign exchange services

Foreign exchange services are provided by many banks around the world. Foreign exchange services include: Currency exchange - where clients can purchase and sell foreign currency banknotes. Foreign Currency Banking - banking transactions are done in foreign currency. Wire transfer - where clients can send funds to international banks abroad.
Investment services
Asset management - the term usually given to describe companies which run collective investment funds. Also refers to services provided by others, generally registered with the Securities and Exchange Commission as Registered Investment Advisors. Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately $100 trillion.[5]
Insurance
Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry.[6] Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.
Other financial services

Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Full service and private client firms primarily assist and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds. Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business. Angel investment - An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital. Conglomerates - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is
Financial services the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts. Debt resolution is a consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to payoff their debts owed. This debt can be accrued in various ways including but not limited to personal loans, credit cards or in some cases merchant accounts. There are many services/companies that can assist with this. These can include debt consolidation, debt settlement and refinancing.
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Financial crime
UK
Fraud within the financial industry costs the UK (regulated by the FSA) an estimated 14bn a year and it is believed a further 25bn is laundered by British institutions.[7]
Market share
The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market capitalization. However it is not the largest category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (Citigroup), only having a 3 % US market share.[8] In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks has a 32% market share.
References
[1] "The Mistakes Of Our Grandparents?" (http:/ / www. contraryinvestor. com/ 2004archives/ mofeb04. htm). Contrary Investor.com. February 2004. . Retrieved 2009-02-06. [2] "Bill Summary & Status 106th Congress (1999 - 2000) S.900 CRS Summary - Thomas (Library of Congress)" (http:/ / thomas. loc. gov/ cgi-bin/ bdquery/ z?d106:SN00900:@@@D& summ2=m& ). . Retrieved 2011-02-08. [3] "Private Banking definition" (http:/ / www. investorwords. com/ 5946/ private_banking. html). Investor Words.com. . Retrieved 2009-02-06. [4] "How Swiss Bank Accounts Work" (http:/ / money. howstuffworks. com/ personal-finance/ banking/ swiss-bank-account. htm). How Stuff Works. . Retrieved 2009-02-06. [5] Prudential: Securities Processing Primer (http:/ / www. cm1. prusec. com/ rschrpts. nsf/ $$rschidxw/ 4A2ACD93260C58E785256FA3005F8D0E/ $FILE/ PROCESSINGPRIMER25-0076. PDF) [6] "Price comparison sites face probe" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 7201345. stm). BBC News. 2008-01-22. . Retrieved 2009-02-06. [7] "Watchdog warns of criminal gangs inside banks" (http:/ / money. guardian. co. uk/ news_/ story/ 0,1456,1643860,00. html). The Guardian (London). 2005-11-16. . Retrieved 2007-11-30. [8] The Opportunity: Small Global Market Share (http:/ / www. citigroup. com/ citigroup/ fin/ data/ p040602. pdf), Page 11, from the Sanford C. Bernstein & Co. Strategic Decisions Conference 6/02/04
Further reading
Porteous, Bruce T.; Pradip Tapadar (December 2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave Macmillan. ISBN1-4039-3608-0.
Investment portfolio
478
Investment portfolio
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.[1]
Definition
The term portfolio refers to any collection of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The dollar amount of each asset may influence the risk/reward ratio of the portfolio and is referred to as the asset allocation of the portfolio. [2]
Description
There are many types of portfolios including the Market Portfolio and the Zero-Investment Portfolio. A portfolio's asset allocation may be managed utilizing any of the following investment approaches and principles: equally-weighting, capitalization-weighting, price-weighting, Risk parity, Capital asset pricing model, Arbitrage pricing theory, Jensen Index, Treynor Index, Sharpe Diagonal (or Index) model, Value at risk model, Modern Portfolio Theory and others. There are several methods for calculating portfolio returns and performance. One traditional method is using quarterly or monthly money-weighted returns, however the true time-weighted method is a method preferred by many investors.[3] There are also several models for measuring the Performance Attribution of a portfolio's returns when compared to an Index or benchmark.
References
[1] (http:/ / www. investopedia. com/ terms/ p/ portfolio. asp) Investopedia, Portfolio definition and explanation, Retrieved July 2011 [2] (http:/ / www. investopedia. com/ terms/ p/ portfolio. asp) Investopedia, Portfolio definition and explanation, Retrieved July 2011. [3] (http:/ / www. compoundinghappens. com/ mw_tw. htm) Investment Performance Measurement Errors, accessed 2008-06-29.
External links
Risk Minimization in Financial Portfolios (http://www.riskcog.com/portfolio.jsp) Simultaneous Consumption Planning and Portfolio Management (http://papers.ssrn.com/sol3/papers. cfm?abstract_id=927331)
Investor profile
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Investor profile
An investor profile or style defines an individual's preferences in investment decisions, for example: Short term trading (active management) or long term holding (buy and hold) Risk averse or risk tolerant / seeker All classes of assets or just one (stocks for example) Value stock, growth stocks, quality stocks, defensive or cyclical stocks... Big cap or small cap (Market capitalization) stocks, Use or not of derivatives Home turf or international diversification Hands on, or via investment funds
What determines an investor profile

The style / profile is determined by Objective personal or social traits such as age, gender, income, wealth, family, tax situation... Subjective attitudes, linked to the temper (emotions) and the beliefs (cognition) of the investor. Generally, the investor's financial return / risk objectives, assuming they are precisely set and fully rational.
External links
perso.orange.fr [1], investor types
References
[1] http:/ / perso. orange. fr/ pgreenfinch/ eprofile. htm
Modern portfolio theory
480

Portfolio analysis redirects here. For theorems about the mean-variance efficient frontier, see Mutual fund separation theorem. For non-mean-variance portfolio analysis, see Marginal conditional stochastic dominance. Modern portfolio theory (MPT) is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize[1] for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways.[2] For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlatedindeed, even if they are positively correlated. More technically, MPT models an asset's return as a normally distributed function (or more generally as an elliptically distributed random variable), defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient. MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, many theoretical and practical criticisms have been leveled against it. These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there is growing evidence that investors are not rational and markets are not efficient.[3] [4]
Concept
The fundamental concept behind MPT is that the assets in an investment portfolio should not be selected individually, each on their own merits. Rather, it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price. Investing is a tradeoff between risk and expected return. In general, assets with higher expected returns are riskier. For a given amount of risk, MPT describes how to select a portfolio with the highest possible expected return. Or, for a given expected return, MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security, of course, unless negative holdings of assets are possible.)[5] MPT is therefore a form of diversification. Under certain assumptions and for specific quantitative definitions of risk and return, MPT explains how to find the best possible diversification strategy.
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History
Harry Markowitz introduced MPT in a 1952 article[6] and a 1959 book.[7] Markowitz classifies it simply as "Portfolio Theory," because "There's nothing modern about it." See also this[5] survey of the history.
Mathematical model
In some sense the mathematical derivation below is MPT, although the basic concepts behind the model have also been very influential.[5] This section develops the "classic" MPT model. There have been many extensions since.
Risk and expected return

MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher expected returns must accept more risk. The exact trade-off will be the same for all investors, but different investors will evaluate the trade-off differently based on individual risk aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favorable risk-expected return profile i.e., if for that level of risk an alternative portfolio exists which has better expected returns. Note that the theory uses standard deviation of return as a proxy for risk, which is valid if asset returns are jointly normally distributed or otherwise elliptically distributed. There are problems with this, however; see criticism. Under the model: Portfolio return is the proportion-weighted combination of the constituent assets' returns. Portfolio volatility is a function of the correlations ij of the component assets, for all asset pairs (i, j). In general: Expected return:
where
is the return on the portfolio,
is the return on asset i and
is the weighting of
component asset (that is, the share of asset i in the portfolio). Portfolio return variance:
where
is the correlation coefficient between the returns on assets i and j. Alternatively the
expression can be written as: , where for i=j.
Portfolio return volatility (standard deviation):
For a two asset portfolio: Portfolio return: Portfolio variance: For a three asset portfolio:
Modern portfolio theory Portfolio return: Portfolio variance:
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Diversification
An investor can reduce portfolio risk simply by holding combinations of instruments which are not perfectly positively correlated (correlation coefficient )). In other words, investors can reduce their exposure to individual asset risk by holding a diversified portfolio of assets. Diversification may allow for the same portfolio expected return with reduced risk. If all the asset pairs have correlations of 0they are perfectly uncorrelatedthe portfolio's return variance is the sum over all assets of the square of the fraction held in the asset times the asset's return variance (and the portfolio standard deviation is the square root of this sum).
The efficient frontier with no risk-free asset

As shown in this graph, every possible combination of the risky assets, without including any holdings of the risk-free asset, can be plotted in risk-expected return space, and the collection of all such possible portfolios defines a region in this space. The left boundary of this region is a hyperbola,[8] and the upper edge of this region is the efficient frontier in the absence of a risk-free asset (sometimes called "the Markowitz bullet"). Combinations along this upper edge represent portfolios (including no holdings of the risk-free asset) for which there is lowest risk for a given level of expected return. Equivalently, a portfolio lying on the efficient frontier represents the combination offering the best possible expected return for given risk level. Matrices are preferred for calculations of the efficient frontier. In matrix form, for a given "risk tolerance" following expression: where is a vector of portfolio weights and (The weights can be negative, which means investors can , the efficient frontier is found by minimizing the
Efficient Frontier. The hyperbola is sometimes referred to as the 'Markowitz Bullet', and is the efficient frontier if no risk-free asset is available. With a risk-free asset, the straight line is the efficient frontier.
short a security.); is the covariance matrix for the returns on the assets in the portfolio; is a "risk tolerance" factor, where 0 results in the portfolio with minimal risk and portfolio infinitely far out on the frontier with both expected return and risk unbounded; and is a vector of expected returns. is the variance of portfolio return. is the expected return on the portfolio. The above optimization finds the point on the frontier at which the inverse of the slope of the frontier would be q if portfolio return variance instead of standard deviation were plotted horizontally. The frontier in its entirety is parametric on q. Many software packages, including Microsoft Excel, MATLAB, Mathematica and R, provide optimization routines suitable for the above problem. results in the
Modern portfolio theory An alternative approach to specifying the efficient frontier is to do so parametrically on expected portfolio return This version of the problem requires that we minimize
483
subject to
for parameter
. This problem is easily solved using a Lagrange multiplier.
The two mutual fund theorem

One key result of the above analysis is the two mutual fund theorem.[8] This theorem states that any portfolio on the efficient frontier can be generated by holding a combination of any two given portfolios on the frontier; the latter two given portfolios are the "mutual funds" in the theorem's name. So in the absence of a risk-free asset, an investor can achieve any desired efficient portfolio even if all that is accessible is a pair of efficient mutual funds. If the location of the desired portfolio on the frontier is between the locations of the two mutual funds, both mutual funds will be held in positive quantities. If the desired portfolio is outside the range spanned by the two mutual funds, then one of the mutual funds must be sold short (held in negative quantity) while the size of the investment in the other mutual fund must be greater than the amount available for investment (the excess being funded by the borrowing from the other fund).
The risk-free asset and the capital allocation line

The risk-free asset is the (hypothetical) asset which pays a risk-free rate. In practice, short-term government securities (such as US treasury bills) are used as a risk-free asset, because they pay a fixed rate of interest and have exceptionally low default risk. The risk-free asset has zero variance in returns (hence is risk-free); it is also uncorrelated with any other asset (by definition, since its variance is zero). As a result, when it is combined with any other asset, or portfolio of assets, the change in return is linearly related to the change in risk as the proportions in the combination vary. When a risk-free asset is introduced, the half-line shown in the figure is the new efficient frontier. It is tangent to the hyperbola at the pure risky portfolio with the highest Sharpe ratio. Its horizontal intercept represents a portfolio with 100% of holdings in the risk-free asset; the tangency with the hyperbola represents a portfolio with no risk-free holdings and 100% of assets held in the portfolio occurring at the tangency point; points between those points are portfolios containing positive amounts of both the risky tangency portfolio and the risk-free asset; and points on the half-line beyond the tangency point are leveraged portfolios involving negative holdings of the risk-free asset (the latter has been sold shortin other words, the investor has borrowed at the risk-free rate) and an amount invested in the tangency portfolio equal to more than 100% of the investor's initial capital. This efficient half-line is called the capital allocation line (CAL), and its formula can be shown to be
In this formula P is the sub-portfolio of risky assets at the tangency with the Markowitz bullet, F is the risk-free asset, and C is a combination of portfolios P and F. By the diagram, the introduction of the risk-free asset as a possible component of the portfolio has improved the range of risk-expected return combinations available, because everywhere except at the tangency portfolio the half-line gives a higher expected return than the hyperbola does at every possible risk level. The fact that all points on the linear efficient locus can be achieved by a combination of holdings of the risk-free asset and the tangency portfolio is known as the one mutual fund theorem,[8] where the mutual fund referred to is the tangency portfolio.
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Asset pricing using MPT

The above analysis describes optimal behavior of an individual investor. Asset pricing theory builds on this analysis in the following way. Since everyone holds the risky assets in identical proportions to each othernamely in the proportions given by the tangency portfolioin market equilibrium the risky assets' prices, and therefore their expected returns, will adjust so that the ratios in the tangency portfolio are the same as the ratios in which the risky assets are supplied to the market. Thus relative supplies will equal relative demands. MPT derives the required expected return for a correctly priced asset in this context.
Systematic risk and specific risk

Specific risk is the risk associated with individual assets - within a portfolio these risks can be reduced through diversification (specific risks "cancel out"). Specific risk is also called diversifiable, unique, unsystematic, or idiosyncratic risk. Systematic risk (a.k.a. portfolio risk or market risk) refers to the risk common to all securities except for selling short as noted below, systematic risk cannot be diversified away (within one market). Within the market portfolio, asset specific risk will be diversified away to the extent possible. Systematic risk is therefore equated with the risk (standard deviation) of the market portfolio. Since a security will be purchased only if it improves the risk-expected return characteristics of the market portfolio, the relevant measure of the risk of a security is the risk it adds to the market portfolio, and not its risk in isolation. In this context, the volatility of the asset, and its correlation with the market portfolio, are historically observed and are therefore given. (There are several approaches to asset pricing that attempt to price assets by modelling the stochastic properties of the moments of assets' returns - these are broadly referred to as conditional asset pricing models.) Systematic risks within one market can be managed through a strategy of using both long and short positions within one portfolio, creating a "market neutral" portfolio.
Capital asset pricing model

The asset return depends on the amount paid for the asset today. The price paid must ensure that the market portfolio's risk / return characteristics improve when the asset is added to it. The CAPM is a model which derives the theoretical required expected return (i.e., discount rate) for an asset in a market, given the risk-free rate available to investors and the risk of the market as a whole. The CAPM is usually expressed:
, Beta, is the measure of asset sensitivity to a movement in the overall market; Beta is usually found via regression on historical data. Betas exceeding one signify more than average "riskiness" in the sense of the asset's contribution to overall portfolio risk; betas below one indicate a lower than average risk contribution.
is the market premium, the expected excess return of the market portfolio's expected return
over the risk-free rate. This equation can be statistically estimated using the following regression equation:
where i is called the asset's alpha , i is the asset's beta coefficient and SCL is the Security Characteristic Line. Once an asset's expected return, , is calculated using CAPM, the future cash flows of the asset can be discounted to their present value using this rate to establish the correct price for the asset. A riskier stock will have a higher beta and will be discounted at a higher rate; less sensitive stocks will have lower betas and be discounted at a lower rate. In theory, an asset is correctly priced when its observed price is the same as its value calculated using the CAPM derived discount rate. If the observed price is higher than the valuation, then the asset is overvalued; it is undervalued for a too low price.
Modern portfolio theory (1) The incremental impact on risk and expected return when an additional risky asset, a, is added to the market portfolio, m, follows from the formulae for a two-asset portfolio. These results are used to derive the asset-appropriate discount rate. Market portfolio's risk = Hence, risk added to portfolio = but since the weight of the asset will be relatively low, i.e. additional risk = Market portfolio's expected return = Hence additional expected return = (2) If an asset, a, is correctly priced, the improvement in its risk-to-expected return ratio achieved by adding it to the market portfolio, m, will at least match the gains of spending that money on an increased stake in the market portfolio. The assumption is that the investor will purchase the asset with funds borrowed at the risk-free rate, ; this is rational if . Thus: i.e. : i.e. : is the beta, in the market portfolio's value. return the covariance between the asset's return and the market's return divided by the variance of the market return i.e. the sensitivity of the asset price to movement
485
Criticism
Despite its theoretical importance, critics of MPT question whether it is an ideal investing strategy, because its model of financial markets does not match the real world in many ways. Efforts to translate the theoretical foundation into a viable portfolio construction algorithm have been plagued by technical difficulties stemming from the instability of the original optimization problem with respect to the available data. Recent research has shown that instabilities of this type disappear when a regularizing constraint or penalty term is incorporated in the optimization procedure.[9]
Assumptions
The framework of MPT makes many assumptions about investors and markets. Some are explicit in the equations, such as the use of Normal distributions to model returns. Others are implicit, such as the neglect of taxes and transaction fees. None of these assumptions are entirely true, and each of them compromises MPT to some degree. Asset returns are (jointly) normally distributed random variables. In fact, it is frequently observed that returns in equity and other markets are not normally distributed. Large swings (3 to 6 standard deviations from the mean) occur in the market far more frequently than the normal distribution assumption would predict.[10] While the model can also be justified by assuming any return distribution which is jointly elliptical,[11] [12] all the joint elliptical distributions are symmetrical whereas asset returns empirically are not. Correlations between assets are fixed and constant forever. Correlations depend on systemic relationships between the underlying assets, and change when these relationships change. Examples include one country declaring war on another, or a general market crash. During times of financial crisis all assets tend to become positively correlated, because they all move (down) together. In other words, MPT breaks down precisely when investors are most in need of protection from risk.
Modern portfolio theory All investors aim to maximize economic utility (in other words, to make as much money as possible, regardless of any other considerations). This is a key assumption of the efficient market hypothesis, upon which MPT relies. All investors are rational and risk-averse. This is another assumption of the efficient market hypothesis, but we now know from behavioral economics that market participants are not rational. It does not allow for "herd behavior" or investors who will accept lower returns for higher risk. Casino gamblers clearly pay for risk, and it is possible that some stock traders will pay for risk as well. All investors have access to the same information at the same time. This also comes from the efficient market hypothesis. In fact, real markets contain information asymmetry, insider trading, and those who are simply better informed than others. Investors have an accurate conception of possible returns, i.e., the probability beliefs of investors match the true distribution of returns. A different possibility is that investors' expectations are biased, causing market prices to be informationally inefficient. This possibility is studied in the field of behavioral finance, which uses psychological assumptions to provide alternatives to the CAPM such as the overconfidence-based asset pricing model of Kent Daniel, David Hirshleifer, and Avanidhar Subrahmanyam (2001).[13] There are no taxes or transaction costs. Real financial products are subject both to taxes and transaction costs (such as broker fees), and taking these into account will alter the composition of the optimum portfolio. These assumptions can be relaxed with more complicated versions of the model. All investors are price takers, i.e., their actions do not influence prices. In reality, sufficiently large sales or purchases of individual assets can shift market prices for that asset and others (via cross-elasticity of demand.) An investor may not even be able to assemble the theoretically optimal portfolio if the market moves too much while they are buying the required securities. Any investor can lend and borrow an unlimited amount at the risk free rate of interest. In reality, every investor has a credit limit. All securities can be divided into parcels of any size. In reality, fractional shares usually cannot be bought or sold, and some assets have minimum orders sizes. More complex versions of MPT can take into account a more sophisticated model of the world (such as one with non-normal distributions and taxes) but all mathematical models of finance still rely on many unrealistic premises.
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MPT does not really model the market

The risk, return, and correlation measures used by MPT are based on expected values, which means that they are mathematical statements about the future (the expected value of returns is explicit in the above equations, and implicit in the definitions of variance and covariance). In practice investors must substitute predictions based on historical measurements of asset return and volatility for these values in the equations. Very often such expected values fail to take account of new circumstances which did not exist when the historical data were generated. More fundamentally, investors are stuck with estimating key parameters from past market data because MPT attempts to model risk in terms of the likelihood of losses, but says nothing about why those losses might occur. The risk measurements used are probabilistic in nature, not structural. This is a major difference as compared to many engineering approaches to risk management. Options theory and MPT have at least one important conceptual difference from the probabilistic risk assessment done by nuclear power [plants]. A PRA is what economists would call a structural model. The components of a system and their relationships are modeled in Monte Carlo simulations. If valve X fails, it causes a loss of back pressure on pump Y, causing a drop in flow to vessel Z, and so on. But in the Black-Scholes equation and MPT, there is no attempt to explain an underlying structure to price changes. Various outcomes are simply given probabilities. And, unlike the PRA, if there is no history of a
Modern portfolio theory particular system-level event like a liquidity crisis, there is no way to compute the odds of it. If nuclear engineers ran risk management this way, they would never be able to compute the odds of a meltdown at a particular plant until several similar events occurred in the same reactor design. Douglas W. Hubbard, 'The Failure of Risk Management', p. 67, John Wiley & Sons, 2009. ISBN 978-0-470-38795-5 Essentially, the mathematics of MPT view the markets as a collection of dice. By examining past market data we can develop hypotheses about how the dice are weighted, but this isn't helpful if the markets are actually dependent upon a much bigger and more complicated chaotic systemthe world. For this reason, accurate structural models of real financial markets are unlikely to be forthcoming because they would essentially be structural models of the entire world. Nonetheless there is growing awareness of the concept of systemic risk in financial markets, which should lead to more sophisticated market models. Mathematical risk measurements are also useful only to the degree that they reflect investors' true concernsthere is no point minimizing a variable that nobody cares about in practice. MPT uses the mathematical concept of variance to quantify risk, and this might be justified under the assumption of elliptically distributed returns such as normally distributed returns, but for general return distributions other risk measures (like coherent risk measures) might better reflect investors' true preferences. In particular, variance is a symmetric measure that counts abnormally high returns as just as risky as abnormally low returns. Some would argue that, in reality, investors are only concerned about losses, and do not care about the dispersion or tightness of above-average returns. According to this view, our intuitive concept of risk is fundamentally asymmetric in nature. MPT does not account for the personal, environmental, strategic, or social dimensions of investment decisions. It only attempts to maximize risk-adjusted returns, without regard to other consequences. In a narrow sense, its complete reliance on asset prices makes it vulnerable to all the standard market failures such as those arising from information asymmetry, externalities, and public goods. It also rewards corporate fraud and dishonest accounting. More broadly, a firm may have strategic or social goals that shape its investment decisions, and an individual investor might have personal goals. In either case, information other than historical returns is relevant. Financial economist Nassim Nicholas Taleb has also criticized modern portfolio theory because it assumes a Gaussian distribution: After the stock market crash (in 1987), they rewarded two theoreticians, Harry Markowitz and William Sharpe, who built beautifully Platonic models on a Gaussian base, contributing to what is called Modern Portfolio Theory. Simply, if you remove their Gaussian assumptions and treat prices as scalable, you are left with hot air. The Nobel Committee could have tested the Sharpe and Markowitz models they work like quack remedies sold on the Internet but nobody in Stockholm seems to have thought about it.[14] :p.279
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The MPT does not take its own effect on asset prices into account
Diversification eliminates non-systematic risk, but at the cost of increasing the systematic risk. Diversification forces the portfolio manager to invest in assets without analyzing their fundamentals, solely for the benefit of eliminating the portfolios non-systematic risk (the CAPM assumes investment in all available assets). This artificially increased demand pushes up the price of assets that, when analyzed individually, would be of little fundamental value. The result is that the whole portfolio becomes more expensive and, as a result, the probability of a positive return decreases (i.e. the risk of the portfolio increases). Empirical evidence for this is the price hike that stocks typically experience once they are included in major indices like the S&P 500.
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Extensions
Since MPT's introduction in 1952, many attempts have been made to improve the model, especially by using more realistic assumptions. Post-modern portfolio theory extends MPT by adopting non-normally distributed, asymmetric measures of risk. This helps with some of these problems, but not others. Black-Litterman model optimization is an extension of unconstrained Markowitz optimization which incorporates relative and absolute `views' on inputs of risk and returns.
Other Applications
Applications to project portfolios and other "non-financial" assets
Some experts apply MPT to portfolios of projects and other assets besides financial instruments.[15] [16] When MPT is applied outside of traditional financial portfolios, some differences between the different types of portfolios must be considered. 1. The assets in financial portfolios are, for practical purposes, continuously divisible while portfolios of projects are "lumpy". For example, while we can compute that the optimal portfolio position for 3 stocks is, say, 44%, 35%, 21%, the optimal position for a project portfolio may not allow us to simply change the amount spent on a project. Projects might be all or nothing or, at least, have logical units that cannot be separated. A portfolio optimization method would have to take the discrete nature of projects into account. 2. The assets of financial portfolios are liquid; they can be assessed or re-assessed at any point in time. But opportunities for launching new projects may be limited and may occur in limited windows of time. Projects that have already been initiated cannot be abandoned without the loss of the sunk costs (i.e., there is little or no recovery/salvage value of a half-complete project). Neither of these necessarily eliminate the possibility of using MPT and such portfolios. They simply indicate the need to run the optimization with an additional set of mathematically-expressed constraints that would not normally apply to financial portfolios. Furthermore, some of the simplest elements of Modern Portfolio Theory are applicable to virtually any kind of portfolio. The concept of capturing the risk tolerance of an investor by documenting how much risk is acceptable for a given return may be applied to a variety of decision analysis problems. MPT uses historical variance as a measure of risk, but portfolios of assets like major projects don't have a well-defined "historical variance". In this case, the MPT investment boundary can be expressed in more general terms like "chance of an ROI less than cost of capital" or "chance of losing more than half of the investment". When risk is put in terms of uncertainty about forecasts and possible losses then the concept is transferable to various types of investment.[15]
Application to other disciplines

In the 1970s, concepts from Modern Portfolio Theory found their way into the field of regional science. In a series of seminal works, Michael Conroy modeled the labor force in the economy using portfolio-theoretic methods to examine growth and variability in the labor force. This was followed by a long literature on the relationship between economic growth and volatility.[17] More recently, modern portfolio theory has been used to model the self-concept in social psychology. When the self attributes comprising the self-concept constitute a well-diversified portfolio, then psychological outcomes at the level of the individual such as mood and self-esteem should be more stable than when the self-concept is undiversified. This prediction has been confirmed in studies involving human subjects.[18] Recently, modern portfolio theory has been applied to modelling the uncertainty and correlation between documents in information retrieval. Given a query, the aim is to maximize the overall relevance of a ranked list of documents
Modern portfolio theory and at the same time minimize the overall uncertainty of the ranked list.[19]
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Comparison with arbitrage pricing theory

The SML and CAPM are often contrasted with the arbitrage pricing theory (APT), which holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors, where sensitivity to changes in each factor is represented by a factor specific beta coefficient. The APT is less restrictive in its assumptions: it allows for an explanatory (as opposed to statistical) model of asset returns, and assumes that each investor will hold a unique portfolio with its own particular array of betas, as opposed to the identical "market portfolio". Unlike the CAPM, the APT, however, does not itself reveal the identity of its priced factors - the number and nature of these factors is likely to change over time and between economies.
References
[1] [2] [3] [4] Harry M. Markowitz - Autobiography, The Nobel Prizes 1990, Editor Tore Frngsmyr, [Nobel Foundation], Stockholm, 1991 http:/ / www. emanagedfutures. com/ articles/ reducing-portfolio-volatility/ Andrei Shleifer: Inefficient Markets: An Introduction to Behavioral Finance. Clarendon Lectures in Economics (2000) Koponen, Timothy M. 2003. Commodities in action: measuring embeddedness and imposing values. The Sociological Review. Volume 50 Issue 4, Pages 543 - 569
[5] Edwin J. Elton and Martin J. Gruber, "Modern portfolio theory, 1950 to date", Journal of Banking & Finance 21 (1997) 1743-1759 [6] Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance 7 (1): 7791. doi:10.2307/2975974. JSTOR2975974. [7] Markowitz, H.M. (1959). Portfolio Selection: Efficient Diversification of Investments (http:/ / cowles. econ. yale. edu/ P/ cm/ m16/ index. htm). New York: John Wiley & Sons. . (reprinted by Yale University Press, 1970, ISBN 978-0-300-01372-6; 2nd ed. Basil Blackwell, 1991, ISBN 978-1-55786-108-5) [8] Merton, Robert. "An analytic derivation of the efficient portfolio frontier," Journal of Financial and Quantitative Analysis 7, September 1972, 1851-1872. [9] Brodie, De Mol, Daubechies, Giannone and Loris (2009). "Sparse and stable Markowitz portfolios" (http:/ / www. pnas. org/ content/ 106/ 30/ 12267. abstract?sid=65401f6d-5d02-4bbb-ad0c-0f2270558572http:/ / www. pnas. org/ content/ 106/ 30/ 12267. abstract?sid=65401f6d-5d02-4bbb-ad0c-0f2270558572). Proceedings of the National Academy of Science 106 (30). . [10] Mandelbrot, B., and Hudson, R. L. (2004). The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin, and Reward. London: Profile Books. [11] Chamberlain, G. 1983."A characterization of the distributions that imply mean-variance utility functions", Journal of Economic Theory 29, 185-201. [12] Owen, J., and Rabinovitch, R. 1983. "On the class of elliptical distributions and their applications to the theory of portfolio choice", Journal of Finance 38, 745-752. [13] 'Overconfidence, Arbitrage, and Equilibrium Asset Pricing,' Kent D. Daniel, David Hirshleifer and Avanidhar Subrahmanyam, Journal of Finance, 56(3) (June, 2001), pp. 921-965 [14] Taleb, Nassim Nicholas (2007), The Black Swan: The Impact of the Highly Improbable, Random House, ISBN 978-1-4000-6351-2. [15] Hubbard, Douglas (2007). How to Measure Anything: Finding the Value of Intangibles in Business. Hoboken, NJ: John Wiley & Sons. ISBN9780470110126. [16] Sabbadini, Tony (2010). "Manufacturing Portfolio Theory" (http:/ / www. scribd. com/ doc/ 40365034/ Manufacturing-Portfolio-Theory-CFPv1). International Institute for Advanced Studies in Systems Research and Cybernetics. . [17] Chandra, Siddharth (2003). "Regional Economy Size and the Growth-Instability Frontier: Evidence from Europe". Journal of Regional Science 43 (1): 95122. doi:10.1111/1467-9787.00291. [18] Chandra, Siddharth; Shadel, William G. (2007). "Crossing disciplinary boundaries: Applying financial portfolio theory to model the organization of the self-concept". Journal of Research in Personality 41 (2): 346373. doi:10.1016/j.jrp.2006.04.007. [19] http:/ / web4. cs. ucl. ac. uk/ staff/ jun. wang/ blog/ 2009/ 07/ 11/ portfolio-theory/
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Further reading
Lintner, John (1965). "The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets". The Review of Economics and Statistics (The MIT Press) 47 (1): 1339. doi:10.2307/1924119. JSTOR1924119. Sharpe, William F. (1964). "Capital asset prices: A theory of market equilibrium under conditions of risk". Journal of Finance 19 (3): 425442. doi:10.2307/2977928. JSTOR2977928. Tobin, James (1958). "Liquidity preference as behavior towards risk". The Review of Economic Studies 25 (2): 6586. doi:10.2307/2296205. JSTOR2296205.
External links
Macro-Investment Analysis (http://www.stanford.edu/~wfsharpe/mia/mia.htm), Prof. William F. Sharpe, Stanford An Introduction to Investment Theory (http://viking.som.yale.edu/will/finman540/classnotes/notes.html), Prof. William N. Goetzmann, Yale School of Management Free Stock Portfolio Optimization Online (http://www.fastocks.com/) Allows users to compare stock performance, make free stock analysis, and optimize stock portfolio.
Post-modern portfolio theory

Post-modern portfolio theory[1] (or "PMPT") is an extension of the traditional modern portfolio theory (MPT, which is an application of mean-variance analysis or MVA). Both theories propose how rational investors should use diversification to optimize their portfolios, and how a risky asset should be priced. What has come to be known as Post Modern Portfolio Theory (PMPT) has no single author. It combines the theoretical research of many authors and has expanded over several decades as academics at universities in many countries tested these theories to determine whether or not they had merit. The essential difference between PMPT and the modern portfolio theory of Markowitz and Sharpe (MPT) is that PMPT focuses on the return that must be earned on the assets in a portfolio in order to meet some future payout. This internal rate of return (IRR) is the link between assets and liabilities. PMPT measures risk and reward relative to this IRR while MPT ignores this IRR and measures risk as dispersion about the mean or average return. The result is substantially different portfolio constructions. Empirical investigations began in 1981 at the Pension Research Institute (PRI) at San Francisco State University. Dr. Hal Forsey and Dr. Frank Sortino were trying to apply Peter Fishburns theory published in 1977 to Pension Fund Management. The result was an asset allocation model that PRI licensed Brian Rom to market in 1988. Mr. Rom heard someone at a conference use the term PMPT and began to use the term to market PRIs allocation model. Sortino and Steven Satchell at Cambridge University co-authored the first book on PMPT. This was intended as a graduate seminar text in portfolio management. A more recent book by Sortino was written for practitioners. The first publication in a major journal was co-authored by Sortino and Dr. Robert van der Meer, then at Shell Oil Netherlands. The concept was popularized by numerous articles by Sortino in Pensions and Investments magazine. Videos, books and papers on PMPT can be found at www.sortinodtr.com. Sortinos current comments regarding PMPT are found at http:/ /pmpt.wordpress.com. A blog for anyone to post comments is http:/ / groups. google. com/ group/pmpt-dtr Sortino claims the major contributors to the underlying theory are: Peter Fishburn at the University of Pennsylvania who developed the mathematical equations for calculating downside risk and provided proofs that the Markowitz model was a subset of a richer framework. Atchison & Brown at Cambridge University who developed the three parameter lognormal distribution which was a more robust model of the pattern of returns than the bell shaped
Post-modern portfolio theory distribution of MPT. Bradley Efron, Stanford University, who developed the bootstrap procedure for better describing the nature of uncertainty in financial markets. William Sharpe at Stanford University who developed returns based style analysis that allowed more accurate estimates of risk and return. Daniel Kahneman at Princeton & Amos Tversky at Stanford who pioneered the field of Behavioral Finance which contests many of the findings of MPT.
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Endnotes
[1] The earliest citation of the term 'Post-Modern Portfolio Theory' in the literature appears in 1993 in the article "Post-Modern Portfolio Theory Comes of Age" by Brian M. Rom and Kathleen W. Ferguson, published in The Journal of Investing, Winter, 1993. Summarized versions of this article have been subsequently published in a number of other journals and websites.
References
For a comprehensive survey of the early literature, see R. Libby and P.C. Fishburn [1977]. Bawa, V. S. (1982). "Stochastic Dominance: A Research Bibliography". Management Science. Balzer, L. A. (1994). "Measuring Investment Risk: A Review". Journal of Investing. Clarkson, R.S. Presentation to the Faculty of Actuaries (British). February 20, 1989. Fishburn, Peter C. (1977). "Mean-Risk Analysis with Risk Associated with Below-Target Returns" (http://jstor. org/stable/1807225). American Economic Review (American Economic Association) 67 (2): 116126. Hammond, Dennis R. (1993). "Risk Management Approaches in Endowment Portfolios in the 1990's". Journal of Investing. Harlow, W.V. "Asset Allocation in a Downside Risk Framework." Financial Analysts Journal, Sept-Oct 1991. "Investment Review." Brinson Partners, Inc. 1992. Kaplan, P. and L. Siegel. "Portfolio Theory is Alive and Well," Journal of Investing, Fall 1994. Lewis, A.L. "Semivariance and the Performance of Portfolios with Options." Financial Analysts Journal, JulyAugust 1990. Leibowitz, M.L. and S. Kogelman. "Asset Allocation under Shortfall Constraints." Salomon Brothers, 1987. Leibowitz, M.L., and T.C. Langeteig. "Shortfall Risks and the Asset Allocation Decision." Journal of Portfolio management, Fall 1989. Libby, R.; Fishburn, P.C. (1977). "Behavioral Models of Risk taking in Business decisions: A Survey and Evaluation" (http://jstor.org/stable/2490353). Journal of Accounting Research (Accounting Research Center, Booth School of Business, University of Chicago) 15 (2): 272292. doi:10.2307/2490353. See also Kahneman, D.; Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under Risk" (http://jstor.org/stable/ 1914185). Econometrica (The Econometric Society) 47 (2): 263291. doi:10.2307/1914185. Post-Modern Portfolio Theory Spawns Post-Modern Optimizer." Money Management Letter, February 15, 1993. Rom, B. M. and K. Ferguson. "Post-Modern Portfolio Theory Comes of Age." Journal of Investing, Winter 1993. Rom, B. M. and K. Ferguson. "Portfolio Theory is Alive and Well: A Response." Journal of Investing, Fall 1994. Rom, B. M. and K. Ferguson. "A software developer's view: using Post-Modern Portfolio Theory to improve investment performance measurement." Managing downside risk in financial markets: Theory, practice and implementation; Butterworth-Heinemann Finance, 2001; p59. Sharpe, W.F. "Capital Asset Prices: A Theory of Market Equilibrium under Consideration of Risk." Journal of Finance, Vol. XIX (1964) Sortino, F. "Looking only at return is risky, obscuring real goal." Pensions and Investments magazine, November 25, 1997. Sortino, F. and H. Forsey "On the Use and Misuse of Downside Risk." The Journal of Portfolio Management, Winter 1996. Sortino, F. and L. Price. "Performance Measurement in a Downside Risk Framework." Journal of Investing, Fall 1994.
Post-modern portfolio theory Sortino, F. and S. Satchell, editors. "Managing downside risk in financial markets: Theory, practice and implementation" Butterworth-Heinemann Finance, 2001. Sortino, F. and R. van der Meer. "Downside Risk: Capturing What's at Stake." Journal of Portfolio Management, Summer 1991. "Why Investors Make the Wrong Choices." Fortune Magazine, January 1987.
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External links
Investment Technologies (http://investmenttechnologies.com/publications.html) FPA Net (http://www.fpanet.org/journal/articles/2005_Issues/jfp0905-art7.cfm) Investment technologies (http://investmenttechnologies.com/about.html)
Retirement spend down

At retirement individuals relinquish a steady stream of employment earnings and enter a phase where they will rely upon the assets they have accumulated to finance the rest of their lives. Retirement spend down refers to the strategy a retiree follows to spend down, or decumulate, assets during retirement. Retirement planning aims to prepare individuals for retirement spend down because the alternative spend down approaches available to retirees depend heavily on decisions they make during their working years. Actuaries and financial planners are experts on this topic.
Importance
More than 10,000 Post-World War II baby boomers will retire every day between now and 2027.[1] This represents the majority of the more than 78 million Americans that comprise this generation those born between 1946 and 1964. 74% of these people are expected to be alive in 2030, which highlights that most of them will live for many years beyond retirement.[2] The following statistics emphasize the importance of a well-planned retirement spend down strategy for these people: Percent of workers who do not feel very confident about having enough money to retire comfortably: 87%[3] Percent of retirees who do not feel very confident about maintaining financial security throughout their remaining lifetime: 80%[4] Percent of workers over age 55 with less than $50,000 of savings: 49% [5] Percent of workers who have not saved at all for retirement: 25%[3] Percent of workers who are not currently saving for retirement: 35%[3] Percent of workers who have not tried to calculate their income needs in retirement: 56%[3]
Successful retirement spend down

Individuals each have their own retirement aspirations, but all retirees face longevity risk the risk of outliving their assets. This can spell financial disaster. Avoiding this risk is therefore a baseline goal that any successful retirement spend down strategy addresses. Generally, longevity risk is greatest for low and middle income individuals. The probabilities of a 65-year old living to various ages are:[6]
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Probability 75% 50% 25%
Male 78 85 91
Female 81 88 93
Longevity risk is largely underestimated. Most retirees do not expect to live beyond age 85, let alone into their 90s. A study of recently retired individuals asked them to rank the following risks in order of the level of concern they present:[7] Health care costs Inflation Investment risk Maintaining lifestyle Need for long-term care Outliving assets (longevity risk)
Longevity risk was ranked as the least concerning of these risks.
Sources of retirement income

Individuals may receive retirement income from a variety of sources: Personal savings Retirement Savings Plans (i.e., Individual retirement account (United States), Registered Retirement Savings Plan (Canada)) Defined contribution plans (i.e., 401(k), 403(b), SIMPLE, 457(b), etc.) Defined benefit pension plans Social Insurance (i.e., Canada Pension Plan, Old Age Security (Canada), National Insurance (United Kingdom), Social Security (United States)) Rental income Annuities Each has unique risk, eligibility, tax, timing, form of payment, and distribution considerations that should be integrated into a retirement spend down strategy.
Modeling retirement spend down: Traditional approach

Traditional retirement spend down approaches generally take the form of a gap analysis. Essentially, these tools collect a variety of input variables from an individual and use them to project the likelihood that the individual will meet specified retirement goals. They model the shortfall or surplus between the individuals retirement income and expected spending needs to identify whether the individual has adequate resources to retire at a particular age. Depending on their sophistication, they may be stochastic (often incorporating Monte Carlo simulation) or deterministic. Standard input variables Current age Expected retirement date or age Life expectancy Current savings Savings rate Current salary
Retirement spend down Salary increase rate Tax rate Inflation rate Rate of return on investments Expected retirement expenses
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Additional input variables that can enhance model sophistication Marital status Spouses age Spouses assets Health status Medical expense inflation Estimated Social Security benefit Estimated benefits from employer sponsored plans Asset class weights comprising personal savings Detailed expected retirement expenses Value of home and mortgage balance Life insurance holdings
Expected post-retirement part-time income Output Shortfall or surplus There are three primary approaches utilized to estimate an individuals spending needs in retirement: Income replacement ratios: financial experts generally suggest that individuals need at least 70% of their pre-retirement income to maintain their standard of living.[8] This approach is criticized from the standpoint that expenses, such as those related to health care, are not stable over time. Consumption smoothing: under this approach individuals develop a target expenditure pattern, generally far before retirement, that is intended to remain level throughout their lives. Proponents argue that individuals often spend conservatively earlier in their lives and could increase their overall utility and living standard by smoothing their consumption.[9] Direct expense modeling: with the help of financial experts, individuals attempt to estimate future expenses directly, using projections of inflation, health care costs, and other variables to provide a framework for the analysis.
Impact of market downturn

Market volatility can have a significant impact on both a workers retirement preparedness and a retirees retirement spend down strategy. The global financial crisis of 20082009 provides an example. American workers lost an estimated $2 trillion in retirement savings during this time frame.[10] 54% of workers lost confidence in their ability to retire comfortably due the direct impact of the market turmoil on their retirement savings.[3] Asset allocation contributed significantly to these issues. Basic investment principles recommend that individuals reduce their equity investment exposure as they approach retirement. Studies show, however, that 43% of 401(k) participants had equity exposure in excess of 70% at the beginning of 2008.[11]
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Coping with retirement spend down challenges

Longevity risk becomes more of a concern for individuals when their retirement savings are depleted by asset losses. Following the market downturn of 2008-2009, 61% of working baby boomers are concerned about outliving their retirement assets.[12] Traditional spend down approaches generally recommend three ways they can attempt to address this risk: Save more (spend less) Invest more aggressively Lower their standard of living Saving more and investing more aggressively are difficult strategies for many individuals to implement due to constraints imposed by current expenses or an aversion to increased risk. Most individuals also are averse to lowering their standard of living. The closer individuals are to retirement, the more drastic these measures must be for them to have a significant impact on the individuals retirement savings or spend down strategies.
Postponing retirement
Individuals tend to have significantly more control over their retirement ages than they do over their savings rates, asset returns, or expenses. As a result, postponing retirement can be an attractive option for individuals looking to enhance their retirement preparedness or recover from investment losses. The relative impact that delaying retirement can have on an individual's retirement spend down is dependent upon specific circumstances, but research has shown that delaying retirement from age 62 to age 66 can increase an average workers retirement income by 33%.[13] Postponing retirement minimizes the probability of running out of retirement savings in several ways: Additional returns are earned on savings that otherwise would be paid out as retirement income Additional savings are accumulated from a longer wage-earning period The post-retirement period is shortened Other sources of retirement income increase in value (Social Security, defined contribution plans, defined benefit pension plans)
Studies show that nearly half of all workers expect to delay their retirement because they have accumulated fewer retirement assets than they had planned.[10] Much of this is attributable to the market downturn of 20082009. Various unforeseen circumstances cause nearly half of all workers to retire earlier than they intend.[3] In many cases, these individuals intend to work part-time during retirement. Again, however, statistics show that this is far less common than intentions would suggest.[3]
Modeling retirement spend down: Alternative approach

The appeal of retirement age flexibility is the focal point of an actuarial approach to retirement spend down that has spawned in response to the surge of baby boomers approaching retirement. The approach is based on a supply and demand model where supply and demand represent the following, which vary across different retirement ages: Supply = the number of post-retirement years an individuals financial resources are expected to cover Demand = the number of post-retirement years an individual is expected to live Under this approach, individuals can specify a desired probability of retirement spend down success. Unlike traditional spend down approaches, retirement age is an output. It is identified by the intersection of the supply and demand curves. This framework allows individuals to quantify the impact of any adjustments to their financial circumstances on their optimal retirement age.
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Similarity to individual asset/liability modeling

Most approaches to retirement spend down can be likened to individual asset/liability modeling. Regardless of the strategy employed, they seek to ensure that individuals assets available for retirement are sufficient to fund their post-retirement liabilities and expenses.
External links
Post Retirement Needs and Risks [14], Society of Actuaries Financial Planning and Retirement Portal [15], AARP Retirement Portal [16], 360 Degrees of Financial Literacy Employee Benefit Research Institute [17] Center for Retirement Research [18], Boston College Journal of Financial Planning [19]
References
[1] http:/ / www. infre. org/ [2] http:/ / www. seniorcitizens. com/ Baby_Boomers [3] http:/ / www. ebri. org/ pdf/ briefspdf/ EBRI_IB_4-2009_RCS1. pdf [4] http:/ / bulletin. aarp. org/ yourmoney/ retirement/ articles/ for_many_retiring_will_mean_tighter_belts. html [5] http:/ / www. ebri. org/ pdf/ FFE119. 16April09. Final. pdf [6] http:/ / www. nylim. com/ mainstayfunds/ 0,2058,20_12007218,00. html [7] http:/ / www. soa. org/ files/ pdf/ spending-investing-retirement. pdf [8] http:/ / www. aarp. org/ money/ financial_planning/ sessionseven/ can_you_afford_to_retire. html [9] http:/ / www. soa. org/ files/ pdf/ research-perspective-retirement. pdf [10] http:/ / www. ebri. org/ pdf/ WSJ_Emp-Bens-Supp_02Apr09. pdf [11] http:/ / www. ebri. org/ pdf/ briefspdf/ EBRI_IB_2-2009_Crisis-Impct. pdf [12] http:/ / www. whymetlife. com/ trends/ downloads/ MetLife_EBTS09. pdf [13] http:/ / crr. bc. edu/ images/ stories/ myths_and_realities. pdf?phpMyAdmin=43ac483c4de9t51d9eb41 [14] http:/ / www. soa. org/ research/ pension/ research-post-retirement-needs-and-risks. aspx [15] http:/ / www. aarp. org/ money/ financial_planning [16] http:/ / www. 360financialliteracy. org/ Life+ Stages/ Retirement [17] http:/ / www. ebri. org [18] http:/ / crr. bc. edu/ index. php [19] http:/ / www. fpajournal. org
Retirement planning
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Retirement planning
Retirement planning, in a financial context, refers to the allocation of finances for retirement. This normally means the setting aside of money or other assets to obtain a steady income at retirement. The goal of retirement planning is to achieve financial independence, so that the need to be gainfully employed is optional rather than a necessity. The process of retirement planning aims to: 1. Assess readiness-to-retire given a desired retirement age and lifestyle, i.e. whether one has enough money to retire; and 2. Identify actions to improve readiness-to-retire.
Obtaining a financial plan

In recent years, producers such as a financial planner or financial adviser have been available to help clients develop retirement plans, where compensation is either fee-based or commissioned contingent on product sale. Such arrangement is sometimes viewed as conflicting to a consumer's interest to have advice rendered without bias or at cost that justifies value. Consumers can now elect a do it yourself (DIY) approach, given the advent of a large, ever growing body of resources. For example, retirement web-tools in the form of simple calculator, mathematical model or decision support system have appeared with greater frequency. A web-based tool that allows client to fully plan, without human intervention, might be considered a producer. A key motivation beyond the DIY trend is based on many of the same arguments of Lean manufacturing process, a constructive alteration of the relationship between producer and consumer.
Modeling and Limitations

Retirement finances touch upon a motley of distinct subject areas or financial domains of client importance, including: investments (i.e. stocks, bonds, mutual funds); real estate; debt; taxes; cash flow (income and expense) analysis; insurance; defined benefits (e.g. social security, traditional pensions). From an analytic perspective, each domain can be formally characterized and modeled using a different class (computer science) representation, as defined by a domain's unique set of attributes and behaviors. Domain models require definition only at a level of abstraction necessary for decision analysis. Since planning is about the future, domains need to extend beyond current state description and address uncertainty, volatility, change dynamics (i.e. constancy or determinism is not assumed). Together, these factors raise significant challenges to any current producer claim of model predictability or certainty. Some might even adopt fatalism -- that the full scope of client issues, non-financial included, render the entire problem indeterminate, unsolvable, and meaningless.
The Monte Carlo method

The Monte Carlo method is a perhaps the most common form of a mathematical model that is applied to predict long-term investment behavior for a client's retirement planning. Its use helps to identify adequacy of client's investment to attain retirement readiness and to clarify strategic choices and actions. Yet, the investment domain is only financial domain and therefore is incomplete. Depending on client context and despite popular press, the investment domain may have very little importance in relation to a client's other domains - e.g. a client who is predisposed to the use of real estate as primary source of retirement funding.
Retirement planning
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Other models
Contemporary retirement planning models have yet to be validated in the sense that the models purport to project a future that has yet to manifest itself. The criticism with contemporary models are some of the same levied against Neoclassical economics. The critic argues that contemporary models may only have proven validity retrospectively, whereas it is the indeterminate future that needs solution. A more moderate school believes that retirement planning methods must further evolve by adopting a more robust and integrated set of tools from the field of complexity science.
References
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem.[1] An individual, community, region or country that possesses an abundance of such possessions or resources is known as wealthy. The concept of wealth is of significance in all areas of economics, especially development economics, yet the meaning of wealth is context-dependent and there is no universally agreed upon definition. Generally, economists define wealth as "anything of value" which captures both the subjective nature of the idea and the idea that it is not a fixed or static concept. Various definitions and concepts of wealth have been asserted by various individuals and in different contexts.[2] Defining wealth can be a normative process with various ethical implications, since often wealth maximization is seen as a goal or is thought to be a normative principle of its own.[3] Although precise data is not available, the total household wealth in the world has been estimated at $125 trillion (USD 125 x1012) in year 2000. About 90% of global wealth is distributed in North America, Europe, and "rich Asia-Pacific" countries (not including India)[4] , and 1% of adults are estimated to hold 40% of world wealth, a number which falls to 32% when adjusted for purchasing power parity.[5]
Definition
For definitions of "wealth," see also Christian Bishop, The Wealth of Nations and Max Weber, The Protestant Ethic and the Spirit of Capitalism. Adam Smith, in his seminal work The Wealth of Nations, described wealth as "the annual produce of the land and labour of the society". This "produce" is, at its simplest, that which satisfies human needs and wants of utility. In popular usage, wealth can be described as an abundance of items of economic value, or the state of controlling or possessing such items, usually in the form of money, real estate and personal property. An individual who is considered wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their society or reference group. In economics, net wealth refers to the value of assets owned minus the value of liabilities owed at a point in time. Wealth can be categorized into three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of past income; and the capital wealth of income producing assets, including real estate, stocks, bonds, and businesses. All these delineations make wealth an especially important part of social stratification. Wealth provides a type of social safety net of protection against an unforeseen decline in ones living standard in the event of job loss or other emergency and can be transformed into home ownership, business ownership, or even a college education.[6] 'Wealth' refers to some accumulation of resources, whether abundant or not. 'Richness' refers to an abundance of such resources. A wealthy (or rich) individual, community, or nation thus has more resources than a poor one.
Wealth Richness can also refer to at least basic needs being met with abundance widely shared. The opposite of wealth is destitution. The opposite of richness is poverty. The term implies a social contract on establishing and maintaining ownership in relation to such items which can be invoked with little or no effort and expense on the part of the owner. The concept of wealth is relative and not only varies between societies, but varies between different sections or regions in the same society. A personal net worth of US $10,000 in most parts of the United States would certainly not place a person among the wealthiest citizens of that locale. However, such an amount would constitute an extraordinary amount of wealth in impoverished developing countries. Concepts of wealth also vary across time. Modern labor-saving inventions and the development of the sciences have enabled the poorest sectors of today's society to enjoy a standard of living equivalent if not superior to the wealthy of the not-too-distant past. This comparative wealth across time is also applicable to the future; given this trend((cn)) of human advancement, it is likely that the standard of living that the wealthiest enjoy today will be considered impoverished by future generations. Industrialization emphasized the role of technology. Many jobs were automated. Machines replaced some workers while other workers became more specialized. Labour specialization became critical to economic success. However, physical capital, as it came to be known, consisting of both the natural capital and the infrastructural capital, became the focus of the analysis of wealth. Adam Smith saw wealth creation as the combination of materials, labour, land, and technology in such a way as to capture a profit (excess above the cost of production).[7] The theories of David Ricardo, John Locke, John Stuart Mill, in the 18th century and 19th century built on these views of wealth that we now call classical economics. Marxian economics (see labor theory of value) distinguishes in the Grundrisse between material wealth and human wealth, defining human wealth as "wealth in human relations"; land and labour were the source of all material wealth.
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Economic analysis
In economics, wealth is the net worth of a person, household, or nation, that is, the value of all assets owned net of all liabilities owed at a point in time. For national wealth as measured in the national accounts, the net liabilities are those owed to the rest of the world.[8] The term may also be used more broadly as referring to the productive capacity of a society or as a contrast to poverty.[9] Analytical emphasis may be on its determinants or distribution.[10] Economic terminology distinguishes between two types of variables: stock and flow. Wealth, as measurable at a date in time, is a stock, like the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow. What marks the income as a flow is its measurement per unit of time, like the value of apples yielded from the orchard per year. In macroeconomic theory the 'wealth effect' may refer to the increase in aggregate consumption from an increase in national wealth. One measure of it is the wealth elasticity of demand. It is the percentage change in the amount demanded of consumption for each one-percent change in wealth. Wealth may be measured in nominal or real values, that is in money value as of a given date or adjusted to net out price changes. The assets include those that are tangible (land and capital) and financial (money, bonds, etc.). Measurable wealth typically excludes intangible or nonmarketable assets such as human capital and social capital. In economics, 'wealth' corresponds to the accounting term 'net worth'. But analysis may adapt typical accounting conventions for economic purposes in social accounting (such as in national accounts). An example of the latter is generational accounting of social security systems to include the present value projected future outlays considered as liabilities.[11] Macroeconomic questions include whether the issuance of government bonds affects investment and consumption through the wealth effect.[12]
Wealth Environmental assets are not usually counted in measuring wealth, in part due to the difficulty of valuation for a non-market good. Environmental or green accounting is a method of social accounting for formulating and deriving such measures on the argument that an educated valuation is superior to a value of zero (as the implied valuation of environmental assets).[13]
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Sociological treatments
"Wealth provides an important mechanism in the intergenerational transmission of inequality."[6] Approximately one half of the wealthiest people in America inherited family fortunes. But the effect of inherited wealth can also be seen on a more modest level. For example, a couple who buy a house with financial help from their parents or a student who has his or her college education paid for; in both scenarios the participants are benefiting directly from the accumulated wealth of previous generations.[6]
Wealth and Social Class

Social class is not identical to wealth, but the two concepts are related (particularly in Marxist theory), leading to the combined concept of Socioeconomic status. Partly as a result of different economic conditions of life, members of different social classes often have different value systems and view the world in different ways. As such, there exist different "conceptions of social reality, different aspirations and hopes and fears, different conceptions of the desirable."[14] The way the various social classes in society view wealth vary and these diverse characteristics are a fundamental dividing line among the classes. According to Richard H Ropers, the concentration of wealth in the United States is inequitably distributed.[15] In 1996, the United States federal government reported that the net worth of the top 1 percent of people in the United States was approximately equal to that of the bottom 90 percent.[6] The Upper Class Upper class values include higher education,and the wealthiest people the accumulation and maintenance of wealth, the maintenance of social networks and the power that accompanies such networks. Children of the upper class are typically schooled on how to manage this power and channel this privilege in different forms. It is in large part by accessing various edifices of information , associates, procedures and auspices that the upper class are able to maintain their wealth and pass it to future generations.[16] The Middle Class The middle class places a greater emphasis on income. The middle class views wealth as something for emergencies and it is seen as more of a cushion. This class comprises people that were raised with families that typically owned their own home, planned ahead and stressed the importance of education and achievement. They earn a significant amount of income and also have significant amounts of consumption. However there is very limited savings (deferred consumption) or investments, besides retirement pensions and homeownership. They have been socialized to accumulate wealth through structured, institutionalized arrangements. Without this set structure, asset accumulation would likely not occur.[16]
Wealth The Lower Class Those with the least amount of wealth are the welfare poor. (see underclass) Wealth accumulation for this class is to some extent prohibited. People that receive AFDC transfers cannot own more than a trivial amount of assets, in order to be eligible and remain qualified for income transfers. Most of the institutions that the welfare poor encounter discourage any accumulation of assets.[16]
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Wealth in the form of land

In the western tradition, the concepts of owning land and accumulating wealth in the form of land were engendered in the rise of the first state, for a primary service and power of government was, and is to this day, the awarding and adjudication of land use rights. Land ownership was also justified according to John Locke. He claimed that because we admix our labour with the land, we thereby deserve the right to control the use of the land and benefit from the product of that land (but subject to his Lockean proviso of "at least where there is enough, and as good left in common for others."). Additionally, in developed countries post-agrarian society (Industrial society) this argument has many critics (including those influenced by Georgist and geolibertarian ideas) who argue that since land, by definition, is not a product of human labor, any claim of private property in it is a form of theft; as David Lloyd George observed, "to prove a legal title to land one must trace it back to the man who stole it." Many older ideas have resurfaced in the modern notions of ecological stewardship, bioregionalism, natural capital, and ecological economics.
References
[1] (http:/ / dictionary. reference. com/ browse/ wealth) "wealth." The American Heritage Dictionary of the English Language, 4th ed., Houghton Mifflin Company. Accessed 21 Feb. 2009. [2] Denis "Authentic Development: Is it Sustainable?", pp. 189-205 in Building Sustainable Societies, Dennis Pirages, ed., M.E. Sharpe, ISBN 1-56324-738-0, 9781563247385. (1996) [3] (http:/ / www. journals. uchicago. edu/ doi/ abs/ 10. 1086/ 467637) Anthony T. Kronman, "Wealth Maximization as a Normative Principle", The Journal of Legal Studies, vol. 9 (March 1980) [4] James B. Davies, Susanna Sandstrm, Anthony Shorrocks, and Edward N. Wolff. (2008). The World Distribution of Household Wealth, p8 (http:/ / www. wider. unu. edu/ publications/ working-papers/ discussion-papers/ 2008/ en_GB/ dp2008-03/ ). UNU-WIDER. [5] James B. Davies, Susanna Sandstrm, Anthony Shorrocks, and Edward N. Wolff. (2008). The World Distribution of Household Wealth (http:/ / www. wider. unu. edu/ publications/ working-papers/ discussion-papers/ 2008/ en_GB/ dp2008-03/ ). UNU-WIDER. [6] Gilbert, Dennis. The American Class Structure in an Age of Growing Inequality . N.p.: Wadsworth Publishing;, 2002. [7] Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations (http:/ / www. gutenberg. org/ etext/ 3300) [8] Paul A. Samuelson and William D. Nordhaus (2004, 18th ed.). Economics, "Glossary of Terms." Nancy D. Ruggles (1987). "social accounting," The New Palgrave: A Dictionary of Economics, v. 4, pp.377-82, esp. p.380. [9] Adam Smith (1776). The Wealth of Nations. David S. Landes. (1998) The Wealth and Poverty of Nations. Review. (http:/ / www. cato. org/ pubs/ journal/ cj18n2/ cj18n2-9. pdf) Partha Dasgupta (1993). An Inquiry into Well-Being and Destitution. Description (http:/ / www. oup. com/ uk/ catalogue/ ?ci=9780198288350) and review. (http:/ / www. nejm. org/ doi/ pdf/ 10. 1056/ NEJM199406163302421) [10] John Bates Clark (1902). The Distribution of Wealth Analytical Table of Contents. (http:/ / books. google. com/ books?hl=en& lr=& id=ihivl3D7TOcC& oi=fnd& pg=RA1-PR13& dq=Clark+ + Distribution+ & ots=gys5EhM82D& sig=S425YxymAlqFGt9z5jCQ_6sV9q0) E.N. Wolff (2002). "Wealth Distribution," International Encyclopedia of the Social & Behavioral Sciences, pp.16394-16401. Abstract. (http:/ / www. sciencedirect. com/ science?_ob=ArticleURL& _udi=B7MRM-4MT09VJ-3SK& _rdoc=11& _hierId=151000138& _refWorkId=21& _explode=151000131,151000138& _fmt=high& _orig=na& _docanchor=& _idxType=SC& view=c& _ct=12& _acct=C000050221& _version=1& _urlVersion=0& _userid=10& md5=9ba159b05baa21f44e844a5aba77e6f1) [11] Laurence J. Kotlikoff, 1987, social security," The New Palgrave: A Dictionary of Economics, v. 4, pp.413-18. Stockton Press. Laurence J. Kotlikoff, 1992, Generational Accounting. Free Press. [12] Robert J. Barro (1974). "Are Government Bonds Net Wealth?", Journal of Political Economy, 8(6), pp. 1095-1111. (http:/ / econ161. berkeley. edu/ Teaching_Folder/ Econ_202b_F2000/ papers/ Barro,_Bonds_Net_Wealth. pdf#page=2) [13] Sjak Smulders, 2008. "green national accounting," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. (http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_G000196& edition=current& q=environment& topicid=& result_number=5) United States National Research Council, 1994. Assigning Economic Value to Natural Resources, National Academy Press.
Wealth
Chapter-preview links. (http:/ / books. nap. edu/ openbook. php?record_id=4844& page=R1) [14] Aspects of Poverty. Ed. Ben B Seligman. New York: Thomas Y. Crowell Company, 1968. [15] Ropers, Richard H, Ph.D. Persistent Poverty: The American Dream Turned Nightmare. New York: Insight Books, 1991. [16] Sherraden, Michael. Assets and the Poor: A New American Welfare Policy. Armonk: M.E. Sharpe, Inc., 1991.
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Wealth management
Private banking concerns the high-quality provision of a range of financial and related services to wealthy clients, principally individuals and their families. Typically the services on offer combine retail banking products such as payment and account facilities plus a wide range of up-market investment related services.[1] Market segmentation and the offering of high quality service provision forms the essence of private banking and key components include:[1] tailoring services to individual client requirements anticipation of client needs a long-term relationship orientation personal contact discretion
investment performance. An important feature of the private banking market relates to client segmentation. The bottom end of the market is referred to as the mass affluent segment typically individuals who have up to $300,000 of investable assets. The top-end of the market are often referred to as ultra HNWIs with over $50 million in investable assets and in-between lie HNWIs ($300,000 to $5 million) and very high HNWIs ($5 million to $50 million). Note that these definitions are by no means precise and different banks and commentators use various definitions for their own market segmentation strategies. The level of service and the range of products on offer increases with the wealth of the respective client.[1]
Wealth management
There is no generally accepted standard definition of wealth management both in terms of the products and services provided and the constitution of the client base served but a basic definition would be financial services provided to wealthy clients, mainly individuals and their families.[2] Private banking forms an important, more exclusive, subset of wealth management. At least until recently, it largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, many clients trusted their private banking relationship manager to get on with it, and took a largely passive approach to financial decision making.[2] Private banking has a very long pedigree, stretching back at least as far as the seventeeth century in the case of some British private banks. It is, however, only really over the last 15 years or so that the term wealth management has found its way into common industry parlance. It developed in response to the arrival of mass affluence during the latter part of the twentieth century; more sophisticated client needs throughout the wealth spectrum; a desire among some clients to be more actively involved in the management of their money; a willingness on the part of some types of financial services players, such as retail banks and brokerages, to extend their offerings to meet the new demand; and, more generally, a recognition among providers that, for many clients, conventional mass-market retail financial services are inadequate. Wealth management is therefore a broader area of financial services than private banking in two main ways:[2]
Wealth management Product range. As in private banking, asset management services are at the heart of the wealth management industry. But wealth management is more than asset management. It focuses on both sides of the clients balance sheet. Wealth management has a greater emphasis on financial advice and is concerned with gathering, maintaining, preserving, enhancing and transferring wealth. It includes the following types of products and services:[2] 1. 2. 3. 4. 5. Brokerage. Core banking-type products, such as current accounts, time deposits and liquidity management. Lending products, such as margin lending, credit cards, mortgages and private jet finance. Insurance and protection products, such as property and health insurance, life assurance and pensions. Asset management in its broadest sense: discretionary and advisory, financial and nonfinancial assets (such as real estate, commodities, wine and art), conventional, structured and alternative investments. 6. Advice in all shapes and forms: asset allocation, wealth structuring, tax and trusts, various types of planning (financial, inheritance, pensions, philanthropic), family-dispute arbitration even psychotherapy to children suffering from affluenza. 7. A wide range of concierge-type services, including yacht broking, art storage, real estate location, and hotel, restaurant and theatre booking. Client segments. Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking, those with more than around $1 million in investable assets. Wealth management, by contrast, targets clients with assets as low as $100 000, i.e. affluent as well as high net worth (HNW) clients.[2] Wealth management can mean different things in different geographic regions. The US and Europe have traditionally stood at two extremes in this regard. In the US, wealth management is more closely allied to transaction-driven brokerage and is typically investment-product driven. In Europe, the term is more synonymous with traditional private banking, with its greater emphasis on advice and exclusivity.[2]
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Private banking rankings

According to Scorpio Partnership's Annual Private Banking Benchmark for 2011, Bank of America still leads the pack courtesy of its rescue of Merrill Lynch in 2008.[3] Morgan Stanley follows as a result of its ownership control of the Smith Barney franchise,[4] while UBS has steadied the ship after all of its difficulties. Notably, the top four in the world are some distance from the rest of mega-players in the market. For instance, Bank of America is USD1.08 trillion clear of Credit Suisse in fifth, which itself has more than USD430 billion more AUM than Royal Bank of Canada in sixth.[5] Analysis of the AUM controlled the top 20 wealth managers by size reveals that their share of all Benchmark AUM jumped significantly from 77.1% by year-end 2009 to 81.6% at the end of 2010 and collectively manage USD11.075 trillion. Indeed, the annual ranking of the global wealth managers showed that the top 10 now collectively manage USD9.214 trillion in HNW assets, representing 67.9% of the total AUM benchmarked by Scorpio Partnership.[5] The twenty largest wealth managers in 2011 (listed by assets under management):[5]
Wealth management
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Before Lehman Brothers collapsed, UBS was the largest wealth manager.
Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12 . 13 . 14 . 15 . 16. 17 . 18 . 19 . 20 .
Firm Bank of America Merrill Lynch Morgan Stanley Smith Barney UBS Wells Fargo Credit Suisse Royal Bank of Canada HSBC Deutsche Bank BNP Paribas J.P. Morgan Pictet Goldman Sachs ABN AMRO Barclays Julius Br Crdit Agricole Bank of New York Mellon Northern Trust Lombard Odier Darier Hentsch Citi Private Bank
AuM ($bln) $1,944.74 $1,628.00 $1,559.90 $1,398.00 $865.06 $435.15 $390.00 $368.55 $340.41 $284.00 $267.66 $229.00 $220.06 $185.91 $181.68 $171.81 $166.00 $154.40 $153.10 $140.70
AuM % Chg. 4.20% 7.96% 6.6% 14.78% 11.56% 14.81% 6.27% 35.31% 45.68% 5.19% 10.05% -0.87% 23.79% 1.92% 22.46% 4.22% 7.79% 6.34% 7.83% 15.42%
Notes: AuM figures are for the high net worth wealth management divisions of these institutions. In the list, there are five Swiss companies including two private banks and eight American companies.
Wealth management
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Market overview
The worlds high net worth individuals (HNWIs) expanded in population and wealth in 2010 surpassing 2007 pre-crisis levels in nearly every region, according to the 15th annual World Wealth Report from Merrill Lynch Global Wealth Management and Capgemini.[6] Globally, HNWIs* financial wealth grew 9.7% in 2010 to reach US$42.7 trillion, surpassing the 2007 pre-crisis peak. The global population of HNWIs grew 8.3% to 10.9 million.[6] Ultra-HNWIs** posted slightly stronger-than-average gains in their numbers and wealth. The global population of Ultra-HNWIs grew by 10.2% in 2010 and its wealth by 11.5%. As a result, Ultra-HNWIs accounted for 36.1% of global HNWI wealth, up from 35.5%, while representing only 0.9% of the global HNWI population.[6] About 53 percent of the worlds millionaires, or individuals with at least $1 million in investable assets excluding primary residences and collectibles, are found in the U.S., Japan and Germany, the report showed.[6] Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, excluding real estate and property such as art. Wealth became more concentrated, with millionaire households controlling 39 percent of the worlds assets, up from 37 percent a year earlier, the Boston Consulting Group said.[7] Global assets under management rose by 8 percent to $121.8 trillion in 2010, beating the studys previous peak of $111.8 trillion in 2007, the Boston-based firm said in a study. Global wealth is defined as total assets under management (AuM) across all households.[7] Singapore will become the worlds top wealth management center by 2013, because of emerging markets growth and as new rules put pressure on Switzerland and London, according to a PricewaterhouseCoopers LLP survey of global wealth-management firms.[8] Singapore will leapfrog both European centers in the next two years with Hong Kong taking third spot behind Switzerland and ahead of London while New York will retain fith position, PwC wrote in its 2011 Global Private Banking and Wealth Management report.[8] Note 1*: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.[6] Note 2**: Ultra-HNWIs are defined as those having investable assets of US$30 million or more, excluding primary residence, collectibles, consumables, and consumer durables.[6]
Further reading
David Maude (2006). Global Private Banking and Wealth Management: The New Realities.
External Links
Michael J. Moore and David Mildenberg, "In the Battle of the Big Brokers, Merrill Is Winning" [9], Bloomberg Businessweek, September 2, 2010.
References
[1] Anna Omarini and Philip Molineux, Private Banking in Europe: Getting Clients and Keeping Them! (http:/ / 129. 3. 20. 41/ eps/ fin/ papers/ 0509/ 0509011. pdf) [2] Global Private Banking and Wealth Management: The New Realities, p. 1-2. [3] "Bank of America to Acquire Merrill as Crisis Deepens" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=a9O9JGOLdI_U), Bloomberg News, September 15, 2008. [4] "Morgan Stanley Pays $2.7 Billion to Citi in Venture" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=acVWAJ2qai_s), Bloomberg News, January 13, 2009.
Wealth management
[5] Global Private Banking Benchmark 2011 (http:/ / www. scorpiopartnership. com/ uploads/ pdfs/ 110707_Scorpio Partnership_PRESS RELEASE_2011 Global Private Banking Benchmark. pdf), Scorpio Partnership, July 13, 2011. [6] World Wealth Report 2011 (http:/ / www. ml. com/ media/ 114235. pdf), Capgemini and Merrill Lynch, 22 June, 2011. [7] Global Wealth Report 2011 (http:/ / www. dasinvestment. com/ fileadmin/ images/ pictures/ 0907/ BCG_2011_0106_Global_Wealth_Report_client_version_May2011. pdf), The Boston Consulting Group, May, 2011. [8] Global Private Banking and Wealth Management Survey 2011 (http:/ / www. pwc. com/ en_GX/ gx/ private-banking-wealth-mgmt-survey/ pdf/ Global-Private-Banking-Wealth-2011. pdf), PwC, June, 2011.
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Risk
Asset allocation
Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame.[1]
Description
Many financial experts say that asset allocation is an important factor in determining returns for an investment portfolio.[2] Asset allocation is based on the principle that different assets perform differently in different market and economic conditions. A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated, hence diversification reduces the overall risk in terms of the variability of returns for An investment portfolio with a diverse asset allocation a given level of expected return. Asset diversification has been described as "the only free lunch you will find in the investment game".[3] Academic research has painstakingly explained the importance of asset allocation and the problems of active management (see academic studies section below). Although risk is reduced as long as correlations are not perfect, it is typically forecast (wholly or in part) based on statistical relationships (like correlation and variance) that existed over some past period. Expectations for return are often derived in the same way. When such backward-looking approaches are used to forecast future returns or risks using the traditional mean-variance optimization approach to asset allocation of modern portfolio theory, the strategy is, in fact, predicting future risks and returns based on past history. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from[4] . Other, more subtle weaknesses include the "butterfly effect", by which seemingly minor errors in forecasting lead to recommended allocations that are grossly skewed from investment mandates and/or impracticaloften even violating an investment manager's "common sense" understanding of a tenable portfolio-allocation strategy.
Asset allocation
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Asset classes and strategies

There are many types of assets that may or may not be included in an asset allocation strategy: cash and cash equivalents (e.g., certificate of deposit, money market funds) fixed interest securities such as Bonds: investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets; or Convertible security stocks: value, dividend, growth, sector specific or preferred (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; public equities versus private equities, domestic, foreign (developed), emerging or frontier markets commercial or residential real estate (also REITs) natural resources: agriculture, forestry and livestock; energy or oil and gas distribution; carbon or water precious metals industrial metals and infrastructure collectibles such as art, coins, or stamps insurance products (annuity, life settlements, catastrophe bonds, personal life insurance products, etc.) derivatives such as long-short or market neutral strategies, options, collateralized debt and futures foreign currency venture capital, leveraged buyout, merger arbitrage or distressed securities There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite. Strategic Asset Allocation the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon[5] . Tactical Asset Allocation method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains[6] [7] . Core-Satellite Asset Allocation is more or less a hybrid of both the strategic and tactical allocations mentioned above[8] . Systematic Asset Allocation is another approach which depends on three assumptions. These are The markets provide explicit information about the available returns. The relative expected returns reflect consensus. Expected returns provide clues to actual returns.
Academic studies
In 1986, Gary P. Brinson, L. Randolph Hood, and SEI's Gilbert L. Beebower (BHB) published a study about asset allocation of 91 large pension funds measured from 1974 to 1983.[9] They replaced the pension funds' stock, bond, and cash selections with corresponding market indexes. The indexed quarterly return were found to be higher than pension plan's actual quarterly return. The two quarterly return series' linear correlation was measured at 96.7%, with shared variance of 93.6%. A 1991 follow-up study by Brinson, Singer, and Beebower measured a variance of 91.5%.[10] The conclusion of the study was that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the BHB study lumped together as "market timing".[11] One problem with the Brinson study was that the cost factor in the two return series was not clearly discussed. However, in response to a letter to the editor, Hood noted that the returns series were gross of management fees.[12] In 1997, William Jahnke initiated debate on this topic, attacking the BHB study in a paper titled The Asset Allocation Hoax.[13] The Jahnke discussion appeared in the Journal of Financial Planning as an opinion piece, not a peer reviewed article. Jahnke's main criticism, still undisputed, was that BHB's use of quarterly data dampens the impact
Asset allocation of compounding slight portfolio disparities over time, relative to the benchmark. One could compound 2% and 2.15% quarterly over 20 years and see the sizable difference in cumulative return. However, the difference is still 15 basis points (hundredths of a percent) per quarter; the difference is one of perception, not fact. In 2000, Ibbotson and Kaplan used five asset classes in their study Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?[14] The asset classes included were large-cap US stock, small-cap US stock, non-US stock, US bonds, and cash. Ibbotson and Kaplan examined the 10 year return of 94 US balanced mutual funds versus the corresponding indexed returns. This time, after properly adjusting for the cost of running index funds, the actual returns again failed to beat index returns. The linear correlation between monthly index return series and the actual monthly actual return series was measured at 90.2%, with shared variance of 81.4%. Ibbotson concluded 1) that asset allocation explained 40% of the variation of returns across funds, and 2) that it explained virtually 100% of the level of fund returns. Gary Brinson has expressed his general agreement with the Ibbotson-Kaplan conclusions. In both studies, it is misleading to make statements such as "asset allocation explains 93.6% of investment return".[15] Even "asset allocation explains 93.6% of quarterly performance variance" leaves much to be desired, because the shared variance could be from pension funds' operating structure.[14] Hood, however, rejects this interpretation on the grounds that pension plans in particular cannot cross-share risks and that they are explicitly singular entities, rendering shared variance irrelevant.[12] The statistics were most helpful when used to demonstrate the similarity of the index return series and the actual return series. A 2000 paper by Meir Statman found that using the same parameters that explained BHB's 93.6% variance result, a hypothetical financial advisor with perfect foresight in tactical asset allocation performed 8.1% better per year, yet the strategic asset allocation still explained 89.4% of the variance.[11] Thus, explaining variance does not explain performance. Statman says that strategic asset allocation is movement along the efficient frontier, whereas tactical asset allocation involves movement of the efficient frontier. A more common sense explanation of the Brinson, Hood, and Beebower study is that asset allocation explains more than 90% of the volatility of returns of an overall portfolio, but will not explain the ending results of your portfolio over long periods of time. Hood notes in his review of the material over 20 years, however, that explaining performance over time is possible with the BHB approach but was not the focus of the original paper.[16] Bekkers, Doeswijk and Lam (2009) investigate the diversification benefits for a portfolio by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a market portfolio approach. The results suggest that real estate, commodities, and high yield add most value to the traditional asset mix of stocks, bonds, and cash. A study with such a broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio.[17]
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Performance indicators
McGuigan described an examination of funds that were in the top quartile of performance during 1983 to 1993.[18] During the second measurement period of 1993 to 2003, only 28.57% of the funds remained in the top quartile. 33.33% of the funds dropped to the second quartile. The rest of the funds dropped to the third or fourth quartile. In fact, low cost was a more reliable indicator of performance. Bogle noted that an examination of five-year performance data of large-cap blend funds revealed that the lowest cost quartile funds had the best performance, and the highest cost quartile funds had the worst performance.[19]
Asset allocation
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Return versus risk trade-off

In asset allocation planning, the decision on the amount of stocks versus bonds in one's portfolio is a very important decision. Simply buying stocks without regard of a possible bear market can result in panic selling later. One's true risk tolerance can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key.
Cumulative return after inflation from 2000-to-2002 bear market 80% stock / 20% bond 70% stock / 30% bond 60% stock / 40% bond 50% stock / 50% bond 40% stock / 60% bond 30% stock / 70% bond 20% stock / 80% bond 34.35% 25.81% 19.99% 13.87% 7.46% 0.74% +6.29% [20]
Projected 10 year Cumulative return after inflation [21] (stock return 8% yearly, bond return 4.5% yearly, inflation 3% yearly 80% stock / 20% bond 70% stock / 30% bond 60% stock / 40% bond 50% stock / 50% bond 40% stock / 60% bond 30% stock / 70% bond 20% stock / 80% bond 52% 47% 42% 38% 33% 29% 24%
The tables show why asset allocation is important. It determines an investor's future return, as well as the bear market burden that he or she will have to carry successfully to realize the returns.
References
[1] (http:/ / www. investopedia. com/ terms/ a/ assetallocation. asp#ixzz1QTuSzfhn) Investopedia, Asset Allocation Definition, Retrieved June 2011 [2] (http:/ / www. investopedia. com/ terms/ a/ assetallocation. asp#ixzz1QTuSzfhn) Investopedia, Asset Allocation Definition, Retrieved June 2011 [3] (http:/ / www. fundadvice. com/ sound-investing-tv/ episodes/ sitv-5. 3. 10. html) [4] MPT [5] Idzorek, Thomas M., Strategic Asset Allocation and Commodities, Ibbotson Associates, March 27, 2006 (http:/ / corporate. morningstar. com/ ib/ documents/ MethodologyDocuments/ IBBAssociates/ Commodities. pdf) [6] Blitz, David and Van Vliet, Pim, Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes, Journal of Portfolio Management, Forthcoming. Available at SSRN: http:/ / ssrn. com/ abstract=1079975 [7] Faber, Mebane T., A Quantitative Approach to Tactical Asset Allocation, Journal of Wealth Management, Spring 2007, February 2009 update available at: http:/ / ssrn. com/ abstract=962461 [8] Singleton, J. Clay, Core-Satellite Portfolio Management: A Modern Approach for Professionally Managed Funds, McGraw-Hill 2004 [9] Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts Journal, July/August 1986. [10] Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, Determinants of Portfolio Performance II: An Update, The Financial Analysts Journal, 47, 3 (1991). [11] Meir Statman, The 93.6% Question of Financial Advisors, The Journal of Investing, Spring 2000, Vol. 9, No. 1: pp. 16-20
Asset allocation
[12] L. Randolph Hood, Response to Letter to the Editor, The Financial Analysts Journal 62/1, January/February 2006 [13] William Jahnke, The Asset Allocation Hoax, Journal of Financial Planning, February 1997 [14] Roger G. Ibbotson and Paul D. Kaplan, Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?, The Financial Analysts Journal, January/February 2000 [15] James Dean Brown, The coefficient of determination, Shiken: JALT Testing & Evaluation SIG Newsletter, Volume 7, No. 1, March 2003. [16] L. Randolph Hood, Determinants of Portfolio Performance - 20 Years Later, The Financial Analysts Journal 61/5 September/October 2005. [17] Bekkers Niels, Doeswijk Ronald Q. and Lam Trevin W., Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=1368689), Journal of Wealth Management, Vol 12, No 3, pp 61-77, 2009. [18] Thomas P. McGuigan, The Difficulty of Selecting Superior Mutual Fund Performance, Journal of Financial Planning, February 2006. [19] The Implications of Style Analysis on Mutual Fund Performance Evaluation (http:/ / johncbogle. com/ speeches/ JCB_Morningstar_6-97. pdf) [20] Stock return from a Wilshire 5000 index fund; bond return from a Barclays Capital Aggregate Bond Index fund; inflation data from US Treasury Department. [21] Input parameters are for illustration purpose only; actual returns will vary.
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External links
Calculator for determining allocation of retirement assets, and related risk questionnaire (http://www. fulcruminquiry.com/allocation.htm) Calculator which determines future asset mix based of differing growth rates and contributions (http:// sporkforge.com/finance/asset_alloc.php) Model portfolios for buy and hold index investors (http://www.bogleheads.org/wiki/Lazy_Portfolios)
Asset diversification
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents.[1] Therefore, any risk-averse investor will diversify to at least some extent, with more risk-averse investors diversifying more completely than less risk-averse investors. Diversification is one of two general techniques for reducing investment risk. The other is hedging. Diversification relies on the lack of a tight positive relationship among the assets' returns, and works even when correlations are near zero or somewhat positive. Hedging relies on negative correlation among assets, or shorting assets with positive correlation. It is important to remember that diversification only works because investment in each individual asset is reduced. If someone starts with $10,000 in one stock and then puts $10,000 in another stock, they would have more risk, not less. Diversification would require the sale of $5,000 of the first stock to be put into the second. There would then be less risk. Hedging, by contrast, reduces risk without selling any of the original position.[2] The risk reduction from diversification does not mean anyone else has to take more risk. If person A owns $10,000 of one stock and person B owns $10,000 of another, both A and B will reduce their risk if they exchange $5,000 of the two stocks, so each now has a more diversified portfolio.[3]
Examples
The simplest example of diversification is provided by the proverb "don't put all your eggs in one basket". Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less risk of losing all of them. In finance, an example of an undiversified portfolio is to hold only one stock. This is risky; it is not unusual for a single stock to go down 50% in one year. It is much less common for a portfolio of 20 stocks to go down that much, even if they are selected at random. If the stocks are
Asset diversification selected from a variety of industries, company sizes and types (such as some growth stocks and some value stocks) it is still less likely. Further diversification can be obtained by investing in stocks from different countries, and in different asset classes such as bonds, real estate, private equity, infrastructure and commodities such as heating oil or gold.[4] Since the mid-1970s, it has also been argued that geographic diversification would generate superior risk-adjusted returns for large institutional investors by reducing overall portfolio risk while capturing some of the higher rates of return offered by the emerging markets of Asia and Latin America.[5] [6]
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Return expectations while diversifying

If the prior expectations of the returns on all assets in the portfolio are identical, the expected return on a diversified portfolio will be identical to that on an undiversified portfolio. Ex post, some assets will do better than others; but since one does not know in advance which assets will perform better, this fact cannot be exploited in advance. The ex post return on a diversified portfolio can never exceed that of the top-performing investment, and indeed will always be lower than the highest return (unless all returns are ex post identical). Conversely, the diversified portfolio's return will always be higher than that of the worst-performing investment. So by diversifying, one loses the chance of having invested solely in the single asset that comes out best, but one also avoids having invested solely in the asset that comes out worst. That is the role of diversification: it narrows the range of possible outcomes. Diversification need not either help or hurt expected returns, unless the alternative non-diversified portfolio has a higher expected return.[7] But risk averse investors may find it beneficial to diversify into assets with lower expected returns, thereby lowering the expected return on the portfolio, when the risk-reduction benefit of doing so exceeds the cost in terms of diminished expected return.
Maximum diversification
Given the advantages of diversification, many experts recommend maximum diversification, also known as buying the market portfolio. Unfortunately, identifying that portfolio is not straightforward. The earliest definition comes from the capital asset pricing model which argues the maximum diversification comes from buying a pro rata share of all available assets. This is the idea underlying index funds. One objection to that is it means avoiding investments like futures that exist in zero net supply. Another is that the portfolio is determined by what securities come to market, rather than underlying economic value. Finally, buying pro rata shares means that the portfolio overweights any assets that are overvalued, and underweights any assets that are undervalued. This line of argument leads to portfolios that are weighted according to some definition of economic footprint, such as total underlying assets or annual cash flow.[8] Risk parity is an alternative idea. This weights assets in inverse proportion to risk, so the portfolio has equal risk in all asset classes. This is justified both on theoretical grounds, and with the pragmatic argument that future risk is much easier to forecast than either future market value or future economic footprint.[9]
Effect of diversification on variance

One simple measure of financial risk is variance. Diversification can lower the variance of a portfolio's return below what it would be if the entire portfolio were invested in the asset with the lowest variance of return, even if the assets' returns are uncorrelated. For example, let asset X have stochastic return and asset Y have stochastic return , with respective return variances placed in asset X and the fraction and and . If the fraction of a one-unit (e.g. one-million-dollar) portfolio is . If . The and . Using this value of is placed in Y, the stochastic portfolio return is
are uncorrelated, the variance of portfolio return is is , which is strictly between
variance-minimizing value of
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in the expression for the variance of portfolio return gives the latter as of the undiversified values and
, which is less than what it would be at eit and
(which respectively give portfolio return variance of and
). Note that the fav
effect of diversification on portfolio variance would be enhanced if
were negatively correlated but diminished
(though not necessarily eliminated) if they were positively correlated. In general, the presence of more assets in a portfolio leads to greater diversification benefits, as can be seen by considering portfolio variance as a function of , the number of assets. For example, if all assets' returns are mutually uncorrelated and have identical variances , portfolio variance is minimized by holding all assets in the equal proportions .[10] Then = the portfolio = return's variance equals
, which is monotonically decreasing in
. The latter analysis can be adapted to show why adding uncorrelated risky assets to a portfolio,[11] [12] thereby increasing the portfolio's size, is not diversification, which involves subdividing the portfolio among many smaller investments. In the case of adding investments, the portfolio's return is instead of and the variance of the portfolio return if the assets are uncorrelated is which is increasing in n rather than decreasing. Thus, for example, when an insurance company adds more and more uncorrelated policies to its portfolio, this expansion does not itself represent diversificationthe diversification occurs in the spreading of the insurance company's risks over a large number of part-owners of the company.
Diversifiable and non-diversifiable risk

The Capital Asset Pricing Model introduced the concepts of diversifiable and non-diversifiable risk. Synonyms for diversifiable risk are idiosyncratic risk and security-specific risk. Synonyms for non-diversifiable risk are systematic risk, beta risk and market risk. If one buys all the stocks in the S&P 500 one is obviously exposed only to movements in that index. If one buys a single stock in the S&P 500, one is exposed both to index movements and movements in the stock relative to the index. The first risk is called non-diversifiable, because it exists however many S&P 500 stocks are bought. The second risk is called diversifiable, because it can be reduced it by diversifying among stocks, and it can be eliminated completely by buying all the stocks in the index. Of course, there's nothing special about the S&P 500; the same argument can apply to any index, up to and including the market portfolio of all assets. The Capital Asset Pricing Model argues that investors should only be compensated for non-diversifiable risk. Other financial models allow for multiple sources of non-diversifiable risk, but also insist that diversifiable risk should not carry any extra expected return. Still other models do not accept this contention[13]
An empirical example relating diversification to risk reduction

In 1977 Elton and Gruber[14] worked out an empirical example of the gains from diversification. Their approach was to consider a population of 3290 securities available for possible inclusion in a portfolio, and to consider the average risk over all possible randomly chosen n-asset portfolios with equal amounts held in each included asset, for various values of n. Their results are summarized in the following table. It can be seen that most of the gains from diversification come for n30.
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Number of Stocks in Portfolio 1 2 4 6 8 10 20 30 40 50 400 500 1000
Average Standard Deviation of Annual Portfolio Returns 49.24% 37.36 29.69 26.64 24.98 23.93 21.68 20.87 20.46 20.20 19.29 19.27 19.21
Ratio of Portfolio Standard Deviation to Standard Deviation of a Single Stock 1.00 0.76 0.60 0.54 0.51 0.49 0.44 0.42 0.42 0.41 0.39 0.39 0.39
Corporate diversification strategies

In corporate portfolio models, diversification is thought of as being vertical or horizontal. Horizontal diversification is thought of as expanding a product line or acquiring related companies. Vertical diversification is synonymous with integrating the supply chain or amalgamating distributions channels. Non-incremental diversification is a strategy followed by conglomerates, where the individual business lines have little to do with one another, yet the company is attaining diversification from exogenous risk factors to stabilize and provide opportunity for active management of diverse resources.
History
Diversification is mentioned in the Bible, in the book of Ecclesiastes which was written in approximately 935 B.C.[15] : But divide your investments among many places, for you do not know what risks might lie ahead.[16] Diversification is also mentioned in the Talmud. The formula given there is to split one's assets into thirds: one third in business (buying and selling things), one third kept liquid (e.g. gold coins), and one third in land (real estate). Diversification is mentioned in Shakespeare[17] (Merchant of Venice): My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate Upon the fortune of this present year: Therefore, my merchandise makes me not sad. The modern understanding of diversification dates back to the work of Harry Markowitz[18] in the 1950s.
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Diversification with an equally-weighted portfolio

The expected return on a portfolio is a weighted average of the expected returns on each individual asset:
where
is the proportion of the investor's total invested wealth in asset
The variance of the portfolio return is given by:
Inserting in the expression for
Rearranging:
where portfolio,
is the variance on asset .
and
is the covariance between assets
and
. In an equally-weighted
The portfolio variance then becomes:
And simplifying:
Now, taking the number of assets,
, to the limit gives:
Thus, in an equally-weighted portfolio, the portfolio variance tends to the average of covariances between securities as the number of securities becomes arbitrarily large.
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References
[1] Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action (http:/ / pearsonschool. mobi/ index. cfm?locator=PSZ16o& filter_161=& filter_423=& filter_422=& filter_424=& filter_281=& filter_425=& programFilterTypeList=161,423,422,424,281,425& PMDbSiteid=2781& PMDbSolutionid=6724& PMDbSubSolutionid=& PMDbCategoryid=815& PMDbSubcategoryid=24843& & PMDbProgramID=23061). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.273. ISBN0-13-063085-3. . [2] Fama, Eugene F.; Merton H. Miller (June 1972). The Theory of Finance. Holt Rinehart & Winston. ISBN978-0155042667. [3] Sharpe, William; Gordon J. Alexander, Jeffrey W. Bailey (October 30, 1998). Investments. Prentice Hall. ISBN978-0130101303. [4] Campbell, John Y. Campbell; Andrew W. Lo, A. Craig MacKinlay (December 9, 1996). The Econometrics of Financial Markets. Princeton University Press. ISBN978-0691043012. [5] (French) "see M. Nicolas J. Firzli, "Asia-Pacific Funds as Diversification Tools for Institutional Investors", Revue Analyse Financire/The French Society of Financial Analysts (SFAF)" (http:/ / www. canadianeuropean. com/ yahoo_site_admin/ assets/ docs/ FONDS_DASIE-PACIFIQUE_REVUE_AF_APR_09. 95131642. pdf). . Retrieved 2009-04-02 [6] (English) "see Michael Prahl, "Asian Private Equity Will it Deliver on its Promise?", INSEAD Global Private Equity Initiative (GPEI)" (http:/ / www. insead. edu/ facultyresearch/ centres/ global_private_equity_initiative/ publications/ documents/ INSEAD_AsiaPEReport_long. pdf). . Retrieved 2011-06-15 [7] Goetzmann, William N. An Introduction to Investment Theory (http:/ / viking. som. yale. edu/ will/ finman540/ classnotes/ class2. html). II. Portfolios of Assets. Retrieved on November 20, 2008. [8] Wagner, Hans Fundamentally Weighted Index Investing (http:/ / www. investopedia. com/ articles/ mutualfund/ 07/ fw_index. asp). Retrieved on June 20, 2010. [9] Asness, Cliff; David Kabiller and Michael Mendelson Using Derivatives and Leverage To Improve Portfolio Performance, Institutional Investor, May 13, 2010 (http:/ / www. iimagazine. com/ Popups/ PrintArticle. aspx?ArticleID=2486929). Retrieved on June 21, 2010. [10] Samuelson, Paul, "General Proof that Diversification Pays,"Journal of Financial and Quantitative Analysis 2, March 1967, 1-13. [11] Samuelson, Paul, "Risk and uncertainty: A fallacy of large numbers," Scientia 98, 1963, 108-113. [12] Ross, Stephen, "Adding risks: Samuelson's fallacy of large numbers revisited," Journal of Financial and Quantitative Analysis 34, September 1999, 323-339. [13] .Fama, Eugene F.; Merton H. Miller (June 1972). The Theory of Finance. Holt Rinehart & Winston. ISBN978-0155042667. [14] E. J. Elton and M. J. Gruber, "Risk Reduction and Portfolio Size: An Analytic Solution," Journal of Business 50 (October 1977), pp. 415-37 [15] Life Application Study Bible: New Living Translation. Wheaton, Illinois: Tyndale House Publishers, Inc.. 1996. p.1024. ISBN0-8423-3267-7. [16] Ecclesiastes 11:2 NLT (http:/ / www. youversion. com/ bible/ nlt/ eccl/ 11/ 2) [17] The Only Guide to a Winning Investment Strategy You'll Ever Need [18] Markowitz, Harry M. (1952). "Portfolio Selection". Journal of Finance 7 (1): 7791. doi:10.2307/2975974. JSTOR2975974.
External links
Macro-Investment Analysis (http://www.stanford.edu/~wfsharpe/mia/mia.htm), Prof. William F. Sharpe, Stanford University Portfolio Diversifier (http://www.riskcog.com/portfolio.jsp), Dynamically-generated diversified portfolios Asset Correlations (http://www.assetcorrelation.com/), Dynamically-generated correlation matrices for the major asset classes An Introduction to Investment Theory (http://viking.som.yale.edu/will/finman540/classnotes/notes.html), Prof. William N. Goetzmann, Yale School of Management Overview of Managed Futures (http://www.barclayhedge.com/research/educational-articles/ managed-futures-articles/managed-futures-overview.html)
Hedge (finance)
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Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, ETFs, insurance, forward contracts, swaps, options, many types of over-the-counter and derivative products, and futures contracts. Public futures markets were established in the 19th century[1] to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations.
Etymology
Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment. The word hedge is from Old English hecg, originally any fence, living or artificial. The use of the word as a verb in the sense of "dodge, evade" is first recorded 1590s; that of insure oneself against loss, as in a bet, is from 1670s. [2]
Examples
Agricultural commodity price hedging
A typical hedger might be a commercial farmer. The market values of wheat and other crops fluctuate constantly as supply and demand for them vary, with occasional large moves in either direction. Based on current prices and forecast levels at harvest time, the farmer might decide that planting wheat is a good idea one season, but the forecast prices are only that forecasts. Once the farmer plants wheat, he is committed to it for an entire growing season. If the actual price of wheat rises greatly between planting and harvest, the farmer stands to make a lot of unexpected money, but if the actual price drops by harvest time, he could be ruined. If at planting time the farmer sells a number of wheat futures contracts equivalent to his anticipated crop size, he effectively locks in the price of wheat at that time: the contract is an agreement to deliver a certain number of bushels of wheat to a specified place on a certain date in the future for a certain fixed price. The farmer has hedged his exposure to wheat prices; he no longer cares whether the current price rises or falls, because he is guaranteed a price by the contract. He no longer needs to worry about being ruined by a low wheat price at harvest time, but he also gives up the chance at making extra money from a high wheat price at harvest times.
Hedging a stock price

A stock trader believes that the stock price of Company A will rise over the next month, due to the company's new and efficient method of producing widgets. He wants to buy Company A shares to profit from their expected price increase. But Company A is part of the highly volatile widget industry. If the trader simply bought the shares based on his belief that the Company A shares were underpriced, the trade would be a speculation. Since the trader is interested in the company, rather than the industry, he wants to hedge out the industry risk by short selling an equal value (number of shares price) of the shares of Company A's direct competitor, Company B. The first day the trader's portfolio is: Long 1,000 shares of Company A at $1 each Short 500 shares of Company B at $2 each (Notice that the trader has sold short the same value of shares)
Hedge (finance) If the trader was able to short sell an asset whose price had a mathematically defined relation with Company A's stock price (for example a put option on Company A shares), the trade might be essentially riskless. In this case, the risk would be limited to the put option's premium. On the second day, a favorable news story about the widgets industry is published and the value of all widgets stock goes up. Company A, however, because it is a stronger company, increases by 10%, while Company B increases by just 5%: Long 1,000 shares of Company A at $1.10 each: $100 gain Short 500 shares of Company B at $2.10 each: $50 loss (In a short position, the investor loses money when the price goes up.) The trader might regret the hedge on day two, since it reduced the profits on the Company A position. But on the third day, an unfavorable news story is published about the health effects of widgets, and all widgets stocks crash: 50% is wiped off the value of the widgets industry in the course of a few hours. Nevertheless, since Company A is the better company, it suffers less than Company B: Value of long position (Company A): Day 1: $1,000 Day 2: $1,100 Day 3: $550 => ($1,000 $550) = $450 loss Value of short position (Company B): Day 1: $1,000 Day 2: $1,050 Day 3: $525 => ($1,000 $525) = $475 profit Without the hedge, the trader would have lost $450 (or $900 if the trader took the $1,000 he has used in short selling Company B's shares to buy Company A's shares as well). But the hedge the short sale of Company B gives a profit of $475, for a net profit of $25 during a dramatic market collapse.
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Hedging Employee Stock Options

Employee Stock Options are securities issued by the company generally to executives and employees. These securities are more volatile than stock and should encourage the holders to manage those positions with a view to reducing that risk. There is only one efficient way to manage the risk of holding employee stock options and that is by use of sales of exchange traded calls and to a lesser degree by buying puts. Companies discourage hedging versus ESOs but have no prohibitions in their contracts. Wealth managers refuse to promote hedging as they have little understanding of the concept.
Hedging fuel consumption

Airlines use futures contracts and derivatives to hedge their exposure to the price of jet fuel. They know that they must purchase jet fuel for as long as they want to stay in business, and fuel prices are notoriously volatile. By using crude oil futures contracts to hedge their fuel requirements (and engaging in similar but more complex derivatives transactions), Southwest Airlines was able to save a large amount of money when buying fuel as compared to rival airlines when fuel prices in the U.S. rose dramatically after the 2003 Iraq war and Hurricane Katrina.
Hedge (finance)
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Types of hedging
Hedging can be used in many different ways including forex trading.[3] The stock example above is a "classic" sort of hedge, known in the industry as a pairs trade due to the trading on a pair of related securities. As investors became more sophisticated, along with the mathematical tools used to calculate values (known as models), the types of hedges have increased greatly.
Hedging strategies
Examples of hedging include: Forward exchange contract for currencies Currency future contracts Money Market Operations for currencies Forward Exchange Contract for interest Money Market Operations for interest Future contracts for interest
This is a list of hedging strategies, grouped by category. Financial derivatives such as call and put options Risk reversal: Simultaneously buying a call option and selling a put option. This has the effect of simulating being long on a stock or commodity position. Delta neutral: This is a market neutral position that allows a portfolio to maintain a positive cash flow by dynamically re-hedging to maintain a market neutral position. This is also a type of market neutral strategy.
Natural hedges
Many hedges do not involve exotic financial instruments or derivatives such as the married put. A natural hedge is an investment that reduces the undesired risk by matching cash flows (i.e. revenues and expenses). For example, an exporter to the United States faces a risk of changes in the value of the U.S. dollar and chooses to open a production facility in that market to match its expected sales revenue to its cost structure. Another example is a company that opens a subsidiary in another country and borrows in the foreign currency to finance its operations, even though the foreign interest rate may be more expensive than in its home country: by matching the debt payments to expected revenues in the foreign currency, the parent company has reduced its foreign currency exposure. Similarly, an oil producer may expect to receive its revenues in U.S. dollars, but faces costs in a different currency; it would be applying a natural hedge if it agreed to, for example, pay bonuses to employees in U.S. dollars. One common means of hedging against risk is the purchase of insurance to protect against financial loss due to accidental property damage or loss, personal injury, or loss of life.
Categories of hedgeable risk

There are varying types of risk that can be protected against with a hedge. Those types of risks include: Commodity risk: the risk that arises from potential movements in the value of commodity contracts, which include agricultural products, metals, and energy products.[4] Credit risk: the risk that money owing will not be paid by an obligor. Since credit risk is the natural business of banks, but an unwanted risk for commercial traders, an early market developed between banks and traders that involved selling obligations at a discounted rate. Currency risk (also known as Foreign Exchange Risk hedging) is used both by financial investors to deflect the risks they encounter when investing abroad and by non-financial actors in the global economy for whom
Hedge (finance) multi-currency activities are a necessary evil rather than a desired state of exposure. Interest rate risk: the risk that the relative value of an interest-bearing liability, such as a loan or a bond, will worsen due to an interest rate increase. Interest rate risks can be hedged using fixed-income instruments or interest rate swaps. Equity risk: the risk that one's investments will depreciate because of stock market dynamics causing one to lose money. Volatility risk: is the threat that an exchange rate movement poses to an investor's portfolio in a foreign currency. Volumetric risk: the risk that a customer demands more or less of a product than expected.
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Hedging equity and equity futures

Equity in a portfolio can be hedged by taking an opposite position in futures. To protect your stock picking against systematic market risk, futures are shorted when equity is purchased, or long futures when stock is shorted. One way to hedge is the market neutral approach. In this approach, an equivalent dollar amount in the stock trade is taken in futures for example, by buying 10,000 GBP worth of Vodafone and shorting 10,000 worth of FTSE futures. Another way to hedge is the beta neutral. Beta is the historical correlation between a stock and an index. If the beta of a Vodafone stock is 2, then for a 10,000 GBP long position in Vodafone an investor would hedge with a 20,000 GBP equivalent short position in the FTSE futures (the index in which Vodafone trades). Futures contracts and forward contracts are means of hedging against the risk of adverse market movements. These originally developed out of commodity markets in the 19th century, but over the last fifty years a large global market developed in products to hedge financial market risk.
Futures hedging
Investors who primarily trade in futures may hedge their futures against synthetic futures. A synthetic in this case is a synthetic future comprising a call and a put position. Long synthetic futures means long call and short put at the same expiry price. To hedge against a long futures trade a short position in synthetics can be established, and vice versa. Stack hedging is a strategy which involves buying various futures contracts that are concentrated in nearby delivery months to increase the liquidity position. It is generally used by investors to ensure the surety of their earnings for a longer period of time.
Contract for difference

A contract for difference (CFD) is a two-way hedge or swap contract that allows the seller and purchaser to fix the price of a volatile commodity. Consider a deal between an electricity producer and an electricity retailer, both of whom trade through an electricity market pool. If the producer and the retailer agree to a strike price of $50 per MWh, for 1 MWh in a trading period, and if the actual pool price is $70, then the producer gets $70 from the pool but has to rebate $20 (the "difference" between the strike price and the pool price) to the retailer. Conversely, the retailer pays the difference to the producer if the pool price is lower than the agreed upon contractual strike price. In effect, the pool volatility is nullified and the parties pay and receive $50 per MWh. However, the party who pays the difference is "out of the money" because without the hedge they would have received the benefit of the pool price.
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Related concepts
Forwards: A contracted agreement specifying an amount of currency to be delivered, at an exchange rate decided on the date of contract. Forward Rate Agreement (FRA): A contract agreement specifying an interest rate amount to be settled at a pre-determined interest rate on the date of the contract. Currency option: A contract that gives the owner the right, but not the obligation, to take (call option) or deliver (put option) a specified amount of currency, at an exchange rate decided at the date of purchase. Non-Deliverable Forwards (NDF): A strictly risk-transfer financial product similar to a Forward Rate Agreement, but used only where monetary policy restrictions on the currency in question limit the free flow and conversion of capital. As the name suggests, NDFs are not delivered but settled in a reference currency, usually USD or EUR, where the parties exchange the gain or loss that the NDF instrument yields, and if the buyer of the controlled currency truly needs that hard currency, he can take the reference payout and go to the government in question and convert the USD or EUR payout. The insurance effect is the same; it's just that the supply of insured currency is restricted and controlled by government. See Capital Control. Interest rate parity and Covered interest arbitrage: The simple concept that two similar investments in two different currencies ought to yield the same return. If the two similar investments are not at face value offering the same interest rate return, the difference should conceptually be made up by changes in the exchange rate over the life of the investment. IRP basically provides the math to calculate a projected or implied forward rate of exchange. This calculated rate is not and cannot be considered a prediction or forecast, but rather is the arbitrage-free calculation for what the exchange rate is implied to be in order for it to be impossible to make a free profit by converting money to one currency, investing it for a period, then converting back and making more money than if a person had invested in the same opportunity in the original currency. Hedge fund: A fund which may engage in hedged transactions or hedged investment strategies.
References
[1] [2] [3] [4] http:/ / www. economist. com/ node/ 168334 "Online Etymology Dictionary definition of hedge" (http:/ / www. etymonline. com/ index. php?term=hedge). . "Forex hedging explained" (http:/ / www. forexpromos. com/ forex-hedging-tips-explained). . Jorion, Philippe (2009). Financial Risk Manager Handbook (5 ed.). John Wiley and Sons. p.287. ISBN9780470479612.
External links
Guide to Hedging Interest Rate Risk (http://www.accountingmajors.com/accountingmajors/articles/ interest-rate-hedges.html) Basic Fixed Income Derivative Hedging Article on Financial-edu.com (http://www.financial-edu.com/ basic-fixed-income-derivative-hedging.php) Hedging Corporate Bond Issuance with Rate Locks article on Financial-edu.com (http://www.financial-edu. com/treasury-rate-lock-agreement.php) The curious moral paradox of Hedging, and how Regulation gives it a blank cheque on theotherschoolofeconomics.org (http://www.theotherschoolofeconomics.org/?p=1036)
Interest rate risk
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Interest rate risk

Categories of financial risk
Credit risk Concentration risk Market risk Interest rate risk Currency risk Equity risk Commodity risk Liquidity risk Refinancing risk Operational risk Legal risk Political risk Reputational risk Volatility risk Settlement risk Profit risk Systemic risk
Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration. Asset liability management is a common name for the complete set of techniques used to manage risk within a general enterprise risk management framework.
Calculating interest rate risk

Interest rate risk analysis is almost always based on simulating movements in one or more yield curves using the Heath-Jarrow-Morton framework to ensure that the yield curve movements are both consistent with current market yield curves and such that no riskless arbitrage is possible. The Heath-Jarrow-Morton framework was developed in the early 1990s by David Heath of Cornell University, Andrew Morton of Lehman Brothers, and Robert A. Jarrow of Kamakura Corporation and Cornell University. There are a number of standard calculations for measuring the impact of changing interest rates on a portfolio consisting of various assets and liabilities. The most common techniques include: 1. Marking to market, calculating the net market value of the assets and liabilities, sometimes called the "market value of portfolio equity" 2. Stress testing this market value by shifting the yield curve in a specific way. Duration is a stress test where the yield curve shift is parallel 3. Calculating the Value at Risk of the portfolio 4. Calculating the multiperiod cash flow or financial accrual income and expense for N periods forward in a deterministic set of future yield curves
Interest rate risk 5. Doing step 4 with random yield curve movements and measuring the probability distribution of cash flows and financial accrual income over time. 6. Measuring the mismatch of the interest sensitivity gap of assets and liabilities, by classifying each asset and liability by the timing of interest rate reset or maturity, whichever comes first.
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Banks and interest rate risk

Banks face many types of interest rate risk: Basis risk the risk presented when yields on assets and costs on liabilities are based on different bases, such as the London Interbank Offered Rate (LIBOR) versus the U.S. prime rate. In some circumstances different bases will move at different rates or in different directions, which can cause erratic changes in revenues and expenses. Yield curve risk the risk presented by differences between short-term and long-term interest rates. Short-term rates are normally lower than long-term rates, and banks earn profits by borrowing short-term money (at lower rates) and investing in long-term assets (at higher rates). But the relationship between short-term and long-term rates can shift quickly and dramatically, which can cause erratic changes in revenues and expenses. Repricing risk the risk presented by assets and liabilities that reprice at different times and rates. For instance, a loan with a variable rate will generate more interest income when rates rise and less interest income when rates fall. If the loan is funded with fixed rated deposits, the bank's interest margin will fluctuate. Option risk the risk presented by optionalities embedded in some assets and liabilities. For instance, mortgage loans present significant option risk due to prepayment speeds that change dramatically when interest rates rise and fall. Falling interest rates will cause many borrowers to refinance and repay their loans, leaving the bank with uninvested cash when interest rates have declined. Alternately, rising interest rates cause mortgage borrowers to repay slower, leaving the bank with more loans based on prior, lower interest rates. Option risk is difficult to measure and control. Model risk the risk presented by mathematical models used to price asset and liabilities not directly quoted on the market. Interest rate pricing models are based on reasonable assumptions about the behaviour of interest rates that may fail in particular market conditions. Most banks are asset sensitive, meaning interest rate changes impact asset yields more than they impact liability costs. This is because substantial amounts of bank funding are not affected, or are just minimally affected, by changes in interest rates. The average checking account pays no interest, or very little interest, so changes in interest rates do not produce notable changes in interest expense. However, banks have large concentrations of short-term and/or variable rate loans, so changes in interest rates significantly impact interest income. In general, banks earn more money when interest rates are high, and they earn less money when interest rates are low. This relationship often breaks down in very large banks that rely significantly on funding sources other than traditional bank deposits. Large banks are often liability sensitive because they depend on large concentrations of funding that are highly interest rate sensitive. Large banks also tend to maintain large concentrations of fixed rate loans, which further increases liability sensitivity. Therefore, large banks will often earn more net interest income when interest rates are low.
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Megaprojects and interest rate risk

Interest rate risk has been shown to be particularly significant and particularly damaging for very large, one-off investment projects, so-called megaprojects. This is because such projects are typically debt-financed and are prone to end up in what has been called the "debt trap," i.e., a situation where due to cost overruns, schedule delays, unforeseen interest rate increases, etc. the costs of servicing debt becomes larger than the revenues available to pay interest on and bring down the debt.[1]
Hedging interest rate risk

Interest rate risks can be reduced (hedged) using bonds, fixed income instruments or fixed-for-floating interest rate swaps.
External links
riskglossary.com Article on interest rate risk [2]. Article on Long term interest rates [3]. Quantifying the Interest Rate Risk of Bonds by Simulation (M.S Thesis) [4], aatay Dastan
References
[1] Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter, 2003, Megaprojects and Risk: An Anatomy of Ambition (Cambridge University Press). [2] http:/ / www. riskglossary. com/ link/ interest_rate_risk. htm [3] http:/ / www. worldwideinterestrates. com/ long_term_interest_rates. htm [4] http:/ / www. quantcode. com/ modules/ wflinks/ visit. php?cid=3& lid=942
Risk assessment
Risk assessment is a step in a risk management procedure. Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized threat (also called hazard). Quantitative risk assessment requires calculations of two components of risk: R, the magnitude of the potential loss L, and the probability p, that the loss will occur. In all types of engineering of complex systems sophisticated risk assessments are often made within Safety engineering and Reliability engineering when it concerns threats to life, environment or machine functioning. The nuclear, aerospace, oil, rail and military industries have a long history of dealing with risk assessment. Also, medical, hospital, and food industries control risks and perform risk assessments on a continual basis. Methods for assessment of risk may differ between industries and whether it pertains to general financial decisions or environmental, ecological, or public health risk assessment.
Explanation
Risk assessment consists of an objective evaluation of risk in which assumptions and uncertainties are clearly considered and presented. Part of the difficulty in risk management is that measurement of both of the quantities in which risk assessment is concerned - potential loss and probability of occurrence - can be very difficult to measure. The chance of error in measuring these two concepts is large. Risk with a large potential loss and a low probability of occurring is often treated differently from one with a low potential loss and a high likelihood of occurring. In theory, both are of nearly equal priority, but in practice it can be very difficult to manage when faced with the scarcity of resources, especially time, in which to conduct the risk management process. Expressed mathematically,
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Financial decisions, such as insurance, express loss in terms of dollar amounts. When risk assessment is used for public health or environmental decisions, loss can be quantified in a common metric such as a country's currency or some numerical measure of a location's quality of life. For public health and environmental decisions, loss is simply a verbal description of the outcome, such as increased cancer incidence or incidence of birth defects. In that case, the "risk" is expressed as:
If the risk estimate takes into account information on the number of individuals exposed, it is termed a "population risk" and is in units of expected increased cases per a Risk assessment from a financial point of view. time period. If the risk estimate does not take into account the number of individuals exposed, it is termed an "individual risk" and is in units of incidence rate per a time period. Population risks are of more use for cost/benefit analysis; individual risks are of more use for evaluating whether risks to individuals are "acceptable"....
Risk assessment in public health

In the context of public health, risk assessment is the process of quantifying the probability of a harmful effect to individuals or populations from certain human activities. In most countries the use of specific chemicals or the operations of specific facilities (e.g. power plants, manufacturing plants) is not allowed unless it can be shown that they do not increase the risk of death or illness above a specific threshold. For example, the American Food and Drug Administration (FDA) regulates food safety through risk assessment.[1] The FDA required in 1973 that cancer-causing compounds must not be present in meat at concentrations that would cause a cancer risk greater than 1 in a million lifetimes. The US Environmental Protection Agency provides basic information about environmental risk assessments for the public via its risk assessment portal.[2]
How the risk is determined

In the estimation of risks, three or more steps are involved that require the inputs of different disciplines: 1. Hazard Identification, aims to determine the qualitative nature of the potential adverse consequences of the contaminant (chemical, radiation, noise, etc.) and the strength of the evidence it can have that effect. This is done, for chemical hazards, by drawing from the results of the sciences of toxicology and epidemiology. For other kinds of hazard, engineering or other disciplines are involved. 2. Dose-Response Analysis, is determining the relationship between dose and the probability or the incidence of effect (dose-response assessment). The complexity of this step in many contexts derives mainly from the need to extrapolate results from experimental animals (e.g. mouse, rat) to humans, and/or from high to lower doses. In addition, the differences between individuals due to genetics or other factors mean that the hazard may be higher for particular groups, called susceptible populations. An alternative to dose-response estimation is to determine an
Risk assessment effect unlikely to yield observable effects, that is, a no effect concentration. In developing such a dose, to account for the largely unknown effects of animal to human extrapolations, increased variability in humans, or missing data, a prudent approach is often adopted by including safety factors in the estimate of the "safe" dose, typically a factor of 10 for each unknown step. 3. Exposure Quantification, aims to determine the amount of a contaminant (dose) that individuals and populations will receive. This is done by examining the results of the discipline of exposure assessment. As different location, lifestyles and other factors likely influence the amount of contaminant that is received, a range or distribution of possible values is generated in this step. Particular care is taken to determine the exposure of the susceptible population(s). Finally, the results of the three steps above are then combined to produce an estimate of risk. Because of the different susceptibilities and exposures, this risk will vary within a population.
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Small subpopulations
When risks apply mainly to small subpopulations, there is uncertainty at which point intervention is necessary. What if a risk is very low for everyone but 0.1% of the population? A difference exists whether this 0.1% is represented by *all infants younger than X days or *recreational users of a particular product. If the risk is higher for a particular sub-population because of abnormal exposure rather than susceptibility, there is a potential to consider strategies to further reduce the exposure of that subgroup. If an identifiable sub-population is more susceptible due to inherent genetic or other factors, there is a policy choice whether to set policies for protecting the general population that are protective of such groups (as is currently done for children when data exists, or is done under the Clean Air Act for populations such as asthmatics) or whether if the group is too small, or the costs to high. Sometimes, a more specific calculation can be applied whether it is more important to analyze each method specifically the changes of the risk assessment method in containing all problems that each of us people could replace.
Acceptable risk increase

The idea of not increasing lifetime risk by more than one in a million has become common place in public health discourse and policy. How consensus settled on this particular figure is unclear. In some respects this figure has the characteristics of a mythical number. In another sense the figure provides a numerical basis for what to consider a negligible increase in risk. Some current environmental decision making allows some discretion to deem individual risks potentially "acceptable" if below one in ten thousand increased lifetime risk. Low risk criteria such as these provide some protection for a case where individuals may be exposed to multiple chemicals (whether pollutants or food additives, or other chemicals). However, both of these benchmarks are clearly small relative to the typical one in four lifetime risk of death by cancer (due to all causes combined) in developed countries. On the other hand, adoption of a zero-risk policy could be motivated by the fact that the 1 in a million policy still would cause the death of hundreds or thousands of people in a large enough population. In practice however, a true zero-risk is possible only with the suppression of the risk-causing activity. More stringent requirements (even 1 in a million) may not be technologically feasible at a given time or may be prohibitively expensive as to render the risk-causing activity unsustainable, resulting in the optimal degree of intervention being a balance between risks vs. benefit. For example, it might well be that the emissions from hospital incinerators result in a certain number of deaths per year. However, this risk must be balanced against the available alternatives. In some unusual cases, there are significant public health risks, as well as economic costs, associated with all options. For example, there are risks associated with no incineration (with the potential risk for spread of infectious diseases) or even no hospitals. Further investigation often identifies more options such as separating noninfectious from infectious wastes, or air pollution controls on a medical incinerator that provide a broad range of options of acceptable risk - though with varying practical implications and varying economic costs. Intelligent thought about a reasonably full set of options is essential. Thus, it is not unusual for there to be an iterative process
Risk assessment between analysis, consideration of options, and follow up analysis.
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Risk assessment in auditing

In auditing, risk assessment is a very crucial stage before accepting an audit engagement. According to ISA315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, "the auditor should perform risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control."<evidence relating to the auditors risk assessment of a material misstatement in the clients financial statements. Then, the auditor obtains initial evidence regarding the classes of transactions at the client and the operating effectiveness of the clients internal controls.In auditing, audit risk includes inherent risk, control risk and detection risk.
Risk assessment and human health

There are many resources that provide health risk information. The National Library of Medicine provides risk assessment and regulation information tools for a varied audience.[3] These include TOXNET (databases on hazardous chemicals, environmental health, and toxic releases),[4] the Household Products Database (potential health effects of chemicals in over 10,000 common household products),[5] and TOXMAP (maps of US Environmental Agency Superfund and Toxics Release Inventory data). The United States Environmental Protection Agency provides basic information about environmental risk assessments for the public.[6]
Risk assessment in information security

IT risk assessment can be performed by a qualitative or quantitative approach, following different methodologies.
Risk assessment in project management

In project management, risk assessment is an integral part of the risk management plan, studying the probability, the impact, and the effect of every known risk on the project, as well as the corrective action to take should that risk occur.[7]
Risk assessment for megaprojects

Megaprojects (sometimes also called "major programs") are extremely large-scale investment projects, typically costing more than US$1 billion per project. Megaprojects include bridges, tunnels, highways, railways, airports, seaports, power plants, dams, wastewater projects, coastal flood protection, oil and natural gas extraction projects, public buildings, information technology systems, aerospace projects, and defence systems. Megaprojects have been shown to be particularly risky in terms of finance, safety, and social and environmental impacts. Risk assessment is therefore particularly pertinent for megaprojects and special methods and special education have been developed for such risk assessment.[8] [9]
Quantitative risk assessment

Further information: Quantitative Risk Assessment software Quantitative risk assessments include a calculation of the single loss expectancy (SLE) of an asset. The single loss expectancy can be defined as the loss of value to asset based on a single security incident. The team then calculates the Annualized Rate of Occurrence (ARO) of the threat to the asset. The ARO is an estimate based on the data of how often a threat would be successful in exploiting a vulnerability. From this information, the Annualized Loss Expectancy (ALE) can be calculated. The annualized loss expectancy is a calculation of the single loss expectancy multiplied by the annual rate of occurrence, or how much an organization could estimate to lose from an asset based
Risk assessment on the risks, threats, and vulnerabilities. It then becomes possible from a financial perspective to justify expenditures to implement countermeasures to protect the asset.
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Risk assessment in software evolution

Further information: ACM A Formal Risk Assessment Model for Software Evolution Studies have shown that early parts of the system development cycle such as requirements and design specifications are especially prone to error. This effect is particularly notorious in projects involving multiple stakeholders with different points of view. Evolutionary software processes offer an iterative approach to requirement engineering to alleviate the problems of uncertainty, ambiguity and inconsistency inherent in software developments.
Criticisms of quantitative risk assessment

Barry Commoner, Brian Wynne and other critics have expressed concerns that risk assessment tends to be overly quantitative and reductive. For example, they argue that risk assessments ignore qualitative differences among risks. Some charge that assessments may drop out important non-quantifiable or inaccessible information, such as variations among the classes of people exposed to hazards. Furthermore, Commoner and O'Brien claim that quantitative approaches divert attention from precautionary or preventative measures.[10] Others, like Nassim Nicholas Taleb consider risk managers little more than "blind users" of statistical tools and methods.[11]
References
Footnotes
[1] Merrill, Richard A. "Food Safety Regulation: Reforming the Delaney Clause" in Annual Review of Public Health, 1997, 18:313-40. This source includes a useful historical survey of prior food safety regulation. [2] EPA.gov (http:/ / www. epa. gov/ risk/ ) [3] SIS.nlm.nih.gov (http:/ / sis. nlm. nih. gov/ enviro/ riskinformation. html) [4] Toxnet.nlm.nih.gov (http:/ / toxnet. nlm. nih. gov) [5] HPD.nlm.nih.gov (http:/ / hpd. nlm. nih. gov/ ) [6] EPA.gov (http:/ / www. epa. gov/ risk/ ) [7] Managing Project Risks (http:/ / www. pmhut. com/ managing-project-risks) - Retrieved May 20th, 2010 [8] Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter, 2003, Megaprojects and Risk: An Anatomy of Ambition (Cambridge University Press). [9] Oxford BT Centre for Major Programme Management [10] Commoner, Barry. O'Brien, Mary. Shrader-Frechette and Westra 1997. [11] The fourth quadrant: a map of the limits of statistics [9.15.08] Nassim Nicholas Taleb An Edge Original Essay
General references
Jean-Lou, C. M.; Dorne, George E. N. Kass, Luisa R. Bordajandi, Billy Amzal, Ulla Bertelsen, Anna F. Castoldi, Claudia Heppner, Mari Eskola, Stefan Fabiansson, Pietro Ferrari, Elena Scaravelli, Eugenia Dogliotti, Peter Fuerst, Alan R. Boobis and Philippe Verger (2011). "Chaper 2. Human Risk Assessment of Heavy Metals: Principles and Applications". In Astrid Sigel, Helmut Sigel, Roland K O Sigel. Metal Ions in Toxicology. RSC Publishing. pp.2760. doi:10.1039/9781849732116-00027. Mumtaz, Moiz M.; Hansen, Hugh; Pohl, Hana R. (2011). "Chapter 3. Mixtures and Their Risk Assessment in Toxicology". In Astrid Sigel, Helmut Sigel, Roland K O Sigel. Metal Ions in Toxicology. RSC Publishing. pp.6180. doi:10.1039/9781849732116-00061. Committee on Risk Assessment of Hazardous Air Pollutants, Board on Environmental Studies and Toxicology, Commission on Life Sciences, National Research Council (1994), Science and judgment in risk assessment (http:/ /books.google.com/books?id=k9mKUyfHakcC&printsec=frontcover&dq=Science+and+judgment+in+ risk+assessment#v=onepage&q&f=false), Washington, D.C: National Academy Press, ISBN0-309-04894-X,
Risk assessment retrieved 27 September 2010 Barry Commoner. Comparing apples to oranges: Risk of cost/benefit analysis from Contemporary moral controversies in technology, A. P. Iannone, ed., pp.6465. Flyvbjerg, Bent, "From Nobel Prize to Project Management: Getting Risks Right." Project Management Journal, vol. 37, no. 3, August 2006, pp. 5-15. (http://flyvbjerg.plan.aau.dk/Publications2006/Nobel-PMJ2006.pdf) Hallenbeck, William H. Quantitative risk assessment for environmental and occupational health. Chelsea, Mich.: Lewis Publishers, 1986 Harremos, Poul, ed. Late lessons from early warnings: the precautionary principle 18962000. John M. Lachin. Biostatistical methods: the assessment of relative risks. Lerche, Ian; Glaesser, Walter (2006), Environmental risk assessment : quantitative measures, anthropogenic influences, human impact. (http://books.google.com/books?id=qB54qgpA_fEC&printsec=frontcover& dq=Environmental+risk+assessment#v=onepage&q&f=false), Berlin: Springer, ISBN3-540-26249-0, retrieved 27 September 2010 Kluger, Jeffrey (November 26, 2006), "How Americans Are Living Dangerously" (http://www.time.com/time/ magazine/article/0,9171,1562978,00.html), Time, retrieved 27 September 2010Also published as December 4 cover title: "Why We Worry About the Wrong Things: The Psychology of Risk" (http://www.time.com/time/ magazine/0,9263,7601061204,00.html)
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Library of Congress. Congressional Research Service. & United States. Congress. House. Committee on Science and Technology. Subcommittee on Science, Research, and Technology (1983), A Review of risk assessment methodologies, Washington: U.S: report / prepared by the Congressional Research Service, Library of Congress for the Subcommittee on Science, Research, and Technology; transmitted to the Committee on Science and Technology, U.S. House of Representatives, Ninety-eighth Congress, first session Deborah G. Mayo. Sociological versus metascientific views of technological risk assessment in Shrader-Frechette and Westra. Nyholm, J, 2009 " Persistency, bioaccumulation and toxicity assessment of selected brominated flame retardants (http://umu.diva-portal.org/smash/get/diva2:216812/FULLTEXT01)" OBrien, Mary (2002), Making better environmental decisions: an alternative to risk assessment (http://books. google.com/books?id=LtCOEN9HWIcC&printsec=frontcover&dq=Making+better+ environmental#v=onepage&q&f=false), Cambridge, Massachusetts: MIT Press, ISBN0-262-15051-4, retrieved 27 September 2010Paperback ISBN 0-262-65053-3 Shrader-Frechette, Kristin; Westra, Laura, eds. (1997), Technology and values (http://books.google.com/ books?id=y5BfvU6uMQMC&printsec=frontcover&dq=Technology+and+values#v=onepage&q&f=false), Lanham, Maryland: Rowman & Littlefield, ISBN0-8476-8631-0, retrieved 27 September 2010
External links
Risk Assessment Worksheet and Management Plan (http://www.pmhut.com/wp-content/uploads/2008/01/ risk_management.pdf) A comprehensive guide to risk assessment in project management, includes template - By John Filicetti
Risk aversion
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Risk aversion
Risk aversion is a concept in psychology, economics, and finance, based on the behavior of humans (especially consumers and investors) while exposed to uncertainty. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff. For example, a risk-averse investor might choose to put his or her money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value. Outside the rather mathematical fields of economics and finance, people have to make choices about how they face risks every day. Some have become very cautious, preferring to minimize risks even when the potential benefit of an action is large.
Example
Utility function of a risk-averse (risk-avoiding) individual.
Utility function of a risk-neutral individual.
Utility function of a risk-affine (risk-seeking) individual.
A person is given the choice between two scenarios, one with a guaranteed payoff and one without. In the guaranteed scenario, the person receives $50. In the uncertain scenario, a coin is flipped to decide whether the person receives $100 or nothing. The expected payoff for both scenarios is $50, meaning that an individual who was insensitive to
Risk aversion risk would not care whether they took the guaranteed payment or the gamble. However, individuals may have different risk attitudes. A person is: risk-averse (or risk-avoiding) - if he or she would accept a certain payment (certainty equivalent) of less than $50 (for example, $40), rather than taking the gamble and possibly receiving nothing. risk-neutral - if he or she is indifferent between the bet and a certain $50 payment. risk-loving (or risk-seeking) - if the guaranteed payment must be more than $50 (for example, $60) to induce him or her to take the guaranteed option, rather than taking the gamble and possibly winning $100. The average payoff of the gamble, known as its expected value, is $50. The dollar amount that the individual would accept instead of the bet is called the certainty equivalent, and the difference between the expected value and the certainty equivalent is called the risk premium. For risk-averse individuals, it becomes positive, for risk-neutral persons it is zero, and for risk-loving individuals their risk premium becomes negative.
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Utility of money
In expected utility theory, an agent has a utility function u(x) where x represents the value that he might receive in money or goods (in the above example x could be 0 or 100). Time does not come into this calculation, so inflation does not appear. (The utility function u(x) is defined only up to affine transformation - in other words a constant factor could be added to the value of u(x) for all x, and/or u(x) could be multiplied by a positive constant factor, without affecting the conclusions.) An agent possesses risk aversion if and only if the utility function is concave. For instance u(0) could be 0, u(100) might be 10, u(40) might be 5, and for comparison u(50) might be 6. The expected utility of the above bet (with a 50% chance of receiving 100 and a 50% chance of receiving 0) is, , and if the person has the utility function with u(0)=0, u(40)=5, and u(100)=10 then the expected utility of the bet equals 5, which is the same as the known utility of the amount 40. Hence the certainty equivalent is 40. The risk premium is ($50 minus $40)=$10, or in proportional terms
or 25% (where $50 is the expected value of the risky bet: (
). This risk premium means that the person
would be willing to sacrifice as much as $10 in expected value in order to achieve perfect certainty about how much money will be received. In other words, the person would be indifferent between the bet and a guarantee of $40, and would prefer anything over $40 to the bet. In the case of a wealthier individual, the risk of losing $100 would be less significant, and for such small amounts his utility function would be likely to be almost linear, for instance if u(0) = 0 and u(100) = 10, then u(40) might be 4.0001 and u(50) might be 5.0001. The utility function for perceived gains has two key properties: an upward slope, and concavity. (i) The upward slope implies that the person feels that more is better: a larger amount received yields greater utility, and for risky bets the person would prefer a bet which is first-order stochastically dominant over an alternative bet (that is, if the probability mass of the second bet is pushed to the right to form the first bet, then the first bet is preferred). (ii) The concavity of the utility function implies that the person is risk averse: a sure amount would always be preferred over a risky bet having the same expected value; moreover, for risky bets the person would prefer a bet which is a mean-preserving contraction of an alternative bet (that is, if some of the probability mass of the first bet is spread out without altering the mean to form the second bet, then the first bet is preferred). The above is an introduction to the mathematics of risk aversion. However it assumes that the individual concerned will act entirely rationally and will not factor into his decision non-monetary, psychological considerations such as regret at having made the wrong decision. Often an individual may come to a different decision depending on how
Risk aversion the proposition is presented, even though there may be no mathematical difference.
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Measures of risk aversion

Absolute risk aversion
The higher the curvature of , the higher the risk aversion. However, since expected utility functions are not uniquely defined (are defined only up to affine transformations), a measure that stays constant with respect to these transformations is needed. One such measure is the Arrow-Pratt measure of absolute risk-aversion (ARA), after the economists Kenneth Arrow and John W. Pratt,[1] [2] also known as the coefficient of absolute risk aversion, defined as . The following expressions relate to this term: Exponential utility of the form is unique in exhibiting constant absolute risk aversion
(CARA): is constant with respect to c. Hyperbolic absolute risk aversion (HARA) is the most general class of utility functions that are usually used in practice (specifically, CRRA (constant relative risk aversion, see below), CARA (constant absolute risk aversion), and quadratic utility all exhibit HARA and are often used because of their mathematical tractability). A utility function exhibits HARA if its absolute risk aversion is a hyperbolic function, namely
The solution to this differential equation (omitting additive and multiplicative constant terms, which do not affect the behavior implied by the utility function) is:
where when
and
. Note that when
, this is CARA, as . See

[3]
, and is decreasing/increasing. Using
, this is CRRA (see below), as
Decreasing/increasing absolute risk aversion (DARA/IARA) is present if the above definition of ARA, the following inequality holds for DARA:
and this can hold only if is,

[4]
. Therefore, DARA implies that the utility function is positively skewed; that ). An example of a DARA utility function is , with would
. Analogously, IARA can be derived with the opposite directions of inequalities, which permits , while
but does not require a negatively skewed utility function ( , with
represent a quadratic utility function exhibiting IARA. Experimental and empirical evidence is mostly consistent with decreasing absolute risk aversion.[5] Contrary to what several empirical studies have assumed, wealth is not a good proxy for risk aversion when studying risk sharing in a principal-agent setting. Although is monotonic in wealth under
either DARA or IARA and constant in wealth under CARA, tests of contractual risk sharing relying on wealth as a proxy for absolute risk aversion are usually not identified.[6]
Risk aversion
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Relative risk aversion

The Arrow-Pratt measure of relative risk-aversion (RRA) or coefficient of relative risk aversion is defined as . Like for absolute risk aversion, the corresponding terms constant relative risk aversion (CRRA) and decreasing/increasing relative risk aversion (DRRA/IRRA) are used. This measure has the advantage that it is still a valid measure of risk aversion, even if the utility function changes from risk-averse to risk-loving as c varies, i.e. utility is not strictly convex/concave over all c. A constant RRA implies a decreasing ARA, but the reverse is not always true. As a specific example, the expected utility function implies RRA = 1. In intertemporal choice problems, the elasticity of intertemporal substitution is often unable to be disentangled from the coefficient of relative risk aversion. The isoelastic utility function
exhibits constant relative risk aversion with . When
and the elasticity of intertemporal substitution
and one is subtracted in the numerator (facilitating the use of l'Hpital's rule), this
simplifies to the case of log utility, and the income effect and substitution effect on saving exactly offset.
Implications of increasing/decreasing absolute and relative risk aversion

The most straightforward implications of increasing or decreasing absolute or relative risk aversion, and the ones that motivate a focus on these concepts, occur in the context of forming a portfolio with one risky asset and one risk-free asset.[1] [2] If the person experiences an increase in wealth, he/she will choose to increase (or keep unchanged, or decrease) the number of dollars of the risky asset held in the portfolio if absolute risk aversion is decreasing (or constant, or increasing). Thus economists avoid using utility functions, such as the quadratic, which exhibit increasing absolute risk aversion, because they have an unrealistic behavioral implication. Similarly, if the person experiences an increase in wealth, he/she will choose to increase (or keep unchanged, or decrease) the fraction of the portfolio held in the risky asset if relative risk aversion is decreasing (or constant, or increasing).
Portfolio theory
In modern portfolio theory, risk aversion is measured as the additional marginal reward an investor requires to accept additional risk. In modern portfolio theory, risk is being measured as standard deviation of the return on investment, i.e. the square root of its variance. In advanced portfolio theory, different kinds of risk are taken into consideration. They are being measured as the n-th radical of the n-th central moment. The symbol used for risk aversion is A or An.
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Limitations
The notion of (constant) risk aversion has come under criticism from behavioral economics. According to Matthew Rabin of UC Berkeley, a consumer who, from any initial wealth level [...] turns down gambles where he loses $100 or gains $110, each with 50% probability [...] will turn down 50-50 bets of losing $1,000 or gaining any sum of money. It is noteworthy that Rabin's article went on to criticize the whole field of expected utility and not just constant relative risk aversion. This has led to some confusion in the field. One solution to the problem observed by Rabin is that proposed by prospect theory and cumulative prospect theory, where outcomes are considered relative to a reference point (usually the status quo), rather than to consider only the final wealth.
Risk aversion in the brain

Attitudes towards risk have attracted the interest of the field of neuroeconomics. A study by researchers at the University of Cambridge [7] suggested that the activity of a specific brain area (right inferior frontal gyrus) correlates with risk aversion, with more risk averse participants (i.e. those having higher risk premia) also having higher responses to safer options. This result coincides with other studies,[8] [9] that show that neuromodulation of the same area results in participants making more or less risk averse choices, depending on whether the modulation increases or decreases the activity of the target area.
Public understanding and risk in social activities

In the real world, many government agencies, e.g. Health and Safety Executive, are fundamentally risk-averse in their mandate. This often means that they demand (with the power of legal enforcement) that risks be minimized, even at the cost of losing the utility of the risky activity. It is important to consider the opportunity cost when mitigating a risk; the cost of not taking the risky action. Writing laws focused on the risk without the balance of the utility may misrepresent society's goals. The public understanding of risk, which influences political decisions, is an area which has recently been recognised as deserving focus. David Spiegelhalter is the Winton Professor of the Public Understanding of Risk at Cambridge University; a role he describes as "outreach".[10] Children's services such as schools and playgrounds have become the focus of much risk-averse planning, meaning that children are often prevented from benefiting from activities that they would otherwise have had. Many playgrounds have been fitted with impact-absorbing matting surfaces. However, these are only designed to save children from death in the case of direct falls on their heads and do not achieve their main goals.[11] They are expensive, meaning that less resources are available to benefit users in other ways (such as building a playground closer to the child's home, reducing the risk of a road traffic accident on the way to it), and children are likely to attempt more dangerous acts, with confidence in the artificial surface. They grow up with a poorer understanding of risk management. Shiela Sage, an early years school advisor, observes "Children who are only ever kept in very safe places, are not the ones who are able to solve problems for themselves. Children need to have a certain amount of risk taking ... so they'll know how to get out of situations."[12] There are also classroom courses in risk taking, for example from a business perspective.[13] A vaccine to protect children against the three common diseases measles, mumps and rubella was developed and recommended for all children in several countries including the UK. However, a controversy arose around allegations that it caused autism. This alleged causal link was thoroughly disproved,[14] and the doctor who made the claims was expelled from the General Medical Council. Even years after the claims were disproved, some parents wanted to avert the risk of causing autism in their own children. They chose to spend significant amounts of their own money on alternatives from private doctors. These alternatives carried their own risks which were not balanced fairly; most often that the children were not properly immunised against the more common diseases of measles, mumps and rubella.
Risk aversion Similarly, mobile phones may carry some small[15] [16] health risk. While most people would accept that unproven risk to gain the benefit of improved communication, others remain so risk averse that they do not. The COSMOS cohort study continues to study the actual risks of mobile phones. Risk aversion theory can be applied to many aspects of life and its challenges, for example: Bribery and corruption - whether the risk of being implicated or caught outweighs the potential personal or professional rewards Drugs - whether the risk of having a bad trip outweighs the benefits of possible transformative one; whether the risk of defying social bans is worth the experience of alteration. See "Harm Reduction". Sex - judgement whether an experience that goes against social convention, ethical mores or common health prescriptions is worth the risk. Extreme sports - having the ability to go against biological predepositions like the fear of height. Play by children in playgrounds or beyond the reach of their parents.
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External links
Paper about problems with risk aversion [17] Economist article on monkey experiments showing behaviours resembling risk aversion [18] (requires a paid subscription to economist.com) Arrow-Pratt Measure on About.com:Economics [19] Risk Aversion of Individuals vs Risk Aversion of the Whole Economy [20] The benefit of utilities: a plausible explanation for small risky parts in the portfolio [21]
References
[1] Arrow, K.J.,1965, "The theory of risk aversion," in Aspects of the Theory of Risk Bearing, by Yrjo Jahnssonin Saatio, Helsinki. Reprinted in: Essays in the Theory of Risk Bearing, Markham Publ. Co., Chicago, 1971, 90109. [2] Pratt, J. W., "Risk aversion in the small and in the large," Econometrica 32, JanuaryApril 1964, 122136. [3] Zender's lecture notes (http:/ / leeds-faculty. colorado. edu/ zender/ Fin7330/ 1-RiskAversion. doc) [4] Haim Levy (2006), Stochastic Dominance: Investment Decision Making under Uncertainty, Springer [5] Friend, Irwin and Blume, Marshall (1975), The Demand for Risky Assets, The American Economic Review. [6] Bellemare, Marc F. and Zachary S. Brown, On the (Mis)Use of Wealth as a Proxy for Risk Aversion (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=1140668), Working Paper, Duke University. [7] Christopoulos GI; Tobler PN; Bossaerts P; Dolan RJ; Schultz W (2009). "Neural Correlates of Value, Risk, and Risk Aversion Contributing to Decision Making under Risk.". J Neurosci 26 (24): 64696472. doi:10.1523/JNEUROSCI.0804-06.2006. PMID16775134. [8] Knoch D, Gianotti LR, Pascual-Leone A, Treyer V, Regard M, Hohmann M, Brugger P (2006). "Disruption of right prefrontal cortex by low-frequency repetitive transcranial magnetic stimulation induces risk-taking behavior.". J Neurosci 26 (24): 64696472. doi:10.1523/JNEUROSCI.0804-06.2006. PMID16775134. [9] Fecteau S, Pascual-Leone A, Zald DH, Liguori P, Thoret H, Boggio PS, Fregni F (2007). "Activation of prefrontal cortex by transcranial direct current stimulation reduces appetite for risk during ambiguous decision making.". J Neurosci 27 (23): 62126218. doi:10.1523/JNEUROSCI.0314-07.2007. PMID17553993. [10] Spiegelhalter, David (Michaelmas 2009). "Don's Diary" (http:/ / www. alumni. cam. ac. uk/ uploads/ File/ CAM58/ CAM58. pdf#page=5). CAM. 58. Cambridge University Alumni Association. p. 3. . [11] Gill, Tim (2007). No fear: Growing up in a Risk Averse society (http:/ / www. gulbenkian. org. uk/ media/ item/ 1266/ 223/ No-fear-19. 12. 07. pdf#page=28). Calouste Gulbenkian Foundation. p.81. ISBN9781903080085. . [12] Sue Durant, Sheila Sage. (10 January 2006). Early Years - The Outdoor Environment (http:/ / www. teachers. tv/ video/ 214). Teachers TV. . [13] Wetton, Noreen; Wilson, John (February 2007). Confident to Earn (http:/ / www. ea. e-renfrew. sch. uk/ curriculinks/ Links/ Teachers/ ConfidentToEarn. pdf). Scottish Executive Education Department. [14] Madsen KM, Hviid A, Vestergaard M et al. (2002). "A population-based study of measles, mumps, and rubella vaccination and autism". N Engl J Med 347 (19): 147782. doi:10.1056/NEJMoa021134. PMID12421889. [15] "What are the health risks associated with mobile phones and their base stations?" (http:/ / www. who. int/ features/ qa/ 30/ en). Online Q&A. World Health Organization. 2005-12-05. . Retrieved 2008-01-19. [16] "Electromagnetic fields and public health: mobile telephones and their base stations" (http:/ / www. who. int/ mediacentre/ factsheets/ fs193/ en). Fact sheet N193. World Health Organization. June 2000. . Retrieved 2008-01-19. [17] http:/ / repositories. cdlib. org/ cgi/ viewcontent. cgi?article=1025& context=iber/ econ
Risk aversion
[18] [19] [20] [21] http:/ / www. economist. com/ science/ displayStory. cfm?story_id=4102350 http:/ / economics. about. com/ cs/ economicsglossary/ g/ arrow_pratt. htm http:/ / ssrn. com/ abstract=941126 http:/ / www. sigmadewe. com/ fileadmin/ user_upload/ pdf-Dateien/ The_Benefit_of_Utilities. pdf
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Risk management
Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events[1] or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures (at any phase in development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as Example of risk management: A NASA model showing areas at high risk from impact deliberate attack from an adversary or for the International Space Station. events of uncertain root-cause. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards.[2] [3] Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety. The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the consequences of a particular risk. Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase.[1]
Introduction
This section provides an introduction to the principles of risk management. The vocabulary of risk management is defined in ISO Guide 73, "Risk management. Vocabulary."[2] In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled. Intangible risk management identifies a new type of a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example, when deficient knowledge is applied to a
Risk management situation, a knowledge risk materializes. Relationship risk appears when ineffective collaboration occurs. Process-engagement risk may be an issue when ineffective operational procedures are applied. These risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality. Intangible risk management allows risk management to create immediate value from the identification and reduction of risks that reduce productivity. Risk management also faces difficulties in allocating resources. This is the idea of opportunity cost. Resources spent on risk management could have been spent on more profitable activities. Again, ideal risk management minimizes spending and minimizes the negative effects of risks.
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Method
For the most part, these methods consist of the following elements, performed, more or less, in the following order. 1. 2. 3. 4. 5. identify, characterize, and assess threats assess the vulnerability of critical assets to specific threats determine the risk (i.e. the expected consequences of specific types of attacks on specific assets) identify ways to reduce those risks prioritize risk reduction measures based on a strategy
Principles of risk management

The International Organization for Standardization (ISO) identifies the following principles of risk management:[4] Risk management should: create value be an integral part of organizational processes be part of decision making explicitly address uncertainty and assumptions be systematic and structured be based on the best available information be tailorable take into account human factors be transparent and inclusive be dynamic, iterative and responsive to change be capable of continual improvement and enhancement
Process
According to the standard ISO 31000 "Risk management -- Principles and guidelines on implementation,"[3] the process of risk management consists of several steps as follows:
Establishing the context

Establishing the context involves: 1. Identification of risk in a selected domain of interest 2. Planning the remainder of the process. 3. Mapping out the following: the social scope of risk management the identity and objectives of stakeholders the basis upon which risks will be evaluated, constraints. 4. Defining a framework for the activity and an agenda for identification.
Risk management 5. Developing an analysis of risks involved in the process. 6. Mitigation or Solution of risks using available technological, human and organizational resources.
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Identification
After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. Source analysis Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport. Problem analysis Risks are related to identified threats. For example: the threat of losing money, the threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholders, customers and legislative bodies such as the government. When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; privacy information may be stolen by employees even within a closed network; lightning striking an aircraft during takeoff may make all people on board immediate casualties. The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or the development of templates for identifying source, problem or event. Common risk identification methods are: Objectives-based risk identification Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk. Scenario-based risk identification In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk - see Futures Studies for methodology used by Futurists. Taxonomy-based risk identification The taxonomy in taxonomy-based risk identification is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire is compiled. The answers to the questions reveal risks.[5] Common-risk checking In several industries, lists with known risks are available. Each risk in the list can be checked for application to a particular situation.[6] Risk charting[7] This method combines the above approaches by listing resources at risk, threats to those resources, modifying factors which may increase or decrease the risk and consequences it is wished to avoid. Creating a matrix under these headings enables a variety of approaches. One can begin with resources and consider the threats they are exposed to and the consequences of each. Alternatively one can start with the threats and examine which resources they would affect, or one can begin with the consequences and determine which combination of threats and resources would be involved to bring them about.
Assessment
Once risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated decisions in order to properly prioritize the implementation of the risk management plan. Even a short-term positive improvement can have long-term negative impacts. Take the "turnpike" example. A highway is widened to allow more traffic. More traffic capacity leads to greater development in the areas
Risk management surrounding the improved traffic capacity. Over time, traffic thereby increases to fill available capacity. Turnpikes thereby need to be expanded in a seemingly endless cycles. There are many other engineering examples where expanded capacity (to do any function) is soon filled by increased demand. Since expansion comes at a cost, the resulting growth could become unsustainable without forecasting and management. The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for intangible assets. Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of information. Nevertheless, risk assessment should produce such information for the management of the organization that the primary risks are easy to understand and that the risk management decisions may be prioritized. Thus, there have been several theories and attempts to quantify risks. Numerous different risk formulae exist, but perhaps the most widely accepted formula for risk quantification is: Rate (or probability) of occurrence multiplied by the impact of the event equals risk magnitude
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Composite Risk Index

The above formula can also be re-written in terms of a Composite Risk Index, as follows: Composite Risk Index = Impact of Risk event x Probability of Occurrence The impact of the risk event is commonly assessed on a scale of 1 to 5, where 1 and 5 represent the minimum and maximum possible impact of an occurrence of a risk (usually in terms of financial losses). However, the 1 to 5 scale can be arbitrary and need not be on a linear scale. The probability of occurrence is likewise commonly assessed on a scale from 1 to 5, where 1 represents a very low probability of the risk event actually occurring while 5 represents a very high probability of occurrence. This axis may be expressed in either mathematical terms (event occurs once a year, once in ten years, once in 100 years etc.) or may be expressed in "plain english" - event has occurred here very often; event has been known to occur here; event has been known to occur in the industry etc.). Again, the 1 to 5 scale can be arbitrary or non-linear depending on decisions by subject-matter experts. The Composite Index thus can take values ranging (typically) from 1 through 25, and this range is usually arbitrarily divided into three sub-ranges. The overall risk assessment is then Low, Medium or High, depending on the sub-range containing the calculated value of the Composite Index. For instance, the three sub-ranges could be defined as 1 to 8, 9 to 16 and 17 to 25. Note that the probability of risk occurrence is difficult to estimate, since the past data on frequencies are not readily available, as mentioned above. After all, probability does not imply certainty. Likewise, the impact of the risk is not easy to estimate since it is often difficult to estimate the potential loss in the event of risk occurrence. Further, both the above factors can change in magnitude depending on the adequacy of risk avoidance and prevention measures taken and due to changes in the external business environment. Hence it is absolutely necessary to periodically re-assess risks and intensify/relax mitigation measures, or as necessary. Changes in procedures, technology, schedules, budgets, market conditions, political environment, or other factors typically require re-assessment of risks.
Risk management
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Risk Options
Risk mitigation measures are usually formulated according to one or more of the following major risk options, which are: 1. Design a new business process with adequate built-in risk control and containment measures from the start. 2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of business operations and modify mitigation measures. 3. Transfer risks to an external agency (e.g. an insurance company) 4. Avoid risks altogether (e.g. by closing down a particular high-risk business area) Later research has shown that the financial benefits of risk management are less dependent on the formula used but are more dependent on the frequency and how risk assessment is performed. In business it is imperative to be able to present the findings of risk assessments in financial, market, or schedule terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial terms.[8] The Courtney formula was accepted as the official risk analysis method for the US governmental agencies. The formula proposes calculation of ALE (annualised loss expectancy) and compares the expected loss value to the security control implementation costs (cost-benefit analysis).
Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories:[9] Avoidance (eliminate, withdraw from or not become involved) Reduction (optimize - mitigate) Sharing (transfer - outsource or insure) Retention (accept and budget)
Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions. Another source, from the US Department of Defense, Defense Acquisition University, calls these categories ACAT, for Avoid, Control, Accept, or Transfer. This use of the ACAT acronym is reminiscent of another ACAT (for Acquisition Category) used in US Defense industry procurements, in which Risk Management figures prominently in decision making and planning. Risk avoidance This includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the legal liability that comes with it. Another would be not flying in order not to take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.
Risk management Hazard Prevention Hazard prevention refers to the prevention of risks in an emergency. The first and most effective stage of hazard prevention is the elimination of hazards. If this takes too long, is too costly, or is otherwise impractical, the second stage is mitigation. Risk reduction Risk reduction or "optimization" involves reducing the severity of the loss or the likelihood of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy. Acknowledging that risks can be positive or negative, optimizing risks means finding a balance between negative risk and the benefit of the operation or activity; and between risk reduction and effort applied. By an offshore drilling contractor effectively applying HSE Management in its organization, it can optimize risk to achieve levels of residual risk that are tolerable.[10] Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a single iteration. Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher capability at managing or reducing risks.[11] For example, a company may outsource only its software development, the manufacturing of hard goods, or customer support needs to another company, while handling the business management itself. This way, the company can concentrate more on business development without having to worry as much about the manufacturing process, managing the development team, or finding a physical location for a call center. Risk sharing Briefly defined as "sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk." The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing. In practice if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As such in the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a "transfer of risk." However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses "transferred", meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policy holder namely the person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the policy holder then some compensation may be payable to the policy holder that is commensurate to the suffering/damage. Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.
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Risk management Risk retention Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.
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Create a risk management plan

Select appropriate controls or countermeasures to measure each risk. Risk mitigation needs to be approved by the appropriate level of management. For instance, a risk concerning the image of the organization should have top management decision behind it whereas IT management would have the authority to decide on computer virus risks. The risk management plan should propose applicable and effective security controls for managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing antivirus software. A good risk management plan should contain a schedule for control implementation and responsible persons for those actions. According to ISO/IEC 27001, the stage immediately after completion of the risk assessment phase consists of preparing a Risk Treatment Plan, which should document the decisions about how each of the identified risks should be handled. Mitigation of risks often means selection of security controls, which should be documented in a Statement of Applicability, which identifies which particular control objectives and controls from the standard have been selected, and why.
Implementation
Implementation follows all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the rest.
Review and evaluation of the plan

Initial risk management plans will never be perfect. Practice, experience, and actual loss results will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with the risks being faced. Risk analysis results and management plans should be updated periodically. There are two primary reasons for this: 1. to evaluate whether the previously selected security controls are still applicable and effective, and 2. to evaluate the possible risk level changes in the business environment. For example, information risks are a good example of rapidly changing business environment.
Limitations
If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that are not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources that could be used more profitably. Unlikely events do occur but if the risk is unlikely enough to occur it may be better to simply retain the risk and deal with the result if the loss does in fact occur. Qualitative risk assessment is subjective and lacks consistency. The primary justification for a formal risk assessment process is legal and bureaucratic.
Risk management Prioritizing the risk management processes too highly could keep an organization from ever completing a project or even getting started. This is especially true if other work is suspended until the risk management process is considered complete. It is also important to keep in mind the distinction between risk and uncertainty. Risk can be measured by impacts x probability.
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Areas of risk management

As applied to corporate finance, risk management is the technique for measuring, monitoring and controlling the financial or operational risk on a firm's balance sheet. See value at risk. The Basel II framework breaks risks into market risk (price risk), credit risk and operational risk and also specifies methods for calculating capital requirements for each of these components.
Enterprise risk management

In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment. In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk. In the more general case, every probable risk can have a pre-formulated plan to deal with its possible consequences (to ensure contingency if the risk becomes a liability). From the information above and the average cost per employee over time, or cost accrual ratio, a project manager can estimate: the cost associated with the risk if it arises, estimated by multiplying employee costs per unit time by the estimated time lost (cost impact, C where C = cost accrual ratio * S). the probable increase in time associated with a risk (schedule variance due to risk, Rs where Rs = P * S): Sorting on this value puts the highest risks to the schedule first. This is intended to cause the greatest risks to the project to be attempted first so that risk is minimized as quickly as possible. This is slightly misleading as schedule variances with a large P and small S and vice versa are not equivalent. (The risk of the RMS Titanic sinking vs. the passengers' meals being served at slightly the wrong time). the probable increase in cost associated with a risk (cost variance due to risk, Rc where Rc = P*C = P*CAR*S = P*S*CAR) sorting on this value puts the highest risks to the budget first. see concerns about schedule variance as this is a function of it, as illustrated in the equation above. Risk in a project or process can be due either to Special Cause Variation or Common Cause Variation and requires appropriate treatment. That is to re-iterate the concern about extremal cases not being equivalent in the list immediately above.
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Risk management activities as applied to project management

In project management, risk management includes the following activities: Planning how risk will be managed in the particular project. Plans should include risk management tasks, responsibilities, activities and budget. Assigning a risk officer - a team member other than a project manager who is responsible for foreseeing potential project problems. Typical characteristic of risk officer is a healthy skepticism. Maintaining live project risk database. Each risk should have the following attributes: opening date, title, short description, probability and importance. Optionally a risk may have an assigned person responsible for its resolution and a date by which the risk must be resolved. Creating anonymous risk reporting channel. Each team member should have the possibility to report risks that he/she foresees in the project. Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of the mitigation plan is to describe how this particular risk will be handled what, when, by who and how will it be done to avoid it or minimize consequences if it becomes a liability. Summarizing planned and faced risks, effectiveness of mitigation activities, and effort spent for the risk management.
Risk management for megaprojects

Megaprojects (sometimes also called "major programs") are extremely large-scale investment projects, typically costing more than US$1 billion per project. Megaprojects include bridges, tunnels, highways, railways, airports, seaports, power plants, dams, wastewater projects, coastal flood protection schemes, oil and natural gas extraction projects, public buildings, information technology systems, aerospace projects, and defence systems. Megaprojects have been shown to be particularly risky in terms of finance, safety, and social and environmental impacts. Risk management is therefore particularly pertinent for megaprojects and special methods and special education have been developed for such risk management.[12] [13]
Risk management of Information Technology

Information technology is increasingly pervasive in modern life in every sector.[14] [15] [16] IT risk is a risk related to information technology. This is a relatively new term due to an increasing awareness that information security is simply one facet of a multitude of risks that are relevant to IT and the real world processes it supports. A number of methodologies have been developed to deal with this kind of risk. ISACA's Risk IT framework ties IT risk to Enterprise risk management.
Risk management techniques in petroleum and natural gas

For the offshore oil and gas industry, operational risk management is regulated by the safety case regime in many countries. Hazard identification and risk assessment tools and techniques are described in the international standard ISO 17776:2000, and organisations such as the IADC (International Association of Drilling Contractors) publish guidelines for HSE Case development which are based on the ISO standard. Further, diagrammatic representations of hazardous events are often expected by governmental regulators as part of risk management in safety case submissions; these are known as bow-tie diagrams. The technique is also used by organisations and regulators in mining, aviation, health, defence, industrial and finance.[17]
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Risk management and business continuity

Risk management is simply a practice of systematically selecting cost effective approaches for minimising the effect of threat realization to the organization. All risks can never be fully avoided or mitigated simply because of financial and practical limitations. Therefore all organizations have to accept some level of residual risks. Whereas risk management tends to be preemptive, business continuity planning (BCP) was invented to deal with the consequences of realised residual risks. The necessity to have BCP in place arises because even very unlikely events will occur if given enough time. Risk management and BCP are often mistakenly seen as rivals or overlapping practices. In fact these processes are so tightly tied together that such separation seems artificial. For example, the risk management process creates important inputs for the BCP (assets, impact assessments, cost estimates etc.). Risk management also proposes applicable controls for the observed risks. Therefore, risk management covers several areas that are vital for the BCP process. However, the BCP process goes beyond risk management's preemptive approach and assumes that the disaster will happen at some point.
Risk communication
Risk communication is a complex cross-disciplinary academic field. Problems for risk communicators involve how to reach the intended audience, to make the risk comprehensible and relatable to other risks, how to pay appropriate respect to the audience's values related to the risk, how to predict the audience's response to the communication, etc. A main goal of risk communication is to improve collective and individual decision making. Risk communication is somewhat related to crisis communication.
Bow tie diagrams

A popular solution to the quest to communicate risks and their treatments effectively is to use bow tie diagrams. These have been effective, for example, in a public forum to model perceived risks and communicate precautions, during the planning stage of offshore oil and gas facilities in Scotland. Equally, the technique is used for HAZID (Hazard Identification) workshops of all types, and results in a high level of engagement. For this reason (amongst others) an increasing number of government regulators for major hazard facilities (MHFs), offshore oil & gas, aviation, etc. welcome safety case submissions which use diagrammatic representation of risks at their core. Communication advantages of bow tie diagrams: [17] Visual illustration of the hazard, its causes, consequences, controls, and how controls fail. The bow tie diagram can be readily understood at all personnel levels. "A picture paints a thousand words."
Seven cardinal rules for the practice of risk communication

(as first expressed by the U.S. Environmental Protection Agency and several of the field's founders[18] ) Accept and involve the public/other consumers as legitimate partners. Plan carefully and evaluate your efforts with a focus on your strengths, weaknesses, opportunities, and threats. Listen to the public's specific concerns. Be honest, frank, and open. Coordinate and collaborate with other credible sources. Meet the needs of the media. Speak clearly and with compassion.
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References
[1] Hubbard, Douglas (2009). The Failure of Risk Management: Why It's Broken and How to Fix It. John Wiley & Sons. p.46. [2] ISO/IEC Guide 73:2009 (2009). Risk management Vocabulary (http:/ / www. iso. org/ iso/ iso_catalogue/ catalogue_ics/ catalogue_detail_ics. htm?csnumber=44651). International Organization for Standardization. . [3] ISO/DIS 31000 (2009). Risk management Principles and guidelines on implementation (http:/ / www. iso. org/ iso/ iso_catalogue/ catalogue_tc/ catalogue_detail. htm?csnumber=43170). International Organization for Standardization. . [4] "Committee Draft of ISO 31000 Risk management" (http:/ / www. nsai. ie/ uploads/ file/ N047_Committee_Draft_of_ISO_31000. pdf) (PDF). International Organization for Standardization. . [5] CMU/SEI-93-TR-6 Taxonomy-based risk identification in software industry (http:/ / www. sei. cmu. edu/ library/ abstracts/ reports/ 93tr006. cfm) [6] Common Vulnerability and Exposures list (http:/ / cve. mitre. org) [7] Crockford, Neil (1986). An Introduction to Risk Management (2 ed.). Cambridge, UK: Woodhead-Faulkner. p.18. ISBN0859413322. [8] Disaster Recovery Journal (http:/ / www. drj. com/ index. php?option=com_content& task=view& id=605& Itemid=450) [9] Dorfman, Mark S. (2007). Introduction to Risk Management and Insurance (9 ed.). Englewood Cliffs, N.J: Prentice Hall. ISBN0-13-224227-3. [10] IADC HSE Case Guidelines for MODUs 3.2, section 4.7 [11] Roehrig, P (2006). "Bet On Governance To Manage Outsourcing Risk" (http:/ / www. btquarterly. com/ ?mc=bet-governance& page=ss-viewresearch). Business Trends Quarterly. . [12] [Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter, 2003, Megaprojects and Risk: An Anatomy of Ambition (Cambridge University Press).] [13] *Oxford BT Centre for Major Programme Management [14] Cortada, James W. (2003-12-04) The Digital Hand: How Computers Changed the Work of American Manufacturing, Transportation, and Retail Industries USA: Oxford University Press pp.512 ISBN0195165888 [15] Cortada, James W. (2005-11-03) The Digital Hand: Volume II: How Computers Changed the Work of American Financial, Telecommunicati ons, Media, and Entertainment Industries USA: Oxford University Press ISBN978-0195165876 [16] Cortada, James W. (2007-11-06) The Digital Hand, Vol 3: How Computers Changed the Work of American Public Sector Industries USA: Oxford University Press pp.496 ISBN978-0195165869 [17] http:/ / www. bowtiexp. com. au/ bowtiexp. asp#aboutBowTies [18] Covello, Vincent T.; Allen., Frederick H. (April 1988). Seven Cardinal Rules of Risk Communication. Washington, DC: U.S. Environmental Protection Agency. OPA-87-020.
Further reading
Alberts, Christopher; Audrey Dorofee, Lisa Marino (March 2008). Mission Diagnostic Protocol, Version 1.0: A Risk-Based Approach for Assessing the Potential for Success (http://www.sei.cmu.edu/library/abstracts/ reports/08tr005.cfm). Software Engineering Institute. Retrieved 2008-05-26. Alexander, Carol and Sheedy, Elizabeth (2005). The Professional Risk Managers' Handbook: A Comprehensive Guide to Current Theory and Best Practices. PRMIA Publications. ISBN0-9766097-0-3. Altemeyer, Lynn (2004). An Assessment of Texas State Government: Implementation of Enterprise Risk Management, Applied Research Project (http://ecommons.txstate.edu/arp/14/). Texas State University. Borodzicz, Edward (2005). Risk, Crisis and Security Management. New York: Wiley. ISBN0-470-86704-3. Flyvbjerg, Bent (August 2006). "From Nobel Prize to Project Management: Getting Risks Right" (http:// flyvbjerg.plan.aau.dk/Publications2006/Nobel-PMJ2006.pdf) (PDF). Project Management Journal (Project Management Institute) 37 (3): 515. Retrieved 2008-05-26. Gorrod, Martin (2004). Risk Management Systems : Technology Trends (Finance and Capital Markets). Basingstoke: Palgrave Macmillan. ISBN1-4039-1617-9. Hutto, John (2009). Risk Management in Law Enforcement, Applied Research Project (http://ecommons.txstate. edu/arp/301/). Texas State University. Institute of Risk Management/AIRMIC/ALARM (2002). A Risk Management Standard (http://www.theirm. org/publications/PUstandard.html). London: Institute of Risk Management. Moteff, John (2005). Risk Management and Critical Infrastructure Protection: Assessing, Integrating, and Managing Threats, Vulnerabilities and Consequences (http://opencrs.com/document/RL32561/2005-02-04) (Report). Washington DC: Congressional Research Service.
Risk management Standards Association of Australia (1999). Risk management. North Sydney, N.S.W: Standards Association of Australia. ISBN0-7337-2647-X. Stoneburner, Gary; Goguen, Alice and Feringa, Alexis (July 2002) (PDF). Risk Management Guide for Information Technology Systems (http://csrc.nist.gov/publications/nistpubs/800-30/sp800-30.pdf). Gaithersburg, MD: National Institute of Standards and Technology. United States Environmental Protection Agency (April 2004). General Risk Management Program Guidance (http://www.epa.gov/OEM/content/rmp/rmp_guidance.htm#General). United State Environmental Protection Agency. Ward, Dan; Quaid, Chris (March/April 2007). "The Pursuit of Courage, Judgment and Luck" (http://web. archive.org/web/20080408205443/http://www.dau.mil/pubs/dam/03_04_2007/war_ma07.pdf) (PDF). Defense AT&L (Defense Acquisition University): 2830. Archived from the original (http://www.dau.mil/ pubs/dam/03_04_2007/war_ma07.pdf) on 2008-04-08. Retrieved 2008-05-26. Airmic / Alarm / IRM (2010) "A structured approach to Enterprise Risk Management (ERM) and the requirements of ISO 31000" http://www.theirm.org/documents/SARM_FINAL.pdf Hopkin, Paul "Fundamentals of Risk Management" Kogan-Page (2010) ISBN 978 0 7494 5942 0
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External links
Risk management (http://www.dmoz.org/Business/Financial_Services/Insurance/Risk_Management/) at the Open Directory Project
Risk-return spectrum
The risk-return spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken.
The progression
There are various classes of possible investments, each with their own positions on the overall risk-return spectrum. The general progression is: short-term debt; long-term debt; property; high-yield debt; equity. There is considerable overlap of the ranges for each investment class. All this can be visualised by plotting expected return on the vertical axis against risk (represented by standard deviation upon that expected return) on the horizontal axis. This line starts at the risk-free rate and rises as risk rises. The line will tend to be straight, and will be straight at equilibrium - see discussion below on domination. For any particular investment type, the line drawn from the risk-free rate on the vertical axis to the risk-return point for that investment has a slope called the Sharpe ratio.
Short-term loans to good government bodies

a lowest end is short-dated loans to government and government-guaranteed entities (usually semi-independent government departments). The lowest of all is the risk-free rate of return. The risk-free rate has zero risk (most modern major governments will inflate and monetise their debts rather than default upon them), but the return is positive because there is still both the time-preference and inflation premium components of minimum expected rates of return that must be met or exceeded if the funding is to be forthcoming from providers. The risk-free rate is commonly approximated by the return paid upon 30-day or their equivalent, but in reality that rate has more to do with the monetary policy of that country's central bank than the market supply conditions for credit.
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Mid- and long-term loans to good government bodies

The next types of investment is longer-term loans to government, such as 3-year bonds. The range width is larger, and follows the influence of increasing risk premium required as the maturity of that debt grows longer. Nevertheless, because it is debt of good government the highest end of the range is still comparatively low compared to the ranges of other investment types discussed below. Also, if the government in question is not at the highest jurisdiction (i.e., is a state or municipal government), or the smaller that government is, the more along the risk-return spectrum that government's securities will be.
Short term loans to blue-chip corporations

Following the lowest risk investments are short-dated bills of exchange from major blue-chip corporations with the highest credit ratings. The further away from perfect is the credit rating, the more along the risk-return spectrum is that particular return.
Mid- and long-term loans to blue-chip corporations

Overlapping the range for short-term debt is the longer term debt from those same well-rated corporations. These are higher up the range because the maturity has increased. The overlap occurs of the mid-term debt of the best rated corporations with the short-term debt of the nearly-but-not perfectly-rated corporations. In this arena, the debts are called investment grade by the rating agencies. The lower the credit rating, the higher the yield and thus the expected return.
Rental property
A commercial property that the investor rents out is comparable in risk or return to a low-investment-grade. Industrial property has higher risk and returns, followed by residential (with the possible exception of the investor's own home).
High-yield debt
After the returns upon all classes of investment-grade debt come the returns on speculative grade high-yield debt (also known derisively as junk bonds). These may come from mid and low rated corporations, and less politically stable governments.
Equity
Equity returns are the profits earned by businesses after interest and tax. Even the equity returns on the highest rated corporations are notably risky. Small-cap stocks are generally riskier than large-cap; companies that primarily service governments, or provide basic consumer goods such as food or utilities, tend to be less volatile than those in other industries. Note that since stocks tend to rise when corporate bonds fall and vice-versa, a portfolio containing a small percentage of stocks can be less risky than one containing only debts.
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Options and futures

Option and futures contracts often provide leverage on underlying stocks, bonds or commodities; this increases the returns but also the risks. Note that in some cases, derivatives can be used to hedge, decreasing the overall risk of the portfolio due to negative correlation with other investments.
Why the progression?

The existence of risk causes the need to incur a number of expenses. For example, the more risky the investment the more time and effort is usually required to obtain information about it and monitor its progress. For another, the importance of a loss of X amount of value is greater than the importance of a gain of X amount of value, so a riskier investment will attract a higher risk premium even if the forecast return is the same as upon a less risky investment. Risk is therefore something that must be compensated for, and the more risk the more compensation required. If an investment had a high return with low risk, eventually everyone would want to invest there. That action would drive down the actual rate of return achieved, until it reached the rate of return the market deems commensurate with the level of risk. Similarly, if an investment had a low return with high risk, all the present investors would want to leave that investment, which would then increase the actual return until again it reached the rate of return the market deems commensurate with the level of risk. That part of total returns which sets this appropriate level is called the risk premium.
Leverage extends the spectrum

The use of leverage can extend the progression out even further. Examples of this include borrowing funds to invest in equities, or use of derivatives. If leverage is used then there are two lines instead of one. This is because although one can invest at the risk-free rate, one can only borrow at an interest rate according to one's own credit-rating. This is visualised by the new line starting at the point of the riskiest unleveraged investment (equities) and rising at a lower slope than the original line. If this new line were traced back to the vertical axis of zero risk, it will cross it at the borrowing rate.
Domination
All investment types compete against each other, even though they are on different positions on the risk-return spectrum. Any of the mid-range investments can have their performances simulated by a portfolio consisting of a risk-free component and the highest-risk component. This principle, called the separation property, is a crucial feature of Modern Portfolio Theory. The line is then called the capital market line. If at any time there is an investment that has a higher Sharpe Ratio than another then that return is said to dominate. When there are two or more investments above the spectrum line, then the one with the highest Sharpe Ratio is the most dominant one, even if the risk and return on that particular investment is lower than another. If every mid-range return falls below the spectrum line, this means that the highest-risk investment has the highest Sharpe Ratio and so dominates over all others. If at any time there is an investment that dominates then funds will tend to be withdrawn from all others and be redirected to that dominating investment. This action will lower the return on that investment and raise it on others. The withdrawal and redirection of capital ceases when all returns are at the levels appropriate for the degrees of risk and commensurate with the opportunity cost arising from competition with the other investment types on the spectrum, which means they all tend to end up having the same Sharpe Ratio.
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Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum.[1] Speculation typically involves the lending of money for the purchase of assets, equity or debt but in a manner that has not been given thorough analysis or is deemed to have low margin of safety or a significant risk of the loss of the principal investment. The term, "speculation," which is formally defined as above in Graham and Dodd's 1934 text, Security Analysis, contrasts with the term "investment," which is a financial operation that, upon thorough analysis, promises safety of principal and a satisfactory return.[1] In a financial context, the terms "speculation" and "investment" are actually quite specific. For instance, although the word "investment" is commonly used to mean any act of placing money in a financial vehicle with the intent of producing returns over a period of time, most ventured moneyincluding funds placed in the world's stock marketsis technically not investment, but speculation. Speculators may rely on an asset appreciating in price due to any of a number of factors that cannot be well enough understood by the speculator to make an investment-quality decision. Some such factors are shifting consumer tastes, fluctuating economic conditions, buyers' changing perceptions of the worth of a stock security, economic factors associated with market timing, the factors associated with solely chart-based analysis, and the many influences over the short-term movement of securities. There are also some financial vehicles that are, by definition, speculation. For instance, trading commodity futures contracts, such as for oil and gold, is, by definition, speculation. Short selling is also, by definition, speculative. Financial speculation can involve the trade (buying, holding, selling) and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to attempt to profit from fluctuations in its price irrespective of its underlying value. In architecture, speculation is used to determine works that show a strong conceptual and strategic focus.[2]
Investment vs. speculation

Identifying speculation can be best done by distinguishing it from investment. According to Ben Graham in Intelligent Investor, the prototypical defensive investor is "...one interested chiefly in safety plus freedom from bother." He admits, however, that "...some speculation is necessary and unavoidable, for in many common-stock situations, there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone."[3] Many long-term investors, even those who buy and hold for decades, may be classified as speculators, excepting only the rare few who are primarily motivated by income or safety of principal and not eventually selling at a profit. Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.[4] There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing.
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The economic benefits of speculation

Sustainable consumption level
The well known speculator Victor Niederhoffer, in "The Speculator as Hero"[5] describes the benefits of speculation: Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers Speculation usually involves more risks than encouraged by the high price further lessen the shortage by investment. growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus. Another service provided by speculators to a market is that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs.
Market efficiency and liquidity

If a certain marketfor example, pork bellieshad no speculators, then only producers (hog farmers) and consumers (butchers, etc.) would participate in that market. With fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies. Any new entrant in the market who wants to either buy or sell pork bellies would be forced to accept an illiquid market and market prices that have a large bid-ask spread or might even find it difficult to find a co-party to buy or sell to. A speculator (e.g., a pork dealer) may exploit the difference in the spread and, in competition with other speculators, reduce the spread. Some schools of thought argue that this creates an efficient market. But it is also true that, as more and more speculators participate in a market, real demand and supply can become diminishingly small compared to supply and demand which is a result of speculation and thus prices become distorted and bubbles appear.
Bearing risks
Speculators also sometimes perform a very important risk bearing role that is beneficial to society. For example, a farmer might be considering planting corn on some unused farmland. Alas, he might not want to do so because he is concerned that the price might fall too far by harvest time. By selling his crop in advance at a fixed price to a speculator, the farmer can hedge the price risk and is now willing to plant the corn. Thus, speculators can actually increase production through their willingness to take on risk.
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Finding environmental and other risks

Hedge funds that do fundamental analysis "are far more likely than other investors to try to identify a firms off-balance-sheet exposures", including "environmental or social liabilities present in a market or company but not explicitly accounted for in traditional numeric valuation or mainstream investor analysis", and hence make the prices better reflect the true quality of operation of the firms.[6]
Shorting
Shorting may act as a canary in a coal mine to stop unsustainable practices earlier and thus reduce damages and forming market bubbles.[6]
The economic disadvantages of speculation

Winner's Curse
Auctions are a method of squeezing out speculators from a transaction, but they may have their own perverse effects; see winner's curse. The winner's curse is however not very significant to markets with high liquidity for both buyers and sellers, as the auction for selling the product and the auction for buying the product occur simultaneously, and the two prices are separated only by a relatively small spread. This mechanism prevents the winner's curse phenomenon from causing mispricing to any degree greater than the spread.
Economic Bubbles
Speculation can also cause prices to deviate from their intrinsic value if speculators trade on misinformation, or if they are just plain wrong. This creates a positive feedback loop in which prices rise dramatically above the underlying value or worth of the items. This is known as an economic bubble. Such a period of increasing speculative purchasing is typically followed by one of speculative selling in which the price falls significantly, in extreme cases this may lead to crashes. In 1936 John Maynard Keynes wrote: "Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. (1936:159)"[7] Mr Keynes himself enjoyed speculation to the fullest, running an early precursor of a hedge fund. As the Bursar of the Cambridge University King's College, he managed two investment funds, one of which, called Chest Fund, invested not only in the then 'emerging' market US stocks, but also periodically included commodity futures and foreign currencies, albeit to a smaller extent (see Chua and Woodward, 1983) . His fund achieved positive returns in almost every year, averaging 13% p.a., even during the Great Depression, thanks to very modern investment strategies, which included inter-market diversification (i.e., invested not only in stocks but also commodities and currencies) as well as shorting, i.e., selling borrowed stocks or futures to make money on falling prices, which Keynes advocated among the principles of successful investment in his 1933 report ("a balanced investment position [...] and if possible, opposed risks.") [8]
Volatility
According to Ziemba and Ziemba (2007), Keynes risk-taking reached 'cowboy' proportions, i.e. 80% of the maximum rationally justifiable levels (of the so called Kelly criterion), with overall return volatility approximately three times higher than the stock market index benchmark. Such levels of volatility, responsible for his spectacular investment performance, would be achievable today only through the most aggressive instruments (such as 3:1 leveraged exchange-traded funds). He chose modern speculation techniques practiced today by hedge funds, which are quite different from the simple buy-and-hold long-term investing.[9]
Speculation It is a controversial point whether the presence of speculators increases or decreases the short-term volatility in a market. Their provision of capital and information may help stabilize prices closer to their true values. On the other hand, crowd behavior and positive feedback loops in market participants may also increase volatility at times.
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Sovereignty and food security

Some nations have moved to limit foreign ownership of cropland in order to ensure that food is available for local consumption while others have sold food land and depend on the World Food Programme.[10]
Regulating speculation
The Tobin tax is a tax intended to reduce short-term currency speculation, ostensibly to stabilize foreign exchange. In May 2008, German leaders planned to propose a worldwide ban on oil trading by speculators, blaming the 2008 oil price rises on manipulation by hedge funds.[11] On December 3, 2009, US Congressman Peter DeFazio stated, "The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets." He claimed a "financial transaction tax legislation will force Wall Street to do their part and put people displaced by that crisis back to work."[12] On January 21, 2010, President Barack Obama endorsed the Volcker Rule which deals with speculative investments of banks that don't benefit their customers. The Volcker Rule states that these investments played a key role in the financial crisis of 20072010.[13]
Books
Sobel, Robert (2000) [1973]. The Money Manias: The Eras of Great Speculation in America, 1770-1970. Beard Books. ISBN1-58798-028-2. Gunther, Max (1992). The Zurich Axioms. Souvenir Press. ISBN0-285-63095-4. Niederhoffer, Victor (2005). Practical Speculation. Wiley. ISBN0-471-67774-4.
References
[1] [2] [3] [4] [5] Graham, Benjamin, and David Dodd (1951). Security Analysis. McGraw-Hill Book Company. ISBN 0071448209. Mona Mahall and Asli Serbest (2009). How Architecture Learned to Speculate. ISBN 9783000298769. Graham, Benjamin (1973). Intelligent Investor. HarperCollins Books. ISBN 0060555661. Barron's ISBN 0-8120-4631-3 Victor Niederhoffer, The Wall Street Journal, February 10, 1989 Daily Speculations (http:/ / www. dailyspeculations. com/ vic/ spec_as_hero. html) [6] Unlikely heroes - Can hedge funds save the world? One pundit thinks so (http:/ / www. economist. com/ businessfinance/ displayStory. cfm?story_id=15536305), The Economist, 2010-2-16 [7] Dr. Stephen Spratt of Intelligence Capital (September 2006). "A Sterling Solution" (http:/ / www. stampoutpoverty. org/ ?lid=9889). Stamp Out Poverty report. Stamp Out Poverty Campaign. p. 15. . Retrieved 2010-01-02. [8] Chua, J. H. and R. S. Woodward (1983). The Investment Wizardry of J.M. Keynes. Financial Analysts Journal 39 (3). pp. 3537. JSTOR4478643. [9] Ziemba, Rachel and William Ziemba (2007). "Good and Bad properties of the Kelly criterion" (http:/ / www. wilmott. com/ pdfs/ 050316_ziemba. pdf). John Wiley & Sons. pp. 2931. . Retrieved 2010-01-26. [10] Valente, Marcela. "Curbing foreign ownership of farmland." (http:/ / english. aljazeera. net/ indepth/ features/ 2011/ 05/ 2011517133358914599. html) IPS, 22 May 2011. [11] Evans-Pritchard, Ambrose (May 26, 2008). "Germany in call for ban on oil speculation" (http:/ / www. telegraph. co. uk/ money/ main. jhtml?xml=/ money/ 2008/ 05/ 26/ cnoil126. xml). The Daily Telegraph (The Daily Telegraph). . Retrieved 2008-05-28. [12] Charles Pope (December 3, 2009). "DeFazio calls for tax on financial transactions but critics abound" (http:/ / www. oregonlive. com/ politics/ index. ssf/ 2009/ 12/ defazio_calls_for_tax_on_high. html). The Oregonian, OregonLive.com. . Retrieved 2010-01-04. [13] David Cho, and Binyamin Appelbaum (January 22). "Obama's 'Volcker Rule' shifts power away from Geithner" (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2010/ 01/ 21/ AR2010012104935. html). The Washington Post. . Retrieved 13 February 2010.
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External links
Congress Plans to Tighten Rules on Energy Speculation (http://www.nytimes.com/2008/06/24/business/ 24speculate.html?_r=1&oref=slogin)
Value at risk
In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.[1] For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period if there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a VaR break.[2] Thus, VaR is a piece of jargon favored in the financial world for a percentile of the predictive probability distribution for the size of a future financial loss. VaR has five main uses in finance: risk management, risk measurement, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.[3] Important related ideas are economic capital, backtesting, stress testing, expected shortfall, and tail conditional expectation.[4]
The 5% Value at Risk of a hypothetical profit-and-loss probability density function
Details
Common parameters for VaR are 1% and 5% probabilities and one day and two week horizons, although other combinations are in use.[5] The reason for assuming normal markets and no trading, and to restricting loss to things measured in daily accounts, is to make the loss observable. In some extreme financial events it can be impossible to determine losses, either because market prices are unavailable or because the loss-bearing institution breaks up. Some longer-term consequences of disasters, such as lawsuits, loss of market confidence and employee morale and impairment of brand names can take a long time to play out, and may be hard to allocate among specific prior decisions. VaR marks the boundary between normal days and extreme events. Institutions can lose far more than the VaR amount; all that can be said is that they will not do so very often.[6] The probability level is about equally often specified as one minus the probability of a VaR break, so that the VaR in the example above would be called a one-day 95% VaR instead of one-day 5% VaR. This generally does not lead to
Value at risk confusion because the probability of VaR breaks is almost always small, certainly less than 0.5.[1] Although it virtually always represents a loss, VaR is conventionally reported as a positive number. A negative VaR would imply the portfolio has a high probability of making a profit, for example a one-day 5% VaR of negative $1 million implies the portfolio has a 5% chance of making more than $1 million over the next day. [7] Another inconsistency is VaR is sometimes taken to refer to profit-and-loss at the end of the period, and sometimes as the maximum loss at any point during the period. The original definition was the latter, but in the early 1990s when VaR was aggregated across trading desks and time zones, end-of-day valuation was the only reliable number so the former became the de facto definition. As people began using multiday VaRs in the second half of the 1990s they almost always estimated the distribution at the end of the period only. It is also easier theoretically to deal with a point-in-time estimate versus a maximum over an interval. Therefore the end-of-period definition is the most common both in theory and practice today.[8]
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Varieties of VaR
The definition of VaR is nonconstructive; it specifies a property VaR must have, but not how to compute VaR. Moreover, there is wide scope for interpretation in the definition.[9] This has led to two broad types of VaR, one used primarily in risk management and the other primarily for risk measurement. The distinction is not sharp, however, and hybrid versions are typically used in financial control, financial reporting and computing regulatory capital. [10] To a risk manager, VaR is a system, not a number. The system is run periodically (usually daily) and the published number is compared to the computed price movement in opening positions over the time horizon. There is never any subsequent adjustment to the published VaR, and there is no distinction between VaR breaks caused by input errors (including Information Technology breakdowns, fraud and rogue trading), computation errors (including failure to produce a VaR on time) and market movements.[11] A frequentist claim is made, that the long-term frequency of VaR breaks will equal the specified probability, within the limits of sampling error, and that the VaR breaks will be independent in time and independent of the level of VaR. This claim is validated by a backtest, a comparison of published VaRs to actual price movements. In this interpretation, many different systems could produce VaRs with equally good backtests, but wide disagreements on daily VaR values.[1] For risk measurement a number is needed, not a system. A Bayesian probability claim is made, that given the information and beliefs at the time, the subjective probability of a VaR break was the specified level. VaR is adjusted after the fact to correct errors in inputs and computation, but not to incorporate information unavailable at the time of computation.[7] In this context, backtest has a different meaning. Rather than comparing published VaRs to actual market movements over the period of time the system has been in operation, VaR is retroactively computed on scrubbed data over as long a period as data are available and deemed relevant. The same position data and pricing models are used for computing the VaR as determining the price movements.[2] Although some of the sources listed here treat only one kind of VaR as legitimate, most of the recent ones seem to agree that risk management VaR is superior for making short-term and tactical decisions today, while risk measurement VaR should be used for understanding the past, and making medium term and strategic decisions for the future. When VaR is used for financial control or financial reporting it should incorporate elements of both. For example, if a trading desk is held to a VaR limit, that is both a risk-management rule for deciding what risks to allow today, and an input into the risk measurement computation of the desks risk-adjusted return at the end of the reporting period.[4]
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VAR in Governance
An interesting takeoff on VaR is its application in Governance for endowments, trusts, and pension plans. Essentially trustees adopt portfolio Values-at-Risk metrics for the entire pooled account and the diversified parts individually managed. Instead of probability estimates they simply define maximum levels of acceptable loss for each. Doing so provides an easy metric for oversight and adds accountability as managers are then directed to manage, but with the additional constraint to avoid losses within a defined risk parameter. VAR utilized in this manner adds relevance as well as an easy to monitor risk measurement control far more intuitive than Standard Deviation of Return. Use of VAR in this context, as well as a worthwhile critique on board governance practices as it relates to investment management oversight in general can be found in 'Best Practices in Governance".[12]
Risk measure and risk metric

The term VaR is used both for a risk measure and a risk metric. This sometimes leads to confusion. Sources earlier than 1995 usually emphasize the risk measure, later sources are more likely to emphasize the metric. The VaR risk measure defines risk as mark-to-market loss on a fixed portfolio over a fixed time horizon, assuming normal markets. There are many alternative risk measures in finance. Instead of mark-to-market, which uses market prices to define loss, loss is often defined as change in fundamental value. For example, if an institution holds a loan that declines in market price because interest rates go up, but has no change in cash flows or credit quality, some systems do not recognize a loss. Or we could try to incorporate the economic cost of things not measured in daily financial statements, such as loss of market confidence or employee morale, impairment of brand names or lawsuits.[4] Rather than assuming a fixed portfolio over a fixed time horizon, some risk measures incorporate the effect of expected trading (such as a stop loss order) and consider the expected holding period of positions. Finally, some risk measures adjust for the possible effects of abnormal markets, rather than excluding them from the computation.[4] The VaR risk metric summarizes the distribution of possible losses by a quantile, a point with a specified probability of greater losses. Common alternative metrics are standard deviation, mean absolute deviation, expected shortfall and downside risk.[1]
VaR risk management

Supporters of VaR-based risk management claim the first and possibly greatest benefit of VaR is the improvement in systems and modeling it forces on an institution. In 1997, Philippe Jorion wrote [13]:[14] [T]he greatest benefit of VAR lies in the imposition of a structured methodology for critically thinking about risk. Institutions that go through the process of computing their VAR are forced to confront their exposure to financial risks and to set up a proper risk management function. Thus the process of getting to VAR may be as important as the number itself. Publishing a daily number, on-time and with specified statistical properties holds every part of a trading organization to a high objective standard. Robust backup systems and default assumptions must be implemented. Positions that are reported, modeled or priced incorrectly stand out, as do data feeds that are inaccurate or late and systems that are too-frequently down. Anything that affects profit and loss that is left out of other reports will show up either in inflated VaR or excessive VaR breaks. A risk-taking institution that does not compute VaR might escape disaster, but an institution that cannot compute VaR will not. [15] The second claimed benefit of VaR is that it separates risk into two regimes. Inside the VaR limit, conventional statistical methods are reliable. Relatively short-term and specific data can be used for analysis. Probability estimates are meaningful, because there are enough data to test them. In a sense, there is no true risk because you have a sum of many independent observations with a left bound on the outcome. A casino doesn't worry about whether red or black will come up on the next roulette spin. Risk managers encourage productive risk-taking in this regime, because
Value at risk there is little true cost. People tend to worry too much about these risks, because they happen frequently, and not enough about what might happen on the worst days.[16] Outside the VaR limit, all bets are off. Risk should be analyzed with stress testing based on long-term and broad market data.[17] Probability statements are no longer meaningful.[18] Knowing the distribution of losses beyond the VaR point is both impossible and useless. The risk manager should concentrate instead on making sure good plans are in place to limit the loss if possible, and to survive the loss if not.[1] One specific system uses three regimes.[19] 1. One to three times VaR are normal occurrences. You expect periodic VaR breaks. The loss distribution typically has fat tails, and you might get more than one break in a short period of time. Moreover, markets may be abnormal and trading may exacerbate losses, and you may take losses not measured in daily marks such as lawsuits, loss of employee morale and market confidence and impairment of brand names. So an institution that can't deal with three times VaR losses as routine events probably won't survive long enough to put a VaR system in place. 2. Three to ten times VaR is the range for stress testing. Institutions should be confident they have examined all the foreseeable events that will cause losses in this range, and are prepared to survive them. These events are too rare to estimate probabilities reliably, so risk/return calculations are useless. 3. Foreseeable events should not cause losses beyond ten times VaR. If they do they should be hedged or insured, or the business plan should be changed to avoid them, or VaR should be increased. It's hard to run a business if foreseeable losses are orders of magnitude larger than very large everyday losses. It's hard to plan for these events, because they are out of scale with daily experience. Of course there will be unforeseeable losses more than ten times VaR, but it's pointless to anticipate them, you can't know much about them and it results in needless worrying. Better to hope that the discipline of preparing for all foreseeable three-to-ten times VaR losses will improve chances for surviving the unforeseen and larger losses that inevitably occur. "A risk manager has two jobs: make people take more risk the 99% of the time it is safe to do so, and survive the other 1% of the time. VaR is the border."[15]
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VaR risk measurement

The VaR risk measure is a popular way to aggregate risk across an institution. Individual business units have risk measures such as duration for a fixed income portfolio or beta for an equity business. These cannot be combined in a meaningful way.[1] It is also difficult to aggregate results available at different times, such as positions marked in different time zones, or a high frequency trading desk with a business holding relatively illiquid positions. But since every business contributes to profit and loss in an additive fashion, and many financial businesses mark-to-market daily, it is natural to define firm-wide risk using the distribution of possible losses at a fixed point in the future.[4] In risk measurement, VaR is usually reported alongside other risk metrics such as standard deviation, expected shortfall and greeks (partial derivatives of portfolio value with respect to market factors). VaR is a distribution-free metric, that is it does not depend on assumptions about the probability distribution of future gains and losses.[15] The probability level is chosen deep enough in the left tail of the loss distribution to be relevant for risk decisions, but not so deep as to be difficult to estimate with accuracy.[20] VaR can be estimated either parametrically (for example, variance-covariance VaR or delta-gamma VaR) or nonparametrically (for examples, historical simulation VaR or resampled VaR).[4] [6] Nonparametric methods of VaR estimation are discussed in Markovich [21] and Novak [22] .
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History of VaR
The problem of risk measurement is an old one in statistics, economics and finance. Financial risk management has been a concern of regulators and financial executives for a long time as well. Retrospective analysis has found some VaR-like concepts in this history. But VaR did not emerge as a distinct concept until the late 1980s. The triggering event was the stock market crash of 1987. This was the first major financial crisis in which a lot of academically-trained quants were in high enough positions to worry about firm-wide survival.[1] The crash was so unlikely given standard statistical models, that it called the entire basis of quant finance into question. A reconsideration of history led some quants to decide there were recurring crises, about one or two per decade, that overwhelmed the statistical assumptions embedded in models used for trading, investment management and derivative pricing. These affected many markets at once, including ones that were usually not correlated, and seldom had discernible economic cause or warning (although after-the-fact explanations were plentiful).[18] Much later, they were named "Black Swans" by Nassim Taleb and the concept extended far beyond finance.[23] If these events were included in quantitative analysis they dominated results and led to strategies that did not work day to day. If these events were excluded, the profits made in between "Black Swans" could be much smaller than the losses suffered in the crisis. Institutions could fail as a result.[15] [18] [23] VaR was developed as a systematic way to segregate extreme events, which are studied qualitatively over long-term history and broad market events, from everyday price movements, which are studied quantitatively using short-term data in specific markets. It was hoped that "Black Swans" would be preceded by increases in estimated VaR or increased frequency of VaR breaks, in at least some markets. The extent to which this has proven to be true is controversial.[18] Abnormal markets and trading were excluded from the VaR estimate in order to make it observable.[16] It is not always possible to define loss if, for example, markets are closed as after 9/11, or severely illiquid, as happened several times in 2008.[15] Losses can also be hard to define if the risk-bearing institution fails or breaks up.[16] A measure that depends on traders taking certain actions, and avoiding other actions, can lead to self reference.[1] This is risk management VaR. It was well established in quantative trading groups at several financial institutions, notably Bankers Trust, before 1990, although neither the name nor the definition had been standardized. There was no effort to aggregate VaRs across trading desks.[18] The financial events of the early 1990s found many firms in trouble because the same underlying bet had been made at many places in the firm, in non-obvious ways. Since many trading desks already computed risk management VaR, and it was the only common risk measure that could be both defined for all businesses and aggregated without strong assumptions, it was the natural choice for reporting firmwide risk. J. P. Morgan CEO Dennis Weatherstone famously called for a 4:15 report that combined all firm risk on one page, available within 15 minutes of the market close.[9] Risk measurement VaR was developed for this purpose. Development was most extensive at J. P. Morgan, which published the methodology and gave free access to estimates of the necessary underlying parameters in 1994. This was the first time VaR had been exposed beyond a relatively small group of quants. Two years later, the methodology was spun off into an independent for-profit business now part of RiskMetrics Group [24].[9] In 1997, the U.S. Securities and Exchange Commission ruled that public corporations must disclose quantitative information about their derivatives activity. Major banks and dealers chose to implement the rule by including VaR information in the notes to their financial statements.[1] Worldwide adoption of the Basel II Accord, beginning in 1999 and nearing completion today, gave further impetus to the use of VaR. VaR is the preferred measure of market risk, and concepts similar to VaR are used in other parts of the accord.[1]
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Mathematics
"Given some confidence level smallest number the VaR of the portfolio at the confidence level exceeds is not larger than " is given by the
[3]
such that the probability that the loss
The left equality is a definition of VaR. The right equality assumes an underlying probability distribution, which makes it true only for parametric VaR. Risk managers typically assume that some fraction of the bad events will have undefined losses, either because markets are closed or illiquid, or because the entity bearing the loss breaks apart or loses the ability to compute accounts. Therefore, they do not accept results based on the assumption of a well-defined probability distribution.[6] Nassim Taleb has labeled this assumption, "charlatanism."[25] On the other hand, many academics prefer to assume a well-defined distribution, albeit usually one with fat tails.[1] This point has probably caused more contention among VaR theorists than any other.[9]
Criticism
VaR has been controversial since it moved from trading desks into the public eye in 1994. A famous 1997 debate [13] between Nassim Taleb and Philippe Jorion set out some of the major points of contention. Taleb claimed VaR:[26] 1. Ignored 2,500 years of experience in favor of untested models built by non-traders 2. Was charlatanism because it claimed to estimate the risks of rare events, which is impossible 3. Gave false confidence 4. Would be exploited by traders More recently David Einhorn and Aaron Brown debated VaR in Global Association of Risk Professionals Review [27][15] [28] Einhorn compared VaR to an airbag that works all the time, except when you have a car accident. He further charged that VaR: 1. 2. 3. 4. Led to excessive risk-taking and leverage at financial institutions Focused on the manageable risks near the center of the distribution and ignored the tails Created an incentive to take excessive but remote risks Was potentially catastrophic when its use creates a false sense of security among senior executives and watchdogs.
New York Times reporter Joe Nocera wrote an extensive piece Risk Mismanagement [29][30] on January 4, 2009 discussing the role VaR played in the Financial crisis of 2007-2008. After interviewing risk managers (including several of the ones cited above) the article suggests that VaR was very useful to risk experts, but nevertheless exacerbated the crisis by giving false security to bank executives and regulators. A powerful tool for professional risk managers, VaR is portrayed as both easy to misunderstand, and dangerous when misunderstood. A common complaint among academics is that VaR is not subadditive.[4] That means the VaR of a combined portfolio can be larger than the sum of the VaRs of its components. To a practising risk manager this makes sense. For example, the average bank branch in the United States is robbed about once every ten years. A single-branch bank has about 0.0004% chance of being robbed on a specific day, so the risk of robbery would not figure into one-day 1% VaR. It would not even be within an order of magnitude of that, so it is in the range where the institution should not worry about it, it should insure against it and take advice from insurers on precautions. The whole point of insurance is to aggregate risks that are beyond individual VaR limits, and bring them into a large enough portfolio to get statistical predictability. It does not pay for a one-branch bank to have a security expert on staff. As institutions get more branches, the risk of a robbery on a specific day rises to within an order of magnitude of VaR. At that point it makes sense for the institution to run internal stress tests and analyze the risk itself. It will spend less on insurance and more on in-house expertise. For a very large banking institution, robberies are a routine daily occurrence. Losses are part of the daily VaR calculation, and tracked statistically rather than case-by-case. A sizable in-house security department is in charge of prevention and control, the general risk manager just tracks the
Value at risk loss like any other cost of doing business. As portfolios or institutions get larger, specific risks change from low-probability/low-predictability/high-impact to statistically predictable losses of low individual impact. That means they move from the range of far outside VaR, to be insured, to near outside VaR, to be analyzed case-by-case, to inside VaR, to be treated statistically.[15] Even VaR supporters generally agree there are common abuses of VaR:[6] [9] 1. Referring to VaR as a "worst-case" or "maximum tolerable" loss. In fact, you expect two or three losses per year that exceed one-day 1% VaR. 2. Making VaR control or VaR reduction the central concern of risk management. It is far more important to worry about what happens when losses exceed VaR. 3. Assuming plausible losses will be less than some multiple, often three, of VaR. The entire point of VaR is that losses can be extremely large, and sometimes impossible to define, once you get beyond the VaR point. To a risk manager, VaR is the level of losses at which you stop trying to guess what will happen next, and start preparing for anything. 4. Reporting a VaR that has not passed a backtest. Regardless of how VaR is computed, it should have produced the correct number of breaks (within sampling error) in the past. A common specific violation of this is to report a VaR based on the unverified assumption that everything follows a multivariate normal distribution.
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References
[1] Jorion, Philippe (2006). Value at Risk: The New Benchmark for Managing Financial Risk (3rd ed.). McGraw-Hill. ISBN978-0071464956. [2] Holton, Glyn (2003). Value-at-Risk: Theory and Practice. Academic Press. ISBN978-0123540102. [3] McNeil, Alexander; Frey, Rdiger; Embrechts, Paul (2005). Quantitative Risk Management: Concepts Techniques and Tools. Princeton University Press. ISBN978-0691122557. [4] Dowd, Kevin (2005). Measuring Market Risk. John Wiley & Sons. ISBN978-0470013038. [5] Pearson, Neil (2002). Risk Budgeting: Portfolio Problem Solving with Value-at-Risk. John Wiley & Sons. ISBN978-0471405566. [6] Aaron Brown, The Unbearable Lightness of Cross-Market Risk, Wilmott Magazine, March 2004. [7] Crouhy, Michel; Galai, Dan; Mark, Robert (2001). The Essentials of Risk Management. McGraw-Hill. ISBN978-0071429665. [8] Jose A. Lopez (September 1996). Regulatory Evaluation of Value-at-Risk Models. Wharton Financial Institutions Center Working Paper 96-51. [9] Kolman, Joe; Onak, Michael; Jorion, Philippe; Taleb, Nassim; Derman, Emanuel; Putnam, Blu; Sandor, Richard; Jonas, Stan et al. (April 1998). Roundtable: The Limits of VaR. Derivatives Strategy. [10] Aaron Brown, The Next Ten VaR Disasters. Derivatives Strategy, March 1997. [11] Wilmott, Paul (2007). Paul Wilmott Introduces Quantitative Finance. Wiley. ISBN978-0470319581. [12] Best Practices in Governance, Lawrence York, 2009 [13] http:/ / www. derivativesstrategy. com/ magazine/ archive/ 1997/ 0497fea2. asp [14] Philippe Jorion in Nassim Taleb and Philippe Jorion, The Jorion/Taleb Debate. Derivatives Strategy, April 1997. [15] Aaron Brown, in David Einhorn and Aaron Brown, Private Profits and Socialized Risk. GARP Risk Review (June/July 2008). [16] Espen Haug (2007). Derivative Models on Models. John Wiley & Sons. ISBN978-0470013229. [17] Ezra Zask, Taking the Stress Out of Stress Testing. Derivative Strategy, February 1999. [18] Kolman, Joe; Onak, Michael; Jorion, Philippe; Taleb, Nassim; Derman, Emanuel; Putnam, Blu; Sandor, Richard; Jonas, Stan et al. (April 1998). "Roundtable: The Limits of Models". Derivatives Strategy. [19] Aaron Brown, On Stressing the Right Size. GARP Risk Review, December 2007. [20] Paul Glasserman, Monte Carlo Methods in Financial Engineering. Springer (2004). ISBN 978-0387004518. [21] Markovich N., Nonparametric analysis of univariate heavy-tailed data. Wiley (2007). [22] Novak S.Y., Extreme value methods with applications to finance. Chapman & Hall/CRC Press (2011). ISBN 9781439835746. [23] Taleb, Nassim Nicholas (2007). The Black Swan: The Impact of the Highly Improbable. New York: Random House. ISBN978-1-4000-6351-2. [24] http:/ / www. riskmetrics. com/ [25] Nassim Taleb, The World According to Nassim Taleb. Derivatives Strategy, December 1996/January 1997. [26] Nassim Taleb in Philippe Jorion in Nassim Taleb and Philippe Jorion, The Jorion/Taleb Debate. Derivatives Strategy, April 1997. [27] http:/ / www. garpdigitallibrary. org/ download/ GRR/ 2012. pdf [28] David Einhorn in David Einhorn and Aaron Brown, Private Profits and Socialized Risk. GARP Risk Review (June/July 2008). [29] http:/ / www. nytimes. com/ 2009/ 01/ 04/ magazine/ 04risk-t. html?pagewanted=1& _r=1 [30] Joe Nocera, Risk Mismanagement, The New York Times Magazine (January 4, 2009)
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External links
Discussion Perfect Storms Beautiful & True Lies In Risk Management (http://www.wilmott.com/blogs/satyajitdas/ enclosures/perfectstorms(may2007)1.pdf), Satyajit Das Gloria Mundi All About Value at Risk (http://www.gloriamundi.org/), Barry Schachter Risk Management (http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?dlbk=&pagewanted=all), Joe Nocera NYTimes article. Tools Online real-time VaR calculator (http://www.cba.ua.edu/~rpascala/VaR/VaRForm.php), Razvan Pascalau, University of Alabama Value-at-Risk (VaR) (http://finance.wharton.upenn.edu/~benninga/mma/MiER74.pdf), Simon Benninga and Zvi Wiener. (Mathematica in Education and Research Vol. 7 No. 4 1998.)
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Ownership
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to hire a professional investment manager, which theoretically offers the prospects of better returns and/or risk management benefit from economies of scale - cost sharing among others diversify more than would be feasible for most individual investors which, theoretically, reduces risk.
Terminology varies with country but collective investment schemes are often referred to as mutual funds, investment funds, managed funds, or simply funds (note: mutual fund has a specific meaning in the US). Around the world large markets have developed around collective investment and these account for a substantial portion of all trading on major stock exchanges. Collective investments are promoted with a wide range of investment aims either targeting specific geographic regions (e.g. Emerging, Europe) or specified industry sectors (e.g. Technology). Depending on the country there is normally a bias towards the domestic market to reflect national self-interest as perceived by policymakers, familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance and other factors such as fees.
The values and performance of collective funds are listed in newspapers
Generic information - structure

Constitution and terminology
Collective investment schemes may be formed under company law, by legal trust or by statute. The nature of the scheme and its limitations are often linked to its constitutional nature and the associated tax rules for the type of structure within a given jurisdiction. Typically there is: A fund manager or investment manager who manages the investment decisions. A fund administrator who manages the trading, reconciliations, valuation and unit pricing. A board of directors or trustees who safeguards the assets and ensures compliance with laws, regulations, and rules. The shareholders or unitholders who own (or have rights to) the assets and associated income. A "marketing" or "distribution" company to promote and sell shares/units of the fund. Please see below for general information on specific forms of scheme in different jurisdictions.
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Net asset value

The Net Asset Value or NAV is the value of a scheme's assets less the value of its liabilities. The method for calculating this varies between scheme types and jurisdiction and can be subject to complex regulation.
Open-end fund
An open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.
Closed-end fund
A closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO) or through private placement. If shares are issued through an IPO, they are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares is high, they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the scheme if demand is high although this may affect the share price. For listed funds, the added element of market forces tends to amplify the performance of the fund increasing investment risk through increased volatility.
Gearing and leverage

Some collective investment schemes have the power to borrow money to make further investments; a process known as gearing or leverage. If markets are growing rapidly this can allow the scheme to take advantage of the growth to a greater extent than if only the subscribed contributions were invested. However this premise only works if the cost of the borrowing is less than the increased growth achieved. If the borrowing costs are more than the growth achieved a net loss is achieved. This can greatly increase the investment risk of the fund by increased volatility and exposure to increased capital risk. Gearing was a major contributory factor in the collapse of the split capital investment trust debacle in the UK in 2002.[1] [2] [3]
Availability and access

Collective investment schemes vary in availability depending on their intended investor base: Public-availability Schemes - are available to most investors within the jurisdiction they are offered. Some restrictions on age and size of investment may be imposed. Limited-availability schemes - are limited by laws, regulations, and/or rules to experienced and/or sophisticated investors and often have high minimum investment requirements. Hedge funds are often restricted this way. Private-availability schemes - may be limited to family members or whoever set up the fund. They are not publicly quoted and often are arranged for tax- or estate-planning purposes. Private equity funds are typically structured this way.
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Limited duration
Some schemes are designed to have a limited term with enforced redemption of shares or units on a specified date.
Unit or share class

Many collective investment schemes split the fund into multiple classes of shares or units. The underlying assets of each class are effectively pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the fund's assets. These differences are supposed to reflect different costs involved in servicing investors in various classes; for example: One class may be sold through a broker or financial adviser with an initial commission (front-end load) and might be called retail shares. Another class may be sold with no commission (load) direct to the public called direct shares. Still a third class might have a high minimum investment limit and only be open to financial institutions, and called institutional shares. In some cases, by aggregating regular investments by many individuals, a retirement plan (such as a 401(k) plan) may qualify to purchase "institutional" shares (and gain the benefit of their typically lower expense ratios) even though no members of the plan would qualify individually.
Generic information - advantages

Diversity and risk
One of the main advantages of collective investment is the reduction in investment risk (capital risk) by diversification. An investment in a single equity may do well, but it may collapse for investment or other reasons (e.g., Marconi, Enron). If your money is invested in such a failed holding you could lose your capital. By investing in a range of equities (or other securities) the capital risk is reduced. The more diversified your capital, the lower the capital risk. This investment principle is often referred to as spreading risk. Collective investments by their nature tend to invest in a range of individual securities. However, if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk investment managers may diversify into different non-perfectly-correlated asset classes. For example, investors might hold their assets in equal parts in equities and fixed income securities.
Reduced dealing costs

If one investor were to buy a large number of direct investments, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits).
Generic information - disadvantages

Costs
The fund manager managing the investment decisions on behalf of the investors will of course expect remuneration. This is often taken directly from the fund assets as a fixed percentage each year or sometimes a variable (performance based) fee. If the investor managed their own investments, this cost would be avoided.
Collective investment scheme Often the cost of advice given by a stock broker or financial adviser is built into the scheme. Often referred to as commission or load (in the U.S.) this charge may be applied at the start of the plan or as an ongoing percentage of the fund value each year. While this cost will diminish your returns it could be argued that it reflects a separate payment for an advice service rather than a detrimental feature of collective investment schemes. Indeed it is often possible to purchase units or shares directly from the providers without bearing this cost.
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Lack of choice
Although the investor can choose the type of fund to invest in, they have no control over the choice of individual holdings that make up the fund.
Loss of owner's rights

If the investor holds shares directly, they may be entitled to shareholders' perks (for example, discounts on the company's products) and the right to attend the company's annual general meeting and vote on important matters. Investors in a collective investment scheme often have none of the rights connected with individual investments within the fund.
Style
Investment aims and benchmarking
Each fund has a defined investment goal to describe the remit of the investment manager and to help investors decide if the fund is right for them. The investment aims will typically fall into the broad categories of Income (value) investment or Growth investment. Income or value based investment tends to select stocks with strong income streams, often more established businesses. Growth investment selects stocks that tend to reinvest their income to generate growth. Each strategy has its critics and proponents; some prefer a blend approach using aspects of each. Funds are often distinguished by asset-based categories such as equity, bonds, property, etc. Also, perhaps most commonly funds are divided by their geographic markets or themes. Examples The largest markets - U.S., Japan, Europe, UK and Far East are often divided into smaller funds e.g. US large caps, Japanese smaller companies, European Growth, UK mid caps etc. Themed funds - Technology, Healthcare, Socially responsible funds In most instances whatever the investment aim the fund manager will select an appropriate index or combination of indices to measure its performance against; e.g. FTSE 100. This becomes the benchmark to measure success or failure against.
Active or passive management

The aim of most funds is to make money by investing in assets to obtain a real return (i.e. better than inflation). The methods used to make your investment vary and two opposing views exist. Active management - Active managers believe that by selectively buying within a Financial market that it is possible to outperform the market as a whole. Therefore they employ dynamic portfolio strategies buying and selling investments with changing market conditions. Passive management - Passive managers believe that it is impossible to predict which individual holdings or section of the market will perform better than another therefore their portfolio strategy is determined at outset of the fund and not varied thereafter. Many passive funds are index funds where the fund tries to mirror the market as a whole. Another example of passive management is the "buy and hold" method used by many traditional Unit Investment
Collective investment scheme Trusts where the portfolio is fixed from outset. An example of active management success In 1998 Richard Branson (head of Virgin) publicly bet Nicola Horlick (head of SG Asset Management) that her SG UK Growth fund would not beat the FTSE 100 index, nor his Virgin Index Tracker fund over three years, nor achieve its stated aim to beat the index by 2% each year. He lost and paid 6,000 to charity.
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Alpha, Beta, R-squared and standard deviation

When analysing investment performance, statistical measures are often used to compare 'funds'. These statistical measures are often reduced to a single figure representing an aspect of past performance: Alpha represents the fund's return when the benchmark's return is 0. This shows the fund's performance relative to the benchmark and can demonstrate the value added by the fund manager. The higher the 'alpha' the better the manager. Alpha investment strategies tend to favour stock selection methods to achieve growth. Beta represents an estimate of how much the fund will move if its benchmark moves by 1 unit. This shows the fund's sensitivity to changes in the market. Beta investment strategies tend to favour asset allocation models to achieve outperformance. R-squared is a measure of the association between a fund and its benchmark. Values are between 0 and 1. Perfect correlation is indicated by 1, and 0 indicates no correlation. This measure is useful in determining if the fund manager is adding value in their investment choices or acting as a closet tracker mirroring the market and making little difference. For example, an index fund will have an R-squared with its benchmark index very close to 1, indicating close to perfect correlation (the index fund's fees and tracking error prevent the correlation from ever equalling 1). Standard deviation is a measure of volatility of the fund's performance over a period of time. The higher the figure the greater the variability of the fund's performance. High historical volatility may indicate high future volatility, and therefore increased investment risk in a fund.
Types of risk
Depending on the nature of the investment, the type of 'investment' risk will vary. A common concern with any investment is that you may lose the money you invest - your capital. This risk is therefore often referred to as capital risk. If the assets you invest in are held in another currency there is a risk that currency movements alone may affect the value. This is referred to as currency risk. Many forms of investment may not be readily salable on the open market (e.g. commercial property) or the market has a small capacity and investments may take time to sell. Assets that are easily sold are termed liquid therefore this type of risk is termed liquidity risk.
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Charging structures and fees

Fee types
There may be an initial charge levied on the purchase of units or shares this covers dealing costs, and commissions paid to intermediaries or salespeople. Typically this fee is a percentage of the investment. Some schemes waive the initial charge and apply an exit charge instead. This may be gradually disappearing after a number of years. The scheme will charge an annual management charge or AMC to cover the cost of administering the scheme and remunerating the investment manager. This may be a flat rate based on the value of the assets or a performance related fee based on a predefined target being achieved. Different unit/share classes may have different combinations of fees/charges.
Pricing models
Open-ended schemes are either dual priced or single priced. Dual priced schemes have a buying (offer) price and selling or (bid) price. The buying price is higher than the selling price, this difference is known as the spread or bid-offer spread. The difference is typically 5% and may be varied by the scheme manager to reflect changes in the market; the amount of variation may be limited by the schemes rules or regulatory rules. The difference between the buying and selling price includes initial charge for entering the fund. The internal workings of a fund are more complicated than this description suggests. The manager sets a price for creation of units/shares and for cancellation. There is a differential between the cancellation and bid prices, and the creation and offer prices. The additional units are created are place in the managers box for future purchasers. When heavy selling occurs units are liquidated from the managers box to protect the existing investors from the increased dealing costs. Adjusting the bid/offer prices closer to the cancellation/creation prices allows the manager to protect the interest of the existing investors in changing market conditions[4] . Most unit trusts are dual priced. Single priced schemes notionally have a single price for units/shares and this price is the same if buying or selling. As single prices scheme can't adjust the difference between the buying and selling price to allow for market conditions another mechanism the dilution levy exists. SICAVs, OEICs and U.S. mutual funds are single priced. A dilution levy can be charged at the discretion of the fund manager, to offset the cost of market transactions resulting from large un-matched buy or sell orders. For example if the volume of purchases outweigh the volume of sales in a particular trading period the fund manager will have to go to the market to buy more of the assets underlying the fund, incurring a brokerage fee in the process and having an adverse affect on the fund as a whole ("diluting" the fund). The same is the case with large sell orders. A dilution levy is therefore applied where appropriate and paid for by the investor in order that large single transactions do not reduce the value of the fund as a whole.[5]
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Internationally recognised collective investments

Exchange-traded funds or ETFs - a closed-end fund traded by listed shares on major stock exchanges. Real Estate Investment Trusts or REITs - a close-ended fund that invests in real estate. Sovereign investment funds
US-specific collective investments

(Click here for US SEC description of investment company types) [6]. Mutual Funds - Open-ended with a corporate or trust structure. Closed-end funds - Closed-ended with corporate structure. Unit Investment Trusts - Open-ended with a trust structure and limited duration. Exchange-traded funds (ETFs) - Structured as mutual funds or unit investment trusts, but publicly traded.
UK-specific collective investments

Investment Trusts - Introduced 1868. Closed-ended with corporate structure. Unit Trusts - Introduced 1931. Open-ended with a trust structure. With-profits policy - Open-ended with a life policy structure. Unitised Insurance Funds - Introduced 1970s. Open-ended with a life policy structure. OEICs or ICVCs - Introduced 1997. Open-ended with a corporate structure. Exchange-traded funds (ETFs) - Open-ended with a corporate structure.
Canadian collective investments

Income Trusts Labour Sponsored Funds Mutual funds
Ireland specific collective investments

Common contractual fund
European collective investments

UCITS SICAVs
France & Luxembourg

Investment funds FCP (Fonds commun de placement) (unincorporated investment fund or common fund) SICAF (Socit d'investissement capital fixe) (Investment company with fixed capital) SICAV (Socit d'investissement capital variable) (Investment company with variable capital)
Netherlands and Belgium

BEVEK (Investment Company with variable capital) BEVAK (Investment company with fixed capital) PRIVAK (Closed-end investment company)
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Ukraine
Instytut spilnogo investuvannya, ISI (Investment Funds) Private investment fund (Payovyi investytsiyny fond) Public investment fund (Korporatyvny investytsiyny fund) Both funds are run by Investment Company (KUA - kompania z upravlinnya actyvami).Funds and companies regulated and supervised by DKTsPFR (Securities and stock market state commission)
Greece
We could say that a mutual fund is a pool of money which belongs to many investors. Otherwise a M/F is the common cashier of many investors who trust a third party to operate and manage their wealth. Moreover they order this third party which in Greece is called A.E.D.A.K. (Mutual Fund Management Company S.A.) to spread their money in many different investment products such as shares, bonds, deposits, repo etc. Those companies in Greece may provide services according to article 4 of Law 3283/2004. People who own units (shares) of a mutual fund are called unitholders. In Greece co-unitholders, which are persons participating in the same units of M/F have exactly the same rights as the unitholder (according to the Law for the deposits in common account 5638/1932). The unitholders have to sign and accept the document which describes the purpose of the Mutual Fund, how it operates, and anything concerning the Fund. This document is the regulation of the M/F. The property of each M/F by law have to be under the control of a bank legally operating in Greece (Greek or foreign). The bank is the custodian of the M/F and except of the custody of the fund also controls the lawfulness of all movements of the management company. The Supervisory and Regulatory Body of M.F. Management Companies and Portfolio Investment Companies is the Greek Capital Market Commission. It comes under the jurisdiction of the Ministry of National Economy and controls the operation of all M/Fs available in Greece. All investors have to be very careful and about the risk they undertake. They have to have in mind that all investments have a certain degree of risk. Risk free investments does not exist. You can find more about Greek Mutual Funds in the site of the Association of Greek Institutional Investors [7] or the site of Greek (Hellenic) Capital Market Commission [8].
Switzerland
open-ended Anlagefonds (unincorporated investment fund or common fund) SICAV (Socit d'investissement capital variable) (Investment company with variable capital) closed-ended SICAF (Socit d'investissement capital fixe) (Investment company with fixed capital) Kommanditgesellschaft fr Kapitalanlagen (Limited Partnership)
Australian collective investments

Managed Investment Scheme per s 9 of the Corporations Act (Cth) 2001 Listed investment company or LIC. Closed-ended collective investment either corporate or trust based. Available since 1928. Unit trusts open-ended trust based investments often called Managed funds, managed investment schemes or unlisted managed funds. If the managed investment scheme is open for retail investors, the managed investment scheme must be registered with ASIC. An unregistered scheme has an Trustee whilst a registered scheme has an Responsible Entity.
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Offshore collective investments

Segregated portfolio company a corporate entity for holding various investments under a single legal entity.
References
[1] Adams, Andrew A (October 2004). The Split Capital Investment Trust Crisis. John Wiley & Sons. ISBN978-0-470-86858-4. [2] Carlisle, James (2002-10-30). "The Lesson From The Split Capital Debacle" (http:/ / www. fool. co. uk/ news/ Comment/ 2002/ c021030a. htm). Market Comment. The Motley Fool. . [3] "Split Capital Investment trusts" (http:/ / www. publications. parliament. uk/ pa/ cm200203/ cmselect/ cmtreasy/ 418/ 41802. htm). Treasury Select Committee. British House of Commons. 2003-02-05. . [4] "Unit trusts and OEICs" (http:/ / www. incademy. com/ courses/ Unit-trusts-and-OEICs/ Pricing-of-units---in-practice/ 8/ 1007/ 10002). Incademy Investor Education. . Retrieved 2008-08-14. [5] "Unit trusts and OEICs" (http:/ / www. incademy. com/ courses/ Unit-trusts-and-OEICs/ OEICs---charges/ 13/ 1007/ 10002). Incademy Investor Education. . Retrieved 2008-08-14. [6] http:/ / www. sec. gov/ answers/ mfinvco. htm [7] http:/ / www. agii. gr [8] http:/ / www. hcmc. gr
External links
Answers (http://www.sec.gov/answers/mfinvco.htm) U.S. SEC Consumer Information Investments (http://www.fsa.gov.uk/consumer/08_INVESTMENTS/index.html) UK FSA Consumer Information [[pt:Fundo_de_investimento]
Equity sharing
Equity sharing, also known as shared ownership or in the US as housing equity partnership (HEP), allows a person to purchase a share in their home even if they cannot afford a mortgage on the whole of the current value. It is generally used in affordable housing, providing a "third way" of land tenure between home ownership and renting. There are various detailed methods to implement equity sharing, and it is implemented in over a hundred community land trusts in the United States. The remaining equity share may be held by the housebuilder, by a private investor or by a landlord such as a housing association. In some models the resident pays rent on that share.
Equity sharing in the United Kingdom

There are two forms of equity sharing in the UK, public sector and private sector. Public sector equity sharing implies some form of taxpayer subsidy and is seen by government as a useful tool of social policy, for example in allowing more first time buyers to access property ownership. The government in England facilitates shared equity chiefly through the Homes and Communities Agency (HCA), currently under the banner of HomeBuy. This covers a range of low cost home ownership options; all aim to help households earning up to 60,000 p.a. to buy a home that they could not otherwise afford.[1] Some are targeted at first-time buyers and key workers.[2] The current types of Homebuy are: New Build HomeBuy, under which purchasers buy at least 25% of a newly-built home, and pay rent on the remainder. The HCA generally subsidises housing associations or other providers to hold the remaining share. The rent is capped at 3% of the value of the unsold share, but typically set at 2.75%. Purchasers may buy additional shares whenever they can afford to do so; this is known as "staircasing".[3]
Equity sharing HomeBuy Direct is a new form of shared ownership introduced in 2009, under which the government and a housing developer jointly fund an equity loan of 30% of the valuation, so that the purchaser only needs to pay a mortgage on 70% of the value. If the purchaser buys an additional share, all three parties participate in any increase in value. The HCA allocated 300million to the scheme for 20092011, and 10,000 homes are available under the initiative.[1] Open Market Homebuy allowed purchasers to buy at least 25% of a property on the open market, with a conventional mortgage on that part, and a low-interest loan on the remainder. This is not currently available as the funding for 2009-10 has already been fully committed. Over 6,000 households used the scheme in 2008/09.[4] Social Homebuy allows tenants of participating Councils and housing associations to buy their rented home on shared ownership terms, with a proportion of the usual Right to Acquire discount.[5] FirstBuy, a scheme for first-time buyers announced in the 2011 Budget. Under it first-time buyers can get help to fund the difference between a 5% deposit and a 75% mortgage. It is only available on selected newbuild schemes. The top-up equity is provided in equal shares by the HCA and the developer. To apply for all Homebuy schemes, applicants must contact their local Homebuy Agent.[6] Private sector shared equity or, as it is sometimes known, investor shared equity, operates quite differently in that there is no element of taxpayer subsidy. Instead, third party investors provide the difference between the buyer's deposit and (typically) a 75% mortgage, in return for an equity stake in the property and a rent. These schemes are run over 5 or 10 years (sometimes with a 'hardship' extension), meaning that at the end of the relevant period, the owner has to buy out the equity stake at the relevant percentage of the then market value. There is generally no penalty on early redemption or partial buy-backs. Thus, equity sharing can be seen as a step up to full ownership of a property. Although investor shared equity is, on the face of it, more expensive than public sector schemes, because of the need to pay rent on the non-owned portion, it nevertheless holds significant advantages: First, it is not confined to newbuild, or to any particular housing provider. Instead, the buyer can research the whole of the market for the best bargain. Some would say this avoids the peril of paying an inflated price to a housebuilder. Secondly, there is less in the way of form filling and waiting lists. Because investor shared equity is essentially a financing mechanism, it is as simple as applying for a mortgage. Thirdly, it is less likely to run out of funding than public sector schemes. So long as investors achieve their desired return, the resources are theoretically limitless. Fourthly, the buyer is put in the position of a cash buyer and is thus empowered to negotiate the best deal with the vendor. Finally, of course, an injection of cash gives the buyer the chance to access the better interest rates and lighter credit checks associated with 75% mortgages.
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Equity sharing in the United States

Equity sharing has been around for some time now and has been put on the shelf in recent years given the loose financing programs. These partnerships were championed by economists Andrew Caplin, Sewin Chan, Joseph Tracy and Charles Freedman in the late 1990s and are very similar to shared-equity plans that have existed for decades in the UK, Europe and the U.S. They are also similar to an earlier proposal produced by Geltner, Miller and Snavely (1995) to develop Home Equity Investment Trusts (HEITs). There have been various spins on this concept from sharing on existing properties, alternatives to reverse mortgage, new purchases and now even investment properties. Originally, in a mutually beneficial way this type of strategy was used for buyers to acquire a property that they could either, not otherwise afford, lacked capital for a down payment, insufficient income to support loan payment, etc. These types of situations have commonly been factors that would lead to a beneficial equity sharing relationship.
Equity sharing In summary, the traditional example of equity share for the purchase of a home provides the buyer with a 20% down-payment; they will have much lower payments, no PMI, better terms/rate and will save a great deal just in payments versus what it will cost them in equity at the eventual sale or refinancing of the property at some point in the future. Particularly, in the case of investment properties there are some other factors to be taken into consideration, like cash flow from the property. If the total of the mortgage payments, taxes, insurance/association dues, and all other expenses must be less than the rent that the tenant pays on the property. If not, the investors will run into a negative cash flow situation, whereby they are paying more than they are getting from the property. This was very common in the era of high LTV (loan to value) loans on investment properties where in most cases they were viewed as risky by banks and therefore had high interest rates and even PMI (private mortgage insurance) in some cases. That being said, how does equity share help an investor and how does it work? If the investor puts up the 20% for the down payment to purchase the property, then after the close enters into an agreement with the fund they give you up to 20% of the purchase price in consideration for a share of the future equity in the property, with no interest and no payments, ever. Now you have a situation where the investor has an 80% LTV loan with lower payments then they would otherwise have, which means greater cash flow potential and less capital expenditures. The additional benefit of the money (20% initially used for the purchase) that would otherwise be tied up in the property, illiquid, and inaccessible without the Fund, will instead be in your pocket. This will also allow individual investors to purchase multiple properties by using their initial capital for a down payment then entering into an Equity share agreement; get cash from the fund and use that cash to purchase more properties and get more cash from the fund.
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References
[1] HomeBuy Direct (http:/ / www. communities. gov. uk/ housing/ buyingselling/ ownershipschemes/ homebuy/ HomeBuyDirect/ ) on DCLG website [2] HomeBuy (http:/ / www. homesandcommunities. co. uk/ home_buy) at HCA website [3] New Build HomeBuy (http:/ / www. communities. gov. uk/ housing/ buyingselling/ ownershipschemes/ homebuy/ newbuildhomebuy/ ) on DCLG website [4] Open Market HomeBuy (http:/ / www. communities. gov. uk/ housing/ buyingselling/ ownershipschemes/ homebuy/ openmarkethomebuy/ ) on CLG website [5] Social HomeBuy (http:/ / www. homesandcommunities. co. uk/ social_homebuy. htm) at HCA website [6] HomeBuy Agents (http:/ / www. homesandcommunities. co. uk/ homebuy_agents) list on HCA website
Davis, John Emmeus (1994), Shared Equity Homeownership: The Changing Landscape of Resale-Restricted, Owner-Occupied Housing (http://www.nhi.org/policy/SharedEquity.html), National Housing Institute
Further reading
Geltner, David M., Norman G. Miller and Jean Snavely. 1995. We Need a Fourth Asset Class: HEITs. Real Estate Finance: 71-81. Caplin, Andrew (1997). Housing Partnerships: A New Approach to a Market at a Crossroads. MIT Press. ISBN 0-262-03243-0.
Financial accountancy
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Financial accountancy (As seen by the COB) (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.[1] The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users. Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company. Management accounting provides accounting information to help managers make decisions to manage the business. In short, Financial Accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization. Financial accountancy is governed by both local and international accounting standards.
Basic accounting concepts

Financial accountants produce financial statements based on Generally Accepted Accounting Principles of a respective country. In particular cases financial statements must be prepared according to the International Financial Reporting Standards. Financial accounting serves the following purposes: producing general purpose financial statements producing information used by the management of a business entity for decision making, planning and performance evaluation producing financial statements for meeting regulatory requirements.
Graphic definition
The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting. The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare an profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFRS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders or owners equity of the company on the date to which the accounts were prepared. Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them), remember the word AWED which represents the first letter of each type of account. Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).
0 = Dr Assets . . . . . / Cr Owners' Equity Cr Liabilities . \ . . . .
_____________________________/\____________________________ Cr Retained Earnings (profit) Cr Common Stock . . .
_________________/\_______________________________ / Dr Expenses Dr Dividends Cr Beginning Retained Earnings \ Cr Revenue
\________________________/ increased by debits \______________________________________________________/ increased by credits
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Crediting a credit Thus -------------------------> account increases its absolute value (balance) Debiting a debit
Debiting a credit Thus -------------------------> account decreases its absolute value (balance) Crediting a debit
When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract.
Related qualification
Many professional accountancy qualifications cover the field of financial accountancy, including Certified Public Accountant (CPA), Chartered Accountant (CA or other national designations) and Chartered Certified Accountant (ACCA).
External Links
Financial Accounting Study Resource [2]
References
[1] Framework, Par 104 (a) (http:/ / www. aasb. com. au/ admin/ file/ content105/ c9/ Framework_07-04nd. pdf) [2] http:/ / www. financial-accounting. us/ index. php
Floating charge
575
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership (LLP), which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets. The conversion (called crystallisation) can be triggered by a number of events; it has become an implied term in debentures (in English law) that a cessation of the company's right to deal with the assets in the ordinary course of business will lead to automatic crystallisation. Additionally, according to express terms of a typical loan agreement, default by the chargor is a trigger for crystallisation. Such defaults typically include non-payment, invalidity of any of the lending or security documents or the launch of insolvency proceedings. Floating charges can only be granted by companies. If an individual person or a partnership[1] was to purport to grant a floating charge, it would be void as a general assignment in bankruptcy.[2] Floating charges take effect in equity only, and consequently are defeated by a bona fide purchaser for value without notice of any asset caught by them. In practice, as the chargor has power to dispose of assets under a floating charge, this is only of any consequence in relation to disposals after the charge has crystallised. The floating charge has been described as "one of equity's most brilliant creations."[3]
Definition
Although the nature of a floating charge has been widely considered by the courts, historically no full definition has ever been given, and the nature of the chargee's interest in the charged assets (or fund of assets) remains doctrinally uncertain. The earliest descriptions were given by Lord Macnaghten in two cases. In Government Stocks and Other Securities Investment Co Ltd v Manila Rly Co [1897] AC 81 at 86 he said: "A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is the essence of such a charge that it remains dormant until the undertaking ceases to be a going concern, or until the person in whose favour the charge is created intervenes. His right to intervene may of course be suspended by agreement. But if there is no agreement for suspension, he may exercise his right whenever he pleases after default." Later in Illingworth v Houldsworth [1904] AC 355 at 358 he stated: "...a floating is ambulatory and shifting in nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp." A description was subsequently given in Re Yorkshire Woolcombers Association [1903] 2 Ch 284, and despite Romer LJ clearly stating in that case that he did not intend to give a definition of the term floating charge, his description is generally cited as the most authoritative definition of what a floating charge is: it is a charge over a class of assets present and future; that class will be changing from time to time; and until the charge crystallises and attaches to the assets, the chargor may carry on its business in the ordinary way. When conducting a recent review of the authorities, in keeping with that tradition, in National Westminster bank plc v Spectrum Plus Ltd [2005] UKHL 41, the House of Lords elected instead to describe the essential characteristic of a floating charge rather than define it, and they described it thus: "the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security."
Floating charge
576
Recharacterisation
Because of the lower priority of a floating charge (as to which see below), most security documents that create floating charges also seek to create fixed charges over as many assets of the company as they reasonably can. In relation to certain assets, this has historically given rise to tension as to whether the charge created is actually a fixed charge, or whether (despite being expressed as a fixed charge) it should be recharacterised as a floating charge, with the lower priority that floating charges have. This issue arises most frequently in relation to trade receivables and cash in bank accounts. In National Westminster bank plc v Spectrum Plus Limited and others [2005] UKHL 41 the House of Lords finally brought some clarity to this area of the law. The essential test of whether a charge was a fixed charge related to the chargor's power to continue to deal with the asset. In order to preserve the status of a charge as a fixed one, the bank must exercise actual control over disposal of the asset. If the chargor is able to deal with the asset, such as by drawing from the account in which charged funds are kept, or into which the proceeds of trade receivables are deposited, then the holder of the charge does not have effective control. The judges held that as this is inconsistent with the status of the charge as fixed (if the chargor company is able to use the proceeds in the ordinary course of its business without the consent of the charge holder), the charge could only take effect as a floating charge. See also: analysis of the House of Lords decision [4]
Nature of the Chargee's interest

Several authors[5] have suggested that the floating chargee, prior to crystallisation, may have no proprietary interest at all in the charged assets. However, this is inconsistent with cases (such as Spectrum) at the highest level which suggest a proprietary interest does exist. Alternatively, the floating chargee may have an inchoate type of proprietary interest, with characteristics that are proprietary but of a lesser order than the proprietary interest of a chargee with a fixed charge. Some authors have suggested that there is an interest in a fund of assets,[6] but the nature and incidents of the interest remain unclear. This has received some judicial support, from Lord Walker in Spectrum, for example. Another possibity is that the holder of a floating charge may have the same quality of proprietary interest as a fixed chargee, but one that is subject to defeasance[7] or overreaching[8] by permitted dealings by the chargor with the charged assets.
History
Historically, floating charges are a fascinating concept in that they are legal devices created entirely by lawyers in private practice; there is no legislation and no judicial decision that was the genesis of a floating charge. In 1862 in an apparently unconnected decision of Holroyd v Marshall (1862) 10 HL Cas 191 it was held that equity would recognise a charge over after-acquired property as being effective to create a security interest over that property automatically upon its acquisition. This decision lead to "a further manifestation of the English genius for harnessing the most abstract conceptions to the service of commerce."[9] Documents came to be drafted that purported to grant security over all of the debtor's present and future property, but by contract expressly permitted the debtor to dispose of those assets, free from the charge, until such times as the debtor's business ceased. This charge came to be known as the "floating charge". The first case in which a floating security device was tested and upheld came a mere eight years after Holroyd v Marshall in Re Panama, New Zealand and Australian Royal Mint Company (1870) 5 Ch App 318; a remarkably quick gestation by any reckoning. The Court of Appeal held that the effect of the document was that the secured creditor could not interfere with the running of the business and its dealings with its own assets until the winding up of the company, but the occurrence of that event entitled the secured creditor to realise its security over the assets and to assert its charge in priority to the general body of creditors
Floating charge Any residual concern about the efficacy of such charges were comprehensively ousted by the House of Lords in Salomon v A Salomon & Co Ltd [1897] AC 22.
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Flexibility
Floating charges are enormously popular as a security device for two principal reasons. From the secured creditor's perspective, the security will cover each and every asset of the chargor. From the chargor's perspective, although all of their assets are encumbered, because the security "floats", they remain free to deal with the assets and dispose of them in the ordinary course of business, thereby obtaining the maximum credit benefit from the lender, but without the inconvenience of requiring the secured creditor's consent to dispose of stock in trade. However, in many jurisdictions, floating charges are required to be registered in order to perfect them; otherwise they may be unenforceable on the bankruptcy of the debtor. This registration requirement has often led to other property rights (such as rights under a defective retention of title clause), which have been recharacterised as a floating charge being held to be void for non-registration.
Remedies
Broadly speaking, holding a floating charge gives the secured creditor two key remedies in the event of non-payment of the secured debt by the company. Firstly, the secured creditor can crystallise the charge, and then sell off any assets that the charge then attaches to as if the charge was a fixed charge. Secondly (and more frequently the case, to preserve the company as a going concern), if the floating charge encompasses substantially all of the assets and undertaking of the company, the secured creditor can appoint an administrative receiver to take over the management and control of the business with a view to discharging the debt out of income or selling off the entire business as a going concern. In countries that permit the making of an administration order, the floating charge had another key benefit. The holder of a floating charge could appoint an administrative receiver and block the appointment of a court appointed administrator, and thus retain control of the distribution of the assets of the company. Practice became such that companies were asked to give "lightweight" floating charges to secured lenders which had no collateral value purely to allow the holders to block administration orders, an approach that was approved by the courts in Re Croftbell Ltd [1990] BCC 781. In the United Kingdom the law has now been changed by statute, but the power to block appointments of administrators has been retained in many other common law jurisdictions.
Crystallisation
Strictly speaking, it is not possible to enforce a floating charge at all - the charge must first crystallise into a fixed charge. In the absence of any special provisions in the relevant document, a floating charge crystallises either upon the appointment of a receiver or upon the commencement of liquidation.[10] It has also been suggested, relying upon obiter dictum comments by Lord Macnaghten in Government Stocks and Securities Investments Co Ltd v Manila Rly Co that a charge should also crystallise upon the company ceasing to trade as a going concern.[11] However, this view is not yet supported by judicial authority.[12] In certain countries, notably Australia and New Zealand, it was for a time very common to include "automatic crystallisation" provisions which would provide that the floating charge would crystallise upon an event of default automatically and without action from the chargee. Automatic crystallisation provisions have been upheld in New Zealand[13] but there are judicial comments suggesting they may not be recognised as effective in Canada.[14] In the United Kingdom there is some inferential support for the validity of automatic crystallisation provisions,[15] but they have never been subject to full judicial consideration.
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Priority
The main purpose of any security is to enable the secured creditor to have priority of claim to the bankrupt party's assets in the event of an insolvency. However, because of the nature of floating charge, the priority of floating charge holder's claims normally rank behind: 1. holders of fixed security (such as a mortgage or fixed charge);[16] and 2. preferential creditors, who are given priority by statute.[17] The floating charge cannot normally be enforced until it has crystallised (and thus, effectively, become a fixed charge) and so most statutes provide that the priority of a fixed charge that was created as a floating charge is treated as a floating charge.[18] Because of the differences in priority of fixed charges and floating charges, security documents came to be drafted to contain as many charges expressed to be fixed charges as possible, and leave as little as possible covered by the floating charge, where it would have secondary priority to the claims of the preferential creditors. A number of judicial decisions[19] gave conflicting interpretations over the characteristics that were definitive of a fixed charge, particularly with reference to charges over book debts (and a fixed charge that did not contain those characteristics would be "recharacterised" as a floating charge). The position was definitively resolved in NatWest v Spectrum Plus Limited when the House of Lords confirmed that a charge over book debts could be a fixed charge, provided that the secured creditor exhibited the necessary degree of control over the proceeds of the book debts. This would normally require that they either be paid into a blocked account, or that they be paid directly to the secured creditor. Any lesser degree of control was not consistent with a fixed charge, and such charges would be construed as floating charges, regardless of what label the parties had given them. See also: Liquidation - Priority of claims
Criticisms
Floating charges have been criticised as a "raw deal" for unsecured creditors.[20] In Salomon v. Salomon & Co. [1897] AC 22 Lord Macnaghten observed that the injustice of the case (as he saw it) was not caused by the introduction of the concept of limited liability, but by the excessive security created by the floating charge. In Re London Pressed Hinge Co Ltd [1905] 1 Ch 576 Buckley J observed that great mischief arose from the very nature of the floating charge as few of general unsecured trade creditors of the company would even be aware of its existence. As most secured lenders will not usually have recourse to their security until the debtor company is in a parlous financial state, the usual position is that even all the remaining assets of the company are not enough to repay the debt secured by the floating charge, leaving the unsecured creditors with nothing. This perception has led to a widening of the classes of preferred creditors who take ahead of the floating charge holders in a number of countries. The introduction of a regime of voidable floating charges for floating charges taken just prior to the onset of insolvency is a partial response to these criticisms. Some countries have also sought to "ring fence" recoveries made for wrongful trading or fraudulent trading from the floating charge to create an artificial pool of assets available to the unsecured creditors.
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Voidable floating charges

Because of the potential for abuse of a security interest that catches all of a company's assets, many jurisdictions have enacted provisions in their insolvency legislation providing that a floating charge granted shortly prior to the company going into liquidation will be invalid, or invalid to the extent that it does not secure new loans made to the company.
Registration
In many jurisdictions, because of their dramatic effect on the availability of assets to unsecured creditors on an insolvency, floating charges are required to be registered.[21]
Analogous security interests

United States
The analogous concept in the United States to the floating charge is the floating lien.
Quebec
When the Quebec Civil Code came into force in 1994 and superseded the Civil Code of Lower Canada, it abolished the charge flottante "floating charge" and created and introduced an analogous security device into Quebec law under the name hypothque ouverte, or "floating mortgage". As a mortgage, it can be taken over immovables and movables (that is, real and personal property); must be in due form, i.e. passed before a notary and registered; confers rights in rem: priority ranking, right of pursuit (that is, it runs with the land and cannot be defeated by a bona fide purchaser), creditor's consent required to dispose of subject; grants powers of recourse: repossession, judicial foreclosure, sale by mortgagee in possession, or administrative receivership. The floating mortgage can be specific or general with respect to immovables and movables, separately or together. The mortgage is not perfected until it crystallises. Crystallisation occurs upon default of the mortgagor and registration of a notice of default, and the mortgage ranks from the date notice is filed. This means that a floating mortgage ranks lower than a fixed mortgage.[22]
Civil law countries

Civilian countries generally allow for a commercial pledge to be taken over the pooled movable assets held or acquired for the use of a business or income-producing activity (going concern) and not for sale. The pool is restricted to movable (personal) property of a long-term nature and of value to the operation of the business, or in other words: inventory (UK: stock); fixed assets tangibles: equipment, machinery, tools, furniture; and legal intangibles: company style (name), logos, goodwill, intellectual property, leases. The pledge never crystallises like a floating charge; instead the pool is a universitas rerum and treated as a single movable security subject. The asset pool is referred to as a fonds de commerce (French), fondo de comercio (Spanish), fondo di commercio (Italian), Geschftsfonds (German), handelsfonds (Dutch), and so on. Besides the class of assets secured, the civilian commercial pledge differs from a floating charge in that fixed assets are not always changing, and the creditor ranks prior to all secured and unsecured claims.[23] Commercial pledges exist in common law countries but are usually taken over working capital (floating assets and investments).
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Further reading
Getzler & Payne, Company Charges - Spectrum and Beyond, ISBN 0-19-929993-5
Footnotes
[1] Although not a limited liability partnership with separate legal personality [2] For example, under English law, a general assignment of book debts by a natural person is void as regards book debts that were not paid before the presentation of the bankruptcy petition, unless the assignment has been registered under the Bills of Sale Act 1878 if the person goes into bankruptcy. See section 344(2) of the Insolvency Act 1986. [3] By Roy Goode writing in Getzler & Payne, Company Charges - Spectrum and Beyond at page 11, ISBN 0-19-929993-5 [4] http:/ / www. hg. org/ articles/ article_724. html [5] WJ Gough, Company Charges (2nd edn, 1996) [6] R Goode, Legal Problems of Credit and Security (3rd edn, 2003) [7] S Worthington, Proprietary Interests in Commercial Transactions (1996) [8] R Nolan, 'Property in a Fund' (2004)120 LQR 108 [9] Commercial Law, Roy Goode, 2nd ed., at page 731 [10] Re Crompton & Co Ltd [1914] 1 Ch 954: "...I think there can be no question at all that according to ordinary principles the winding up puts an end to the period of suspension; and the reason that it does that is that the effect of the winding up is to put an end to the floating nature of the security" at 963 [11] Lingard, Bank Security Documents, 3rd ed. at para 9.19 [12] Although in Robson v Smith [1895] 2 Ch 118 Romer J did assert that a company could deal with assets subject to a floating charge until it is wound up or stops business. However, in Re Woodroffes (Musical Instruments) Ltd [1986] Ch 366 Nourse J he referred to earlier authorities assuming the cessation of business would cause crystallisation rather than deciding it. [13] Re Manurewa Transport [1971] NZLE 909 [14] Referred to by Lord Hoffmann in Re Brightlife [1986] 3 All ER 673 at 678 [15] In Evans v Rival Granite Quarries Ltd [1910] 2 QB 979 Buckley LJ referred to the an event occurring which "is defined as bringing to an end the licence of the company to carry on business". In Re Bond Worth Slade J referred to "some other agreed event" as affecting crystallisation. [16] This was confirmed in Wheatley v Silkstone & Haigh Moor Coal Co (1885) 29 Ch D 715; because the disposition by the chargor (in creating the mortgage or fixed charge) is permitted by the concept of the floating charge, the grant of a mortgage or charge takes the relevant asset out of the pool of assets caught by the floating charge. [17] See for example in the United Kingdom section 175(2)(b) of the Insolvency Act 1986 [18] See for example section 29(a)(a) of the Insolvency Act 1986 [19] Commencing with the decision of Slade J in Siebe Gorman v Barclays Bank [1979] 2 Lloyd's Rep 142 [20] http:/ / www. oecd. org/ dataoecd/ 11/ 18/ 20218724. pdf [21] For example, in the United Kingdom, see section 860 of the Companies Act 2006 [22] Vilaysoun Loungnarath, Jr., L'Endettement de l'entreprise au Qubec : paramtres juridiques, [pdf]: <http://www.usherbrooke.ca/droit/fileadmin/sites/droit/documents/RDUS/volume_26/26-1-loungnarath.pdf>, accessed 22 August 2011. [23] Al Tamimi & Company, Banking & Security Law in the UAE, [brochure], p. 24: <http://www.tamimi.com/files/Legal%20Brochures/BaningandSecurityLaw.pdf>, accessed 23 Sept. 2011.
Flow-through entity
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Flow-through entity
A flow-through entity (FTE) is a legal entity where income "flows through" to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities or fiscally-transparent entities. Depending on the local tax regulations, this structure can avoid dividend tax and double taxation because only owners or investors are taxed on the revenue. Technically, for tax purposes, flow-through entities are considered "non-entities" because they are not taxed; rather, taxation "flows-through" to another tax return. Common types of FTEs are general partnerships, limited partnerships and limited liability partnerships. In the United States, additional types of FTE include S corporations, income trusts and limited liability companies. Most countries require an FTE (or its owners) to file an annual return reporting the shares of income allocated to owners, and to provide each owner with a statement of allocated income to enable owners to report their shares of income on their own tax returns. In the United States, the statement of allocated income is known as form K-1 (or Schedule K-1).
References
Fractional ownership
In business, fractional ownership is a percentage share of an expensive asset. Shares are sold to individual owners. A fractional owner enjoys priorities and privileges, such as reduced rates, priority access on holidays and income sharing. Typically, a company manages the asset on behalf of the owners, who pay monthly/annual fees for the management plus variable (e.g. per-hour, per-day) use fees. For rapidly-depreciating assets, the management company may sell the asset and distribute the proceeds back to the owners, who can then claim a capital loss and optionally purchase a fraction of a new asset. Whether fractional ownership provides a financial advantage over renting is an on-going debate, and some countries and regions have tax laws that provide additional benefits for owners, such as capital-loss allowances, while others might penalize ownership over renting.
Aviation
Fractional ownership offers an individual or company the option to purchase a share of an aircraftShares from as little as 1/16 of an aircraft, which offers approximately 50 hours of flight time per year, to 1/2 of an aircraft can be purchased, depending on the needs of the operator. The most common amounts purchased usually range from about 1/8 to 1/4 (approximately 200 flight hours per year) of an aircraft.[1] Though the owner takes title of the portion of their investment, they are not assigned to a dedicated aircraft for usage. Instead, they are given access to a pool of similar aircraft, and therefore, theoretically, an owner may never actually fly on their titled jet. Co-owners (referred to as owners) of a fractional program's aircraft are required to pay a percentage of the aircrafts purchase price that is proportionate to the amount of hours they wish to fly per year, for the duration of their contract typically 5 years. In addition to the price, there are fees charged for all occupied flight hours (that fluctuate with changes in fuel prices), as well as monthly fixed-management fees that cover maintenance and administration of the program. In return, the customer receives a predetermined number of hours in the aircraft of their choice, based on the owners needs and the amount they are willing to pay. Fractional owners are guaranteed that this aircraft, or another aircraft of the same model or comparable aircraft type, will be available 24 hours a day, 365 days per year, with as little as four hours notice [1] . In addition, the management company provides all scheduling, flight planning,
Fractional ownership staffing, catering, maintenance, communications, and insurance services. A fractional owner simply picks up the phone, calls a dispatcher, requests a flight, and drives to the airport.
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History
The term fractional ownership originally became popular for business jets. Richard Santulli of NetJets pioneered the concept of allowing businesses to purchase shares in a jet to reduce costs. With a fractional jet plan, members will typically fly in any jet available, not necessarily the one in which they own shares. The management company will reposition jets as necessary and provide flight crews. Companies with greater needs purchase larger shares to get access to more time. The fractional-ownership concept has since been extended to smaller aircraft and has now become common for single-engine piston aircraft like the Cirrus SR22, which are beyond the financial means of many private pilots. The same concepts apply, except that the management company may not provide flight crews nor reposition the aircraft. Many pilots get together to buy light aircraft in a privately bought and managed fractional ownership, this is often known as group flying. Fractional ownership has played a significant role in revitalizing the general aviation manufacturing industry since the late 1990s, and most manufacturers actively support fractional ownership programs.
Fractional property ownership

Fractional ownership simply means the division of any asset into portions or shares. If the asset is a property, the title or deed can be legally divided into shares. In certain instances this is done by creating a "mezzanine structure", i.e. creating a company which owns the property then allowing multiple owners or investors to own shares in the company. Those shares can then be purchased and owned by more than one individual. The reasons for a "mezzanine structure" can vary. Two common reasons are to allow transfer of shares without the need to reflect changes on the title or deed to the property, and for tax benefits. Shared ownership of the property and its deed will also entitle shareholders to certain usage rights, usually in the form of weeks. Conceptually, fractional ownership is not the same as timeshare. Fractional ownership affords much of the freedom and usage benefits offered in timeshare, however, the fundamental difference with fractional ownership is that the purchaser owns part of the title (as opposed to units of "time"). Therefore, if the property appreciates in value, then so do the shares. As with whole ownership, fractional owners can sell whenever they deem necessary or prudent, releasing the capital growth from their "bricks & mortar" investment.
Real property
The practice of joining together with family and friends to share ownership of vacation property has been around for many years. But the fractional property industry started in the US in the Rocky Mountains ski resorts in the early 1990s. These first fractional developments recognized that people did not want to buy whole homes, which they would only use for a few weeks a year in the mountains. According to research firm Ragatz Associates there were over 250 fractional developments in North America in 2006 and fractional properties can now be found throughout the world. Outside the USA a non-commercial form of fractional ownership has been in existence for several decades. In this form, otherwise unconnected individuals (rather than family or friends) form private syndicates to purchase, for example, vacation property or boats. These syndicates operate as private member groups with small numbers on a non-profit basis, generally just sharing expenses and usage. These groups can involve assets ranging from modest apartments or condominium type properties to multi-million euro / dollar properties, and leverage their ability to make collective purchases of additional assets such as boats or vehicles as additional facilities, while retaining control entirely within the membership of the group.
Fractional ownership The popularity of the term fractional ownership has caused extensive rebranding in other industries where similar concepts, such as real estate timeshares, were already well established. Fractional ownership divides a property into more affordable segments for individuals and also matches an individual's ownership time to their actual usage time. A fractional share gives the owners certain privileges, such as a number of days or weeks when they can use the property. Occasionally, the property is sold after a pre-determined time, distributing the relative proceeds back to the owners. A few private owner-groups have developed highly sophisticated usage allocation schemes and other features based on the principle of attempting to get as close as possible to the flexibility of individual ownership, and only compromising this to the minimum extent necessary to accommodate multiple owners. In such schemes the basic agreement is between the members themselves, whereas in most commercial fractional ownership schemes, the owner's principal relationship is with the property developer and/or promoter of the scheme.
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Private residence clubs

Private residence clubs are the luxury, high end of the fractional property market. They provide the services and amenities of five star hotels, and some of the luxury hotel groups run their own private residence clubs. Occasionally membership in a private residence club grants to its member only the right to usage of the club properties and services, without ownership rights in the properties themselves. Note a private residence club is different from a destination club, although the terms are sometimes used interchangeably. In addition to luxury private residence clubs, single "stand-alone" vacation homes and condos can be converted to fractional ownership. This fractional home conversion process can be accomplished by any knowledgeable seller or through a fractional consulting company. The benefit of fractional home conversion includes the ability of the home owner to keep a portion of the ownership for themselves, pay off debt and reduce expenses. A key aspect for any fractional owner is to understand their usage rights and the reservation plans. These vary from property to property. Some offer fixed occupancy periods in which an owner uses the same time each year. Some offer "floating" periods, in which the occupancy times rotate throughout the year, and some offer a mixture of these, with some time fixed and some floating. Another variation in the business model is what are called "destination resorts". These are typically properties, whether hotel rooms, suites, or freestanding villas, located on property owned and managed by a hotel developer, and which provide amenities typically expected of a high class hotel or resort. Some hotels are also developed as a condo-hotel, in which individual rooms are sold off to individual owners.[2]
Sports cars
Individuals may now purchase fractional shares of high-end sports cars, including some of the world's most exclusive exotic car brands such as Bugatti, Maybach, Porsche, Lamborghini, Maserati, Ferrari, Aston Martin, and Koenigsegg. Such expensive automobiles, when owned by individuals, typically spend the majority of their time in storage, with high annual ownership costs. Fractional shares distributes these annual costs across several owners, who pay for and benefit from the asset.
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Other areas
Fractional ownership is also beginning to appear for luxury items such as small yachts and megayachts, jet aircraft (especially business jets) and high-end motorhomes. Fractional yacht / boat ownership provides marine-enthusiasts with ownership of shares in yachts of all sizes and uses. Some programs sell actual equity in the watercraft and others sell "membership," where the members' dues provide access to the boats, but no ownership. Fractional yacht companies sell shares/membership in small motor boats, sailboats, mid-range yachts all the way to the megayachts for day-use, multi year contracts, or charter-like arrangements.[2]
Citations & References

[1] "Fractional Ownership" (http:/ / www. aopa. org/ members/ files/ topics/ fractional_overview. html). AOPA Pilot Magazine. 2005-02-17. . Retrieved 2010-12-09. [2] Hughes, Kate (2008-03-01). "How to live like a millionaire even if it's only part-time" (http:/ / www. independent. co. uk/ money/ invest-save/ how-to-live-like-a-millionaire-ndash-even-if-its-only-parttime-789840. html). independent.co.uk. Independent News and Media. . Retrieved 2008-04-08.
External links
Baring, Lucinda (2008-09-02). "How to Become a Part Time Millionaire" (http://www.spectator.co.uk/ business/the-magazine/investment/810556/how-to-become-a-parttime-millionaire.thtml). How to become a part-time millionaire. The Spectator. Retrieved 2008-08-25. Talwani, Sanjay (2007-09-02). "Taste of Good Life" (http://www.washingtondiplomat.com/September 2007/ c2_09_07.html). Fractional Ownership Offers Lavish LifestyleAt Least for a Week. The Washington Diplomat. Retrieved 2007-12-23. Bridge, Mark (2007-09-08). "Share a millionaire lifestyle" (http://business.timesonline.co.uk/tol/business/ money/consumer_affairs/article2407666.ece). The Times. London: Times Newspapers. Retrieved 2007-12-23. Budworth, David (2005-08-05). "Live it up at a fraction of the cost" (http://business.timesonline.co.uk/tol/ business/money/investment/article2198044.ece). The Sunday Times. London: Times Newspapers. Retrieved 2007-12-23. Christie, Les (2006-06-23). "Million-dollar homes ... for a fraction of the price." (http://money.cnn.com/2006/ 06/23/real_estate/fractionals_are_coming/index.htm). Money Magazine. Cable News Network. Retrieved 2007-12-23. Denyer, Lucy (2007-09-16). "Share and share alike" (http://property.timesonline.co.uk/tol/life_and_style/ property/investment/article2445600.ece). The Sunday Times. London: Times Newspapers. Retrieved 2007-12-23.
Security interest
585
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt.[1] It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets. Such rights vary according to the type of security interest, but in most cases, a holder of the security interest is entitled to seize, and usually sell, the property to discharge the debt that the security interest secures.
Rationale
A secured creditor takes a security interest to enforce its rights against collateral in case the debtor defaults on the obligation. If the debtor goes bankrupt, a secured creditor takes precedence over unsecured creditor in the distribution. There are other reasons that people sometimes take security over assets. In shareholders' agreements involving two parties (such as a joint venture), sometimes the shareholders will each charge their shares in favor of the other as security for the performance of their obligations under the agreement to prevent the other shareholder selling their shares to a third party. It is sometimes suggested that banks may take floating charges over companies by way of security - not so much for the security for payment of their own debts, but because this ensures that no other bank will, ordinarily, lend to the company, thereby almost granting a monopoly in favour of the bank holding the floating charge on lending to the company.[2] Some economists question the utility of security interests and secured lending generally. Proponents argue that secured interests lower the risk for the lender, and in turn allows the lender to charge lower interest, thereby lower the cost of capital for the borrower. Compare, for example, interest rates for a mortgage loan and for a credit card debt. Detractors argue that creditors with security interests can destroy companies that are in financial difficulty, but which might still recover and be profitable. The secured lenders might get nervous and enforce the security early, repossessing key assets and forcing the company into bankruptcy. Further, the general principle of most insolvency regimes is that creditors should be treated equally (or pari passu), and allowing secured creditors a preference to certain assets upsets the conceptual basis of an insolvency.[3] More sophisticated criticisms of security point out that although unsecured creditors will receive less on insolvency, they should be able to compensate by charging a higher interest rate. However, since many unsecured creditors are unable to adjust their "interest rates" upwards (tort claimants, employees), the company benefits from a cheaper rate of credit, to the detriment of these non-adjusting creditors. There is thus a transfer of value from these parties to secured borrowers.[4] Most insolvency law allows mutual debts to be set-off, allowing certain creditors (those who also owe money to the insolvent debtor) a pre-preferential position. In some countries, "involuntary" creditors (such as tort victims) also have preferential status, and in others environmental claims have special preferred rights for cleanup costs. The most frequently used criticism of secured lending is that, if secured creditors are allowed to seize and sell key assets, a liquidator or bankruptcy trustee loses the ability to sell off the business as a going concern, and may be forced to sell the business on a break-up basis. This may mean realising a much smaller return for the unsecured creditors, and will invariably mean that all the employees will be made redundant. For this reason, many jurisdictions restrict the ability of secured creditors to enforce their rights in a bankruptcy. In the U.S., the Chapter 11 creditor protection, which completely prevents enforcement of security interests, aims at keeping enterprises running at the expense of creditors' rights, and is often heavily criticised for that reason.[5] In the United Kingdom, an administration order has a similar effect, but are less expansive in scope and restriction in terms of creditors rights. European systems are often touted as being pro-creditor, but many European jurisdictions also
Security interest impose restrictions upon time limits that must be observed before secured creditors can enforce their rights. The most draconian jurisdictions in favour of creditor's rights tend to be in offshore financial centres, who hope that, by having a legal system heavily biased towards secured creditors, they will encourage banks to lend at cheaper rates to offshore structures, and thus in turn encourage business to use them to obtain cheaper funds.[6]
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Security
Under English law and in common law jurisdictions derived from English law, there are eight types of proprietary security interests: (1) 'true' legal mortgage; (2) equitable mortgage; (3) statutory mortgage; (4) fixed equitable charge, or bill of sale; (5) floating equitable charge; (6) pledge, or pawn; (7) legal lien; (8) equitable lien; and (9) hypothecation, or trust receipt. Security interests at common law are either possessory or non-possessory, depending upon whether the secured party actually needs to take possession of the collateral). Alternatively, they arise by agreement between the parties (usually by executing a security agreement), or by operation of law. The following discussion of the types of security interest principally concerns English law. English law on security interests has been followed in most common law countries, and most common law countries have similar property statutes[7] regulating the common law rules.
Types
Security interests may be taken on any type of property. The law divides property into two classes: personal property and real property. Real property is the land, the buildings affixed to it and the rights that go with the land. Personal property is defined as any property other than real property.
"True" legal mortgage

A legal mortgage arises when the assets are conveyed to the secured party as security for the obligations, but subject to a right to have the assets reconveyed when the obligations are performed.[8] This right is referred to as the "equity of redemption". The law has historically taken a dim view of provisions which might impede this right to have the assets reconveyed (referred to as being a "clog" on the equity of redemption), although the position has become more relaxed in recent years in relation to sophisticated financial transactions. References to "true" legal mortgages mean mortgages by the traditional common law method of transfer subject to a proviso in this manner, and references are usually made in contradistinction to either equitable mortgages or statutory mortgages. True legal mortgages are relatively rare in modern commerce, outside of occasionally with respect to shares in companies. In England, true legal mortgages of land have been abolished in favour of statutory mortgages.[9] To complete a legal mortgage it is normally necessary that title to the assets is conveyed into the name of the secured party such that the secured party (or its nominee) becomes the legal titleholder to the asset. If a legal mortgage is not completed in this manner it will normally take effect as an equitable mortgage. Because of the requirement to transfer title, it is not possible to take a legal mortgage over future property, or to take more than one legal mortgage over the same assets. However, mortgages (legal and equitable) are non-possessory security interests. Normally the party granting the mortgage (the mortgagor) will remain in possession of the mortgaged asset.[10] The holder of a legal mortgage has three primary remedies in the event that there is a default on the secured obligations: they can foreclose on the assets, they can sell the assets or they can appoint a receiver over the assets. The holder of a mortgage can also usually sue upon the covenant to pay which appears in most mortgage instruments. There are a range of other remedies available to the holder of a mortgage,[11] but they relate predominantly to land, and accordingly have been superseded by statute, and they are rarely exercised in practice in relation to other assets. The beneficiary of a mortgage (the mortgagee) is entitled to pursue all of its remedies
Security interest concurrently[12] or consecutively.[13] Foreclosure is rarely exercised as a remedy. To execute foreclosure, the secured party needs to petition the court,[14] and the order is made in two stages (nisi and absolut), making the process slow and cumbersome. Courts are historically reluctant to grant orders for foreclosure, and will often instead order a judicial sale. If the asset is worth more than the secured obligations, the secured party will normally have to account for the surplus. Even if a court makes a decree absolut and orders foreclosure, the court retains an absolute discretion to reopen the foreclosure after the making of the order,[15] although this would not affect the title of any third party purchaser.[16] The holder of a legal mortgage also has a power of sale over the assets. Every mortgage contains an implied power of sale.[17] This implied power exists even if the mortgage is not under seal.[18] All mortgages which are made by way of deed also ordinarily contain a power of sale implied by statute, but the exercise of the statutory power is limited by the terms of the statute. Neither implied power of sale requires a court order, although the court can usually also order a judicial sale. The secured party has a duty to get the best price reasonably obtainable, however, this does not require the sale to be conducted in any particular fashion (i.e. by auction or sealed bids). What the best price reasonably obtainable will be will depend upon the market available for the assets and related considerations. The sale must be a true sale - a mortgagee cannot sell to himself, either alone or with others, even for fair value;[19] such a sale may be restrained or set aside or ignored.[20] However, if the court orders a sale pursuant to statute, the mortgagee may be expressly permitted to buy.[21] The third remedy is to appoint a receiver. Technically the right to appoint a receiver can arise two different ways under the terms of the mortgage instrument, and (where the mortgage instrument is executed as a deed) by statute. In England, a third remedy, "appropriation" may exist under The Financial Collateral Arrangements (No.2) Regulations 2003[22] where the assets subject to the mortgage are 'financial collateral' and the mortgage instrument provides that the regulations apply. Appropriation is a means whereby the mortgagee can take title to the assets, but must account to the mortgagor for their fair market value (which must be specified in the mortgage instrument), but without the need to obtain any court order. If the mortgagee takes possession then under the common law they owe strict duties to the mortgagor to safeguard the value of the property (although the terms of the mortgage instrument will usually limit this obligation). However, the common law rules relate principally to physical property, and there is a shortage of authority as to how they might apply to taking "possession" of rights, such as shares. Nonetheless, a mortgagee is well advised to remain respectful of their duty to preserve the value of the mortgaged property both for their own interests and under their potential liability to the mortgagor.
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Equitable mortgage
An equitable mortgage can arise in two different ways either as a legal mortgage which was never perfected by conveying the underlying assets, or by specifically creating a mortgage as an equitable mortgage. A mortgage over equitable rights (such as a beneficiary's interests under a trust) will necessarily exist in equity only in any event. Under the laws of some jurisdictions, a mere deposit of title documents can give rise to an equitable mortgage.[23] With respect to land this has now been abolished in England,[24] although in many jurisdictions company shares can still be mortgaged by deposit of share certificates in this manner. Generally speaking, an equitable mortgage has the same effect as a perfected legal mortgage except in two respects. Firstly, being an equitable right, it will be extinguished by a bona fide purchaser for value who did not have notice of the mortgage. Secondly, because the legal title to the mortgaged property is not actually vested in the secured party, it means that a necessary additional step is imposed in relation to the exercise of remedies such as foreclosure (although in the recent case of Alfa Telecom Turkey Limited v Cukurova Finance International Limited HCVAP 2007/027, heard in the Eastern Caribbean Court of Appeal as to matters of English law (and so currently subject to appeal to the Privy Council), it was held that an equitable mortgagee could enforce security over financial collateral (in this case shares) by informing the interested mortgagor and other interested parties of the fact without first taking
Security interest possession of shares or having his ownership interest recorded in the register.
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Statutory mortgage
Many jurisdictions permit specific assets to be mortgaged without transferring title to the assets to the mortgagee. Principally, statutory mortgages relate to land, registered aircraft and registered ships. Generally speaking, the mortgagee will have the same rights as they would have had under a traditional true legal mortgage, but the manner of enforcement is usually regulated by the statute.
Equitable charge
A fixed equitable charge confers a right on the secured party to look to (or appropriate) a particular asset in the event of the debtor's default, which is enforceable by either power of sale or appointment of a receiver. It is probably the most common form of security taken over assets. Technically, a charge (or a "mere" charge) cannot include the power to enforce without judicial intervention, as it does not include the transfer of a property proprietary interest in the charged asset. If a charge includes this right (such as private sale by a receiver), it is really an equitable mortgage (sometimes called charge by way of mortgage). Since little turns on this distinction, the term "charge" is often used to include an equitable mortgage. An equitable charge is also a non-possessory form of security, and the beneficiary of the charge (the chargee) does not need to retain possession of the charged property. Where security equivalent to a charge is given by a natural person (as opposed to a corporate entity) it is usually expressed to be a bill of sale, and is regulated under applicable bills of sale legislation. Difficulties with the Bills of Sale Acts in Ireland, England and Wales have made it virtually impossible for individuals to create floating charges.
Floating charge
Floating charges are similar in effect to fixed equitable charges once they crystallise (usually upon the commencement of liquidation proceedings against the chargor), but prior to that they "float" and do not attach to any of the chargor's assets, and the chargor remains free to deal with or dispose of them.
Pledge
A pledge (also sometimes called a pawn) is a form of possessory security, and accordingly, the assets which are being pledged need to be physically delivered to the beneficiary of the pledge (the pledgee). Pledges are rarely used in commercial contexts, but are still used by pawnbrokers, which, contrary to their old world image, remain a regulated credit industry. The pledgee has a common law power of sale in the event of a default on the secured obligations which arises if the secured obligations are not satisfied by the agreed time (or, in default of agreement, within a reasonable period of time). If the power of sale is exercised, then the holder of the pledge must account to the pledgor for any surplus after payment of the secured obligations. A pledge does not confer a right to appoint a receiver or foreclose. If the holder of pledge sells or disposes of the pledged assets when not entitled to do so, they may be liable in conversion to the pledgor.
Legal lien
A legal lien, in most common law systems, is a right to retain physical possession of tangible assets as security for the underlying obligations. In some jurisdictions it is a form of possessory security, and possession of the assets must be transferred to (and maintained by) the secured party. The right is purely passive; the secured party (the lienee) has no right to sell the assets - merely a right to refuse to return them until paid. In the United States, a lien can be a non-possessory security interest. See the main article: lien for a discusssion of the differences between the United
Security interest States and other common law countries. Most legal liens arise as a matter of law (mostly by common law, but also by statute), however, it is possible to create a legal lien by contract. The courts have confirmed that it is possible to also give the secured party a power of sale in such a contract, but case law on such a power is limited and it is difficult to know what limitations and duties would be imposed on the exercise of such a power.
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Equitable lien
Equitable liens are slightly amorphous forms of security interest that only arise by operation of law in certain circumstances. Academically it has been noted that there seems to be no real unifying principle behind the circumstances that give rise to them.[25] An equitable lien takes effect essentially as an equitable charge, and they arise only in specified situations, (e.g. an unpaid vendor's lien in relation to property is an equitable lien; a maritime lien is sometimes thought to be an equitable lien). It is sometimes argued that where the constitutional documents of a company provide that the company has a lien over its own shares, this take effect as an equitable lien,[26] and if that analysis is correct, then it is probably the one exception to the rule that equitable liens arise by operation of law rather than by agreement.
Hypothecation
Hypothecation, or "trust receipts" are relatively uncommon forms of security interest whereby the underlying assets are pledged, not by delivery of the assets as in a conventional pledge, but by delivery of a document or other evidence of title. Hypothecation is usually seen in relation to bottomry (cf. bills of lading), whereby the bill of lading is endorsed by the secured party, who, unless the security is redeemed, can claim the property by delivery of the bill.
Security interest vs. general obligation

Some obligations are backed only by a security interest against specific designated property, and liability for repayment of the debt is limited to the property itself, with no further claim against the obligor. These are referred to as "nonrecourse obligations". Other obligations (i.e., recourse obligations) are backed by the full credit of the borrower. If the borrower defaults, then the creditor can force the obligor into bankruptcy and the creditors will divide all assets of the obligor. Depending on the relative credit of the obligor, the quality of the asset, and the availability of a structure to separate the obligations of the asset from the obligations of the obligor, the interest rate charged on one may be higher or lower than the other.
Perfection
Perfection of security interests means different things to lawyers in different jurisdictions. in English law, perfection has no defined statutory or judicial meaning, but academics have pressed the view that it refers to the attachment of the security interest to the underlying asset. Others have argued cogently that attachment is a separate legal concept, and that perfection refers to any steps required to ensure that the security interest is enforceable against third parties.[27] in American law, perfection is generally taken to refer to any steps required to ensure that the security interest remains enforceable on the debtor's bankruptcy. With the Americanization of the world's legal profession, the second definition is becoming more frequently used commercially, and arguably is to be preferred, as the traditional English legal usage has little purpose except in relation to the comparatively rare true legal mortgage (very few other security interests require additional steps to attach to the asset, but security interests frequently require some form of registration to be enforceable on the
Security interest chargor's insolvency).
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"Quasi-security"
There are a number of other arrangements which parties can put in place which have the effect of conferring security in a commercial sense, but do not actually create a proprietary security interest in the assets. For example, it is possible to grant a power of attorney or conditional option in favour of the secured party relating to the subject matter, or to utilise a retention of title arrangement, or execute undated transfer instruments. Whilst these techniques may provide protection for the secured party, they do not confer a proprietary interest in the assets which the arrangements relate to, and their effectiveness may be limited if the debtor goes into bankruptcy. It is also possible to replicate the effect of security by making an outright transfer of the asset, with a provision that the asset is re-transferred once the secured obligations are repaid. In some jurisdictions, these arrangements may be recharacterised as the grant of a mortgage, but most jurisdictions tend to allow the parties freedom to characterise their transactions as they see fit.[28] Common examples of this are financings using a stock loan or repo agreement to collateralise the cash advance, and title transfer arrangements (for example, under the "Transfer" form English Law credit support annex to an ISDA Master Agreement (as distinguished from the other forms of CSA, which grant security)).
United States the U.C.C.

In the United States, under article 9 of the Uniform Commercial Code which regulates security interests in personal property (as opposed to real property), a security interest is a right in a debtor's property that secures payment or performance of an obligation. A security interest is created by a security agreement, under which the debtor grants a security interest in the debtor's property as collateral for a loan or other obligation. A security interest grants the holder a right to take a remedial action with respect to the property, upon occurrence of certain events, such as the non-payment of a loan. The creditor may take possession of such property in satisfaction of the underlying obligation. The holder will sell such property at a public auction or through a private sale, and apply the proceeds to satisfy the underlying obligation. If the proceeds exceed the amount of the underlying obligation, the debtor is entitled to the excess. If the proceeds fall short, the holder of the security interest is entitled to a deficiency judgment whereby the holder can institute additional legal proceedings to recover the full amount unless it is a non-recourse debt like many mortgage loans in the United States. In the U.S. the term "security interest" is often used interchangeably with "lien". However, the term "lien" is more often associated with the collateral of real property than with of personal property. A security interest is typically granted by a "security agreement". The security interest is established with respect to the property, if the debtor has an ownership interest in the property and the holder of the security interest conferred value to the debtor, such as giving a loan. The holder may "perfect" the security interest to put third parties on notice thereof. Perfection is typically achieved by filing a financing statement with government, often the secretary of state located at a jurisdiction where a corporate debtor is incorporated. Perfection can also be obtained by possession of the collateral, if the collateral is tangible property. Absent perfection, the holder of the security interest may have difficulty enforcing his rights in the collateral with regard to third parties, including a trustee in bankruptcy and other creditors who claim a security interest in the same collateral.
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Notes
[1] Black's Law Dictionary (8th ed. 2004). [2] V Finch, Corporate Insolvency Law: Principles and Perspectives (CUP, Cambridge 2002) 78, "A charge... may be so all-embracing as to give the charge holder what amounts in practice to an exclusive right to supply the debtor with credit in that potential second financiers will be deterred from lending by the breadth of the existing charge." R Goode Commercial Law (Penguin, London 2004) [3] Although the principle of equality is rarely observed in practice, most countries have "preferential creditors" (including, usually, employees and the tax authorities, who have first claim on an insolvency; see eg Cork Report, ch 35, para 149-197 [4] LA Bebchuk and JM Fried, 'The Uneasy Case for the Priority of Secured Claims in Bankruptcy' (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=417960#) (1996) 105 Yale Law Journal 857934 [5] The Economist described the American bankruptcy system, tongue-in-cheek, as "...perverse affairs. First, failed managers often hang on to the helm well after their firms have officially gone bust. After companies seek safe harbour under Chapter 11, America's famous insolvency law, banks swoop in to lend them even more money. Next, lawyers help the firm restructure older debts, giving bosses months or years to run their businesses interest-free. Failure, American style, is nice work if you can get it". (http:/ / www. economist. com/ displaystory. cfm?story_id=1047606) [6] There seems to be much anecdotal evidence that this works, although hard data is scarce. A huge proportion of the international shipping tonnage is registered in jurisdictions flying flags of convenience, and, although, again, hard data is difficult to come by, a signification proportion of the non-US securitisation market uses offshore special purpose vehicles to issue the asset-backed securities, partly for benefits in relation to recharacterisation and partly for benefits in relation to protection of secured creditor's rights. [7] Based upon the English Law of Property Act 1925 and its predecessor statutes [8] Santley v Wilde [1899] 2 Ch 474; Carter v Wake (1877) 4 Ch D 605 [9] Land Registration Act 2002 [10] The word "mort-gage" comes from the French term meaning "dead pledge", and is in distinction to the "living pledge" whereby the party who benefits from the security interest was expected to take possession of the mortgaged property, and work it to generate a profit; such security interests fell into disuse centuries ago. [11] Perfection of title, orders for possession, delivery of documents etc. [12] China & South Sea Bank Ltd v Tan [1990] 1 AC 536; Re BCCI (No 8) [1998] AC 214 [13] The holder for a mortgage may appoint a receiver notwithstanding that they have already started foreclosure proceedings, see Stevens v Theatres Ltd [1903] 1 Ch 857; if a power of sale is exercised and there is a shortfall, the holder of the mortgage can still sue on the covenant to pay. But there are two exceptions - once a decree nisi has been granted in foreclosure proceedings, the power of sale can only be exercised with the leave of the court, and an applicant to enforce a right of foreclosure and the covenant to pay should be brought in the same proceedings. [14] Re Farnol, Eades, Irvine & Co [1915] 1 Ch 22. "Foreclosure as a thing which can be done by a person has no meaning. Foreclosure is done by the order of the court, not by any person. In the strict legal sense it is nothing more than the destruction of the equity of redemption which previously existed." per Warrington J at 24. [15] Campbell v Holyland (1877) 7 Ch D 166; Quarles v Knight (1820) 8 Price 630; Eyre v Hansom (1840) 2 Beav 349 [16] Stevens v Theatres Ltd [1903] 1 Ch 857 [17] Deverges v Sandeman, Clark & Co [1902] 1 Ch 579; Stubbs v Slater [1910] 1 Ch 632 [18] Deverges v Sandeman, Clark & Co. [1902] 1 Ch 579 [19] National Bank of Australasia v United Hand-in-Hand and Band of Hope (1879) 4 App Cas 391; Martinson v Clowes (1882) 21 Ch D 857; Warner v Jacob (1882) 20 Ch D 220 [20] Williams v Wellingborough BC [1975] 1 WLR 1327; Martinson v Clowes (1882) 21 Ch D 857 [21] Palk v Mortgage Services Funding plc [1993] Ch 330 [22] SI No 3226 of 2003 [23] For a recent example an equitable mortgage created this way in Australia, see Theodore v Mistford Pty Ltd [2005] HCA 45 (http:/ / www. austlii. edu. au/ cgi-bin/ disp. pl/ au/ cases/ cth/ HCA/ 2005/ 45. html) [24] The English Court of Appeal in United Bank of Kuwait v Sahib [1996] 3 WLR 372 in construing a provision relating to formalities for disposition of interests in land in the English Law of Property (Miscellaneous Provisions) Act 1989 held that the provisions repealed the common law rules relating the creation of equitable mortgages by deposit of title deeds (see 113 LQR 533) [25] See Palmer & McKendrick, Interests in Goods, 2nd ed. page 975 and following [26] Hickman v Kent Sheep Breeders [1915] 1 Ch 881 [27] Goode, Legal Problems of Credit and Security, 2nd ed. [28] WDA v Exfinco [1992] BCLC 148
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References
V Finch, Corporate Insolvency Law: Principles and Perspectives (CUP 2002) Black's Law Dictionary (8th edn 2004) Palmer & E McKendrick, Interests in Goods (2nd edn) R Goode, Legal Problems of Credit and Security (2nd edn)
External links
Department of Business Small Firm Loan Guarantee scheme (http://www.berr.gov.uk/whatwedo/enterprise/ enterprisesmes/info-business-owners/access-to-finance/sflg/page37607.html) in the UK
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Investing
Financial economics
Financial economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment".[1] It is additionally characterised by its "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade".[2] The questions within financial economics are typically framed in terms of "time, uncertainty, options and information".[2] Time: money now is traded for money in the future. Uncertainty (or risk): The amount of money to be transferred in the future is uncertain. Options: one party to the transaction can make a decision at a later time that will affect subsequent transfers of money. Information: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future monetary value (FMV). The subject is usually taught at a postgraduate level; see Master of Financial Economics.
Subject matter
Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance. It studies: Valuation - Determination of the fair value of an asset How risky is the asset? (identification of the asset appropriate discount rate) What cash flows will it produce? (discounting of relevant cash flows) How does the market price compare to similar assets? (relative valuation) Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)
Financial markets and instruments Commodities - topics Stocks - topics Bonds - topics Money market instruments- topics Derivatives - topics
Financial institutions and regulation Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.
Financial economics
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Models in Financial economics

Financial economics is primarily concerned with building models to derive testable or policy implications from acceptable assumptions. Some fundamental ideas in financial economics are portfolio theory, the Capital Asset Pricing Model. Portfolio theory studies how investors should balance risk and return when investing in many assets or securities. The Capital Asset Pricing Model describes how markets should set the prices of assets in relation to how risky they are. The Modigliani-Miller Theorem describes conditions under which corporate financing decisions are irrelevant for value, and acts as a benchmark for evaluating the effects of factors outside the model that do affect value. A common assumption is that financial decision makers act rationally (see Homo economicus; efficient market hypothesis). However, recently, researchers in experimental economics and experimental finance have challenged this assumption empirically. They are also challenged - theoretically - by behavioral finance, a discipline primarily concerned with the limits to rationality of economic agents. Other common assumptions include market prices following a random walk, or asset returns being normally distributed. Empirical evidence suggests that these assumptions may not hold, and in practice, traders and analysts, and particularly risk managers, frequently modify the "standard models".
References
[1] "Robert C. Merton - Nobel Lecture" (http:/ / nobelprize. org/ nobel_prizes/ economics/ laureates/ 1997/ merton-lecture. pdf) (PDF). . Retrieved 2009-08-06. [2] "Financial Economics" (http:/ / www. stanford. edu/ ~wfsharpe/ mia/ int/ mia_int2. htm). Stanford.edu. . Retrieved 2009-08-06.
External links
Theory
Foundations of Finance (http://faculty.chicagogsb.edu/eugene.fama/research/index.htm), Theory of Finance (http://faculty.chicagogsb.edu/eugene.fama/research/index.htm), Eugene Fama, University of Chicago Graduate School of Business Macro-Investment Analysis (http://www.stanford.edu/~wfsharpe/mia/int/mia_int2.htm), Professor William Sharpe, Stanford Graduate School of Business Lecture Notes in Financial Economics (http://personal.lse.ac.uk/mele/files/fin_eco.pdf), Antonio Mele, London School of Economics Great Moments in Financial Economics I (http://web.archive.org/web/20070927123033/http://www. in-the-money.com/artandpap/I+Present+Value.doc), II (http://web.archive.org/web/20070927123027/ http://www.in-the-money.com/artandpap/II+Modigliani-Miller+Theorem.doc), "III" (http://web.archive. org/web/20070927123024/http://www.in-the-money.com/artandpap/III+Short-Sales+and+Stock+Prices. doc). Archived from the original (http://www.in-the-money.com/artandpap/III Short-Sales and Stock Prices. doc) on 2007-09-27.; IVa (http://web.archive.org/web/20070927123029/http://www.in-the-money.com/ artandpap/IV+Fundamental+Theorem+-+Part+I.doc); "IVb" (http://web.archive.org/web/ 20070927123021/http://www.in-the-money.com/artandpap/IV+Fundamental+Theorem+-+Part+II.doc). Archived from the original (http://www.in-the-money.com/artandpap/IV Fundamental Theorem - Part II.doc) on 2007-09-27.. Prof. Mark Rubinstein, Haas School of Business Microfoundations of Financial Economics (http://www.ulb.ac.be/cours/solvay/farber/PhD.htm) Prof. Andr Farber Solvay Business School Handbook of the Economics of Finance (http://ideas.repec.org/b/eee/finhes/2.html#related), G.M. Constantinides, M. Harris, R. M. Stulz
Financial economics Financial economics (http://www.sciencedirect.com/science?_ob=RefWorkIndexURL&_idxType=SC& _cdi=23486&_refWorkId=21&_explode=151000131,151000133&_alpha=&_acct=C000050221& _version=1&_userid=10&md5=f2c773b745753022e1cccc9a38d83508&refID=151000133#151000133), International Encyclopedia of the Social & Behavioral Sciences, Oxford: Elsevier, 2001. Financial economics topics (http://www.dictionaryofeconomics.com/articles_by_topic?topicid=G) with Abstracts, The New Palgrave Dictionary of Economics, 2008. An introduction to investment theory (http://viking.som.yale.edu/will/web_pages/will/finman540/ classnotes/notes.html), Prof. William Goetzmann, Yale School of Management Notes on General Equilibrium Asset Pricing (http://pascal.iseg.utl.pt/~pbrito/cursos/mestrado/fef/fef2009. pdf), Prof. Paulo Brito, ISEG, Technical University of Lisbon
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Context and history

Finance Theory (http://cepa.newschool.edu/het/schools/finance.htm), The History of Economic Thought Website, The New School The Scientific Evolution of Finance (http://www.finance-and-physics.org/Library/Articles3/ scienceandfinance/science.htm) Prof. Don Chance, Prof. Pamela Peterson 50 Years of Finance (http://www.ulb.ac.be/cours/solvay/farber/VUB/01 Inaugurale rede.pdf) Prof. Andr Farber, Universit Libre de Bruxelles "A Short History of Investment Forecasting" (http://web.archive.org/web/20071012112134/http:// roundtable.informs.org/public-access/min061a.htm). Archived from the original (http://roundtable.informs. org/public-access/min061a.htm) on 2007-10-12., Professor Michael Phillips, California State University, Northridge Pioneers of Finance (http://campus.murraystate.edu/academic/faculty/larry.guin/FinancialHistory.htm), Prof. Larry Guin, Murray State University
Links and portals

Financial Economics Links on WebEc (http://www.helsinki.fi/WebEc/webecg.html) JEL Classification Codes Guide (http://www.aeaweb.org/jel/guide/jel.php?class=G) Financial Economics Links on RFE (http://rfe.org/showCat.php?cat_id=56) SSRN Financial Economics Network (http://www.ssrn.com/fen/index.html) "Books on Financial Economics": list on economicsnetwork.ac.uk (http://www.economicsnetwork.ac.uk/ books/FinancialEconomics.htm)
Securities
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Securities
Securities
Securities Bond Stock Investment fund Derivative Structured finance Agency security Markets Bond market Stock market Futures market Foreign exchange market Commodity market Spot market Over-the-counter market (OTC) Bonds by coupon Fixed rate bond Floating rate note Zero-coupon bond Inflation-indexed bond Commercial paper Perpetual bond Bonds by issuer Corporate bond Government bond Municipal bond Pfandbrief Sovereign bond Equities (stocks) Stock Share Initial public offering (IPO) Short selling Investment funds Mutual fund Index fund Exchange-traded fund (ETF) Closed-end fund Segregated fund Hedge fund
Securities
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Structured finance Securitization Asset-backed security Mortgage-backed security Commercial mortgage-backed security Residential mortgage-backed security Tranche Collateralized debt obligation Collateralized fund obligation Collateralized mortgage obligation Credit-linked note Unsecured debt Agency security Derivatives Option Warrant Futures Forward contract Swap Credit derivative Hybrid security
A security is generally a fungible, negotiable financial instrument representing financial value.[1] Securities are broadly categorized into: debt securities (such as banknotes, bonds and debentures), equity securities, e.g., common stocks; and, derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.
Classification
Securities may be classified according to many categories or classification systems: Currency of denomination Ownership rights Term to maturity Degree of liquidity Income payments Tax treatment Credit rating Industrial sector or "industry". ("Sector" often refers to a higher level or broader category, such as Consumer Discretionary, whereas "industry" often refers to a lower level classification, such as Consumer Appliances. See
Securities Industry for a discussion of some classification systems.) Region or country (such as country of incorporation, country of principal sales/market of its products or services, or country in which the principal securities exchange where it trades is located) Market capitalization State (typically for municipal or "tax-free" bonds in the U.S.)
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New capital
Commercial enterprises have traditionally used securities as a means of raising new capital. Securities may be an attractive option relative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, the governments may raise capital through the issuance of securities (see government debt).
Repackaging
In recent decades, securities have been issued to repackage existing assets. In a traditional securitization, a financial institution may wish to remove assets from its balance sheet to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way more attractive to investors. In other words, a basket of assets is typically contributed or placed into a separate legal entity such as a trust or SPV, which subsequently issues shares of equity interest to investors. This allows the sponsor entity to more easily raise capital for these assets as opposed to finding buyers to purchase directly such assets.
By type of holder
Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds. Investment The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment. Collateral The last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called "buying on margin". Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A, either at inception (transfer of title) or only in default (non-transfer-of-title institutional). For institutional loans property rights are not transferred but nevertheless enable A to satisfy its claims in the event that B fails to make good on its obligations to A or otherwise becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other institutional investors such as mutual funds are significant collateral takers as well as providers. In
Securities addition, private parties may utilize stocks or other securities as collateral for portfolio loans in securities lending scenarios. On the consumer level, loans against securities have grown into three distinct groups over the last decade: 1) Standard Institutional Loans, generally offering low loan-to-value with very strict call and coverage regimens, akin to standard margin loans; 2) Transfer-of-Title (ToT) Loans, typically provided by private parties where borrower ownership is completely extinguished save for the rights provided in the loan contract; and 3) Non-Transfer-of-Title Credit Line facilities where shares are not sold and they serve as assets in a standard lien-type line of cash credit. Of the three, transfer-of-title loans have fallen into the very high-risk category as the number of providers have dwindled as regulators have launched an industry-wide crackdown on transfer-of-title structures where the private lender may sell or sell short the securities to fund the loan. See sell short. Institutionally managed consumer securities-based loans, on the other hand, draw loan funds from the financial resources of the lending institution, not from the sale of the securities.
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Debt and equity

Securities are traditionally divided into debt securities and equities (see also derivatives).
Debt
Debt securities may be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and certain other characteristics. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that is not senior is "subordinated". Corporate bonds represent the debt of commercial or industrial entities. Debentures have a long maturity, typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated check with a maturity of not more than 270 days. Money market instruments are short term debt instruments that may have characteristics of deposit accounts, such as certificates of deposit, and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly liquid. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. They include eurobonds and euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source of finance for governments. U.S. federal government bonds are called treasuries. Because of their liquidity and perceived low risk, treasuries are used to manage the money supply in the open market operations of non-US central banks. Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent the debt of state, provincial, territorial, municipal or other governmental units other than sovereign governments. Supranational bonds represent the debt of international organizations such as the World Bank, the International Monetary Fund, regional multilateral development banks and others.
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Equity
An equity security is a share of equity interest in an entity such as the capital stock of a company, trust or partnership. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. In bankruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. However, equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profits and capital gain, whereas holders of debt securities receive only interest and repayment of principal regardless of how well the issuer performs financially. Furthermore, debt securities do not have voting rights outside of bankruptcy. In other words, equity holders are entitled to the "upside" of the business and to control the business. Stock
Hybrid
Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders. However, from a legal perspective, they are capital stock and therefore may entitle holders to some degree of control depending on whether they contain voting rights. Convertibles are bonds or preferred stock that can be converted, at the election of the holder of the convertibles, into the common stock of the issuing company. The convertibility, however, may be forced if the convertible is a callable bond, and the issuer calls the bond. The bondholder has about 1 month to convert it, or the company will call the bond by giving the holder the call price, which may be less than the value of the converted stock. This is referred to as a forced conversion. Equity warrants are options issued by the company that allow the holder of the warrant to purchase a specific number of shares at a specified price within a specified time. They are often issued together with bonds or existing equities, and are, sometimes, detachable from them and separately tradeable. When the holder of the warrant exercises it, he pays the money directly to the company, and the company issues new shares to the holder. Warrants, like other convertible securities, increases the number of shares outstanding, and are always accounted for in financial reports as fully diluted earnings per share, which assumes that all warrants and convertibles will be exercised.
The securities markets

Primary and secondary market
In the U.S., the public securities markets can be divided into primary and secondary markets. The distinguishing difference between the two markets is that in the primary market, the money for the securities is received by the issuer of those securities from investors, typically in an initial public offering transaction, whereas in the secondary market, the securities are simply assets held by one investor selling them to another investor (money goes from one investor to the other). An initial public offering is when a company issues public stock newly to investors, called an "IPO" for short. A company can later issue more new shares, or issue shares that have been previously registered in a shelf registration. These later new issues are also sold in the primary market, but they are not considered to be an IPO but are often called a "secondary offering". Issuers usually retain investment banks to assist them in administering the IPO, obtaining SEC (or other regulatory body) approval of the offering filing, and selling the new issue. When the investment bank buys the entire new issue from the issuer at a discount to resell it at a markup, it is
Securities called a firm commitment underwriting. However, if the investment bank considers the risk too great for an underwriting, it may only assent to a best effort agreement, where the investment bank will simply do its best to sell the new issue. For the primary market to thrive, there must be a secondary market, or aftermarket that provides liquidity for the investment securitywhere holders of securities can sell them to other investors for cash. Otherwise, few people would purchase primary issues, and, thus, companies and governments would be restricted in raising equity capital (money) for their operations. Organized exchanges constitute the main secondary markets. Many smaller issues and most debt securities trade in the decentralized, dealer-based over-the-counter markets. In Europe, the principal trade organization for securities dealers is the International Capital Market Association [2]. In the U.S., the principal trade organization for securities dealers is the Securities Industry and Financial Markets Association [3], which is the result of the merger of the Securities Industry Association and the Bond Market Association. The Financial Information Services Division of the Software and Information Industry Association (FISD/SIIA [4]) represents a round-table of market data industry firms, referring to them as Consumers, Exchanges, and Vendors.
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Public offer and private placement

In the primary markets, securities may be offered to the public in a public offer. Alternatively, they may be offered privately to a limited number of qualified persons in a private placement. Sometimes a combination of the two is used. The distinction between the two is important to securities regulation and company law. Privately placed securities are not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not nearly as liquid as it is for public (registered) securities. Another category, sovereign bonds, is generally sold by auction to a specialized class of dealers.
Listing and OTC dealing

Securities are often listed in a stock exchange, an organized and officially recognized market on which securities can be bought and sold. Issuers may seek listings for their securities to attract investors, by ensuring there is a liquid and regulated market that investors can buy and sell securities in. Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by commercial information vendors such as Reuters and Bloomberg. There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.
Market
London is the centre of the eurosecurities markets. There was a huge rise in the eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities is currently effected through two European computerized clearing/depositories called Euroclear (in Belgium) and Clearstream (formerly Cedelbank) in Luxembourg. The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and Euronext. There are ramp up market in Emergent countries, but it is growing slowly.
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Physical nature of securities

Certificated securities
Securities that are represented in paper (physical) form are called certificated securities. They may be bearer or registered. Bearer securities Bearer securities are completely negotiable and entitle the holder to the rights under the security (e.g. to payment if it is a debt security, and voting if it is an equity security). They are transferred by delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing the back of the instrument, and delivery. Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they may be used to facilitate the evasion of regulatory restrictions and tax. In the United Kingdom, for example, the issue of bearer securities was heavily restricted firstly by the Exchange Control Act 1947 until 1953. Bearer securities are very rare in the United States because of the negative tax implications they may have to the issuer and holder. Registered securities In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. Instead, the issuer (or its appointed agent) maintains a register in which details of the holder of the securities are entered and updated as appropriate. A transfer of registered securities is effected by amending the register.
Non-certificated securities and global certificates

Modern practice has developed to eliminate both the need for certificates and maintenance of a complete security register by the issuer. There are two general ways this has been accomplished. Non-certificated securities In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to maintain a legal record of their securities electronically. In the United States, the current "official" version of Article 8 of the Uniform Commercial Code permits non-certificated securities. However, the "official" UCC is a mere draft that must be enacted individually by each of the U.S. states. Though all 50 states (as well as the District of Columbia and the U.S. Virgin Islands) have enacted some form of Article 8, many of them still appear to use older versions of Article 8, including some that did not permit non-certificated securities.[5] In the U.S. today, most mutual funds issue only non-certificated shares to shareholders, though some may issue certificates only upon request and may charge a fee. Shareholders typically don't need certificates except for perhaps pledging such shares as collateral for a loan. Global certificates, book entry interests, depositories To facilitate the electronic transfer of interests in securities without dealing with inconsistent versions of Article 8, a system has developed whereby issuers deposit a single global certificate representing all the outstanding securities of a class or series with a universal depository. This depository is called The Depository Trust Company, or DTC. DTC's parent, Depository Trust & Clearing Corporation (DTCC), is a non-profit cooperative owned by approximately thirty of the largest Wall Street players that typically act as brokers or dealers in securities. These thirty banks are called the DTC participants. DTC, through a legal nominee, owns each of the global securities on behalf of all the DTC participants.
Securities All securities traded through DTC are in fact held, in electronic form, on the books of various intermediaries between the ultimate owner, e.g. a retail investor, and the DTC participants. For example, Mr. Smith may hold 100 shares of Coca Cola, Inc. in his brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co. may hold 1000 shares of Coca Cola on behalf of Mr. Smith and nine other customers. These 1000 shares are held by Jones & Co. in an account with Goldman Sachs, a DTC participant, or in an account at another DTC participant. Goldman Sachs in turn may hold millions of Coca Cola shares on its books on behalf of hundreds of brokers similar to Jones & Co. Each day, the DTC participants settle their accounts with the other DTC participants and adjust the number of shares held on their books for the benefit of customers like Jones & Co. Ownership of securities in this fashion is called beneficial ownership. Each intermediary holds on behalf of someone beneath him in the chain. The ultimate owner is called the beneficial owner. This is also referred to as owning in "Street name". Among brokerages and mutual fund companies, a large amount of mutual fund share transactions take place among intermediaries as opposed to shares being sold and redeemed directly with the transfer agent of the fund. Most of these intermediaries such as brokerage firms clear the shares electronically through the National Securities Clearing Corp. or "NSCC", a subsidiary of DTCC. Other depositories: Euroclear and Clearstream Besides DTC, two other large securities depositories exist, both in Europe: Euroclear and Clearstream.
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Divided and undivided security

The terms "divided" and "undivided" relate to the proprietary nature of a security. Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. The issuer owes only one set of obligations to shareholders under its memorandum, articles of association and company law. A share represents an undivided fractional part of the issuing company. Registered debt securities also have this undivided nature.
Fungible and non-fungible security

The terms "fungible" and "non-fungible" are a feature of assets. If an asset is fungible, this means that if such an asset is lent, or placed with a custodian, it is customary for the borrower or custodian to be obliged at the end of the loan or custody arrangement to return assets equivalent to the original asset, rather than the specific identical asset. In other words, the redelivery of fungibles is equivalent and not in specie. In other words, if an owner of 100 shares of IBM transfers custody of those shares to another party to hold for a purpose, at the end of the arrangement, the holder need simply provide the owner with 100 shares of IBM identical to those received. Cash is also an example of a fungible asset. The exact currency notes received need not be segregated and returned to the owner. Undivided securities are always fungible by logical necessity. Divided securities may or may not be fungible, depending on market practice. The clear trend is towards fungible arrangements.
Securities
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Regulation
In the United States, the public offer and sale of securities must be either registered pursuant to a registration statement that is filed with the U.S. Securities and Exchange Commission (SEC) or are offered and sold pursuant to an exemption therefrom. Dealing in securities is regulated by both federal authorities (SEC) and state securities departments. In addition, the brokerage industry is supposedly self policed by Self Regulatory Organizations (SROs), such as the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (or NASD) or the MSRB. With respect to investment schemes that do not fall within the traditional categories of securities listed in the definition of a security (Sec. 2(a)(1) of the 33 act and Sec. 3(a)(10) of the 34 act) the US Courts have developed a broad definition for securities that must then be registered with the SEC. When determining if there a is an "investment contract" that must be registered the courts look for an investment of money, a common enterprise and expectation of profits to come primarily from the efforts of others. See SEC v. W.J. Howey Co. and SEC v. Glenn W. Turner Enterprises, Inc.
Notes
[1] The official definition of a security given really in the Securities Exchange Act of 1934 is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, [[option (finadeposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered int,
o on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."
[2] [3] [4] [5] http:/ / www. icma-group. org/ http:/ / www. sifma. org/ http:/ / www. fisd. net http:/ / www. law. cornell. edu/ uniform/ ucc. html#a8
Stock trader
605
Stock trader
A stock trader or a stock investor is an individual or firm who buys and sells stocks in the financial markets. Many stock traders will trade bonds (and possibly other financial assets) as well. Trading stocks is a risky and complex occupation because the direction of the markets are generally unpredictable and lack transparency, also financial regulators are sometimes unable to adequately detect, prevent and re-mediate irregularities committed by malicious listed companies or other financial market participants. In addition, the financial markets are usually subjected to speculation.
Historical photo of stock traders and stock brokers in the trading floor of the New York Stock Exchange (1963).
Stock traders and stock investors

Individuals or firms trading equity (stock) on the stock markets as their principal capacity are called stock traders. Stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. The stock trader is usually a professional. Persons can call themselves full or part-time stock traders/investors while maintaining other professions. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to their A view of a computerized trading floor at the Frankfurt Stock Exchange. clients finances, he is also called a financial advisor or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment, fund management, and wealth management. These wealthy and powerful organized investors, are sometimes referred to as institutional investors. Several different types of stock trading exist including day trading, trend following, market making, scalping (trading), momentum trading, trading the news, and arbitrage.
Stock trader On the other hand, stock investors are firms or individuals who purchase stocks with the intention of holding them for an extended period of time, usually several months to years. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the buy and hold strategy, which as the name suggests, implies that investors will buy stock ownership in a corporation and hold onto those stocks for the very long term, generally measured in years. This strategy was made popular in the equity bull market of the 1980s and 90s where buy-and-hold investors rode out short-term market declines and continued to hold as the market returned to its previous highs and beyond. However, during the 2001-2003 equity bear market, the buy-and-hold strategy lost some followers as broader market indexes like the NASDAQ saw their values decline by over 60%.
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Methodology
Stock traders/investors usually need a stock broker such as a bank or a brokerage firm to access the stock market. Since the advent of Internet banking, an Internet connection is commonly used to manage positions. Using the Internet, specialized software, and a personal computer, stock traders/investors make use of technical and fundamental analysis to help them in making decisions. They may use several information resources, some of which are strictly technical. Using the pivot points calculated from a previous day's trading, they attempt to predict the buy and sell points of the current day's trading session. These points give a cue to traders as to where prices will head for the day, prompting each trader where to enter his trade, and where to exit. An added tool for the stock picker is the use of "stock screens". Stock screens allow the user to input specific parameters, based on technical and/or fundamental conditions, that he or she deems desirable. Primary benefits associated with stock screens is its ability to return a small group of stocks for further analysis, among tens of thousands, that fit the requirements requested. There is criticism on the validity of using these technical indicators in analysis, and many professional stock traders do not use them. Many full-time stock traders and stock investors, as well as most other people in finance, have a formal education and training in fields such as economics, finance, mathematics and computer science, which are particularly relevant to this occupation.
Expenses, costs and risk

Trading activities are not free. They have a considerably high level of risk, uncertainty and complexity, especially for unwise and inexperienced stock traders/investors seeking an easy way to make money quickly. In addition, stock traders/investors face several costs such as commissions, taxes and fees to be paid for the brokerage and other services, like the buying/selling orders placed at the stock exchange. Depending on the nature of each national or state legislation involved, a large array of fiscal obligations must be respected, and taxes are charged by jurisdictions over those transactions, dividends and capital gains that fall within their scope. However, these fiscal obligations will vary from jurisdiction to jurisdiction. Among other reasons, there could be some instances where taxation is already incorporated into the stock price through the differing legislation that companies have to comply with in their respective jurisdictions; or that tax free stock market operations are useful to boost economic growth. Beyond these costs are the opportunity costs of money and time, currency risk, financial risk, and internet, data and news agency services and electricity consumption expenses - all of which must be accounted for.
Stock picking
The efficient-market hypothesis
Although many companies offer courses in stock picking, and numerous experts report success through technical analysis and fundamental analysis, many economists and academics state that because of the efficient-market hypothesis (EMH) it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In the distribution of investors, many academics believe that the richest are simply outliers in such a
Stock trader distribution (i.e. in a game of chance, they have flipped heads twenty times in a row). When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat, the market. However, market efficiency - championed in the EMH formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful. This "random walk" of prices, commonly spoken about in the EMH school of thought, results in the failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an index fund. At the academic level, the very concept of market timing (the act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data) is called into question by those who believe in the efficient market theory. This theory is based on the premise that, at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else.
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Beating the market, fraud and scams

Outside of academia, the controversy surrounding market timing is primarily focused on day trading conducted by individual investors and the mutual fund trading scandals perpetrated by institutional investors in 2003. Media coverage of these issues has been so prevalent that many investors now dismiss market timing as a credible investment strategy. Unexposed insider trading, accounting fraud, embezzlement and pump and dump strategies are factors that hamper an efficient, rational, fair and transparent investing, because they may create fictitious company's financial statements and data, leading to inconsistent stock prices. Day trading sits at the extreme end of the investing spectrum from conventional buy-and-hold wisdom. It is the ultimate market-timing strategy. While all the attention that day trading attracts seems to suggest that the theory is sound, critics argue that, if that were so, at least one famous money manager would have mastered the system and claimed the title of "the Warren Buffet of day trading". The long list of successful investors that have become legends in their own time does not include a single individual that built his or her reputation by day trading. Even Michael Steinhardt, who made his fortune trading in time horizons ranging from 30 minutes to 30 days, claimed to take a long-term perspective on his investment decisions. From an economic perspective, many professional money managers and financial advisors shy away from day trading, arguing that the reward simply does not justify the risk. Despite the controversy, market timing is neither illegal nor unethical. Attempting to make a profit is the reason investors invest, and buy low and sell high is the general goal of most investors (although short-selling and arbitrage take a different approach, the success or failure of these strategies still depends on timing). The problems with mutual fund trading that cast market timing in a negative light occurred because the prospectuses written by the mutual fund companies strictly forbid short-term trading. Despite this prohibition, special clients were
Charting is the use of graphical and analytical patterns and data to attempt to predict future prices
Stock trader allowed to do it anyway. So, the problem was not with the trading strategy but rather with the unethical and unfair implementation of that strategy, which permitted some investors to engage in it while excluding others. All of the world's greatest investors rely, to some extent, on market timing for their success. Whether they base their buy/sell decisions on fundamental analysis of the markets, technical analysis of individual companies, personal intuition, or all of the above, the ultimate reason for their success involves making the right trades at the right time. In most cases, those decisions involve extended periods of time and are based on buy-and-hold investment strategies. Value investing is a clear example, as the strategy is based on buying stocks that trade for less than their intrinsic values and selling them when their value is recognized in the marketplace. Most value investors are known for their patience, as undervalued stocks often remain undervalued for significant periods of time. Some investors choose a blend of technical, fundamental and environmental factors to influence where and when they invest. These strategists reject the 'chance' theory of investing, and attribute their higher level of returns to both insight and discipline. Financial fail and unsuccessful stories related with stock trading abound. Trading stocks is one of the most difficult occupations one can have, with a failure rate estimated by most as at least 90% in short-term investing, like day trading strategies. One reason for this high failure rate is that most new traders start out with too little capital, and the expectation of being able to pay their bills with their trading profits. Another big reason for this high failure rate is that most new traders start without a coherent game plan or strategy to trade. Other major reasons are the unpredictability of the markets, especially in the short-term, the large number of corporate and financial scams and frauds among listed companies, and out-of-control erroneous advertisement and biased aggressive advertising campaigns related with trading, brokerage, stock picking strategies, and so on. Every year, a lot of money is wasted in non-peer-reviewed (and largely unregulated) publications and courses attended by credulous people that get persuaded and take the bill, hoping getting rich by trading on the markets. This allow wide-spread promotion of inaccurate and unproven trading methods for stocks, bonds, commodities, or Forex, while generating sizable revenues for unscrupulous authors, advisers and self-titled trading gurus. Trading stocks is a risky and complex occupation because the direction of the markets are generally unpredictable and lack transparency, also financial regulators are sometimes unable to adequately detect, prevent and remediate irregularities committed by malicious listed companies or other financial market participants. In addition, the financial markets are usually subjected to speculation. This does not invalidate the well documented true and genuine stories of large success and consistent profitability of many individual stock investors and stock investing organizations along the history.
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Famous stock traders or stock investors

Bernard Baruch Jos Berardo Warren Buffett Jim Cramer Nicolas Darvas Philip Arthur Fisher Benjamin Graham John W. Henry Rakesh Jhunjhunwala John Maynard Keynes Edward Lampert Peter Lynch William O'Neil David Ricardo Jim Rogers Martin Schwartz Jim Slater George Soros John Templeton Martin Zweig
Sebastin Piera
Steven A. Cohen
Alexander Elder
Jesse Lauriston Livermore
Stock trader
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References
Notes
Bonds
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.[1] Thus a bond or fixed income is like a loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).
Issuing bonds
Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by bookrunners who arrange the bond issue, have the direct contact with investors and act as advisors to the bond issuer in terms of timing and price of the bond issue. The bookrunners' willingness to underwrite must be discussed prior to opening books on a bond issue as there may be limited appetite to do so. In the case of government bonds, these are usually issued by auctions, called a public sale, where both members of the public and banks may bid for bond. Since the coupon is fixed, but the price is not, the percent return is a function both of the price paid as well as the coupon.[2] However, because the cost of issuance for a publicly auctioned bond can be cost prohibitive for a smaller loan, it is also common for smaller bonds to avoid the underwriting and auction process through the use of a private placement bond. In the case of a private placement bond, the bond is held by the lender and does not enter the large bond market.[3] Sometimes the documentation allows the issuer to borrow more at a later date by issuing further bonds on the same terms as before, but at the current market price. This is called a tap issue or bond tap.[4]
Features of bonds
The most important features of a bond are: nominal, principal or face amount the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term. Some structured bonds can have a redemption amount which is different from the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund. This can result in an investor receiving less or more than his original investment at maturity. issue price the price at which investors buy the bonds when they are first issued, which will typically be approximately equal to the nominal amount. The net proceeds that the issuer receives are thus the issue price, less
Bonds issuance fees. maturity date the date on which the issuer has to repay the nominal amount. As long as all payments have been made, the issuer has no more obligation to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to thirty years. Some bonds have been issued with maturities of up to one hundred years, and some do not mature at all. In the market for U.S. Treasury securities, there are three groups of bond maturities: short term (bills): maturities between one to five year; (instruments with maturities less than one year are called Money Market Instruments) medium term (notes): maturities between six to twelve years; long term (bonds): maturities greater than twelve years. coupon the interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index, such as LIBOR, or it can be even more exotic. The name coupon originates from the fact that in the past, physical bonds were issued which had coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment. The "quality" of the issue refers to the probability that the bondholders will receive the amounts promised at the due dates. This will depend on a wide range of factors. Indentures and Covenants An indenture is a formal debt agreement that establishes the terms of a bond issue, while covenants are the clauses of such an agreement. Covenants specify the rights of bondholders and the duties of issuers, such as actions that the issuer is obligated to perform or is prohibited from performing. In the U.S., federal and state securities and commercial laws apply to the enforcement of these agreements, Bond issued by the Dutch East India Company in which are construed by courts as contracts between issuers and 1623 bondholders. The terms may be changed only with great difficulty while the bonds are outstanding, with amendments to the governing document generally requiring approval by a majority (or super-majority) vote of the bondholders. High yield bonds are bonds that are rated below investment grade by the credit rating agencies. As these bonds are more risky than investment grade bonds, investors expect to earn a higher yield. These bonds are also called junk bonds. coupon dates the dates on which the issuer pays the coupon to the bond holders. In the U.S. and also in the U.K. and Europe, most bonds are semi-annual, which means that they pay a coupon every six months. Optionality: Occasionally a bond may contain an embedded option; that is, it grants option-like features to the holder or the issuer: Callability Some bonds give the issuer the right to repay the bond before the maturity date on the call dates; see call option. These bonds are referred to as callable bonds. Most callable bonds allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so called call premium. This is mainly the case for high-yield bonds. These have very strict covenants, restricting the issuer in its operations. To be free from these covenants, the issuer can repay the bonds early, but only at a high cost. Putability Some bonds give the holder the right to force the issuer to repay the bond before the maturity date on the put dates; see put option. These are referred to as retractable or putable bonds. call dates and put datesthe dates on which callable and putable bonds can be redeemed early. There are four main categories.
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Bonds A Bermudan callable has several call dates, usually coinciding with coupon dates. A European callable has only one call date. This is a special case of a Bermudan callable. An American callable can be called at any time until the maturity date. A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation. Also known as a "survivor's option". sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. The entire bond issue can be liquidated by the maturity date. If that is not the case, then the remainder is called balloon maturity. Issuers may either pay to trustees, which in turn call randomly selected bonds in the issue, or, alternatively, purchase bonds in open market, then return them to trustees. convertible bond lets a bondholder exchange a bond to a number of shares of the issuer's common stock. exchangeable bond allows for exchange to shares of a corporation other than the issuer.
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Types of Bond
The following descriptions are not mutually exclusive, and more than one of them may apply to a particular bond. Fixed rate bonds have a coupon that remains constant throughout the life of the bond. Floating rate notes (FRNs) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. For example the coupon may be defined as three month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically every one or three months.
Bond certificate for the state of South Carolina issued in 1873 under the state's Consolidation Act.
Zero-coupon bonds pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is Series E savings bonds issued by the U.S. government. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating ("stripping off") the coupons from the principal. In other words, the separated coupons and the final principal payment of the bond may be traded separately. See IO (Interest Only) and PO (Principal Only). Inflation linked bonds, in which the principal amount and the interest payments are indexed to inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position briefly reversed itself for short-term UK bonds in December 2008). However, as the principal amount grows, the payments increase with inflation. The United Kingdom was the first sovereign issuer to issue inflation linked Gilts in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. government.
Bonds
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Other indexed bonds, for example equity-linked notes and bonds indexed on a business indicator (income, added value) or on a country's GDP. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Examples of asset-backed securities are mortgage-backed securities (MBS's), collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs). Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As a result, the risk is higher. Therefore, subordinated bonds usually have a lower credit rating than senior bonds. The main examples of subordinated bonds can be found Receipt for temporary bonds for the state of Kansas issued in 1922 in bonds issued by banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches get paid back first, the subordinated tranches later. Perpetual bonds are also often called perpetuities or 'Perps'. They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today, although the amounts are now insignificant. Some ultra-long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century) are virtually perpetuities from a financial point of view, with the current value of principal near zero. Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets.[5] U.S. corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local tax-exempt bearer bonds were prohibited in 1983.[6] Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity, are sent to the registered owner. Treasury bond, also called government bond, is issued by the Federal government and is not exposed to default risk. It is characterized as the safest bond, with the lowest interest rate. A treasury bond is backed by the full faith and credit of the federal government. For that reason, this type of bond is often referred to as risk-free.
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Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their agencies. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt. Build America Bonds (BABs) is a new form of municipal bond authorized by the American Recovery and Reinvestment Act of 2009. Unlike traditional municipal bonds, which are usually tax exempt, interest received on BABs is subject to federal taxation. However, as with municipal bonds, the bond is tax-exempt within the state it is issued. Generally, BABs offer significantly higher yields (over 7 percent) than standard municipal bonds.[7]
Pacific Railroad Bond issued by City and County of San Francisco, CA. May 1, 1865
Book-entry bond is a bond that does not have a paper certificate. As physically processing paper bonds and interest coupons became more expensive, issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. Some book-entry bond issues do not offer the option of a paper certificate, even to investors who prefer them.[8] Lottery bond is a bond issued by a state, usually a European state. Interest is paid like a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Some of these redemptions will be for a higher value than the face value of the bond. War bond is a bond issued by a country to fund a war. Serial bond is a bond that matures in installments over a period of time. In effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity over a 5-year interval. Revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds. Revenue bonds are typically "non-recourse," meaning that in the event of default, the bond holder has no recourse to other governmental assets or revenues. Climate bond is a bond issued by a government or corporate entity in order to raise finance for climate change mitigation or adaptation related projects or programs.
Bonds issued in foreign currencies

Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies as it may appear to be more stable and predictable than their domestic currency. Issuing bonds denominated in foreign currencies also gives issuers the ability to access investment capital available in foreign markets. The proceeds from the issuance of these bonds can be used by companies to break into foreign markets, or can be converted into the issuing company's local currency to be used on existing operations through the use of foreign exchange swap hedges. Foreign issuer bonds can also be used to hedge foreign exchange rate risk. Some foreign issuer bonds are called by their nicknames, such as the "samurai bond." These can be issued by foreign issuers looking to diversify their investor base away from domestic markets. These bond issues are generally governed by the law of the market of issuance, e.g., a samurai bond, issued by an investor based in Europe, will be governed by Japanese law. Not all of the following bonds are restricted for purchase by investors in the market of issuance. Eurodollar bond, a U.S. dollar-denominated bond issued by a non-U.S. entity outside the U.S[9] Yankee bond, a US dollar-denominated bond issued by a non-US entity in the US market Kangaroo bond, an Australian dollar-denominated bond issued by a non-Australian entity in the Australian market Maple bond, a Canadian dollar-denominated bond issued by a non-Canadian entity in the Canadian market
Bonds Samurai bond, a Japanese yen-denominated bond issued by a non-Japanese entity in the Japanese market Uridashi bond, a non-yen-demoninated bond sold to Japanese retail investors. Shibosai Bond is a private placement bond in Japanese market with distribution limited to institutions and banks. Shogun bond, a non-yen-denominated bond issued in Japan by a non-Japanese institution or government[10] Bulldog bond, a pound sterling-denominated bond issued in London by a foreign institution or government Matrioshka bond, a Russian rouble-denominated bond issued in the Russian Federation by non-Russian entities. The name derives from the famous Russian wooden dolls, Matrioshka, popular among foreign visitors to Russia Arirang bond, a Korean won-denominated bond issued by a non-Korean entity in the Korean market[11] Kimchi bond, a non-Korean won-denominated bond issued by a non-Korean entity in the Korean market[12] Formosa bond, a non-New Taiwan Dollar-denominated bond issued by a non-Taiwan entity in the Taiwan market[13] Panda bond, a Chinese renminbi-denominated bond issued by a non-China entity in the People's Republic of China market[14] Dimsum bond, a Chinese renminbi-denominated bond issued by a Chinese entity in Hong Kong. Enables foreign investors forbidden from investing in Chinese corporate debt in mainland China to invest in and be exposed to Chinese currency in Hong Kong.[15] Huaso bond, a Chilean peso-denominated bond issued by a non-Chilean entity in the Chilean market. [16]
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Trading and valuing bonds

The interest rate that the issuer of a bond must pay is influenced by a variety of factors, such as current market interest rates, the length of the term and the creditworthiness of the issuer. These factors are likely to change over time, so the market price of a bond will vary after it is issued. This price is expressed as a percentage of nominal value. Bonds are not necessarily issued at par (100% of face value, corresponding to a price of 100), but bond prices converge to par when they approach maturity (if the market expects the maturity payment to be made in full and on time) as this is the price the issuer will pay to redeem the bond. This is referred to as "Pull to Par". At other times, prices can be above par (bond is priced at greater than 100), which is called trading at a premium, or below par (bond is priced at less than 100), which is called trading at a discount. Most government bonds are denominated in units of $1000 in the United States, or in units of 100 in the United Kingdom. Hence, a deep discount US bond, selling at a price of 75.26, indicates a selling price of $752.60 per bond sold. (Often, in the US, bond prices are quoted in points and thirty-seconds of a point, rather than in decimal form.) Some short-term bonds, such as the U.S. Treasury Bill, are always issued at a discount, and pay par amount at maturity rather than paying coupons. This is called a discount bond. The market price of a bond is the present value of all expected future interest and principal payments of the bond discounted at the bond's redemption yield, or rate of return. That relationship defines the redemption yield on the bond, which represents the current market interest rate for bonds with similar characteristics. The yield and price of a bond are inversely related so that when market interest rates rise, bond prices fall and vice versa. Thus the redemption yield could be considered to be made up of two parts: the current yield (see below) and the expected capital gain or loss: roughly the current yield plus the capital gain (negative for loss) per year until redemption. The market price of a bond may include the accrued interest since the last coupon date. (Some bond markets include accrued interest in the trading price and others add it on explicitly after trading.) The price including accrued interest is known as the "full" or "dirty price". (See also Accrual bond.) The price excluding accrued interest is known as the "flat" or "clean price". The interest rate adjusted for (divided by) the current price of the bond is called the current yield (this is the nominal yield multiplied by the par value and divided by the price). There are other yield measures that exist such as the yield to first call, yield to worst, yield to first par call, yield to put, cash flow yield and yield to maturity.
Bonds The relationship between yield and maturity for otherwise identical bonds is called a yield curve. A yield curve is essentially a measure of the term structure of bonds. Bonds markets, unlike stock or share markets, often do not have a centralized exchange or trading system. Rather, in most developed bond markets such as the U.S., Japan and western Europe, bonds trade in decentralized, dealer-based over-the-counter markets. In such a market, market liquidity is provided by dealers and other market participants committing risk capital to trading activity. In the bond market, when an investor buys or sells a bond, the counterparty to the trade is almost always a bank or securities firm acting as a dealer. In some cases, when a dealer buys a bond from an investor, the dealer carries the bond "in inventory." The dealer's position is then subject to risks of price fluctuation. In other cases, the dealer immediately resells the bond to another investor. Bond markets can also differ from stock markets in that, in some markets, investors sometimes do not pay brokerage commissions to dealers with whom they buy or sell bonds. Rather, the dealers earn revenue by means of the spread, or difference, between the price at which the dealer buys a bond from one investorthe "bid" priceand the price at which he or she sells the same bond to another investorthe "ask" or "offer" price. The bid/offer spread represents the total transaction cost associated with transferring a bond from one investor to another.
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Investing in bonds
Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies and banks. Most individuals who want to own bonds do so through bond funds. Still, in the U.S., nearly 10% of all bonds outstanding are held directly by households. Sometimes, bond markets rise (while yields fall) when stock markets fall. More relevantly, the volatility of bonds (especially short and medium dated bonds) is lower than that of stocks. Thus bonds are generally viewed as safer investments than stocks, but this perception is only partially correct. Bonds do suffer from less day-to-day volatility than stocks, and bonds' interest payments are often higher than the general level of dividend payments. Bonds are liquid it is fairly easy to sell one's bond investments, though not nearly as easy as it is to sell stocks and the comparative certainty of a fixed interest payment twice per year is attractive. Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back (the recovery amount), whereas the company's stock often ends up valueless. However, bonds can also be risky but less risky than stocks: Fixed rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest rates rise. Since the payments are fixed, a decrease in the market price of the bond means an increase in its yield. When the market interest rate rises, the market price of bonds will fall, reflecting investors' ability to get a higher interest rate on their money elsewhere perhaps by purchasing a newly issued bond that already features the newly higher interest rate. Note that this drop in the bond's market price does not affect the interest payments to the bondholder at all, so long-term investors who want a specific amount at the maturity date do not need to worry about price swings in their bonds and do not suffer from interest rate risk. Bonds are also subject to various other risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, sovereign risk and yield curve risk. Price changes in a bond will also immediately affect mutual funds that hold these bonds. If the value of the bonds held in a trading portfolio has fallen over the day, the value of the portfolio will also have fallen. This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers (irrespective of whether the value is immediately "marked to market" or not). If there is any chance a holder of individual bonds may need to sell his bonds and "cash out", interest rate risk could become a real problem (conversely, bonds' market prices would increase if the prevailing interest rate were to drop, as it did from 2001 through 2003). One way to quantify the interest rate risk on a bond is in terms of its duration. Efforts to control this risk are called immunization or hedging.
Bonds Bond prices can become volatile depending on the credit rating of the issuer for instance if the credit rating agencies like Standard & Poor's and Moody's upgrade or downgrade the credit rating of the issuer. A downgrade will cause the market price of the bond to fall. As with interest rate risk, this risk does not affect the bond's interest payments (provided the issuer does not actually default), but puts at risk the market price, which affects mutual funds holding these bonds, and holders of individual bonds who may have to sell them. A company's bondholders may lose much or all their money if the company goes bankrupt. Under the laws of many countries (including the United States and Canada), bondholders are in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some other creditors. Bank lenders, deposit holders (in the case of a deposit taking institution such as a bank) and trade creditors may take precedence. There is no guarantee of how much money will remain to repay bondholders. As an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds. Some bonds are callable, meaning that even though the company has agreed to make payments plus interest towards the debt for a certain period of time, the company can choose to pay off the bond early. This creates reinvestment risk, meaning the investor is forced to find a new place for his money, and the investor might not be able to find as good a deal, especially because this usually happens when interest rates are falling.
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Bond indices
A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Barclays Capital Aggregate (ex Lehman Aggregate), Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfolios.
References
[1] O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in action (http:/ / www. pearsonschool. com/ index. cfm?locator=PSZ3R9& PMDbSiteId=2781& PMDbSolutionId=6724& PMDbCategoryId=& PMDbProgramId=12881& level=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.197, 507. ISBN0-13-063085-3. . [2] http:/ / www. dmo. gov. uk/ index. aspx?page=Gilts/ Operations [3] http:/ / www. housingfinance. com/ ahf/ articles/ 2005/ march/ bond1. html [4] Tap issue (http:/ / www. investopedia. com/ terms/ t/ tap_issue. asp) at Investopedia [5] Eason, Yla (June 6, 1983). "Final Surge in Bearer Bonds" New York Times. [6] Quint, Michael (August 14, 1984). "Elements in Bearer Bond Issue". New York Times. [7] Benjamin Shepherd. "A Slice of the Pie" (http:/ / www. investingdaily. com/ ruk/ 18220/ a-slice-of-the-pie. html). InvestingDaily.com. . Retrieved 2010-1-19. [8] no byline (July 18, 1984). "Book Entry Bonds Popular". New York Times. [9] "Eurodollar deposit" (http:/ / www. riskglossary. com/ link/ eurodollar_deposit. htm). . Retrieved 2009-01-05. [10] no byline (2005-12-05). "Ninja loans may yet overtake samurais" (http:/ / www. thestandard. hk/ news_detail. asp?we_cat=10& art_id=7106& sid=5769214& con_type=1& d_str=20051205). The Standard. . Retrieved 2008-12-09. [11] Batten, Jonathan A.; Peter G. Szilagyi (2006-04-19). "Developing Foreign Bond Markets: The Arirang Bond Experience in Korea" (http:/ / www. tcd. ie/ iiis/ documents/ discussion/ pdfs/ iiisdp138. pdf) (PDF). IIS Discussion Papers (138). . Retrieved 2007-07-06. [12] Gwon, Yeong-seok (2006-05-24). " (Announcement: first 'Kimchi Bonds' next month)" (http:/ / www. hani. co. kr/ arti/ economy/ stock/ 126171. html). The Hankyoreh. . Retrieved 2007-07-06. [13] Chung, Amber (2007-04-19). "BNP Paribas mulls second bond issue on offshore market" (http:/ / www. taipeitimes. com/ News/ biz/ archives/ 2007/ 04/ 19/ 2003357355). Taipei Times. . Retrieved 2007-07-04. [14] Areddy, James T. (2005-10-11). "Chinese Markets Take New Step With Panda Bond" (http:/ / online. wsj. com/ article/ SB112893305062664267. html?mod=article-outset-box). The Wall Street Journal. . Retrieved 2007-07-06. [15] Stein, Peter (2010-11-01). "'Dim Sum Bonds' on the Menu for Foreign Investors" (http:/ / online. wsj. com/ article/ SB10001424052702304354104575568180321350908. html). The Wall Street Journal. . Retrieved 2010-11-01.
Bonds
[16] . http:/ / www. bloomberg. com/ news/ 2011-03-27/ chile-expects-more-huaso-bond-sales-in-coming-months-larrain-says. html.
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External links
Bonds links (http://www.dmoz.org/Business/Investing/Stocks_and_Bonds/Bonds//) at the Open Directory Project
Financial derivatives
A derivative instrument is a contract between two parties that specifies conditionsin particular, dates and the resulting values of the underlying variablesunder which payments, or payoffs, are to be made between the parties.[1] [2] One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.[3] Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (e.g., exchange-traded or over-the-counter); and their pay-off profile. Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). For example, a speculator may sell deep in-the-money naked calls on a stock, expecting the stock price to plummet, but exposing himself to potentially unlimited losses. Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.
Usage
Derivatives are used by investors to: provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative;[4] speculate and make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level); hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out;[5] obtain exposure to the underlying where it is not possible to trade in the underlying (e.g., weather derivatives);[6] create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level).
Hedging
Derivatives allow risk related to the price of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be available because of events unspecified by the contract, such as the weather, or that one party will renege on the contract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insured against counter-party risk. From another perspective, the farmer and the miller both reduce a risk and acquire a risk when they sign the futures contract: the farmer reduces the risk that the price of wheat will fall below the price specified in the contract and acquires the risk that the price of wheat will rise above the price specified in the contract (thereby losing additional
Financial derivatives income that he could have earned). The miller, on the other hand, acquires the risk that the price of wheat will fall below the price specified in the contract (thereby paying more in the future than he otherwise would have) and reduces the risk that the price of wheat will rise above the price specified in the contract. In this sense, one party is the insurer (risk taker) for one type of risk, and the counter-party is the insurer (risk taker) for another type of risk. Hedging also occurs when an individual or institution buys an asset (such as a commodity, a bond that has coupon payments, a stock that pays dividends, and so on) and sells it using a futures contract. The individual or institution has access to the asset for a specified amount of time, and can then sell it in the future at a specified price according to the futures contract. Of course, this allows the individual or institution the benefit of holding the asset, while reducing the risk that the future selling price will deviate unexpectedly from the market's current assessment of the future value of the asset. Derivatives can serve legitimate business purposes. For example, a corporation borrows a large sum of money at a specific interest rate.[7] The rate of interest on the loan resets every six months. The corporation is concerned that the rate of interest may be much higher in six months. The corporation could buy a forward rate agreement (FRA), which is a contract to pay a fixed rate of interest six months after purchases on a notional amount of money.[8] If the interest rate after six months is above the contract rate, the seller will pay the difference to the corporation, or FRA buyer. If the rate is lower, the corporation will pay the difference to the seller. The purchase of the FRA serves to reduce the uncertainty concerning the rate increase and stabilize earnings.
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Derivatives traders at the Chicago Board of Trade
Speculation and arbitrage

Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus, some individuals and institutions will enter into a derivative contract to speculate on the value of the underlying asset, betting that the party seeking insurance will be wrong about the future value of the underlying asset. Speculators look to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is low. Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an asset falls below the price specified in a futures contract to sell the asset. Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in futures contracts. Through a combination of poor judgment, lack of oversight by the bank's management and regulators, and unfortunate events like the Kobe earthquake, Leeson incurred a US$1.3 billion loss that bankrupted the centuries-old institution.[9]
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Types
OTC and exchange-traded
In broad terms, there are two groups of derivative contracts, which are distinguished by the way they are traded in the market: Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is US$684 trillion (as of June 2008).[10] Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counter-party. Therefore, they are subject to counter-party risk, like an ordinary contract, since each counter-party relies on the other to perform. Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.[11] A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee. The world's largest[12] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.
Common derivative contract types

Some of the common variants of derivative contracts are as follows: 1. Forwards:A tailored contract between two parties, where defrayal takes place on a specific time in the future at today's pre-determined price. 2. Futures: are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in the manner that while the former is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold, the latter is a non-standardized contract written by the parties themselves. 3. Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counter-party has the obligation to carry out the
Financial derivatives transaction. Options are of two types- Call option and Put option. The buyer of a Call option although has a right to buy a certain quantity of the underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right. Similarly, the buyer of a Put option although has the right to sell a certain quantity of an underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right. 4. Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options as well, known as Warrant (finance). These are generally traded over-the-counter. 5. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets.
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Examples
The overall derivatives market has five major classes of underlying asset: interest rate derivatives (the largest) foreign exchange derivatives credit derivatives equity derivatives
commodity derivatives Some common examples of these derivatives are:

UNDERLYING Exchange-traded futures Equity DJIA Index future Single-stock future CONTRACT TYPES Exchange-traded options Option on DJIA Index future Single-share option Option on Eurodollar future Option on Euribor future OTC swap OTC forward OTC option
Equity swap
Back-to-back Repurchase agreement
Stock option Warrant Turbo warrant
Interest rate
Eurodollar future Euribor future
Interest rate swap Forward rate agreement Interest rate cap and floor Swaption Basis swap Bond option Credit default Repurchase agreement swap Total return swap Currency swap Currency forward Credit default option
Credit
Bond future
Option on Bond future
Foreign exchange Currency future
Option on currency future
Currency option
Commodity
WTI crude oil futures
Weather derivatives
Commodity swap Iron ore forward contract
Gold option
Other examples of underlying exchangeables are: Property (mortgage) derivatives Economic derivatives that pay off according to economic reports[13] as measured and reported by national statistical agencies Freight derivatives Inflation derivatives Weather derivatives Insurance derivatives Emissions derivatives[14]
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Valuation
Market and arbitrage-free prices
Two common measures of value are: Market price, i.e., the price at which traders are willing to buy or sell the contract; Arbitrage-free price, meaning that no risk-free profits can be made by trading in these contracts; see rational pricing.
Determining the market price
For exchange-traded derivatives, market price is usually transparent, making it difficult to automatically broadcast prices. In particular with OTC contracts, there is no central exchange to collate and disseminate prices.
[15] Total world derivatives from 19982007 compared to total world wealth in the year [16] 2000
Determining the arbitrage-free price

The arbitrage-free price for a derivatives contract can be complex, and there are many different variables to consider. Arbitrage-free pricing is a central topic of financial mathematics. For futures/forwards the arbitrage free price is relatively straightforward, involving the price of the underlying together with the cost of carry (income received less interest costs), although there can be complexities. However, for options and more complex derivatives, pricing involves developing a complex pricing model: understanding the stochastic process of the price of the underlying asset is often crucial. A key equation for the theoretical valuation of options is the BlackScholes formula, which is based on the assumption that the cash flows from a European stock option can be replicated by a continuous buying and selling strategy using only the stock. A simplified version of this valuation technique is the binomial options model. OTC represents the biggest challenge in using models to price derivatives. Since these contracts are not publicly traded, no market price is available to validate the theoretical valuation. And most of the model's results are input-dependant (meaning the final price depends heavily on how we derive the pricing inputs).[17] Therefore it is common that OTC derivatives are priced by Independent Agents that both counterparties involved in the deal designate upfront (when signing the contract).
Criticism
Derivatives are often subject to the following criticisms:
Risk
The use of derivatives can result in large losses because of the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset's price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:
Financial derivatives American International Group (AIG) lost more than US$18 billion through a subsidiary over the preceding three quarters on Credit Default Swaps (CDS).[18] The US federal government then gave the company US$85 billion in an attempt to stabilize the economy before an imminent stock market crash. It was reported that the gifting of money was necessary because over the next few quarters, the company was likely to lose more money. The loss of US$7.2 Billion by Socit Gnrale in January 2008 through mis-use of futures contracts. The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted. The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998. The loss of US$1.3 billion equivalent in oil derivatives in 1993 and 1994 by Metallgesellschaft AG.[19] The loss of US$1.2 billion equivalent in equity derivatives in 1995 by Barings Bank.[20] UBS AG, Switzerlands biggest bank, suffered a $2 billion loss through unauthorized trading discovered in September, 2011. [21]
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Counter-party risk
Some derivatives (especially swaps) expose investors to counter-party risk. Different types of derivatives have different levels of counter-party risk. For example, standardized stock options by law require the party at risk to have a certain amount deposited with the exchange, showing that they can pay for any losses; banks that help businesses swap variable for fixed rates on loans may do credit checks on both parties. However, in private agreements between two companies, for example, there may not be benchmarks for performing due diligence and risk analysis.
Large notional value

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway's 2002 annual report. Buffett called them 'financial weapons of mass destruction.' The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator. (See Berkshire Hathaway Annual Report for 2002) [22]
Leverage of an economy's debt

Derivatives massively leverage the debt in an economy, making it ever more difficult for the underlying real economy to service its debt obligations, thereby curtailing real economic activity, which can cause a recession or even depression. In the view of Marriner S. Eccles, U.S. Federal Reserve Chairman from November, 1934 to February, 1948, too high a level of debt was one of the primary causes of the 1920s30s Great Depression. (See Berkshire Hathaway Annual Report for 2002)
Benefits
The use of derivatives also has its benefits: Derivatives facilitate the buying and selling of risk, and many financial professionals consider this to have a positive impact on the economic system. Although someone loses money while someone else gains money with a derivative, under normal circumstances, trading in derivatives should not adversely affect the economic system because it is not zero sum in utility.
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Government regulation
In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans." More oversight of the banks in this market is needed, he also said. Additionally, the report said, "[t]he Department of Justice is looking into derivatives, too. The departments antitrust unit is actively investigating 'the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,' according to a department spokeswoman."[23] Over-the-counter dealing will be less common as the 2010 Dodd-Frank Wall Street Reform Act comes into effect. The law mandated the clearing of certain swaps at registered exchanges and imposed various restrictions on derivatives. To implement Dodd-Frank, the CFTC developed new rules in at least 30 areas [24]. The Commission determines which swaps are subject to mandatory clearing and whether a derivatives exchange is eligible to clear a certain type of swap contract.
Glossary
Bilateral netting: A legally enforceable arrangement between a bank and a counter-party that creates a single legal obligation covering all included individual contracts. This means that a banks obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement. Credit derivative: A contract that transfers credit risk from a protection buyer to a credit protection seller. Credit derivative products can take many forms, such as credit default swaps, credit linked notes and total return swaps. Derivative: A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof. Exchange-traded derivative contracts: Standardized derivative contracts (e.g., futures contracts and options) that are transacted on an organized futures exchange. Gross negative fair value: The sum of the fair values of contracts where the bank owes money to its counter-parties, without taking into account netting. This represents the maximum losses the banks counter-parties would incur if the bank defaults and there is no netting of contracts, and no bank collateral was held by the counter-parties. Gross positive fair value: The sum total of the fair values of contracts where the bank is owed money by its counter-parties, without taking into account netting. This represents the maximum losses a bank could incur if all its counter-parties default and there is no netting of contracts, and the bank holds no counter-party collateral. High-risk mortgage securities: Securities where the price or expected average life is highly sensitive to interest rate changes, as determined by the FFIEC policy statement on high-risk mortgage securities. Notional amount: The nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional. Over-the-counter (OTC) derivative contracts: Privately negotiated derivative contracts that are transacted off organized futures exchanges. Structured notes: Non-mortgage-backed debt securities, whose cash flow characteristics depend on one or more indices and / or have embedded forwards or options. Total risk-based capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common shareholders equity, perpetual preferred shareholders equity with non-cumulative dividends, retained earnings, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a banks allowance
Financial derivatives for loan and lease losses.
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References
[1] Rubinstein, Mark (1999). Rubinstein on derivatives. Risk Books. ISBN1899332537. [2] Hull, John C. (2006). Options, Futures and Other Derivatives, Sixth Edition. Prentice Hall. pp.1. [3] Kaori Suzuki and David Turner (December 10, 2005). "Sensitive politics over Japan's staple crop delays rice futures plan" (http:/ / www. ft. com/ cms/ s/ 0/ d9f45d80-6922-11da-bd30-0000779e2340. html). The Financial Times. . Retrieved October 23, 2010. [4] Shirreff, David (2004). "Derivatives and leverage" (http:/ / books. google. com/ books?id=mwirEO_f1DkC). Dealing With Financial Risk. USA: The Economist. p.23. ISBN1-57660-162-5. . Retrieved 14 September 2011. [5] Khullar, Sanjeev (2009). "Using Derivatives to Create Alpha" (http:/ / books. google. com/ books?id=uv73DVVSgAsC). In John M. Longo. Hedge Fund Alpha: A Framework for Generating and Understanding Investment Performance. Singapore: World Scientific. p.105. ISBN978-981-283-465-2. . Retrieved 14 September 2011. [6] Don M. Chance; Robert Brooks (2010). "Advanced Derivatives and Strategies" (http:/ / books. google. com/ books?id=DT0nnLDMYTgC). Introduction to Derivatives and Risk Management (8th ed.). Mason, Ohio: Cengage Learning. pp.483515. ISBN978-0-324-60120-6. . Retrieved 14 September 2011. [7] Chisolm, Derivatives Demystified (Wiley 2004) [8] Chisolm, Derivatives Demystified (Wiley 2004) Notional sum means there is no actual principal. [9] News.BBC.co.uk (http:/ / news. bbc. co. uk/ 2/ hi/ business/ 375259. stm), "How Leeson broke the bank BBC Economy" [10] BIS survey: The Bank for International Settlements (BIS) semi-annual OTC derivatives statistics (http:/ / www. bis. org/ statistics/ derstats. htm) report, for end of June 2008, shows US$683.7 billion total notional amounts outstanding of OTC derivatives with a gross market value of US$20 trillion. See also Prior Period Regular OTC Derivatives Market Statistics (http:/ / www. bis. org/ publ/ otc_hy0805. htm). [11] Hull, J.C. (2009). Options, futures, and other derivatives . Upper Saddle River, NJ : Pearson/Prentice Hall, c2009 [12] Futures and Options Week: According to figures published in F&O Week 10 October 2005. See also FOW Website (http:/ / www. fow. com). [13] "Biz.Yahoo.com" (http:/ / biz. yahoo. com/ c/ e. html). Biz.Yahoo.com. 2010-08-23. . Retrieved 2010-08-29. [14] FOW.com (http:/ / www. fow. com/ Article/ 1385702/ Issue/ 26557/ Emissions-derivatives-1. html), Emissions derivatives, 1 December 2005 [15] "Bis.org" (http:/ / www. bis. org/ statistics/ derstats. htm). Bis.org. 2010-05-07. . Retrieved 2010-08-29. [16] "Launch of the WIDER study on The World Distribution of Household Wealth: 5 December 2006" (http:/ / www. wider. unu. edu/ events/ past-events/ 2006-events/ en_GB/ 05-12-2006/ ). . Retrieved 9 June 2009. [17] Boumlouka, Makrem (2009),"Alternatives in OTC Pricing", Hedge Funds Review, 10-30-2009. http:/ / www. hedgefundsreview. com/ hedge-funds-review/ news/ 1560286/ otc-pricing-deal-struck-fitch-solutions-pricing-partners [18] Kelleher, James B. (2008-09-18). ""Buffett's Time Bomb Goes Off on Wall Street" by James B. Kelleher of Reuters" (http:/ / www. reuters. com/ article/ newsOne/ idUSN1837154020080918). Reuters.com. . Retrieved 2010-08-29. [19] Edwards, Franklin (1995), "Derivatives Can Be Hazardous To Your Health: The Case of Metallgesellschaft" (http:/ / www0. gsb. columbia. edu/ faculty/ fedwards/ papers/ DerivativesCanBeHazardous. pdf), Derivatives Quarterly (Spring 1995): 817, [20] Whaley, Robert (2006). Derivatives: markets, valuation, and risk management (http:/ / books. google. com/ books?id=Hb7xXy-wqiYC& printsec=frontcover& cad=0#v=onepage& q& f=false). John Wiley and Sons. p.506. ISBN0471786322. . [21] http:/ / www. businessweek. com/ news/ 2011-09-15/ ubs-loss-shows-banks-fail-to-learn-from-kerviel-leeson. html [22] http:/ / www. berkshirehathaway. com/ 2002ar/ 2002ar. pdf [23] Story, Louise, "A Secretive Banking Elite Rules Trading in Derivatives" (http:/ / www. nytimes. com/ 2010/ 12/ 12/ business/ 12advantage. html?hp), The New York Times, December 11, 2010 (December 12, 2010 p. A1 NY ed.). Retrieved 2010-12-12. [24] http:/ / www. cftc. gov/ LawRegulation/ DoddFrankAct/ index. htm
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Further reading
John C. Hull (2011), Options, Futures and Other Derivatives, Pearson Education, 8th Edition Michael Durbin (2011), All About Derivatives, McGraw-Hill, 2nd Edition Mehraj Mattoo (1997), Structured Derivatives: New Tools for Investment Management A Handbook of Structuring, Pricing & Investor Applications (Financial Times)
External links
BBC News Derivatives simple guide (http://news.bbc.co.uk/1/hi/business/2190776.stm) European Union proposals on derivatives regulation 2008 onwards (http://ec.europa.eu/internal_market/ financial-markets/derivatives/index_en.htm) Derivatives in Africa (http://www.mfw4a.org/capital-markets/derivatives-derivatives-exchanges-commodities. html) Derivatives Litigation (http://derivatives-litigation.blogspot.com/)
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short). In many cases, the underlying asset to a futures contract may not be traditional commodities at all that is, for financial futures the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. While the futures contract specifies a trade taking place in the future, the purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either party. Thus the exchange requires both parties to put up an initial amount of cash, the margin. Additionally, since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also. The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value (since any gain or loss has already been previously settled by marking to market). A closely related contract is a forward contract. A forward is like a futures in that it specifies the exchange of goods for a specified price at a specified future date. However, a forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. Nor is the contract standardized, as on the exchange. Unlike an option, both parties of a futures contract must fulfill the contract on the delivery date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position can close out its contract obligations by taking the opposite position on another futures contract on the same asset and settlement date. The difference in futures prices is then a profit or loss.
Futures contract
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Origin
Aristotle described the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application". Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or poor and because the olive press owners were willing to hedge against the possibility of a poor yield. When the harvest time came, and many presses were wanted concurrently and suddenly, he let them out at any rate he pleased, and made a large quantity of money.[1] The first futures exchange market was the Djima Rice Exchange in Japan in the 1730s, to meet the needs of samurai whobeing paid in rice, and after a series of bad harvestsneeded a stable conversion to coin.[2] The Chicago Board of Trade (CBOT) listed the first ever standardized 'exchange traded' forward contracts in 1864, which were called futures contracts. This contract was based on grain trading and started a trend that saw contracts created on a number of different commodities as well as a number of futures exchanges set up in countries around the world.[3] By 1875 cotton futures were being traded in Mumbai in India and within a few years this had expanded to futures on edible oilseeds complex, raw jute and jute goods and bullion.[4]
Standardization
Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying asset or instrument. This could be anything from a barrel of crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc. The currency in which the futures contract is quoted. The grade of the deliverable. In the case of bonds, this specifies which bonds can be delivered. In the case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. For example, the NYMEX Light Sweet Crude Oil contract specifies the acceptable sulphur content and API specific gravity, as well as the pricing point -- the location where delivery must be made. The delivery month. The last trading date. Other details such as the commodity tick, the minimum permissible price fluctuation.
Futures contract
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Margin
To minimize credit risk to the exchange, traders must post a margin or a performance bond, typically 5%-15% of the contract's value. To minimize counterparty risk to traders, trades executed on regulated futures exchanges are guaranteed by a clearing house. The clearing house becomes the buyer to each seller, and the seller to each buyer, so that in the event of a counterparty default the clearer assumes the risk of loss. This enables traders to transact without performing due diligence on their counterparty. Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Clearing margin are financial safeguards to ensure that companies or corporations perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. Customer margin Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance bond margin. Initial margin is the equity required to initiate a futures position. This is a type of performance bond. The maximum exposure is not limited to the amount of the initial margin, however the initial margin requirement is calculated based on the maximum estimated change in contract value within a trading day. Initial margin is set by the exchange. If a position involves an exchange-traded product, the amount or percentage of initial margin is set by the exchange concerned. In case of loss or if the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as variation margin, margin called for this reason is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day. Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit in the clients account. Some U.S. exchanges also use the term maintenance margin, which in effect defines by how much the value of the initial margin can reduce before a margin call is made. However, most non-US brokers only use the term initial margin and variation margin. The Initial Margin requirement is established by the Futures exchange, in contrast to other securities Initial Margin (which is set by the Federal Reserve in the U.S. Markets).
Futures contract A futures account is marked to market daily. If the margin drops below the margin maintenance requirement established by the exchange listing the futures, a margin call will be issued to bring the account back up to the required level. Maintenance margin A set minimum margin per outstanding futures contract that a customer must maintain in his margin account. Margin-equity ratio is a term used by speculators, representing the amount of their trading capital that is being held as margin at any particular time. The low margin requirements of futures results in substantial leverage of the investment. However, the exchanges require a minimum amount that varies depending on the contract and the trader. The broker may set the requirement higher, but may not set it lower. A trader, of course, can set it above that, if he does not want to be subject to margin calls. Performance bond margin The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit. Return on margin (ROM) is often used to judge performance because it represents the gain or loss compared to the exchanges perceived risk as reflected in required margin. ROM may be calculated (realized return) / (initial margin). The Annualized ROM is equal to (ROM+1)(year/trade_duration)-1. For example if a trader earns 10% on margin in two months, that would be about 77% annualized.
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Settlement - physical versus cash-settled futures

Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). The Nymex crude futures contract uses this method of settlement upon expiration Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. The parties settle by paying/receiving the loss/gain related to the contract in cash when the contract expires.[5] Cash settled futures are those that, as a practical matter, could not be settled by delivery of the referenced item - i.e. how would one deliver an index? A futures contract might also opt to settle against an index based on trade in a related spot market. Ice Brent futures use this method. Expiry (or Expiration in the U.S.) is the time and the day that a particular delivery month of a futures contract stops trading, as well as the final settlement price for that contract. For many equity index and interest rate futures contracts (as well as for most equity options), this happens on the third Friday of certain trading months. On this day the t+1 futures contract becomes the t futures contract. For example, for most CME and CBOT contracts, at the expiration of the December contract, the March futures become the nearest contract. This is an exciting time for arbitrage desks, which try to make quick profits during the short period (perhaps 30 minutes) during which the underlying cash price and the futures price sometimes struggle to converge. At this moment the futures and the underlying assets are extremely liquid and any disparity between an index and an underlying asset is quickly traded by arbitrageurs. At this moment also, the increase in volume is caused by traders rolling over positions to the next contract or, in the case of equity index futures, purchasing underlying components of those indexes to hedge against current index positions. On the expiry date, a European equity arbitrage trading desk in London or Frankfurt will see positions expire in as many as eight major markets almost every half an hour.
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Pricing
When the deliverable asset exists in plentiful supply, or may be freely created, then the price of a futures contract is determined via arbitrage arguments. This is typical for stock index futures, treasury bond futures, and futures on physical commodities when they are in supply (e.g. agricultural crops after the harvest). However, when the deliverable commodity is not in plentiful supply or when it does not yet exist - for example on crops before the harvest or on Eurodollar Futures or Federal funds rate futures (in which the supposed underlying instrument is to be created upon the delivery date) - the futures price cannot be fixed by arbitrage. In this scenario there is only one force setting the price, which is simple supply and demand for the asset in the future, as expressed by supply and demand for the futures contract.
Arbitrage arguments
Arbitrage arguments ("Rational pricing") apply when the deliverable asset exists in plentiful supply, or may be freely created. Here, the forward price represents the expected future value of the underlying discounted at the risk free rateas any deviation from the theoretical price will afford investors a riskless profit opportunity and should be arbitraged away. Thus, for a simple, non-dividend paying asset, the value of the future/forward, F(t), will be found by compounding the present value S(t) at time t to maturity T by the rate of risk-free return r.
or, with continuous compounding
This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. In a perfect market the relationship between futures and spot prices depends only on the above variables; in practice there are various market imperfections (transaction costs, differential borrowing and lending rates, restrictions on short selling) that prevent complete arbitrage. Thus, the futures price in fact varies within arbitrage boundaries around the theoretical price.
Pricing via expectation

When the deliverable commodity is not in plentiful supply (or when it does not yet exist) rational pricing cannot be applied, as the arbitrage mechanism is not applicable. Here the price of the futures is determined by today's supply and demand for the underlying asset in the futures. In a deep and liquid market, supply and demand would be expected to balance out at a price which represents an unbiased expectation of the future price of the actual asset and so be given by the simple relationship. . By contrast, in a shallow and illiquid market, or in a market in which large quantities of the deliverable asset have been deliberately withheld from market participants (an illegal action known as cornering the market), the market clearing price for the futures may still represent the balance between supply and demand but the relationship between this price and the expected future price of the asset can break down.
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Relationship between arbitrage arguments and expectation

The expectation based relationship will also hold in a no-arbitrage setting when we take expectations with respect to the risk-neutral probability. In other words: a futures price is martingale with respect to the risk-neutral probability. With this pricing rule, a speculator is expected to break even when the futures market fairly prices the deliverable commodity.
Contango and backwardation

The situation where the price of a commodity for future delivery is higher than the spot price, or where a far future delivery price is higher than a nearer future delivery, is known as contango. The reverse, where the price of a commodity for future delivery is lower than the spot price, or where a far future delivery price is lower than a nearer future delivery, is known as backwardation.
Futures contracts and exchanges

Contracts There are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities (such as single-stock futures), currencies or intangibles such as interest rates and indexes. For information on futures markets in specific underlying commodity markets, follow the links. For a list of tradable commodities futures contracts, see List of traded commodities. See also the futures exchange article. Foreign exchange market Money market Bond market Equity market Soft Commodities market
Trading on commodities began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century, when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (also called spot or cash market) or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts. Although contract trading began with traditional commodities such as grains, meat and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates and private interest rates. Exchanges Contracts on financial instruments were introduced in the 1970s by the Chicago Mercantile Exchange (CME) and these instruments became hugely successful and quickly overtook commodities futures in terms of trading volume and global accessibility to the markets. This innovation led to the introduction of many new futures exchanges worldwide, such as the London International Financial Futures Exchange in 1982 (now Euronext.liffe), Deutsche Terminbrse (now Eurex) and the Tokyo Commodity Exchange (TOCOM). Today, there are more than 90 futures and futures options exchanges worldwide trading to include: [6] CME Group (formerly CBOT and CME) -- Currencies, Various Interest Rate derivatives (including US Bonds); Agricultural (Corn, Soybeans, Soy Products, Wheat, Pork, Cattle, Butter, Milk); Index (Dow Jones Industrial Average); Metals (Gold, Silver), Index (NASDAQ, S&P, etc.) IntercontinentalExchange (ICE Futures Europe) - formerly the International Petroleum Exchange trades energy including crude oil, heating oil, natural gas and unleaded gas
Futures contract NYSE Euronext - which absorbed Euronext into which London International Financial Futures and Options Exchange or LIFFE (pronounced 'LIFE') was merged. (LIFFE had taken over London Commodities Exchange ("LCE") in 1996)- softs: grains and meats. Inactive market in Baltic Exchange shipping. Index futures include EURIBOR, FTSE 100, CAC 40, AEX index. South African Futures Exchange - SAFEX Sydney Futures Exchange Tokyo Stock Exchange TSE (JGB Futures, TOPIX Futures) Tokyo Commodity Exchange TOCOM Tokyo Financial Exchange [7] - TFX - (Euroyen Futures, OverNight CallRate Futures, SpotNext RepoRate Futures) Osaka Securities Exchange OSE (Nikkei Futures, RNP Futures) London Metal Exchange - metals: copper, aluminium, lead, zinc, nickel, tin and steel IntercontinentalExchange (ICE Futures U.S.) - formerly New York Board of Trade - softs: cocoa, coffee, cotton, orange juice, sugar New York Mercantile Exchange CME Group- energy and metals: crude oil, gasoline, heating oil, natural gas, coal, propane, gold, silver, platinum, copper, aluminum and palladium Dubai Mercantile Exchange Korea Exchange - KRX Singapore Exchange - SGX - into which merged Singapore International Monetary Exchange (SIMEX) ROFEX - Rosario (Argentina) Futures Exchange
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Codes
Most Futures contracts codes are four characters. The first two characters identify the contract type, the third character identifies the month and the last character is the last digit of the year. Third (month) futures contract codes are January = F February = G March = H April = J May = K June = M July = N August = Q September = U October = V November = X December = Z
Example: CLX0 is a Crude Oil (CL), November (X) 2010 (0) contract.
Who trades futures?

Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to hedge out the risk of price changes; and speculators, who seek to make a profit by predicting market moves and opening a derivative contract related to the asset "on paper", while they have no practical use for or intent to actually take or make delivery of the underlying asset. In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract.
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Hedgers
Hedgers typically include producers and consumers of a commodity or the owner of an asset or assets subject to certain influences such as an interest rate. For example, in traditional commodity markets, farmers often sell futures contracts for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan. Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed. In modern (financial) markets, "producers" of interest rate swaps or equity derivative products will use financial futures or equity index futures to reduce or remove the risk on the swap.
Speculators
Speculators typically fall into three categories: position traders, day traders, and swing traders (swing trading), though many hybrid types and unique styles exist. In general position traders hold positions for the long term (months to years), day traders (or active traders) enter multiple trades during the day and will have exited all positions by market close, and swing traders aim to buy or sell at the bottom or top of price swings.[8] With many investors pouring into the futures markets in recent years controversy has risen about whether speculators are responsible for increased volatility in commodities like oil, and experts are divided on the matter. [9] An example that has both hedge and speculative notions involves a mutual fund or separately managed account whose investment objective is to track the performance of a stock index such as the S&P 500 stock index. The Portfolio manager often "equitizes" cash inflows in an easy and cost effective manner by investing in (opening long) S&P 500 stock index futures. This gains the portfolio exposure to the index which is consistent with the fund or account investment objective without having to buy an appropriate proportion of each of the individual 500 stocks just yet. This also preserves balanced diversification, maintains a higher degree of the percent of assets invested in the market and helps reduce tracking error in the performance of the fund/account. When it is economically feasible (an efficient amount of shares of every individual position within the fund or account can be purchased), the portfolio manager can close the contract and make purchases of each individual stock. The social utility of futures markets is considered to be mainly in the transfer of risk, and increased liquidity between traders with different risk and time preferences, from a hedger to a speculator, for example.
Options on futures
In many cases, options are traded on futures, sometimes called simply "futures options". A put is the option to sell a futures contract, and a call is the option to buy a futures contract. For both, the option strike price is the specified futures price at which the future is traded if the option is exercised. Futures are often used since they are delta one instruments. Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula, namely Black's formula for futures. Investors can either take on the role of the option seller/option writer or the option buyer. Option sellers are generally seen as taking on more risk because they are contractually obligated to take the opposite futures position if the options buyer exercises his or her right to the futures position specified in the option. The price of an option is determined by supply and demand principles and consists of the option premium, or the price paid to the option seller for offering the option and taking on risk. [10]
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Futures contract regulations

All futures transactions in the United States are regulated by the Commodity Futures Trading Commission (CFTC), an independent agency of the United States government. The Commission has the right to hand out fines and other punishments for an individual or company who breaks any rules. Although by law the commission regulates all transactions, each exchange can have its own rule, and under contract can fine companies for different things or extend the fine that the CFTC hands out. The CFTC publishes weekly reports containing details of the open interest of market participants for each market-segment that has more than 20 participants. These reports are released every Friday (including data from the previous Tuesday) and contain data on open interest split by reportable and non-reportable open interest as well as commercial and non-commercial open interest. This type of report is referred to as the 'Commitments of Traders Report', COT-Report or simply COTR.
Definition of futures contract

Following Bjrk[11] we give a definition of a futures contract. We describe a futures contract with delivery of item J at the time T: There exists in the market a quoted price F(t,T), which is known as the futures price at time t for delivery of J at time T. The price of entering a futures contract is equal to zero. During any time interval , the holder receives the amount . (this reflects
instantaneous marking to market) At time T, the holder pays F(T,T) and is entitled to receive J. Note that F(T,T) should be the spot price of J at time T.
Nonconvergence
Some exchanges tolerate 'nonconvergence', the failure of futures contracts and the value of the physical commodities they represent to reach the same value on 'contract settlement' day at the designated delivery points. An example of this is the CBOT (Chicago Board of Trade) Soft Red Winter wheat (SRW) futures. SRW futures have settled more than 20 apart on settlement day and as much as $1.00 difference between settlement days. Only a few participants holding CBOT SRW futures contracts are qualified by the CBOT to make or receive delivery of commodities to settle futures contracts. Therefore, it's impossible for almost any individual producer to 'hedge' efficiently when relying on the final settlement of a futures contract for SRW. The trend is for the CBOT to continue to restrict those entities that can actually participate in settling commodities contracts to those that can ship or receive large quantities of railroad cars and multiple barges at a few selected sites. The Commodity Futures Trading Commission, which has oversight of the futures market in the United States, has made no comment as to why this trend is allowed to continue since economic theory and CBOT publications maintain that convergence of contracts with the price of the underlying commodity they represent is the basis of integrity for a futures market. It follows that the function of 'price discovery', the ability of the markets to discern the appropriate value of a commodity reflecting current conditions, is degraded in relation to the discrepancy in price and the inability of producers to enforce contracts with the commodities they represent.[12]
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Futures versus forwards

While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects: Futures are exchange-traded, while forwards are traded over-the-counter. Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. Futures are margined, while forwards are not. Thus futures have significantly less credit risk, and have different funding.
Exchange versus OTC

Futures are always traded on an exchange, whereas forwards always trade over-the-counter, or can simply be a signed contract between two parties. Thus: Futures are highly standardized, being exchange-traded, whereas forwards can be unique, being over-the-counter. In the case of physical delivery, the forward contract specifies to whom to make the delivery. The counterparty for delivery on a futures contract is chosen by the clearing house.
Margining
Futures are margined daily to the daily spot price of a forward with the same agreed-upon delivery price and underlying asset (based on mark to market). Forwards do not have a standard. They may transact only on the settlement date. More typical would be for the parties to agree to true up, for example, every quarter. The fact that forwards are not margined daily means that, due to movements in the price of the underlying asset, a large differential can build up between the forward's delivery price and the settlement price, and in any event, an unrealized gain (loss) can build up. Again, this differs from futures which get 'trued-up' typically daily by a comparison of the market value of the future to the collateral securing the contract to keep it in line with the brokerage margin requirements. This true-ing up occurs by the "loss" party providing additional collateral; so if the buyer of the contract incurs a drop in value, the shortfall or variation margin would typically be shored up by the investor wiring or depositing additional cash in the brokerage account. In a forward though, the spread in exchange rates is not trued up regularly but, rather, it builds up as unrealized gain (loss) depending on which side of the trade being discussed. This means that entire unrealized gain (loss) becomes realized at the time of delivery (or as what typically occurs, the time the contract is closed prior to expiration) assuming the parties must transact at the underlying currency's spot price to facilitate receipt/delivery. The result is that forwards have higher credit risk than futures, and that funding is charged differently. In most cases involving institutional investors, the daily variation margin settlement guidelines for futures call for actual money movement only above some insignificant amount to avoid wiring back and forth small sums of cash. The threshold amount for daily futures variation margin for institutional investors is often $1,000. The situation for forwards, however, where no daily true-up takes place in turn creates credit risk for forwards, but not so much for futures. Simply put, the risk of a forward contract is that the supplier will be unable to deliver the referenced asset, or that the buyer will be unable to pay for it on the delivery date or the date at which the opening party closes the contract. The margining of futures eliminates much of this credit risk by forcing the holders to update daily to the price of an equivalent forward purchased that day. This means that there will usually be very little additional money due on the final day to settle the futures contract: only the final day's gain or loss, not the gain or loss over the life of the
Futures contract contract. In addition, the daily futures-settlement failure risk is borne by an exchange, rather than an individual party, further limiting credit risk in futures. Example: Consider a futures contract with a $100 price: Let's say that on day 50, a futures contract with a $100 delivery price (on the same underlying asset as the future) costs $88. On day 51, that futures contract costs $90. This means that the "mark-to-market" calculation would requires the holder of one side of the future to pay $2 on day 51 to track the changes of the forward price ("post $2 of margin"). This money goes, via margin accounts, to the holder of the other side of the future. That is, the loss party wires cash to the other party. A forward-holder, however, may pay nothing until settlement on the final day, potentially building up a large balance; this may be reflected in the mark by an allowance for credit risk. So, except for tiny effects of convexity bias (due to earning or paying interest on margin), futures and forwards with equal delivery prices result in the same total loss or gain, but holders of futures experience that loss/gain in daily increments which track the forward's daily price changes, while the forward's spot price converges to the settlement price. Thus, while under mark to market accounting, for both assets the gain or loss accrues over the holding period; for a futures this gain or loss is realized daily, while for a forward contract the gain or loss remains unrealized until expiry. Note that, due to the path dependence of funding, a futures contract is not, strictly speaking, a European-style derivative: the total gain or loss of the trade depends not only on the value of the underlying asset at expiry, but also on the path of prices on the way. This difference is generally quite small though. With an exchange-traded future, the clearing house interposes itself on every trade. Thus there is no risk of counterparty default. The only risk is that the clearing house defaults (e.g. become bankrupt), which is considered very unlikely.
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Further reading
The National Futures Association [13] (2006). An Educational Guide to Trading Futures and Options on Futures [14] . Chicago, Illinois.
Notes
[1] Aristotle, Politics, trans. Benjamin Jowett, vol. 2, The Great Books of the Western World, book 1, chap. 11, p. 453. [2] Schaede, Ulrike (September 1989). "Forwards and futures in tokugawa-period Japan:A new perspective on the Djima rice market". Journal of Banking & Finance 13 (45): 487513. doi:10.1016/0378-4266(89)90028-9 [3] "timeline-of-achievements" (http:/ / www. cmegroup. com/ company/ history/ timeline-of-achievements. html). CME Group. . Retrieved August 5, 2010. [4] Inter-Ministerial task force (chaired by Wajahat Habibullah) (May 2003). "Convergence of Securities and Commodity Markets report" (http:/ / www. fmc. gov. in/ htmldocs/ reports/ rep03. htm). Forward Markets Commission (India). . Retrieved August 5, 2010. [5] Cash settlement on Wikinvest [6] Futures & Options Factbook (http:/ / www. theIFM. org/ gfb). Institute for Financial Markets. [7] http:/ / www. tfx. co. jp/ en/ [8] Levy-Mayer, I. Futures Trading (https:/ / www. cannontrading. com) - Futures Trading Types (http:/ / www. cannontrading. com/ pdf/ blood-type. pdf), Stocks, Futures, Options (SFO) Magazine, July 2004. Accessed December 10, 2010 [9] Dreibus, Tony C. Commodity Bubbles Caused by Speculators Need Intervention, UN Agency Says (http:/ / www. bloomberg. com/ news/ 2011-06-05/ commodity-bubbles-caused-by-speculators-need-intervention-un-agency-says. html), Bloomberg, June 5, 2011. Accessed July 2, 2011 [10] CME Group CME Options on Futures: The Basics (http:/ / www. cmegroup. com/ resources-for/ files/ G66_Options_on_Fut2001. pdf). Accessed February 8, 2011 [11] Bjrk: Arbitrage theory in continuous time, Cambridge university press, 2004 [12] Henriques, D Mysterious discrepancies in grain prices baffle experts (http:/ / www. iht. com/ articles/ 2008/ 03/ 27/ business/ commod. php), International Herald Tribune, March 23, 2008. Accessed April 12, 2008 [13] http:/ / www. nfa. futures. org/ [14] http:/ / www. nfa. futures. org/ nfa-investor-information/ publication-library/ opportunity-and-risk-entire. pdf
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References
The Institute for Financial Markets (http://www.theifm.org) (2003). Futures & Options (http://www.theifm. org/index.cfm?inc=education/focourse.inc). Washington, DC: The IFM. p.237. Redhead, Keith (1997). Financial Derivatives: An Introduction to Futures, Forwards, Options and Swaps. London: Prentice-Hall. ISBN013241399X. Lioui, Abraham; Poncet, Patrice (2005). Dynamic Asset Allocation with Forwards and Futures. New York: Springer. ISBN0387241078. Valdez, Steven (2000). An Introduction To Global Financial Markets (3rd ed.). Basingstoke, Hampshire: Macmillan Press. ISBN0333764471. Arditti, Fred D. (1996). Derivatives: A Comprehensive Resource for Options, Futures, Interest Rate Swaps, and Mortgage Securities. Boston: Harvard Business School Press. ISBN0875845606.
U.S. Futures exchanges and regulators

Chicago Board of Trade, now part of CME Group Chicago Mercantile Exchange, now part of CME Group Commodity Futures Trading Commission National Futures Association Kansas City Board of Trade New York Board of Trade now ICE New York Mercantile Exchange, now part of CME Group Minneapolis Grain Exchange
External links
CME Group futures contracts product codes (http://www.cmegroup.com/product-codes-listing/)
Investment strategy
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Investment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Usually the strategy will be designed around the investor's risk-return tradeoff: some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere in between. Passive strategies are often used to minimize transaction costs, and active strategies such as market timing are an attempt to maximize returns. One of the better-known investment strategies is buy and hold. Buy and hold is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of return despite periods of volatility or decline. A purely passive variant of this strategy is indexing, where an investor buys a small proportion of all the shares in a market index such as the S&P 500, or more likely, in a mutual fund called an index fund or an exchange-traded fund (ETF). This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and hold. The smaller, retail investor more typically uses the buy and hold investment strategy in real estate investment where the holding period is typically the lifespan of their mortgage.
External links
MoneyWeek Investment Advice [1] Wheel of fortune [2] Design and test your investment strategy for a virtual wheel of fortune, optimize your strategies using different utility functions. Virtual stock market [3] Design and test your investment strategy for a virtual stock market, where three stocks and a bank account are available for investing.
References
[1] http:/ / www. moneyweek. com/ file/ 39/ investing. html [2] http:/ / www. fam. tuwien. ac. at/ public/ simulation/ wheel_en. html [3] http:/ / www. fam. tuwien. ac. at/ public/ simulation/ exchange_en. html
Buy and hold
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Buy and hold

Buy and hold is a long-term investment strategy based on the view that in the long run financial markets give a good rate of return despite periods of volatility or decline. This viewpoint also holds that short-term market timing, i.e. the concept that one can enter the market on the lows and sell on the highs, does not work; attempting timing gives negative results, at least for small or unsophisticated investors, so it is better for them to simply buy and hold. The antithesis of buy-and-hold is the concept of day trading, in which money can be made in the short term if an individual tries to short on the peaks, and buy on the lows with greater money coming with greater volatility. One of the strongest arguments for the buy and hold strategy is the efficient-market hypothesis (EMH): If every security is fairly valued at all times, then there is really no point to trade. Some take the buy-and-hold strategy to an extreme, advocating that you should never sell a security unless you need the money.[1] Others have advocated buy-and-hold on purely cost-based grounds, without resort to the EMH. Costs such as brokerage and bid/offer spread are incurred on all transactions, and buy-and-hold involves the fewest transactions for a given amount invested in the market, all other things being equal. Warren Buffett is an example of a buy-and-hold advocate who has rejected the EMH in his writings, and has built his fortune by investing in companies at times when they were undervalued. Some may argue that Warren Buffett is a long-term market timer.
References
[1] www.efficientmarket.ca (http:/ / www. efficientmarket. ca/ article/ Buy-And-Hold)
External links
Never Sell: Buy and Hold Forever (http://www.efficientmarket.ca/article/Buy-And-Hold) (Efficient Market Canada, Investment Magazine) The Buy and Hold Apocalypse (http://www.fool.com/school/buyandhold.htm): Motley Fool article John Bogle, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, Dell, 1994, ISBN 0-440-50682-4 Mark T. Hebner, Index Funds: The 12-Step Program for Active Investors, IFA Publishing, 2005, ISBN 0-976-80230-9 Interactive Java Applet " 'Buy and Hold' - How much can you make over longer time periods? (http://www. frog-numerics.com/ifs/ifs_LevelA/AverageReturnHoldOnly.html)"
Growth investing
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Growth investing
Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term "growth investing" contrasts with the strategy known as value investing. However, some notable investors such as Warren Buffett have stated that there is no theoretical difference between the concepts of value and growth ("Growth and Value Investing are joined at the hip"), in consideration of the concept of an asset's intrinsic value. In addition, when just investing in one style of stocks, diversification could be negatively impacted. Thomas Rowe Price, Jr. has been called "the father of growth investing".[1]
Growth at reasonable price

After the bursting of the dotcom bubble, "growth at any price" has fallen from favour. Attaching a high price to a security in the hope of high growth may be risky, since if the growth rate fails to live up to expectations, the price of the security can plummet. It is often more fashionable now to seek out stocks with high growth rates that are trading at reasonable valuations.
Growth investment vehicles

There are many ways to execute a growth investment strategy. Some of these include: Emerging markets Recovery shares Blue chips Internet and technology stock Smaller companies Special situations Second-hand life policies
References
[1] Investopedia. The Greatest Investors: Thomas Rowe Price, Jr. (http:/ / www. investopedia. com/ university/ greatest/ thomasroweprice. asp)
External links
fool.com: Value, Growth, and Buffett (http://www.fool.com/imo/2002/a020424.htm) Morningstar style box (http://search.morningstar.com/Glossary/Glossary_M.html#21)
Index fund
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Index fund
An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.
Tracking
Tracking can be achieved by trying to hold all of the securities in the index, in the same proportions as the index. Other methods include statistically sampling the market and holding "representative" securities. Many index funds rely on a computer model with little or no human input in the decision as to which securities are purchased or sold and is therefore a form of passive management.
Fees
The lack of active management generally gives the advantage of lower fees and lower taxes in taxable accounts. Of course, the fees reduce the return to the investor relative to the index. In addition it is usually impossible to precisely mirror the index as the models for sampling and mirroring, by their nature, cannot be 100% accurate. The difference between the index performance and the fund performance is known as the "tracking error" or informally "jitter". Index funds are available from many investment managers. Some common indices include the S&P 500, the Nikkei 225, and the FTSE 100. Less common indexes come from academics like Eugene Fama and Kenneth French, who created "research indexes" in order to develop asset pricing models, such as their Three Factor Model. The Fama-French three-factor model is used by Dimensional Fund Advisors to design their index funds. Robert Arnott and Professor Jeremy Siegel have also created new competing fundamentally based indexes based on such criteria as dividends, earnings, book value, and sales.
Origins
In 1973, Burton Malkiel wrote A Random Walk Down Wall Street, which presented academic findings for the lay public. It was becoming well known in the lay financial press that most mutual funds were not beating the market indices. Malkiel wrote
What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out "You can't buy the averages." It's time the public could. ....there is no greater service [the New York Stock Exchange] could provide than to sponsor such a fund and run it on a nonprofit basis.... Such a fund is much needed, and if the New York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it, I hope [1] some other institution will.
John Bogle graduated from Princeton University in 1951, where his senior thesis was titled: "Mutual Funds can make no claims to superiority over the Market Averages." Bogle wrote that his inspiration for starting an index fund came from three sources, all of which confirmed his 1951 research: Paul Samuelson's 1974 paper, "Challenge to Judgment", Charles Ellis' 1975 study, "The Loser's Game", and Al Ehrbar's 1975 Fortune magazine article on indexing. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009. Bogle started the First Index Investment Trust on December 31, 1975. At the time, it was heavily derided by competitors as being "un-American" and the fund itself was seen as "Bogle's folly".[2] Fidelity Investments Chairman Edward Johnson was quoted as saying that he "[couldn't] believe that the great mass of investors are going to be satisfied with receiving just average returns".[3] Bogle's fund was later renamed the Vanguard 500 Index Fund, which
Index fund tracks the Standard and Poor's 500 Index. It started with comparatively meager assets of $11 million but crossed the $100 billion milestone in November 1999; this astonishing increase was funded by the market's increasing willingness to invest in such a product. Bogle predicted in January 1992 that it would very likely surpass the Magellan Fund before 2001, which it did in 2000. John McQuown and David G. Booth at Wells Fargo and Rex Sinquefield at American National Bank in Chicago both established the first Standard and Poor's Composite Index Funds in 1973. Both of these funds were established for institutional clients; individual investors were excluded. Wells Fargo started with $5 million from their own pension fund, while Illinois Bell put in $5 million of their pension funds at American National Bank. In 1971, Jeremy Grantham and Dean LeBaron at Batterymarch Financial Management "described the idea at a Harvard Business School seminar in 1971, but found no takers until 1973. For its efforts, Batterymarch won the "Dubious Achievement Award" from Pensions & Investments magazine in 1972. Two years later, in December 1974, the firm finally attracted its first index client."[4] In 1981, David Booth and Rex Sinquefield started Dimensional Fund Advisors (DFA), and McQuown joined its Board of Directors many years later. DFA further developed indexed based investment strategies. Wells Fargo sold its indexing operation to Barclay's Bank of London, and it now operates as Barclays Global Investors; it is one of the world's largest money managers.
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Economic theory
Economist Eugene Fama said, "I take the market efficiency hypothesis to be the simple statement that security prices fully reflect all available information." A precondition for this strong version of the hypothesis is that information and trading costs, the costs of getting prices to reflect information, are always 0 (Grossman and Stiglitz (1980))." A weaker and economically more sensible version of the efficiency hypothesis says that prices reflect information to the point where the marginal benefits of acting on information (the profits to be made) do not exceed marginal costs (Jensen (1978)). Economists cite the efficient-market hypothesis (EMH) as the fundamental premise that justifies the creation of the index funds. The hypothesis implies that fund managers and stock analysts are constantly looking for securities that may out-perform the market; and that this competition is so effective that any new information about the fortune of a company will rapidly be incorporated into stock prices. It is postulated therefore that it is very difficult to tell ahead of time which stocks will out-perform the market.[5] By creating an index fund that mirrors the whole market the inefficiencies of stock selection are avoided. In particular the EMH says that economic profits cannot be wrung from stock picking. This is not to say that a stock picker cannot achieve a superior return, just that the excess return will on average not exceed the costs of winning it (including salaries, information costs, and trading costs). The conclusion is that most investors would be better off buying a cheap index fund. Note that return refers to the ex-ante expectation; ex-post realisation of payoffs may make some stock-pickers appear successful. In addition there have been many criticisms of the EMH.
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Indexing methods
Traditional indexing
Indexing is traditionally known as the practice of owning a representative collection of securities, in the same ratios as the target index. Modification of security holdings happens only when companies periodically enter or leave the target index.
Synthetic indexing
Synthetic indexing is a modern technique of using a combination of equity index futures contracts and investments in low risk bonds to replicate the performance of a similar overall investment in the equities making up the index. Although maintaining the future position has a slightly higher cost structure than traditional passive sampling, synthetic indexing can result in more favourable tax treatment, particularly for international investors who are subject to U.S. dividend withholding taxes. The bond portion can hold higher yielding instruments, with a trade-off of corresponding higher risk, a technique referred to as enhanced indexing.
Enhanced indexing
Enhanced indexing is a catch-all term referring to improvements to index fund management that emphasize performance, possibly using active management. Enhanced index funds employ a variety of enhancement techniques, including customized indexes (instead of relying on commercial indexes), trading strategies, exclusion rules, and timing strategies. The cost advantage of indexing could be reduced or eliminated by employing active management. Enhanced indexing strategies help in offsetting the proportion of tracking error that would come from expenses and transaction costs. These enhancement strategies can be: lower cost, issue selection, yield curve positioning, sector and quality positioning and call exposure positioning.
Advantages
Low costs
Because the composition of a target index is a known quantity, it costs less to run an index fund. No highly paid stock pickers or analysts are needed. Typically expense ratios of an index fund ranges from 0.15% for U.S. Large Company Indexes to 0.97% for Emerging Market Indexes. The expense ratio of the average large cap actively managed mutual fund as of 2005 is 1.36%. If a mutual fund produces 10% return before expenses, taking account of the expense ratio difference would result in an after expense return of 9.85% for the large cap index fund versus 8.64% for the actively managed large cap fund.
Simplicity
The investment objectives of index funds are easy to understand. Once an investor knows the target index of an index fund, what securities the index fund will hold can be determined directly. Managing one's index fund holdings may be as easy as rebalancing every six months or every year.
Lower turnovers
Turnover refers to the selling and buying of securities by the fund manager. Selling securities in some jurisdictions may result in capital gains tax charges, which are sometimes passed on to fund investors. Even in the absence of taxes, turnover has both explicit and implicit costs, which directly reduce returns on a dollar-for-dollar basis. Because index funds are passive investments, the turnovers are lower than actively managed funds. According to a
Index fund study conducted by John Bogle over a sixteen-year period, investors get to keep only 47% of the cumulative return of the average actively managed mutual fund, but they keep 87% in a market index fund. This means $10,000 invested in the index fund grew to $90,000 vs. $49,000 in the average actively managed stock mutual fund. That is a 40% gain from the reduction of silent partners.
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No style drift
Style drift occurs when actively managed mutual funds go outside of their described style (i.e. mid-cap value, large cap income, etc.) to increase returns. Such drift hurts portfolios that are built with diversification as a high priority. Drifting into other styles could reduce the overall portfolio's diversity and subsequently increase risk. With an index fund, this drift is not possible and accurate diversification of a portfolio is increased.
Disadvantages
Possible tracking error from index
Since index funds aim to match market returns, both under- and over-performance compared to the market is considered a "tracking error". For example, an inefficient index fund may generate a positive tracking error in a falling market by holding too much cash, which holds its value compared to the market. According to The Vanguard Group, a well run S&P 500 index fund should have a tracking error of 5 basis points or less, but a Morningstar survey found an average of 38 basis points across all index funds.[6]
Cannot outperform the target index

By design, an index fund seeks to match rather than outperform the target index. Therefore, a good index fund with low tracking error will not generally outperform the index, but rather produces a rate of return similar to the index minus fund costs.
Index composition changes reduce return

Whenever an index changes, the fund is faced with the prospect of selling all the stock that has been removed from the index, and purchasing the stock that was added to the index. The S&P 500 index has a typical turnover of between 1% and 9% per year.[7] In effect, the index, and consequently all funds tracking the index, are announcing ahead of time the trades that they are planning to make. As a result, the price of the stock that has been removed from the index tends to be driven down, and the price of stock that has been added to the index tends to be driven up, in part due to arbitrageurs, in a practice known as "index front running".[8] The index fund, however, has suffered market impact costs because they had to sell stock whose price was depressed, and buy stock whose price was inflated. These losses can be considered small, however, relative to an index fund's overall advantage gained by low costs.
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Diversification
Diversification refers to the number of different securities in a fund. A fund with more securities is said to be better diversified than a fund with smaller number of securities. Owning many securities reduces volatility by decreasing the impact of large price swings above or below the average return in a single security. A Wilshire 5000 index would be considered diversified, but a bio-tech ETF would not.[9] Since some indices, such as the S&P 500 and FTSE 100, are dominated by large company stocks, an index fund may have a high percentage of the fund concentrated in a few large companies. This position represents a reduction of diversity and can lead to increased volatility and investment risk for an investor who seeks a diversified fund. Some advocate adopting a strategy of investing in every security in the world in proportion to its market capitalization, generally by investing in a collection of ETFs in proportion to their home country market capitalization.[10] A global indexing strategy may outperform one based only on home market indexes because there may be less correlation between the returns of companies operating in different markets than between companies operating in the same market.
Asset allocation and achieving balance

Asset allocation is the process of determining the mix of stocks, bonds and other classes of investable assets to match the investor's risk capacity, which includes attitude towards risk, net income, net worth, knowledge about investing concepts, and time horizon. Index funds capture asset classes in a low cost and tax efficient manner and are used to design balanced portfolios. A combination of various index mutual funds or ETFs could be used to implement a full range of investment policies from low risk to high risk.
Comparison of index funds with index ETFs

In the United States, mutual funds price their assets by their current value every business day, usually at 4:00 p.m. Eastern time, when the New York Stock Exchange closes for the day.[11] Index ETFs, on the other hand, are priced during normal trading hours, usually 9:30 a.m. to 4:00 p.m. Eastern time.
U.S. capital gains tax considerations

U.S. mutual funds are required by law to distribute realized capital gains to their shareholders. If a mutual fund sells a security for a gain, the capital gain is taxable for that year; similarly a realized capital loss can offset any other realized capital gains. Scenario: An investor entered a mutual fund during the middle of the year and experienced an overall loss for the next 6 months. The mutual fund itself sold securities for a gain for the year, therefore must declare a capital gains distribution. The IRS would require the investor to pay tax on the capital gains distribution, regardless of the overall loss. A small investor selling an ETF to another investor does not cause a redemption on ETF itself; therefore, ETFs are more immune to the effect of forced redemptions causing realized capital gains.
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References
[1] Burton Malkiel (1973). A Random Talk Down Wall Street. W. W. Norton. ISBN 0-393-05500-0., page 226-7 [2] Bogle, John. "The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy" (http:/ / www. vanguard. com/ bogle_site/ lib/ sp19970401. html). Bogle Financial Center. . [3] Ferri, Richard (2006-12-22). "All About Index Funds" (http:/ / books. google. com/ books?id=wuTWFNXuNw8C& pg=PA38& lpg=PA38& dq=index+ fund+ unamerican& source=web& ots=9JuonIA0u4& sig=_ni97KfBlBoyPjhyLBiQh--9RxE#PPA37,M1). McGraw-Hill. . [4] Bogle, John. Common Sense on Mutual Funds. [5] Burton G. Malkiel, A Random Walk Down Wall Street, W. W. Norton, 1996, ISBN 0-393-03888-2 [6] Tergesen, Anne; Young, Lauren (2004-04-19). "Index Funds Aren't All Equal" (http:/ / www. businessweek. com/ magazine/ content/ 04_16/ b3879125_mz070. htm). BusinessWeek (McGraw-Hill Companies). . Retrieved 2007-02-20. [7] "S&P 500 Turnover Data" (http:/ / www2. standardandpoors. com/ portal/ site/ sp/ en/ au/ page. topic/ indices_500/ 2,3,2,2,0,0,0,0,0,5,13,0,0,0,0,0. html). Standard & Poor's. The McGraw-Hill Companies, Inc.. . Retrieved 2007-02-20. [8] "Understanding index front running" (http:/ / www. thetradenews. com/ 1578). The Trade Magazine. The TRADE Ltd.. . Retrieved 2009-03-24. [9] Bogle, John C. (2004-04-13). "As The Index Fund Moves from Heresy to Dogma . . . What More Do We Need To Know?" (http:/ / www. vanguard. com/ bogle_site/ sp20040413. html). The Gary P. Brinson Distinguished Lecture. Bogle Financial Center. . Retrieved 2007-02-20. [10] Gale, Martin.. "Building a Globally Efficient Equity Portfolio with Exchange Traded Funds" (http:/ / www. efficientmarket. ca/ article/ Globally_Efficient_Equity_Portfolio). . Retrieved 2008-01-08. [11] "Frequently Asked Questions About Mutual Fund Share Pricing" (http:/ / www. ici. org/ funds/ abt/ faqs_navs. html). Investment Company Institute. . Retrieved 2009-03-24.
John Bogle, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, Dell, 1994, ISBN 0-440-50682-4 Mark T. Hebner, Index Funds: The 12-Step Program for Active Investors, IFA Publishing, 2007, ISBN 0-9768023-0-9 Taylor Larimore, Mel Lindauer, Michael LeBoeuf, The Bogleheads' Guide to Investing, Wiley, 2006, ISBN 0-471-73033-5 From Berkshire Hathaway 2004 Annual Report; see Wikiquotes for text.
External links
Bogleheads.org - Investing advice inspired by the example of Jack Bogle (http://www.bogleheads.org/) The best investment advice you'll never get (http://www.sanfranmag.com/story/ best-investment-advice-youll-never-get) San Francisco Magazine article about the history and practice of Index funds, with commentary on mutual funds Is Stock Picking Declining Around the World? (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=849627) The article argues that there is a move towards indexing. The Lowdown on Index Funds (http://www.investopedia.com/articles/basics/03/032803.asp) Investopedia's introduction to Index Funds False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas (http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=869748) Evidence that stock selection is not a viable investing strategy. The Prescient Are Few (http://www.nytimes.com/2008/07/13/business/13stra.html?_r=1) - ...the number of funds that have beaten the market over their entire histories is so small that the False Discovery Rate test cant eliminate the possibility that the few that did were merely false positives just lucky, in other words. The Selection and Termination of Investment Management Firms by Plan Sponsors (http://www.ifa.com/pdf/ Performancechaser_fullarticle.pdf) A study about the difficulty of hiring and firing investment managers. Summary: (http://www.ifa.com/12steps/step5/step5page2.asp#f5J) the fired managers beat the hired managers over the 3 years after the decision.
Quality investing
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Quality investing
Quality investing is an investment strategy based on clearly defined fundamental factors that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability). Quality Investing supports best overall rather than best-in-class approach.
History
The idea for quality investing originated in the bond and real estate investing, where both the quality and price of potential investments are determined by ratings and expert attestations. Later the concept was applied to enterprises in equity markets. Benjamin Graham, the founding father of value investing, was the first to recognize the quality problem among equities back in the 1930s. Graham classified stocks as either quality or Low quality. He also observed that the greatest losses result not from buying quality at an excessively high price, but from buying Low quality at a price that seems good value.[1] The quality issue in a corporate context attracted particular attention in the management economics literature following the development of the BCG matrix in 1970. Using the two specific dimensions of life cycle and the experience curve concept, the matrix allocates a company's products and even companies themselves to one of two quality classes (Cash Cows and Stars) or two Non-quality classes (question Marks and Dogs). Other important works on quality of corporate business can be found primarily among the US management literature. These include, for example, "In Search of Excellence" by Thomas Peters and Robert Waterman[2] , "Built to Last" by Jim Collins and Jerry Porras[3] , and "Good to Great" by Jim Collins[4] . Quality investing gained credence in particular after the burst of the Dot-com bubble in 2001 when investors witnessed the spectacular failures of companies such as Enron and Worldcom. These corporate collapses focused investors awareness on quality, which may vary from stock to stock. Investors started to pay more attention to quality of balance sheet, earnings quality , information transparency, corporate governance quality.
Identification of Corporate quality

As a rule, systematic quality investors identify quality stocks using a defined schedule of criteria that they have generally developed themselves and revise continually. Selection criteria that demonstrably influence and/or explain a company's business success or otherwise can be broken down into five categories:[5] 1. Market Positioning: quality company possesses an economic moat, which distinguishes it from peers and allows to conquer leading market position. The company operates in the industry which offers certain growth potential and has global trends (e.g. ageing population for pharmaceuticals industry) as tailwinds. 2. Business model: According to the BCG matrix, the business model of a quality company is usually classified as star (growing business model, large capex) or cash cow (established business model, ample cash flows, attractive dividend yield). Having a competitive advantage, quality company offers good product portfolio, well-established value chain and wide geographical span. 3. Corporate Governance: Evaluation of corporate management execution is mainly based on soft-criteria assessment. Quality company has professional management, which is limited in headcount (6-8 members in top management) and has a low turnover rate. Its corporate governance structure is transparent, plausible and accordingly organized. 4. Financial Strength: Solid balance sheet, high capital and sales profitability, ability to generate ample cash flows are key attributes of quality company. Quality company tends to demonstrate positive financial momentum for
Quality investing several years in a row. Earnings are of high quality, with operating cash flows exceeding net income, inventories and accounts receivables not growing faster than sales etc. 5. Attractive valuation: Valuation ultimately is related to quality, which is similar to investments in real estate. Attractive valuation, which is defined by high discounted cash flow (DCF), low P/E ratio and P/B ratio, becomes an important factor in quality investing process. According to a number of studies the company can sustain its quality for about 11 months in average, which means that quantitative and qualitative monitoring of the company is done systematically.
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Comparison to other investment models

Quality investing is an investment style that can be viewed independent of value investing and growth Investing. A quality portfolio may therefore also contain stocks with Growth and Value attributes. Nowadays, Value Investing is based first and foremost on stock valuation. Certain valuation coefficients, such as the price/earnings and price/book ratios, are key elements here. Value is defined either by valuation level relative to the overall market or to the sector, or as the opposite of Growth. An analysis of the company's fundamentals is therefore secondary. Consequently, a Value investor will buy a company's stock because he believes that it is undervalued and that the company is a good one. A quality investor, meanwhile, will buy a company's stock because it is an excellent company that is also attractively valued. Modern Growth Investing centers primarily on Growth stocks. The investor's decision rests equally on experts' profit forecasts and the company's earnings per share. Only stocks that are believed to generate high future profits and a strong growth in earnings per share are admitted to a Growth investor's portfolio. The share price at which these anticipated profits are bought, and the fundamental basis for growth, are secondary considerations. Growth investors thus focus on stocks exhibiting strong earnings expansion and high profit expectations, regardless of their valuation. Quality investors, meanwhile, favor stocks whose high earnings growth is rooted in a sound fundamental basis and whose price is justified.
References
[1] [2] [3] [4] [5] Benjamin Graham (1949). The Intelligent Investor , New York: Collins. ISBN 0-06-055566-1. Thomas Peters and Robert Waterman (1982). In Search of Excellence. ISBN 0-06-015042-4 Jim Collins and Jerry Porras (1994). Built to Last. ISBN 978-0887307393 Jim Collins (2001). Good to Great . ISBN 978-0-06-662099-2 Weckherlin, P. / Hepp, M. (2006). Systematische Investments in Corporate Excellence, Verlag Neue Zrcher Zeitung. ISBN 3-03823-278-5.
Socially responsible investing
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Socially responsible investing, also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to maximize both financial return and social good. In general, socially responsible investors favor corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some (but not all) avoid businesses involved in alcohol, tobacco, gambling, weapons, and/or the military. The areas of concern recognized by the SRI industry can be summarized as environment, social justice, and corporate governance (ESG).
History
The origins of socially responsible investing (SRI) may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave tradebuying or selling humans. One of the most articulate early adopters of SRI was John Wesley Alternative Energy: One of many forms of (17031791), one of the founders of Methodism. Wesley's sermon sustainable investing "The Use of Money" outlined his basic tenets of social investing i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers. Some of the most well known applications of socially responsible investing were religiously motivated. Investors would avoid sinful companies, such as those associated with products such as guns, liquor, and tobacco. The modern socially responsible investing movement evolved with the political climate of the 1960s. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. King combined ongoing dialog with boycotts and direct action targeting specific corporations. Concerns about the Vietnam War were incorporated by some social investors.[1] [2] Many people living during the era remember a picture in June 1972 of a naked nine year-old girl, Phan Th Kim Phc, running towards a photographer screaming, her back burning from the napalm dropped on her village. That photograph channeled outrage against Dow Chemical,[3] the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War. During this time, social investors increasingly sought to address equality for women, civil rights, and labor-management issues. In the late 1970s, SRI activism gave increasing attention to nuclear power and automobile emissions control. During the 1950s and 1960s, trade unions deployed multiemployer pension fund monies for targeted investments. The United Mine Workers fund invested in medical facilities, for example, and the International Ladies' Garment Workers' Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects.[4] Labor unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions. In 1978, SRI efforts by pension funds was spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.[5]
Socially responsible investing From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid. International opposition to apartheid strengthened after the 1960 Sharpeville massacre. In 1976 the United Nations imposed a mandatory arms embargo against South Africa. In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the Sullivan Principles. Reports documenting the application of the Sullivan Principles discovered that U.S. companies were not attempting to lessen discrimination within South Africa. Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting from companies operating in South Africa. The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone didn't bring an end to apartheid, it did focus persuasive international pressure on the South African business community. Since the late 1990s, socially responsible investing has become increasingly defined as a means to promote environmentally sustainable development.[6] Many investors consider effects of climate change a significant business and investment risk. CERES was founded in 1989 by Joan Bavaria and Dennis Hayes as a network for investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns.[7] Representatives from the SRI industry have gathered at the annual SRI in the Rockies Conference since 1989 to exchange ideas and gain momentum for new initiatives. This conference is produced by First Affirmative Financial Network, an investment advisory firm that specializes in sustainable and responsible investing. The conference has attracted over 550 persons annually since 2006.[8] The first sell-side brokerage in the world to offer SRI research was a Brazilian bank called Unibanco. The service was launched in January 2001 by Unibanco SRI analyst Christopher Wells from the So Paulo headquarters of the bank and was targeted at SRI funds in Europe and the US, although it was sent to non-SRI funds both in and out of Brazil. The research was specific about Brazilian listed companies on environmental, social but not governance issues. It was sent for free to Unibanco's clients. The service lasted until mid 2002. Two good things came out this research: 1) The idea was picked up by Mike Tyrrell, who worked at Jupiter, an SRI fund manager in London, and who developed it into something much bigger and better at HSBC and then Citigroup. 2) ABN AMRO's operation in Brazil used this research to create the first SRI fund in an emerging market, launched in November 2001. As of late 2008, this fund, called Fundo Ethical, was the Brazilian operation's biggest and best performing stock fund of any kind. (ABN AMRO's operation in Brazil was bought by Santander in 2007.) Drawing on the industry's experience using divestment as a tool against apartheid, the Sudan Divestment Task Force was established in 2006 in response to the genocide occurring in the Darfur region of the Sudan.[9] Support from the US government followed with the Sudan Accountability and Divestment Act of 2007. More recently, some social investors have sought to address the rights of indigenous peoples around the world who are affected by the business practices of various companies. The 2007 SRI in the Rockies Conference held a special pre-conference specifically to address the concerns of indigenous peoples. Healthy working conditions, fair wages, product safety, and equal opportunity employment also remain headline concerns for many social investors.[10]
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Modern applications
Socially responsible investing (SRI) is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $2.71 trillion in 2007, an increase over the $2.16 trillion counted in 2003 according to the Social Investment Forum's 2007 Report on Socially Responsible Investing Trends in the United States [11]. From 2005-2007 alone, SRI assets increased more than 18 percent while the broader universe of professionally managed assets increased less than 3 percent.[12] As of 2007 about one out of every nine dollars under professional management in the United States is involved in socially responsible investing11 percent of the $25.1 trillion in total assets under management tracked in Nelson Informations Directory of Investment Managers.
Socially responsible investing Research estimates by financial consultancy Celent predict that the SRI market in the US will reach $3 trillion by 2011. The European SRI market grew from 1 trillion in 2005 to 1.6 trillion in 2007.[13] Ethical investment in the UK In 1985, Friends Provident launched the first ethically screened investment fund with criteria which excluded tobacco, arms, alcohol and oppressive regimes. Since 1985, over 90 investment funds have launched offering a wide range of investment criteria; both negatively screened and with positive investment criteria i.e. investing into companies involved in promoting sustainability. Barchester Green Investment also launched in 1985 and is the UK's longest established ethical investment specialist IFA (Independent Financial Adviser) firm link title [14]. According to the Ethical Investment Research Service (EIRIS) GBP 6.7 billion is invested in ethical and environmental investment funds in the UK.[15] Since 1985, most of the major investment organizations have launched ethical and socially responsible funds although this has led to a great deal of discussion and debate over the use of the term "ethical" investment. This is because each of the fund management organizations tend to apply a slightly different approach to running their funds. The large Dutch insurance group AEGON, for example, run very tightly screened ethical funds whereas the Standard Life and AXA "ethical" funds operate with less strict exclusion criteria. This variation in the types of ethical and sustainable investment on offer has created considerable growth in the ethical specialist IFA sector with a number of firms now operating.
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Government-controlled funds
Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behavior, respect the rights of workers, take environmental concerns into account, and generally avoid violations of human rights. One outstanding endorsement of such policies is The Government Pension Fund of Norway, which is mandated to avoid "investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages."[16] Many pension funds are currently under pressure to disinvest from the arms company BAE Systems, partially due to a campaign run by the Campaign Against Arms Trade (CAAT).[17] Liverpool council has passed a successful resolution to disinvest from the company,[18] however a similar attempt by the Scottish Green Party in Edinburgh was blocked by the Liberal Democrats.[19]
Mutual funds
Socially responsible mutual funds counted by the 2003 Trends Report increased in number to 200 in 2003, up from 181 in 2001, 168 in 1999, and 139 in 1997. Assets in socially screened mutual funds identified by the Trends Report grew by 19 percent, to $162 billion, up from $136 billion in 2001. More than half (51 percent) of this growth is attributed to both newly identified and newly created funds, and 49 percent represents growth in existing assets. In terms of attracting investor assets, socially screened mutual funds grew on a net basis in 2002 while the rest of the mutual fund industry contracted. According to Lipper, socially responsible mutual funds saw net inflows of $1.5 billion during 2002. Over the same time, US diversified equity funds posted outflows of nearly $10.5 billion. According to the Social Investment Forum, socially responsible mutual funds have grown from $12 billion in 1995 to $179 billion, far outpacing the overall growth of mutual funds in the US.[20] Social Investment Forum maintains charts member firms.
[21]
describing the socially responsible mutual funds offered by its
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Separately managed accounts

According to the 2007 Report on Socially Responsible Investing Trends in the United States, there are more than $1.9 trillion in socially screened separate accounts, a 28 percent increase since 2005. Assets managed for institutional investors comprise $1.88 trillion of this amount, and assets for high-net-worth clients comprise $39.5 billion.
Shareholder advocacy
Between 2001 and 2003, shareholder advocacy activity increased by 15 percent, growing from 269 social and crossover resolutions (which combined aspects of both "social" and traditional corporate governance issues) filed in 2001 to 310 in 2003. Likewise, the average percentage of votes received on these resolutions increased from 8.7 percent in 2001 to 11.4 percent in 2003. Of the total $2.15 trillion in all socially screened portfolios, $441 billion are in portfolios controlled by investors who are also involved in shareholder advocacy on various social issues. Shareholder resolutions are filed by a wide variety of institutional investors, including public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56 resolutions.[23] Regulations governing shareholder resolutions vary from country to country. In the United States, they are determined by the Securities and Exchange Commission, which also requires mutual funds to disclose how they voted on behalf of their investors.[24] U.S. shareholders have organized various groups to facilitate jointly filing resolutions. These include the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the Social Investment Forum.
Community investing
Community investing, a subset of Socially Responsible Investing, allows for investment directly into community based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the U.S., or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.[25] Community investing climbed 84 percent between 2001 and 2003. Assets held and invested locally by community development financial institutions (CDFIs) based in the United States totaled $14 billion in 2003, up from $7.6 billion in 2001.
Investing strategies
Investing in capital markets
Social investors use four basic strategies to maximize financial return and attempt to maximize social good. These strategies may satisfy the ethical principal of non-harming, but with the exception of shareholder activism, they do not necessarily create positive social impact. Negative Screening Negative Screening excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments. In a recent 8 year period, the Domini 400 Social Index a benchmark that measures the impact of social screening on financial performance returned 18.54% vs. 16.95% for the S&P 500.[26]
Socially responsible investing Despite the impressive growth, the knock against SRI has long been that investors had to settle for lagging returns in exchange for assuaging their consciences. So-called "sin stocks," including purveyors of tobacco, alcohol, gambling and defense contractors, were banned from portfolios on moral or ethical grounds. And shutting out entire industries hurts performance, the critics said.[27] However, in a comprehensive study, financial economists Lobe, Roithmeier, and Walkshusl taking the position of the advocatus diaboli, answer the question whether to invest in a socially responsible way or not? They create a set of global and domestic sin indexes consisting of 755 publicly traded socially irresponsible stocks around the world belonging to the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. They compare their stock market performance directly with a set of virtue comparables consisting of the most important international socially responsible investment indexes. They find no compelling evidence that ethical and unethical screens lead to a significant difference in their financial performance, which is in contrast with the results of prior studies on sinful investing.[28] Divesting Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations. Shareholder activism Shareholder activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities. Recent movements have also been reported of "investor relations activism", in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation; this is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole.[29] Positive investing Positive investing is the new generation of socially responsible investing.[27] It involves making investments in activities and companies believed to have a positive social impact. Positive investing suggested a broad revamping of the industry's methodology for driving change through investments.[30] [31] This investment approach allows investors to positively express their values on corporate behavior issues such as social justice and the environment through stock selection --- without sacrificing portfolio diversification or long-term performance.[32] Positive screening pushes the idea of sustainability, not just in the narrow environmental or humanitarian sense, but also in the sense of a company's long term potential to compete and succeed.[27]
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Community investment
By investing directly in an institution, rather than purchasing stock, an investor is able to create a greater social impact: Money spent purchasing stock accrues to the stock's previous owner and may not generate social good, while money invested in a community institution is put to work. For example, money invested in a Community Development Financial Institution may be used by that institution to alleviate poverty or inequality, spread access to capital to under-served communities, support economic development or green business, or create other social good.
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Impact investing
In Impact investing, an investor will actively seek to place capital in businesses and funds that combine financial and social returns. These businesses can thus provide social or environmental impact at a scale that purely philanthropic interventions usually cannot reach.[33] This capital may be in a range of forms including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Impacting investing has its roots in the Venture capital community, and an investor will often take active role mentoring or leading the growth of the company or start-up. Impact investing has become prominent in international development, where funds and organizations such as the Acumen Fund, Rockefeller Foundation, the Grassroots Business Fund, the Skoll Foundation and Verde Ventures are using this approach.
Global context
Socially responsible investing is a global phenomenon. With the international scope of business itself, social investors frequently invest in companies with international operations. As international investment products and opportunities have expanded, so have international SRI products. The ranks of social investors are growing throughout developed and developing countries. Trade organizations keeping track of some of this growth include the Social Investment Forum in the U.S.,[34] the Social Investment Organization in Canada,[35] EuroSIF in the E.U.,[36] the Associate for Sustainable and Responsible Investment in Asia,[37] and the Responsible Investment Association of Australasia.[38] In 2006, the United Nations Environment Programme launched its Principles for Responsible Investment. The Principles provide a framework to help investors incorporate environmental, social, and governance (ESG) factors into the investment process.
External links
UN Principles for Responsible Investment [39] Moskowitz Prize - Quantitative Research in the field of Socially Responsible Investing [40] Socially Responsible Investing at Appropedia Socially Responsible Investing facts from the Social Investment Forum [41]
References
[1] "The Evolution of Socially Responsible Investing" (http:/ / www. enn. com/ today. html?id=10738). . Retrieved 30 October 2006. [2] "The Investment FAQ Strategy Socially Responsible Investing" (http:/ / invest-faq. com/ articles/ strat-sri. html). . Retrieved 30 Oct 2006. [3] Students for Bhopal Student Power Crushes Dow (http:/ / www. studentsforbhopal. org/ DowVietnam. htm) [4] Gray, Hillel. New Directions in the Investment and Control of Pension Funds. DC: Investor Responsibility Research Center, 1983. p.36-37 [5] Gray 1983, p.34 [6] Richardson, Benjamin J., Socially Responsible Investment Law: Regulating the Unseen Polluters (Oxford University Press, 2008). [7] Ceres - Coalition for Environmentally Responsible Economies (http:/ / www. ceres. org) [8] SRI in the Rockies: The premier industry conference for socially responsible investing in the United States of America (http:/ / www. sriintherockies. com/ ) [9] Sudan Divestment Task Force - Home (http:/ / www. sudandivestment. org) [10] Jackson, Kevin T., Building Reputational Capital: Strategies for Integrity and Fair Play That Improve the Bottom Line (Oxford University Press, 2004). [11] http:/ / www. socialinvest. org/ resources/ pubs/ documents/ FINALExecSummary_2007_SIF_Trends_wlinks. pdf [12] http:/ / www. socialinvest. org/ resources/ pubs/ documents/ FINALExecSummary_2007_SIF_Trends_wlinks. pdf [13] According to figures published by Celent 13 March 2007. [14] http:/ / www. barchestergreen. co. uk [15] http:/ / www. eiris. org/ pages/ top%20menu/ key%20facts%20and%20figures/ market%20statistics. htm [16] "Ethical Guidelines for the Government Pension Fund Global" (http:/ / web. archive. org/ web/ 20070903230123/ http:/ / www. regjeringen. no/ en/ dep/ fin/ Selected-topics/ andre/ Ethical-Guidelines-for-the-Government-Pension-Fund---Global-. html). Archived from the original (http:/ / www. regjeringen. no/ en/ dep/ fin/ Selected-topics/ andre/

Ethical-Guidelines-for-the-Government-Pension-Fund---Global-. html) on 3 September 2007. . Retrieved 19 September 2007. [17] CAAT Campaigns - Clean Investment launch 2007 (http:/ / www. caat. org. uk/ campaigns/ clean-investment/ ) [18] Ethical Investment Blog: Liverpool Council Disinvests from BAE (http:/ / ethicalinvestmentedinburgh. blogspot. com/ 2007/ 11/ liverpool-council-disinvests-from-bae. html) [19] Edinburgh and Midlothian Greens Blog Archive Greens continue fight for ethical pensions Lib Dem councillors under fire for ignoring party policy (http:/ / www. edinburghgreens. org. uk/ site/ press-coverage/ ethical-pensions-council/ ) [20] Young, Lauren. A Social Funds Strategic Shift. Business Week Online. May 2006. 14 [21] http:/ / www. socialinvest. org/ resources/ mfpc/ [22] http:/ / www. gabelli. com/ funds/ products/ 1794. html [23] Interfaith Center on Corporate Responsibility (http:/ / www. iccr. org/ news/ press_releases/ 2004/ pr_proxybook04. htm) [24] http:/ / www. iccr. org/ news/ press_releases/ pdf%20files/ AeN_February%202007. pdf [25] Social Investment Forum: Community Investing (http:/ / www. socialinvest. org/ projects/ communityinvesting. cfm) [26] Harrington, Cynthia. Socially Responsible Investing. Journal of Accountancy. January 2003: 1 11 [27] Wine, Elisabeth (1 August 2009). "SRI Plows the Path to Profitability" (http:/ / www. onwallstreet. com/ ows_issues/ 2009_8/ sri-plows-the-path-to-profitability-2663476-1. html). On Wall Street. . [28] Lobe, Sebastian, Roithmeier, Stefan and Walkshusl, Christian,Vice vs. Virtue Investing(7 August 2009). Available at SSRN: (http:/ / ssrn. com/ abstract=1089827) [29] Carther,Socially Responsible Mutual Funds(18 September 2009). Available at: (http:/ / www. investopedia. com/ articles/ mutualfund/ 03/ 030503. asp#axzz1Qtq4Zi2G) [30] Lewis, Geoff (1 June 2005). "Advocacy Investing Catnip for Wealthy Clients?" (http:/ / registeredrep. com/ mag/ finance_advocacy_investing_catnip/ ). Overland Park: Registered Rep.. . Retrieved 12 May 2005. [31] Bragga, Rick (1 September 2005). "Finance by the Book" (http:/ / www. afpnet. org/ ka/ ka-3. cfm?content_item_id=22149& folder_id=902). Advancing Philanthropy. . Retrieved 12 May 2005. [32] Wells, Angela (July 2004). "New Financial Study Shows Stocks Can Reflect Investor Values without Sacrificing Performance" (http:/ / www. csrwire. com/ News/ 2888. html). Sunnyvale: Yahoo Finance. . Retrieved 12 May 2005. [33] Monitor Institute, Investing for Social and Environmental Impact (http:/ / www. monitorinstitute. com/ impactinvesting/ ), January 2009. [34] Social Investment Forum - Advancing socially and environmentally responsible investing (SRI Membership Association) (http:/ / www. socialinvest. org) [35] http:/ / www. socialinvestment. ca [36] Eurosif - European Social Investment Forum (http:/ / www. eurosif. org) [37] ASrIA - Homepage (http:/ / www. asria. org) [38] Responsible Investment Association Australasia (http:/ / www. eia. org. au) [39] http:/ / www. unpri. org [40] http:/ / www. haas. berkeley. edu/ responsiblebusiness/ MoskowitzResearchProgram. html [41] http:/ / www. socialinvest. org/ resources/ sriguide/ srifacts. cfm
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Abramson, Lorne, "Investing Responsibly", Index Universe, December 31, 2009, http://finance.yahoo.com/ news/Investing-indexuniverse-1846170110.html?x=0
Value investing
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Value investing
Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis.[1] As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios. High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value.[2] The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions. However, the future distributions and the appropriate discount rate can only be assumptions. For the last 25 years, Warren Buffett has taken the value investing concept even further with a focus on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.
History
Benjamin Graham
Value investing was established by Benjamin Graham and David Dodd, both professors at Columbia Business School and teachers of many famous investors. In Graham's book The Intelligent Investor, he advocated the important concept of margin of safety first introduced in Security Analysis, a 1934 book he co-authored with David Dodd which calls for a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard to adverse future developments often encountered in the stock market.
Further evolution
However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is most useful in industries where most assets are Benjamin Graham tangible. Intangible assets such as patents, software, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF), where the value of an asset is the sum of its future cash flows, discounted back to the present.
Value investing
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Value investing performance

Performance of value strategies
Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.[3] [4] [5]
Performance of value investors

Another way to examine the performance of value investing strategies is to examine the investing performance of well-known value investors. Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in his May 17, 1984 speech that was published as The Superinvestors of Graham-and-Doddsville. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategiesvalue investing is, on average, successful in the long run. During about a 25-year period (196590), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you taught that the world was flat."[6]
Well-known value investors

Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote Security Analysis, first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote The Intelligent Investor, a book that brought value investing to individual investors. Aside from Buffett, many of Graham's other students, such as William J. Ruane, Irving Kahn and Charles Brandes have gone on to become successful investors in their own right. Graham's most famous student, however, is Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running Berkshire Hathaway. Charlie Munger joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company. Buffett has credited Munger with encouraging him to focus on long-term sustainable growth rather than on simply the valuation of current cash flows or assets.[7] Columbia Business School has played a significant role in shaping the principles of the Value Investor, with professors and students making their mark on history and on each other. Ben Grahams book, The Intelligent Investor, was Warren Buffetts bible and he referred to it as "the greatest book on investing ever written. A young Warren Buffett studied under Prof. Ben Graham, took his course and worked for his small investment firm, Graham Newman, from 1954 to 1956. Twenty years after Ben Graham, Prof. Roger Murray arrived and taught value investing to a young student named Mario Gabelli. About a decade or so later, Prof. Bruce Greenwald arrived and produced his own protgs, including Mr. Paul Sonkinjust as Ben Graham had Mr. Buffett as a protg, and Roger Murray had Mr. Gabelli. Mutual Series has a well known reputation of producing top value managers and analysts in this modern era. This tradition stems from two individuals: the late great value mind Max Heine, founder of the well regarded value investment firm Mutual Shares fund in 1949 and his protg legendary value investor Michael F. Price. Mutual Series was sold to Franklin Templeton in 1996. The disciples of Heine and Price quietly practice value investing at
Value investing some of the most successful investment firms in the country. Seth Klarman is a Mutual Series alum and the founder and president of The Baupost Group, a Boston-based private investment partnership, authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000.[8] Another famous value investor is John Templeton. Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Martin Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) because they are not as important and attempts to predict their movement are almost always futile. Martin Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by another famous investor Joel Greenblatt in his book on special-situation investment You Can Be a Stock Market Genius (ISBN 0-684-84007-3, pp 247). Joel Greenblatt achieved annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures. Charles de Vaulx and Jean-Marie Eveillard are well known global value managers. For a time, these two were paired up at the First Eagle Funds, compiling an enviable track record of risk-adjusted outperformance. For example, Morningstar designated them the 2001 "International Stock Manager of the Year" and de Vaulx earned second place from Morningstar for 2006. Eveillard is known for his Bloomberg appearances where he insists that securities investors never use margin or leverage. The point made is that margin should be considered the anathema of value investing, since a negative price move could prematurely force a sale. In contrast, a value investor must be able and willing to be patient for the rest of the market to recognize and correct whatever pricing issue created the momentary value. Eveillard correctly labels the use of margin or leverage as speculation, the opposite of value investing. Christopher H. Browne of Tweedy, Browne was well known for value investing. According to the Wall Street Journal, Tweedy, Browne was the favorite brokerage firm of Benjamin Graham during his lifetime; also, the Tweedy, Browne Value Fund and Global Value Fund have both beat market averages since their inception in 1993.[9] In 2006, Christopher H. Browne wrote The Little Book of Value Investing in order to teach ordinary investors how to value invest.[10]
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Criticism
Value stocks do not always beat growth stocks, as demonstrated in the late 1990s.[11] Moreover, when value stocks perform well, it may not mean that the market is inefficient, though it may imply that value stocks are simply riskier and thus require greater returns.[11] An issue with buying shares in a bear market is that despite appearing undervalued at one time, prices can still drop along with the market.[12] Conversely, an issue with not buying shares in a bull market is that despite appearing overvalued at one time, prices can still rise along with the market. Another issue is the method of calculating the "intrinsic value". Two investors can analyze the same information and reach different conclusions regarding the intrinsic value of the company. There is no systematic or standard way to value a stock.[13]
Value investing
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Value investing books and resources

Security Analysis, editions 1934,[14] 1940,[15] 1951[16] and 1962[17] and 1988 [18] and 2008 [19] ISBN 978-0-07-159253-6 "Value Investing Made Easy," Janet Lowe, McGraw-Hill. ISBN 978-0070388642 The Theory of Investment Value (1938), by John Burr Williams. ISBN 0-87034-126-X The Intelligent Investor (1949), by Benjamin Graham. ISBN 0-06-055566-1 You Can Be a Stock Market Genius (1997), by Joel Greenblatt. ISBN 0-684-84007-3. Contrarian Investment Strategies: The Next Generation (1998), by David Dreman. ISBN 0-684-81350-5. The Essays of Warren Buffett (2001), edited by Lawrence A. Cunningham [20]. ISBN 0-9664461-1-9. The Little Book That Beats the Market (2006), by Joel Greenblatt. ISBN 0-471-73306-7. The Little Book of Value Investing (2006), by Chris Browne. ISBN 0-470-05589-8. Value Investors Club [21] Value Investor Insight (www.valueinvestorinsight.com) "The Rediscovered Benjamin Graham - selected writings of the wall street legend," by Janet Lowe. John Wiley & Sons "Benjamin Graham on Value Investing," Janet Lowe, Dearborn
Value Investors at Wikiquote

Warren Buffett Benjamin Graham Joel Greenblatt
References
[1] Graham, Benjamin (1934). Security Analysis New York: McGraw Hill Book Co., 4. ISBN 0-07-144820-9. [2] Graham (1949). The Intelligent Investor New York: Collins, Ch.20. ISBN 0-06-055566-1. [3] The Cross-Section of Expected Stock Returns, by Fama & French, 1992, Journal of Finance (http:/ / ideas. repec. org/ a/ bla/ jfinan/ v47y1992i2p427-65. html) [4] Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout Sample of Financial Firms, by Lyon & Barber, 1997, Journal of Finance (http:/ / ideas. repec. org/ a/ bla/ jfinan/ v52y1997i2p875-83. html) [5] Overreaction, Underreaction, and the Low-P/E Effect, by Dreman & Berry, 1995, Financial Analysts Journal (http:/ / www. cfapubs. org/ doi/ abs/ 10. 2469/ faj. v51. n4. 1917) [6] Joseph Nocera, The Heresy That Made Them Rich, The New York Times, October 29, 2005 [7] Warren Buffett's 1989 letter to Berkshire Hathaway shareholders (http:/ / www. berkshirehathaway. com/ letters/ 1989. html) [8] The $700 Used Book (http:/ / www. businessweek. com/ magazine/ content/ 06_32/ b3996085. htm). (2006, Aug. 7). BusinessWeek, Personal Finance section. Accessed 11-11-2008. [9] http:/ / online. wsj. com/ article/ SB10001424052748703438404574598442025375858. html [10] http:/ / www. wiley. com/ WileyCDA/ WileyTitle/ productCd-0470055898. html [11] Robert Huebscher. Burton Malkiel Talks the Random Walk (http:/ / www. advisorperspectives. com/ newsletters09/ pdfs/ Burton_Malkiel_Talks_the_Random_Walk. pdf). July 7, 2009. [12] When Value Investing Doesn't Work (http:/ / dev. cnbc. com/ id/ 27925283) [13] (http:/ / www. jpmorgan. com/ tss/ General/ Investment_Style/ 1159369368373) [14] Graham and Dodd. 1934. Security Analysis: Principles and Technique, 1E. New York and London: McGraw-Hill Book Company, Inc. [15] Graham and Dodd. 1940. Security Analysis: Principles and Technique, 2E. New York and London: McGraw-Hill Book Company, Inc. [16] Graham et al. 1951. Security Analysis: Principles and Technique, 3E. New York: McGraw Hill Book Company, Inc. [17] Graham et al. 1962. Security Analysis: Principles and Technique, 4E. New York: McGraw-Hill Book Company, Inc. [18] Graham and Dodd. 1988. Security Analysis: Principles and Technique, 5E. McGraw-Hill Professional [19] Graham and Dodd. 2008. Security Analysis: Principles and Technique, 6E. McGraw-Hill Professional [20] http:/ / www. bc. edu/ schools/ law/ fac-staff/ deans-faculty/ cunninghaml/ [21] http:/ / www. valueinvestorsclub. com/
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Returns & profits

Benefit shortfall
A benefit shortfall results from the actual benefits of a venture being lower than the projected, or estimated, benefits of that venture.[1] If, for instance, a company is launching a new product or service and projected sales are 40 million dollars per year, whereas actual annual sales turn out to be only 30 million dollars, then the benefit shortfall is said to be 25 percent. Sometimes the terms "demand shortfall" or "revenue shortfall" are used instead of benefit shortfall. Public and private enterprises alike fall victim to benefit shortfalls. Prudent planning of new ventures will include the risk of benefit shortfalls in risk assessment and risk management. If large benefit shortfalls coincide with large cost overruns in a venture - as happened for the Channel tunnel between the UK and France - then fiscal and other distress will be particularly pronounced for that venture.[2] The root cause of benefit shortfalls is benefit overestimation during the planning phase of new ventures. Benefit overestimation (and cost underestimation) are main sources of error and bias in cost-benefit analysis. Reference class forecasting was developed to reduce the risk of benefit shortfalls and cost overruns.[3] The discipline of Benefits Realisation Management seeks to identify any benefits shortfall as early as possible in a project or programmes delivery in order to allow corrective action to be taken, costs to be controlled and benefits realised.
References
[1] Flyvbjerg, Bent, Mette S. Holm, and Sren L. Buhl (2005), How (In)accurate Are Demand Forecasts in Public Works Projects?, (http:/ / flyvbjerg. plan. aau. dk/ Traffic91PRINTJAPA. pdf) Journal of the American Planning Association, vol. 71, no. 2, pp. 131-146.] [2] Flyvbjerg, Bent, Nils Bruzelius, and Werner Rothengatter (2003), . Megaprojects and Risk: An Anatomy of Ambition, (http:/ / books. google. com/ books?vid=ISBN0521009464& id=RAV5P-50UjEC& printsec=frontcover& dq=megaprojects+ and+ Risk:+ An+ Anatomy+ of+ Ambition) Cambridge: Cambridge University Press. [3] Flyvbjerg, B. (2008), Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice, (http:/ / www. sbs. ox. ac. uk/ centres/ bt/ Documents/ Curbing Optimism Bias and Strategic Misrepresentation. pdf) European Planning Studies, vol. 16, no. 1, January, pp. 3-21.]
Capital accumulation
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The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money (whether in the form of profit, rent, interest, royalties, capital gain or some other kind of return). Human capital may also be seen as a form of capital: investment in one's personal abilities, such as through education, to improve their function and therefore capital accumulation (wealth) in a market economy.[1] This activity forms the basis of the economic system of capitalism, where economic activity is structured around the accumulation of capital (investment in production in order to realize a financial profit).
Definition
The definition of capital accumulation is subject to controversy and ambiguities, because it could refer to a net addition to existing wealth, or to a redistribution of wealth. If more wealth is produced than there was before, a society becomes richer; the total stock of wealth increases. But if some accumulate capital only at the expense of others, wealth is merely shifted from A to B. In principle, it is possible that a few people or organisations accumulate capital and grow richer, although the total stock of wealth of society decreases.But it should be noticed that capital may increase by increasing the total wealth of society but few people grow richer while most of the people grow comparatively poorer. That is actually the tendency of the capital accumulation discovered by Marx.[2] Most often, capital accumulation involves both a net addition and a redistribution of wealth, which may raise the question of who really benefits from it most. In economics, accounting and Marxian economics, capital accumulation is often equated with investment of profit income or savings, especially in real capital goods. The concentration and centralisation of capital are two of the results of such accumulation (see below). But capital accumulation can refer variously to real investment in tangible means of production. financial investment in assets represented on paper, yielding profit, interest, rent, royalties, fees or capital gains. investment in non-productive physical assets such as residential real estate or works of art that appreciate in value. "human capital accumulation", i.e., new education and training increasing the skills of the (potential) labour force which can increase earnings from work.
Non-financial and financial capital accumulation is usually needed for economic growth, since additional production usually requires additional funds to enlarge the scale of production. Smarter and more productive organization of production can also increase production without increased capital. Capital can be created without increased investment by inventions or improved organization that increase productivity, discoveries of new assets (oil, gold, minerals, etc.), the sale of property, etc. In modern macroeconomics and econometrics the term capital formation is often used in preference to "accumulation", though the United Nations Conference on Trade and Development (UNCTAD) refers nowadays to "accumulation". The term is occasionally used in national accounts.
The measurement of accumulation

Accumulation can be measured as the monetary value of investments, the amount of income that is reinvested, or as the change in the value of assets owned (the increase in the value of the capital stock). Using company balance sheets, tax data and direct surveys as a basis, government statisticians estimate total investments and assets for the purpose of national accounts, national balance of payments and flow of funds statistics. Usually the Reserve Banks and the Treasury provide interpretations and analysis of this data. Standard indicators include Capital formation, Gross fixed capital formation, fixed capital, household asset wealth, and foreign direct investment.
Capital accumulation Organisations such as the International Monetary Fund, UNCTAD, the World Bank Group, the OECD, and the Bank for International Settlements used national investment data to estimate world trends. The Bureau of Economic Analysis, Eurostat and the Japan Statistical Office provide data on the USA, Europe and Japan respectively. Other useful sources of investment information are business magazines such as Fortune, Forbes, The Economist, Business Week, etc., and various corporate "watchdog" organisations and non-governmental organization publications. A reputable scientific journal is the Review of Income & Wealth. In the case of the USA, the "Analytical Perspectives" document (an annex to the yearly budget) provides useful wealth and capital estimates applying to the whole country.
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HarrodDomar model
In macroeconomics, following the HarrodDomar model, the savings ratio ( ) and the capital coefficient ( ) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment. The rate of growth of the real stock of fixed capital ( ) is:
where
is the real national income. If the capital-output ratio or capital coefficient ( is equal to the rate of growth of . This is determined by
) is constant, the rate
of growth of
(the ratio of net fixed investment or
saving to ) and . A country might for example save and invest 12% of its national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually. However, as Keynesian economics points out, savings do not automatically mean investment (as liquid funds may be hoarded for example). Investment may also not be investment in fixed capital (see above). Assuming that the turnover of total production capital invested remains constant, the proportion of total investment which just maintains the stock of total capital, rather than enlarging it, will typically increase as the total stock increases. The growth rate of incomes and net new investments must then also increase, in order to accelerate the growth of the capital stock. Simply put, the bigger capital grows, the more capital it takes to keep it growing and the more markets must expand.
Marxian concept of capital accumulation

In Karl Marx's economic theory, capital accumulation refers to the operation whereby profits are reinvested increasing the total quantity of capital. Capital is viewed by Marx as expanding value, that is, in other terms, as a sum of money that is transformed into a larger sum of money. (Capitalism is this money-making activity, although Marxists often equate capitalism with the capitalist mode of production). Here, capital is defined essentially as economic or commercial asset value in search of additional value or surplus-value. This requires property relations which enable objects of value to be appropriated and owned, and trading rights to be established. According to Marx, capital accumulation has a double origin, namely in trade and in expropriation, both of a legal or illegal kind. The reason is that a stock of capital can be increased through a process of exchange or "trading up" but also through directly taking an asset or resource from someone else, without compensation. David Harvey calls this accumulation by dispossession. Marx does not discuss gifts and grants as a source of capital accumulation, nor does he analyze taxation in detail. Nowadays the tax take is often so large (i.e., 25-40% of GDP) that some authors refer to state capitalism. This gives rise to a proliferation of tax havens to evade tax liability. The continuation and progress of capital accumulation depends on the removal of obstacles to the expansion of trade, and this has historically often been a violent process. As markets expand, more and more new opportunities develop
Capital accumulation for accumulating capital, because more and more types of goods and services can be traded in. But capital accumulation may also confront resistance, when people refuse to sell, or refuse to buy (for example a strike by investors or workers, or consumer resistance). What spurs accumulation is competition; in business, if you don't go forward, you go backward, and unless the law prevents it, the strong will exploit the weak. In general, Marx's critique of capital accumulation is that the human chase after wealth and self-enrichment leads to inhuman consequences. The enrichment of some is at the expense of the immiseration of others, and competition becomes brutal. The basis of it all is the exploitation of the labour effort of others. When the "economic cake" expands, this may be obscured because all can gain from trade. But when the "economic cake" shrinks, then capital accumulation can only occur by taking income or assets from other people, other social classes, or other nations. The point is that to exist, capital must always grow, and to ensure that it will grow, people are prepared to do almost anything. The hypothetical system of socialism would succeed capitalism as the dominant mode of production when the accumulation of capital can no longer sustain itself due to falling rates of profit in real production relative to increasing productivity. A socialist economy would not base production on the accumulation of capital, but would instead base production and economic activity on the criteria of satisfying human needs - that is, production would be carried out directly for use.
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Concentration and centralization

According to Marx, capital has the tendency for concentration and centralization the hands of richest capitalists. Marx explains: "It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals.... Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many.... The battle of competition is fought by cheapening of commodities. The cheapness of commodities demands, caeteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of. Here competition rages.... It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, partly vanish."[3]
The rate of accumulation

In Marxian economics, the rate of accumulation is defined as (1) the value of the real net increase in the stock of capital in an accounting period, (2) the proportion of realised surplus-value or profit-income which is reinvested, rather than consumed. This rate can be expressed by means of various ratios between the original capital outlay, the realised turnover, surplus-value or profit and reinvestments (see, e.g., the writings of the economist Michal Kalecki). Other things being equal, the greater the amount of profit-income that is disbursed as personal earnings and used for consumptive purposes, the lower the savings rate and the lower the rate of accumulation is likely to be. However, earnings spent on consumption can also stimulate market demand and higher investment. This is the cause of endless controversies in economic theory about "how much to spend, and how much to save". In a boom period of capitalism, the growth of investments is cumulative, i.e. one investment leads to another, leading to a constantly expanding market, an expanding labor force, and an increase in the standard of living for the majority of the people. In a stagnating, decadent capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation, and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the
Capital accumulation level of permanent unemployment. As a rule, the larger the total sum of capital invested, the higher the return on investment will be. The more capital one owns, the more capital one can also borrow and reinvest at a higher rate of profit or interest. The inverse is also true, and this is one factor in the widening gap between the rich and the poor. Ernest Mandel emphasized that the rhythm of capital accumulation and growth depended critically on (1) the division of a society's social product between "necessary product" and "surplus product", and (2) the division of the surplus product between investment and consumption. In turn, this allocation pattern reflected the outcome of competition among capitalists, competition between capitalists and workers, and competition between workers. The pattern of capital accumulation can therefore never be simply explained by commercial factors, it also involved social factors and power relationships.
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The circuit of capital accumulation from production

Strictly speaking, capital has accumulated only when realised profit income has been reinvested in capital assets. But the process of capital accumulation in production has, as suggested in the first volume of Marx's Das Kapital, at least 7 distinct but linked moments: The initial investment of capital (which could be borrowed capital) in means of production and labor power. The command over surplus-labour and its appropriation. The valorisation (increase in value) of capital through production of new outputs. The appropriation of the new output produced by employees, containing the added value. The realisation of surplus-value through output sales. The appropriation of realised surplus-value as (profit) income after deduction of costs. The reinvestment of profit income in production.
All of these moments do not refer simply to an "economic" or commercial process. Rather, they assume the existence of legal, social, cultural and economic power conditions, without which creation, distribution and circulation of the new wealth could not occur. This becomes especially clear when the attempt is made to create a market where none exists, or where people refuse to trade. In fact Marx suggests that the original or primitive accumulation of capital often occurs through violence, plunder, slavery, robbery, extortion and theft. He argues that the capitalist mode of production requires that people must be forced to work in value-adding production for someone else, and for this purpose, they must be cut off from sources of income other than selling their labor power.
Simple and expanded reproduction

In volume 2 of Das Kapital, Marx continues the story and shows that, with the aid of bank credit, capital in search of growth can more or less smoothly mutate from one form to another, alternately taking the form of money capital (liquid deposits, securities, etc.), commodity capital (tradeable products, real estate etc.), or production capital (means of production and labor power). His discussion of the simple and expanded reproduction of the conditions of production offers a more sophisticated model of the parameters of the accumulation process as a whole. At simple reproduction, a sufficient amount is produced to sustain society at the given living standard; the stock of capital stays constant. At expanded reproduction, more product-value is produced than is necessary to sustain society at a given living standard (a surplus product; the additional product-value is available for investments which enlarge the scale and variety of production. The bourgeois claim there is no economic law according to which capital is necessarily re-invested in the expansion of production, that such depends on anticipated profitability, market expectations and perceptions of investment risk. Such statements only explain the subjective experiences of investors and ignore the objective realities which would
Capital accumulation influence such opinions. As Marx states in Vol.2, simple reproduction only exists if the variable and surplus capital realized by Dept. 1 - producers of means of production- exactly equals that of the constant capital of Dept. 2, producers of articles of consumption (pg 524). Such equilibrium rests on various assumptions, such as a constant labor supply (no population growth). Accumulation does not imply a necessary change in total magnitude of value produced but can simply refer to a change in the composition of an industry (pg. 514). Ernest Mandel introduced the additional concept of contracted economic reproduction, i.e. reduced accumulation where business operating at a loss outnumbers growing business, or economic reproduction on a decreasing scale, for example due to wars, natural disasters or devalorisation. Balanced economic growth requires that different factors in the accumulation process expand in appropriate proportions. But markets themselves cannot spontaneously create that balance, in fact what drives business activity is precisely the imbalances between supply and demand: inequality is the motor of growth. This partly explains why the worldwide pattern of economic growth is very uneven and unequal, even although markets have existed almost everywhere for a very long time. Some people argue that it also explains government regulation of market trade and protectionism.
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Capital accumulation as social relation

"Accumulation of capital" sometimes also refers in Marxist writings to the reproduction of capitalist social relations (institutions) on a larger scale over time, i.e., the expansion of the size of the proletariat and of the wealth owned by the bourgeoisie. This interpretation emphasizes that capital ownership, predicated on command over labor, is a social relation: the growth of capital implies the growth of the working class (a "law of accumulation"). In the first volume of Das Kapital Marx had illustrated this idea with reference to Edward Gibbon Wakefield's theory of colonisation: "...Wakefield discovered that in the Colonies, property in money, means of subsistence, machines, and other means of production, does not as yet stamp a man as a capitalist if there be wanting the correlative the wage-worker, the other man who is compelled to sell himself of his own free-will. He discovered that capital is not a thing, but a social relation between persons, established by the instrumentality of things. Mr. Peel, he moans, took with him from England to Swan River, West Australia, means of subsistence and of production to the amount of 50,000. Mr. Peel had the foresight to bring with him, besides, 3,000 persons of the working-class, men, women, and children. Once arrived at his destination, Mr. Peel was left without a servant to make his bed or fetch him water from the river. Unhappy Mr. Peel, who provided for everything except the export of English modes of production to Swan River!" "Das Kapital", vol.1, ch. 33 [4] In the third volume of Das Kapital, Marx refers to the "fetishism of capital" reaching its highest point with interest-bearing capital, because now capital seems to grow of its own accord without anybody doing anything. In this case, "The relations of capital assume their most externalised and most fetish-like form in interest-bearing capital. We have here , money creating more money, self-expanding value, without the process that effectuates these two extremes. In merchant's capital, , there is at least the general form of the capitalistic movement, although it confines itself solely to the sphere of circulation, so that profit appears merely as profit derived from alienation; but it is at least seen to be the product of a social relation, not the product of a mere thing. (...) This is obliterated in , the form of interest-bearing capital. (...) The thing (money, commodity, value) is now capital even as a mere thing, and capital appears as a mere thing. The result of the entire process of reproduction appears as a property inherent in the thing itself. It depends on the owner of the money, i.e., of the commodity in its continually exchangeable form, whether he wants to spend it as money or loan it out as capital. In interest-bearing capital, therefore, this automatic fetish, self-expanding value, money generating money, are brought out in their pure state and in this form it no longer bears the
Capital accumulation birth-marks of its origin. The social relation is consummated in the relation of a thing, of money, to itself. Instead of the actual transformation of money into capital, we see here only form without content." "Das Kapital", vol.1, ch. 24 [5]
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Psychology, sociology and ethics of capital accumulation

There have been numerous psychological and sociological studies of the motivations of investment behaviour by individuals. Most of these suggest that the propensity to accumulate capital is associated with qualities such as an intelligent understanding of property ownership, a positive attitude towards money, the ability to seize a money-making opportunity, and a desire to acquire more wealth. Like so many things human, some theorists regard these qualities as innate and genetic qualities, while others regard them as learned through social experience; some theorists think that both biological and social factors are involved. However, even if a strong motivation for enrichment or social improvement exists, the business, government, legal, climate, local culture or social instability may prevent this motivation from being realised. Hernando de Soto for example argues that the reason why poor countries are poor is mainly because of the absence of a legal-cultural infrastructure of "asset management" and of formalised and enforced private property rights. Many systems seemed designed to keep a small minority in power so they can consume more. This power minority takes advantage of the common peopleconsuming much more than they produce. One popular argument in this respect remains the vicious cycle of poverty: the poor are poor because they are poor. Critics of this argument object it is an uninformative and unhelpful tautology. Greed and desire can play a very important role in capital accumulation, but are not a necessary requirement. Indeed according to Max Weber's study of capitalism and the Protestant ethic, frugality, sobriety, deferred consumption and saving were among the key values of the rising bourgeoisie in the age of the Reformation. Some economic historians (e.g., David Landes, Gregory Clark (economist)) refer to national psychology and argue that some nations or cultures (e.g., Europe) are inherently better equipped for capital accumulation, due to cultural habits, customs and values. Other economic historians (e.g. Paul A. Baran) have argued that psychological factors explain very little, because a nation which previously had a low level of accumulation can suddenly "take off". In that case, the causes must be sought in the prevailing social relations. Controversies about the ethics of accumulation have occurred ever since commercial trade began. If informal and formal prostitution is regarded as the oldest profession, the first ethical debate about accumulation must have occurred tens of thousands of years ago at the very least. The problem is that trade or market forces do not create any particular morality of their own, beyond the requirement to meet contractual obligations that settle transactions. Some forms of trade may be accepted, others rejected, but there exists no general moral principle for this which can be derived from the trade itself. A good contemporary illustration of this problem is the gigantic increase in total reported crime and the grey economy or shadow economy after the deregulation of world markets from the 1980s, and the marketisation of the USSR and China. But ancient philosophers and theologians already knew about the problem, which is why they were intensely preoccupied with the politics of the rule of law and its enforcement. The main ethical questions concern which routes to wealth are morally justifiable, and what entitles individuals and groups to appropriate amounts of wealth, in particular wealth which they have not themselves created. The medieval economists invented theories of a just price and the moral debate surfaces again these days, e.g., in the controversies about fair trade, imperialism and Islamic banking. Neo-liberal theory emphasises that a "good" person is one who creates new wealth by deferring consumption or improving production, while socialis] theory says a "good" person should be forced to share their wealth however accumulated. The most popular moral theories are similar to that of John Rawls.
Capital accumulation Karl Marx illustrated his analysis with sarcastic comments about Christian accumulation; some forms of accumulation were believed to be compatible with Jesus Christ, while others were not; some forms of accumulation were forgiven by God afterwards, others were not. Martin Luther for example raged against usury and extortion. Marxism-Leninism is hostile to all private property and market activity. It must be kept in mind that the "private property" that Marx refers to is the ownership of the means of production by a generally small elite of wealthy entrepreneurs. The proletariat, or laborer, is inferior to all aspects of productionincluding labor, the products or services made, and revenue; and therefore the division of labor and its products must be equally redistributed to avoid the control and degradation of an unknown bourgeoisie. But because capital accumulation does not presuppose any particular or specific "moral system", accumulation can also continue regardless of any particular morality advocated by popes, presidents, queens, journalists, pop stars, business tycoons or anybody else. All that is required is (1) the ability to own assets and trade in them and (2) sufficient income beyond subsistence and (3) the will to defer consumption to be able to accumulate capital.
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Different forms of capital accumulation

Essentially, in capitalism the production of output depends on the accumulation of capital. The propensity to invest in production therefore depends a lot on expectations of profitability and sales volume, and on perceptions of market risk. If production stops being profitable, or if sales drop sharply, or if there is social instability, capital will exit more and more from the sphere of production. Or if it cannot or does not, rationalisation investments will be undertaken, to amalgamate unprofitable enterprises into profitable units. As a corollary, capital accumulation may be the accumulation of production capital (industrial assets), or the accumulation of money capital (financial assets), or the accumulation of commodity capital (products, real estate etc. which can be traded). But irrespective of whether the additional capital value (or surplus-value happens to take the form of profit, interest, rent, or some kind of tax impost or royalty income, what drives the accumulation process is the perpetual search for more surplus-value, for added value as such. This requires a constant supply of a labor force which can conserve and add value to inputs and capital assets, and thus create a higher value. Normally, the socio-economic compulsion to work for a living in capitalist society is legally enforced and regulated by the statee, for example through workfare and strict conditions for receiving an unemployment benefit. Although capital accumulation does not necessarily require production, ultimately the basis for it is value-adding production which makes net additions to the stock of wealth. Capital can accumulate by shifting the ownership of assets from one place to another, but ultimately the total stock of assets must increase. Other things being equal, if production fails to grow sufficiently, the level of debt will increase, ultimately causing a breakdown of the accumulation process when debtors cannot pay creditors. Capital accumulation does not necessarily require trade either, although capital presupposes trade, and the ability to exchange goods for money. The reason is that wealth can be amassed through illegal or legalised expropriation (robbery, plunder, theft, piracy, slavery, embezzlement, fraud and so on). However, a continuous and cumulative accumulation process always presupposes that capital ownership is secure. Consequently, military and police forces have typically been necessary for capital accumulation on a larger scale, to protect property. In medieval society, typically the bourgeoisie could not protect its capital assets permanently from attacks, which meant that the accumulation process was interrupted, and remained limited in scope. Today however, capitalists can own billions of dollars worth of assets which are well-protected against crime (see the annual Merrill-Lynch survey of the world's wealthy). With the aid of private banking it is easier to obscure or hide the wealth that one owns.
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Regime of accumulation
Both the Regulation School of French Marxist economists, inspired by the original writings of Michel Aglietta and developed by Robert S. Boyer, as well as the American social structure of accumulation school founded by the economists Samuel Bowles and David Gordon have emphasized that the processes of capital accumulation occur within a social regime of accumulation. In other words, a specific political and socio-economic environment is required that enables sustained investment and economic growth. This environment is created partly by state policy, but partly by also by technological innovations, changes in popular culture, commercial developments, the media, and so on. An example of such a regime often cited here is that of Fordism, named after the enterprise of Henry Ford. As the pattern of accumulation changes, the regime of accumulation also changes. Similar ideas also surface in institutional economics. The main insight here is that market trade cannot flourish without regulation by a legal system plus the enforcement of basic moral conduct and private property by the state. But the regime of accumulation responds to the total experience of living in capitalist society, not just market trade.
Environmental criticisms
The environmental criticism of capital accumulation focuses on four main ideas. Firstly, there is the problem of externalities. This means that public or privately owned industry incurs costs, including environmental and health costs, which are not charged or priced. This happens for example when effluents are discharged on land, water or in the air, which can cause pollution or despoilation of terrains. In recognition of this, environmental taxes are sometimes imposed. Secondly, commercial activities which may be rational from the point of view of a narrow public or private enterprise may not be rational from the point of view of the larger society, or from the point of view of the biosphere, especially when they involve the destruction of natural habitats of flora and fauna, pollution and entropy. Because a natural resource happens to be a freely available good (for example fish in the open sea), it may be over utilized by either public or private enterprises. Or, a lot of energy may be wasted producing and transporting a good to the consumer. Or, the disturbance of subsistence economics by commerce may cause overpopulation by not controlling population by starvation. Thirdly, goods and services may be produced for public or private profit in ways which are directly or indirectly harmful to human life, either because of the nature of the use-value involved, or because of the techniques used to produce them, or because they encourage consumer habits with harmful effects. Finally, business and cultural ethics may often not be reconcilable with some human ethics or good environmental ethics. This means for example that the imputation of a price to an environmental cost, or imposing an environment tax may be insufficient as a policy, because some things which have value simply have no price. Nowadays environmental concerns are an essential part of so-called socially responsible business and corporate governance. However, opinion is divided about whether a capitalist market economy can be ecologically sustainable. Some argue that the experience of wide spread environmental destruction in the Soviet Union and China proves that state socialism or command economy can be ecologically worse than capitalism. Today [2005] some environmentalists consider capitalism, or the "free market system" as it is usually called, incapable of complying with the basic requisites of a sustainable and respectful habitation of planet earth. A major problem, inherent in some free market production dynamics, is the constant desire to constantly expand production. In this particular regard, critics point to the penchant to plan in short-term cycles, and with a narrow concern about the fortunes of only a single country, firm or business entity, thereby ignoring the cumulative effect brought to bear on the biosphere by the entire production system.
Capital accumulation In the 1970s, some environmentalists argued for a policy of'"zero economic growth" in "affluent" Western societies. However, when a long recession began in that decade, halving economic growth rates, most people became more concerned about mass unemployment. Thus, the proponents of zero growth lost popularity. Nowadays, the popular concept is sustainable economic development or growth. But interpretations of what that means can differ wildly. One difficulty is that predictions of future resource scarcity are usually based on extrapolation from the past, "assuming present trends will continue", but they may not.
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Capital accumulation and risk

Most capital accumulation involves risk, because capital is committed to an investment without perfect certainty of future earnings. A capital asset could gain value, but it could also lose value in the future. Owners of capital (investors) therefore typically diversify their investment portfolio, and try to minimise the risks involved in investments by every possible means. In the course of two centuries of capital accumulation based on industrialisation the intensive economising and exploitation of human labour, and technological innovation, the value of the assets that are invested in has become very large the markets traded in extend around the globe the deregulation of markets has increased the level of market uncertainty the volume of speculative capital has grown enormously the banking industry dominates the ownership of capital assets. This has led to an enormous expansion of the insurance industry and of the profession of risk management. As a corollary, this powerfully stimulates the construction of mathematical models which aim to assess how probable it is that particular "risky events" will occur. Some sociologists such as Frank Furedi claim that an exaggerated and unhealthy preoccupation or anxiety about risks has infiltrated the whole of modern society. Speculation - making money from price differentials or price fluctuations - is justified as follows: "The roles of speculators in a market economy are to absorb risk and to add liquidity to the marketplace by risking their own capital for the chance of monetary reward." However, speculation often also occurs with borrowed capital. In this case, capital is borrowed at a low rate of interest, and reinvested at a higher return.
Capital accumulation and military wars

Wars typically causes the diversion, destruction and creation of capital assets as capital assets are both destroyed or consumed and diverted to types of production needed to fight the war. Many assets are wasted and in some few cases created specifically to fight a war. War driven demands may be a powerful stimulus for the accumulation of capital and production capability in limited areas and market expansion outside the immediate theatre of war. Often this has induced laws against perceived and real war profiteering. War destruction can be illustrated by looking at World War II. Industrial war damage was heaviest in Japan, where 1/4 of factory buildings and 1/3 of plant & equipment were destroyed; 1/7 of electric power-generating capacity was destroyed and 6/7 of oil refining capacity. The Japanese merchant fleet lost 80% of their ships. In Germany in 1944, when air attacks were heaviest, 6.5% of machine tools were damaged or destroyed, but around 90% were later repaired. About 10% of steel production capacity was lost. In Europe, the United States and the Soviet Union enormous resources were accumulated and ultimately dissipated as planes, ships tanks, etc. were built and then lost or destroyed. Germany's total war damage was estimated at about 17.5% of the pre-war total capital stock by value, i.e., about 1/6. In the Berlin area alone, there were 8 million refugees lacking basic necessities. In 1945, less than 10% of the railways were still operating. 2395 rail bridges were destroyed and a total of 7500 bridges, 10,000 locomotives and more than 100,000 goods wagons were destroyed. Less than 40% of the remaining locomotives were operational.
Capital accumulation However, by the first quarter of 1946 European rail traffic, which was given assistance and preferences (by western appointed military governors) for resources and material as an essential asset, regained its prewar operational level. At the end of the year, 90% of Germany's railway lines were operating again. In retrospect, the rapidity of infrastructure reconstruction appears astonishing. Initially, in May 1945, newly installed U.S. President Harry S. Truman's directive had been that no steps would be taken towards economic rehabilitation of Germany. In fact, the initial industry plan of 1946 prohibited production in excess of half of the 1938 level; the iron and steel industry was allowed to produce only less than a third of pre-war output. These plans were rapidly revised and better plans were instituted. In 1946, over 10% of Germany's physical capital stock (plant & equipment) was also dismantled and confiscated, most of it going to the USSR. By 1947, industrial production in Germany was at 1/3 of the 1938 level, and industrial investment at about 1/2 the 1938 level. The first big strike wave in the Ruhr occurred in early 1947 - it was about food rations and housing, but soon there were demands for nationalisation. The U.S. appointed military Governor (Newman) however stated at the time that he had the power to break strikes by withholding food rations. The clear message was: "no work, no eat". As the military controls in Western Germany were nearly all relinquished and the Germans were allowed to rebuild their own economy with Marshal Plan aid things rapidly improved. By 1951, German industrial production had overtaken the prewar level. The Marshall Aid funds were important, but, after the currency reform (which permitted German capitalists to revalue their assets) and the establishment of a new political system, much more important was the commitment of the USA to rebuilding German capitalism and establishing a free market economy and government, rather than keeping Germany in a weak position. Initially, average real wages remained low, lower even than in 1938, until the early 1950s, while profitability was unusually high. So the total investment fund, aided by credits, was also high, resulting in a high rate of capital accumulation which was nearly all reinvested in new construction or new tools. This was called the German economic miracle or "Wirtschaftswunder".[6] In the United States in World War II the large investments in industrial plant necessitated by the war brought some advantages; but the costs of dead, waste and debt would have never been under taken by any rational government for the slight advantages. In modern times, it has often been possible to rebuild physical capital assets destroyed in wars completely within the space of about 10 years, except in cases of severe pollution by chemical warfare or other kinds of irreparable devastation. However, damage to human capital has been much more devastating, in terms of fatalities (in the case of World War II, about 55 million deaths), permanent physical disability, enduring ethnic hostility and psychological injuries which have effects for at least several generations.
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New developments in capital accumulation

New trends in capital accumulation include: financialisation (the extraordinarily strong growth of the international financial markets. This is trade in financial claims to current and future income. As a corollary, the proportion of national income which consists of interest income and rentier income increases. The International Swaps and Derivatives Association reported in September 2006 that the outstanding nominal value of swaps and derivatives at the end of June 2006 was $283 trillion nearly ten times the combined GDP of the US, Canada, the EU, Japan, and China; or ten times the value of total US home equity (each being valued at about $34 trillion). According to Standard & Poor's, world stock market capitalization is about $41 trillion. Of total swaps and derivatives, some $26 trillion was in the fastest growing area, credit default swaps. Modern information technology makes it possible to engage in very complex investment projects and shift funds extremely quickly from one placement to another in space and time. This increases the rotation speed of capital and raises the profit rate, but can also increase potential financial risks. the growing controversies about intellectual property rights and the protection (or security) of ideas which can make money for the owner. Increasingly, the basic conditions necessary for a good, service or idea to become a
Capital accumulation tradeable commodity are theoretically defined. ongoing privatisation of assets which were previously under public ownership. The IMF estimates suggest that in two decades since 1985 more than $2 trillion US dollars (in 2005 values) worth of state assets were privatised worldwide. Typically, these assets also rise sharply in value within a few years, because they involve enterprises occupying monopoly positions (e.g., utilities) which thus provide guaranteed profits. If profits dry up in the private sector, capitalists acquire public assets paid for by all citizens, with the argument that if they run them, supply will be more efficient. The enormous increase in capital gains from rising property values in the richer countries, especially in the |housing market. US tax data for fiscal 2000 showed that realised capital gains in the USA peaked at an estimated $644.3 billion worth of income while US GDP in 2000 was at US$9,817.0 billion, in other words realised capital gains assessed for tax purposes were equal to 6.5% of GDP at that point (total capital gains would be larger). Yet GDP, being a measure of value added in production, does not even include this "hidden" personal and business income. A growing proportion of capital assets which is not productively invested (overcapitalisation), together with an increase in the amount of consumer debt and liabilities. Some observers see the cause as being an increase in the gap between rich and poor, which causes only sluggish demand growth. "Debt management" has become a distinct and profitable business. The crisis of numerous pension funds providing a large amount of investment capital, which are alleged to be badly managed. An international "competition of currency values" strongly influenced by speculative capital, which has a big effect on the pattern of international trade. The magnitudes involved can be gauged, e.g., from the currency conversion ratios used to establish purchasing power parity (PPP). For example, India's GDP valued at PPP becomes five times larger. This tends to stimulate counter-trade. The acceleration of the concentration and centralisation of capital internationally in very large corporations. The Fortune Magazine "Global 500" largest corporations in 2004 employed more people than the whole workforce of Germany. The after-tax profit volume of the Fortune Global 500 was said to be $731 billion, the combined asset value was $60.8 trillion, gross income (revenues) $14.8 trillion, and stockholders equity $6.8 trillion. For comparison, world GDP in 2004 was valued at $40.9 trillion (World Bank). The Merrill lynch/CapGemini World Wealth Report 2005 covering High Net Worth Individuals (HNWI) claims the fortunes of the world's millionaires and billionaires grew strongly in 2004, increasing by 8.2% to US$30.8 trillion in one year. Driven by North America & AsiaPacific, this represents "the highest growth of HNWI wealth in more than three years". Dollarisation - more US currency now circulates outside the US than inside it, and some countries such as Ecuador and El Salvador have adopted the US dollar as national currency. "Dollar hegemony" is maintained by large Asian, Arab and European investments in the United States. the tendency for corporate investment to orient towards activities which secure good short-term returns for shareholders. This is called "value-based management". Most corporate executive officers (CEO's) cite profitability as their prime concern. an increasing preoccupation with the conditions for extending credit, and with all sorts of risk factors. World markets are increasingly sensitive to events and disturbances which might cause social instability or panics. the declining overall significance of business start-ups, in the sense of enterprises creating new products and services, rather than being just tax-shelters or secondary employment (whether this is a permanent trend remains to be seen). the growth of criminal (or illegal) accumulation as measured by crime reports, including business crime and corruption such as fraud, embezzlement, money laundering, insider trading, smurfing and theft, but also prostitution, forced labour, slavery, war plunder etc. The volume of illegal international transactions is now said to be around $1 trillion a year, equal to the GDP of Spain or Canada. National Geographic has reported there are
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Capital accumulation about 27 million slaves in the world. International Labour Organization estimates of forced labor are a little over a dozen million. There are possibly 70 million people involved around the world in prostitution of one form or another. But there are many more, employed or unemployed, in "intermediate" positions. Traditional sociological categories may not describe their situation accurately, but a growing "underclass" (which may not be an accurate label) is a policy concern for many governments. the most ignored aspect is the changing structure of the international workforce in its totality, specifically the number employed by specific employment status and by income, in different sectors. But just as Marx's Law of Accumulation predicted, the working class has grown enormously within 2 centuries. Deon Filmer estimated that 2,474 million people participated in the worldwide non-domestic labour force in the mid-1990s. Of these around a fifth, 379 million people, worked in industry, 800 million in services, and 1,074 million in agriculture. The majority of workers in industry and services were wage & salary earners - 58 percent of the industrial workforce and 65 percent of the services workforce. But a big portion were self-employed or involved in family labour. Filmer suggests the total of employees worldwide in the 1990s was about 880 million, compared with around a billion working on own account on the land (mainly peasants), and some 480 million working on own account in industry and services. tax havens. Hides 8 trillion.
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References
[1] [2] [3] [4] [5] [6] (http:/ / marxists. org/ glossary/ terms/ c/ a. htm#capital) Definition of Capital on Marxists.org Karl MARX. "Das Kapital, ch.25" (http:/ / www. marxists. org/ archive/ marx/ works/ 1867-c1/ ch25. htm). . Retrieved July 7, 2011. (http:/ / www. marxists. org/ archive/ marx/ works/ 1867-c1/ ch25. htm) "Das Kapital", vol.1, ch. 25 http:/ / www. marxists. org/ archive/ marx/ works/ 1867-c1/ ch33. htm http:/ / www. marxists. org/ archive/ marx/ works/ 1894-c3/ ch24. htm Armstrong, Glyn & Harrison 1984
A few references to works of theory

Michel Aglietta, A Theory of Capitalist Regulation. Elmar Altvater, Gesellschaftliche Produktion und konomische Rationalitt; Externe Effekte und zentrale Planung im Wirtschaftssystem des Sozialismus. Samir Amin, Accumulation on a world scale. Philip Armstrong, Andrew Glyn and John Harrison, Capitalism since World War II. Paul A. Baran, The Political Economy of Growth. Gregory Clark (economist) A Farewell to Alms: A Brief Economic History of the World. P. Groenewegen (ed.), Economics and ethics.London: Routledge 1996. Henryk Grossman, The Law of Accumulation and Collapse of the Capitalist System. Andre Gunder Frank, World accumulation, 1492 - 1789. New York 1978 Rudolf Hilferding, Finance Capital. Rosa Luxemburg, The Accumulation of Capital. Ernest Mandel, Marxist Economic Theory. Karl Marx, Das Kapital Vol. 1, Part 7 and Vol. 2, Part 3. Seymour Melman, Profits without production. Michael Perelman, Steal this Idea: the Corporate Confiscation of Creativity. Joan Robinson, Essays in the Theory of Economic Growth. Harry Rothman, Murderous providence; A study of pollution in industrial societies. Vaclav Smil, China's Environmental Crisis: An Inquiry into the Limits of National Development. Armonk: M.E. Sharpe, 1992. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.
Capital accumulation Manual Velzquez, Business Ethics: Concepts and Cases. William J. Bernstein, The Birth of Plenty: How the Modern World of Prosperity was Launched. Deon Filmer, Estimating the World at Work, a background report for World Bank's World Development Report 1995 (Washington DC, 1995). Willem van Schendel and Itty Abraham (eds), Illicit Flows and Criminal Things. States, Borders, and the Other Side of Globalization. Bloomington, Indiana University Press, 2005; ISBN 0-253-34669-X Joshua S. Goldstein, War and economic History (http://www.joshuagoldstein.com/jgeconhi.htm)
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External links
Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden 1800-2000 by Rodney Edvinsson (http://www.diva-portal.org/diva/getDocument?urn_nbn_se_su_diva-378-1__fulltext.pdf) David Harvey, Reading Marx's Capital (http://davidharvey.org), Reading Marxs Capital - Class 11, Chapter 25, The General Law of Capitalist Accumulation (http://davidharvey.org/2008/08/capital-class-11/) (video lecture)
Cash flow return on investment

Cash flow return on investment is a valuation model that assumes the stock market sets prices based on cash flow, not on corporate performance and earnings. CFROI = Cash Flow / Market Recapitalization For the corporation, it is essentially internal rate of return (IRR). CFROI is compared to a hurdle rate to determine if investment/product is performing adequately. The hurdle rate is the total cost of capital for the corporation calculated by a mix of cost of debt financing plus investors `expected return on equity investments. The CFROI must exceed the hurdle rate to satisfy both the debt financing and the investors expected return. CFROI = Gross Cash Flow / Gross Investment Michael J. Maubossin, in his 2006 book 'MORE THAN YOU KNOW', quoted an analysis by CSFB, that, measured by CFROI, performance of companies tend to converge after five years in terms of their survival rates. The CFROI for a firm or a division can then be written as follows: CFROI = (Gross Cash Flow - Economic Depreciation) / Gross Investment This annuity is called the economic depreciation. Economic Depreciation = (Replacement Cost in Current dollars (Kc)) / ((1+ Kc )^n - 1) where n is the expected life of the asset.
Profit accounting
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Profit accounting
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.
Definition
There are several important profit measures in common use. Note that the words earnings, profit and income are used as substitutes in some of these terms (also depending on US or UK usage), thus inflating the number of profit measures. Gross profit equals sales revenue minus cost of goods sold (COGS), thus removing only the part of expenses that can be traced directly to the production or purchase of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) equals sales revenue minus cost of goods sold and all expenses except for interest, amortization, depreciation and taxes. It measures the cash earnings that can be used to pay interest and repay the principal. Since interest is paid before income tax is calculated, the debtholder can ignore taxes. Operating profit or Earnings Before Interest and Taxes (EBIT) equals sales revenue minus cost of goods sold and all expenses except for interest and taxes. This is the surplus generated by operations. It is also known as Operating Profit Before Interest and Taxes (OPBIT) or simply Profit Before Interest and Taxes (PBIT). Earnings Before Tax (EBT) or Net Profit Before Tax equals sales revenue minus cost of goods sold and all expenses except for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes or simply pre-tax Income. Earnings After Tax or Net Profit After Tax equals sales revenue after deducting all expenses, including taxes (unless some distinction about the treatment of extraordinary expenses is made). In the US, the term Net Income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items. Earnings After Tax (or Net Profit After Tax) minus payable dividends becomes Retained Earnings. To accountants, Economic Profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is Earnings After Tax less the Equity Charge, a risk-weighted cost of capital. This is almost identical to the economists' definition of economic profit. There are analysts who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as Economic Value Added (EVA). Economists define also the following types of profit: Abnormal profit (or Supernormal profit) Subnormal profit Monopoly profit (or Super profit) Optimum Profit is a theoretical measure and denotes the "right" level of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.
Profit accounting Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, whereby that resource cannot be easily duplicated by other firms.
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Notes References
Pyle, William W., and Kermit D. Larson (1981). Fundamental Accounting Principles. Homewood, Illinois: Richard D. Irwin. ISBN 0256023867
External links
Profit and Loss (http://mises.org/story/2321), Ludwig von Mises (1951) Measuring the Long-Run Profitability of the Firm (http://lipas.uwasa.fi/~ts/smuc/smuc.html), Salmi Virtanen (1997)
Return on capital
Return on capital (ROC) is a ratio used in finance, valuation, and accounting. The ratio is estimated by dividing the after-tax operating income (NOPAT) by the book value of invested capital.
Formula
This differs from ROIC. Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as net operating profit less adjusted taxes divided by invested capital and is usually expressed as a percentage. In this calculation, capital invested includes all monetary capital invested: long-term debt, common and preferred shares. When the return on capital is greater than the cost of capital (usually measured as the weighted average cost of capital), the company is creating value; when it is less than the cost of capital, value is destroyed.
ROIC formula
Note that the numerator in the ROIC fraction does not subtract interest expense, because denominator includes debt capital.
References
675
Valuation
Appraisal
Economic appraisal is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and satisfying requirements for decision accountability. It is a systematic process for examining alternative uses of resources, focusing on assessment of needs, objectives, options, costs, benefits, risks, funding, affordability and other factors relevant to decisions. The main types of economic appraisal are: Cost-benefit analysis Cost-effectiveness analysis Scoring and weighting Economic appraisal is a methodology designed to assist in defining problems and finding solutions that offer the best value for money (VFM). This is especially important in relation to public expenditure and is often used as a vehicle for planning and approval of public investment relating to policies, programmes and projects. The principles of appraisal are applicable to all decisions, even those concerned with small expenditures. However, the scope of appraisal can also be very wide. Good economic appraisal leads to better decisions and VFM. It facilitates good project management and project evaluation. Appraisal is an essential part of good financial management, and it is vital to decision-making and accountability.
References External links

UK Treasury Green Book (http://greenbook.treasury.gov.uk/) Department of Finance & Personnel: Economic Appraisal - what is it? (http://eag.dfpni.gov.uk/what-is.htm)
Art valuation
676
Art valuation
Art valuation, an art-specific subset of financial valuation, is the process of estimating the potential market value of works of art and as such is a financial rather than an aesthetic concern. Art valuation involves comparing data from multiple sources such as art auction houses, private and corporate collectors, curators, and specialized analysts to arrive at a value. Art valuation is accomplished not only for investment and financing purposes, but as part of estate valuations, for charitable contributions, for tax planning, insurance, and loan collateral purposes.[1]
The art market economic model

The art market operates in an economic model that considers more than supply and demand: is a hybrid type of prediction market where art is bought and sold for values based not only on its perceived cultural value but on its predicted future monetary value, thus valuing artworks for such a market takes into account a variety of factors. Supply and demand affect the secondary market, existing art that has been sold at least once before, more than it does the primary art market, where new art comes to the market for the first time. Once a work is sold on the primary market it enters the secondary market. Alpha consumers (trend-setters) and gallery or agent promotion are the prime forces at work in valuing works on the primary market: new, contemporary art that has no predictive market history and thus its valuation is more difficult and speculative. In the late 1980s, investment firms focusing on both the primary and secondary art markets began to spring up and study the market in-depth.[2] [3] [4] [5] [6]
Art valuation generally

Art valuation activity concerns itself with estimating market demand, liquidity capability of lots, works, and artists, and valuation trends such as average sale price and mean estimates.[7] Unlike the volumes in the securities market where millions of people and firms participate in buying and selling financial interests or the commodities market where measures of raw or primary products are exchanged using standardized contracts, art market activity largely follows the demands of a more limited array of private collectors, museums, and large corporate interests as the primary market participants.[8] Because the art market's participants are far more limited in number than the securities or commodities markets, art valuation relies to a great extent on the advice and enthusiasm of experienced private collectors, curators, and specialized market analysts, and this limitation in turn increases the risk that some items may be over or undervalued. Additionally, the art market is seasonal rather than ongoing: art valuations made for an autumn auction may be unrealistic for the following spring auction season as fortunes in the financial markets during one season affect the art market in the following season.[9] In the case of contemporary art especially, when an artist is not well known and hasn't any auction history, the risks of incorrect valuation are greater. Valuation estimates are given in ranges of prices to offset uncertainty.[10] Another technique for pricing pieces by new artists of uncertain value is to ignore aesthetics and look at three semi-commoditized aspects: "scale" - size and level of detail, "intensity" - effort, and "medium" - quality of the materials.[11] Research data available from art auction houses such as Christie's, Sotheby's, Phillips de Pury & Company, and Lyon & Turnbull are those tracking market trends such as yearly lot transactions, bought-in statistics, sales volume, price levels, and pre-auction estimates.[12] There are also companies such as ArtTactic[13] and Artprice[14] utilizing art auction data as providers of art market research analysis.[15]
Art valuation
677
Valuation for tax and other law-related purposes

In the United States art bought and sold by collectors is treated as a capital asset for tax purposes,[16] and disputes relating to the valuation of art or the nature of gain on its sale are often decided by the Tax Court and other courts. Important cases include Crispo Gallery v. Commissioner (need to produce credible documentary evidence of valuation as taxpayer has ultimate burden of persuasion),[17] Angell v. Commissioner (fraud perpetuated upon the IRS through inflated appraisals),[18] Drummond v. Commissioner (cannot claim gain from art sale as income from business unless actually in the business),[19] Estate of Querbach v. A & B Appraisal Serv. (appraiser's liability for misidentifying a painting),[20] Estate of Robert Scull v. Commissioner (previous sales of the same property without subsequent events affecting value are generally strong indicators of fair market value),[21] Nataros v. Fine Arts Gallery of Scottsdale (in the absence of fraud or negligent misrepresentation, buyers believing they have overpaid at auction because of bad advice bear a heavy burden of proof),[22] Williford v. Commissioner (the 'Williford Factors' test: eight factors to determine whether property is held for investment or held for sale).[23]
References
[1] See Christie's (http:/ / www. christies. com/ services/ valuations/ ) and Sotheby's (http:/ / www. sothebys. com/ help/ faq/ faq_beforeauction. html#a04) descriptions of valuation. [2] Gerard and Louis, On pricing the priceless: Comments on the economics of the visual art market (http:/ / www. sciencedirect. com/ science/ article/ B6V64-3YRSMF4-28/ 2/ 44fafa98be1c97504c5a1fdc722b55ba), European Economic Review, Elsevier, vol. 39(3-4), April 1995, pp. 509-518. (membership required). [3] Campbell, The Art of Portfolio Diversification (http:/ / i1. exhibit-e. com/ collectionofmodernart/ 39049d22. pdf), Maastricht University, March 2004. (art as an asset class) [4] Castlestone Management, Major Structural Themes Influencing the Art Market (http:/ / i1. exhibit-e. com/ collectionofmodernart/ ce63a3fb. pdf), April 2009. [5] See, for example, Gerber, Primary Art Market Investments - A Safe Haven when All Else Suddenly Correlates? (http:/ / www. primeartfunds. com/ Downloads/ Working Copy _ State of the Primary Art Market _ Manuel Gerber _ nov08. pdf), Prime Art Management Ltd., published in Art Fund Tracker, Nov. 2008. [6] Schnfeld and Reinstaller, The effects of gallery and artist reputation on prices in the primary market for art (http:/ / www. wu-wien. ac. at/ inst/ vw1/ papers/ wu-wp90. pdf), Working Paper, Department of Economics, Vienna University of Economics & B.A., May 2005. [7] See artnet.com's Market Trends FAQ (http:/ / www. artnet. com/ products/ mt_faq. asp). [8] The art market sees itself as a microcosm: it lists its collectors in the hundreds, as opposed to the securities market which has millions of participants. The Top Ten (http:/ / artnews. com/ issues/ article. asp?art_id=2536), The ARTnews 200 Top Collectors (http:/ / artnews. com/ issues/ article. asp?art_id=2520) [9] Discussion of the contraction of the art market during the 2008-2009 recession when sales at Sothebys, Christies, and Phillips de Pury & Company were less than half the previous year. (November 2008, $803.3 million compared to November 2007, $1.75 billion) Esterow, How to Buy in 2009 (http:/ / artnews. com/ issues/ article. asp?art_id=2642), ARTnews, March 2009. [10] "Generally, an estimate is made by seeing what a comparable piece of art sold for recently. Estimates are given in a range of prices, not one fixed figure." FAQ #13 (http:/ / www. phillipsartexpert. com/ ask_simon/ ) [11] "Why A Dead Shark Costs $12 Million" (http:/ / www. npr. org/ templates/ transcript/ transcript. php?storyId=128084948). 2010-06-25. . Retrieved 2010-07-27. [12] See, for example, artnet.com's sample report: Market Performance Report for Piet Mondian (http:/ / www. artnet. com/ products/ MT_sample. pdf). [13] http:/ / www. arttactic. com/ Content/ about-us [14] http:/ / web. artprice. com/ corporate/ EN/ [15] See, for example, arttactic's monthly Rawfacts newsletter (http:/ / www. arttactic. com/ newsletters. php). [16] 26 U.S.C. 1221. Capital asset defined. [17] Andrew Crispo Gallery, Inc. v. Commissioner (http:/ / openjurist. org/ 86/ f3d/ 42/ andrew-crispo-gallery-inc-v-commissioner-of-internal-revenue), 86 F.3d 42 1996 affg. T.C. Memo. 1992-106. [18] Angell v. Commissioner (http:/ / www. regulations. gov/ fdmspublic/ ContentViewer?objectId=09000064806dfc03& disposition=attachment& contentType=msw8)DOC, T.C. Memo 1986-528, aff'd 861 F.2d 723 (7th Cir. 1988). [19] Drummond v. Commissioner (http:/ / sc. findacase. com/ research/ wfrmDocViewer. aspx/ xq/ fac. \C04\PLS\1998\19980715_1825. C04. htm/ qx), 155 F.3d 558 (4th Cir.) 1998; and at vlex.com (http:/ / vlex. com/ vid/ drummond-v-commissioner-irs-18181935). [20] Estate of Querbach v. A & B Appraisal Serv., No.L-089362-85 Supr. Ct N.J., Bergen County, 1987 cited in Orenstein, Show Me the Monet: the Suitability of Product Disparagement to Art Experts (http:/ / www. law. gmu. edu/ assets/ subsites/ gmulawreview/ files/ 13-4/ documents/ Orenstein. pdf), George Mason Law Review, Vol. 13:4 2005, p. 917 fn. 66.
Art valuation
[21] Estate of Scull v. Commissioner, T.C. Memo. 1994-211 as cited by Walford v. Commissioner, No. 6506-86 (2003). [22] Nataros v. Fine Arts Gallery of Scottsdale (http:/ / www. artinfo. com/ news/ story/ 30041/ when-ishmael-called/ ?page=2), 126 Ariz. 44, 612 P.2d 500 (Ct.App.1980). [23] Williford v. Commissioner, 64 T.C.M. (CCH) 422 (1992) fn. 13. The eight factors are: (1) frequency and regularity of sales; (2) the substantiality of sales; (3) the duration the property was held; (4) the nature of the taxpayer's business and the extent to which the taxpayer segregated the collection from his or her business inventory; (5) the purpose for acquiring and holding the property before sale; (6) the extent of the taxpayer's sales efforts by advertising or otherwise; (7) the time and effort the taxpayer dedicated to the sales; and (8) how the sales proceeds were used.
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External resources
Kuspit, Art Values or Money Values? (http://www.artnet.com/magazineus/features/kuspit/kuspit3-6-07.asp), ARTnet, 3/6/07. Dunbier, Fine Art Comparables, tfaoi.org, Part 1 (http://www.tfaoi.org/articles/rd4.htm) and Part 2 (http:// www.tfaoi.org/articles/rd5.htm). The Dunbier System & ENCompass 22,000 Artist Directory (http://www.arlisna.org/artdoc/vol18/iss2/04. pdf), an early computerized valuation method no longer updated. Gerzog, Valuing Art in an Estate (http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1028366_code243167. pdf?abstractid=1028366&mirid=1), Tax Analysts, Tax Notes, Vol. 117, Nov. 5, 2007. Fitz Gibbon, From Prints to Posters: The Production of Artistic Value in a Popular Art World (http://caliber. ucpress.net/doi/abs/10.1525/si.1987.10.1.111), Symbolic Interaction, Spring 1987, Vol. 10, No. 1, Pages 111128 , DOI 10.1525/si.1987.10.1.111 (abstract). Marshall & Chisti, An Exploration of the Relationships of Physical Features of Art Works to Art Valuations and Selling Prices in Fundraising (http://www.una.edu/sobie/proc2006.pdf), Society of Business, Industry and Economics, Proceedings 2006, p.81. Campbell, Art as a Financial Investment (http://papers.ssrn.com/sol3/Delivery.cfm/ SSRN_ID978467_code230208.pdf?abstractid=978467&rulid=6936564&mirid=1), 2007. Thompson and McAndrew, The Collateral Value of Fine Art (http://papers.ssrn.com/sol3/Delivery.cfm/ SSRN_ID878385_code542089.pdf?abstractid=878385&mirid=1), Journal of Banking and Finance, Jan 2006. International Foundation for Art Research IFAR's overview of case law on valuation in the U.S. (http://www. ifar.org/case_law.php?ID=60). Art market news and information: Artfacts (http://www.artfacts.net/) Artinfo searchable Sale Index (http://artsalesindex.artinfo.com/artsalesindex/asi), and art market news (http://www.artinfo.com/artmarket/) Artnet News (http://www.artnet.com/magazineus/news/news.asp) ARTnews (http://artnews.com/) (magazine) Artprice.com's sample estimate (http://web.artprice.com/html/en/estimate.htm) ArtTactic (http://www.arttactic.com/) AskART.com (http://www.askart.com/) (oriented toward American art) The Mei Moses Fine Art Index (http://www.artasanasset.com/main/) From the perspective of a well-known art educator, Michael Moses, co-founder of the Mei Moses Art Index, discusses in two podcasts how art has performed on a historical basis in comparison with securities. Part 1 (http:// www.arttactic.com/podcast.php?id=6) and Part 2 (http://www.arttactic.com/podcast.php?id=9). ArtTactic.
Blockage discount
679
Blockage discount
Blockage discount is an art-business-related and legal term of art for referring to the money discount assigned to a group of artworks by a single artist when that group of works is to be released to market as a group rather than individually. A blockage discount adjusts the fair market value of the works downward because of the risks of depreciation when a large volume of art is released into the market all at once.[1] [2] [3] A blockage discount adjusting fair market value also affects the tax consequences of a sale in the U.S., and is frequently a subject of litigation when an artist dies while holding a large collection of her or his own work. For instance, when Georgia O'Keeffe died she had over 400 of her own works in her estate, and when Andy Warhol died he had over 28,000. In Georgia O'Keeffe's case, her estate's appraisers established blockage discounts based on solid evidence of market sales, but the IRS used its own valuation and the Tax Court assessed a resulting tax of more than the valuation of the collected works at her death.[4] In Andy Warhol's case the blockage discount for works in his estate was nearly 50%. Therefore, accountants and estate planners for artists plan with such eventualities in mind.[5] The IRS has stated that carrying costs and opportunity costs are relevant factors for consideration in blockage discounts, along with time to market.[3] , [3]
References
[1] In re Warhol, No. 824/87, 1994 WL 245246 * 1 (Surr. Ct., N.Y. Co. 1994). [2] Grosz v. Serge Sabarsky, Inc., 24 A.D.3d 264, 806 N.Y.S.2d 498, 500 (1st Dept 2005). (http:/ / www. lexisone. com/ lx1/ caselaw/ freecaselaw?action=OCLDisplayLanding& format=FULL& sourceID=bcfbd& searchTerm=eIWY. ggXa. aadj. ecHc& searchFlag=y& l1loc=FCLOW) [3] Bresler, Art Law: The Guide for Collectors, Investors, Dealers, and Artists, Practising Law Institute, 1998, p.1157 et seq.. (http:/ / books. google. com/ books?id=qSInf61-xaUC& pg=PA1157& vq=blockage+ discount& dq=blockage+ discount+ art& source=gbs_search_s& cad=0) [4] Establishing a Value is Important!, Planned Giving Design Center, LLC. 2009. (http:/ / www. pgdc. com/ pgdc/ article/ 2004/ 05/ establishing-value-important) [5] Englebrecht, Valuation of Art Objects for Estate Tax Purposes, The CPA Journal, 09/02/2002. (http:/ / www. nysscpa. org/ cpajournal/ 2002/ 0902/ features/ f094002. htm)
External resources
Wadler, The Heirs of George Grosz Battle His Dealer's Ghost; A Protracted Lawsuit Outlives Its Target, But Not Its Anger, The New York Times, August 27, 2001. (http:/ / www. nytimes. com/ 2001/ 08/ 27/ arts/ heirs-george-grosz-battle-his-dealer-s-ghost-protracted-lawsuit-outlives-its.html)
Cost of capital
680
Cost of capital
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities".[1] It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
Summary
For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company's average business activities it is reasonable to use the company's average cost of capital as a basis for the evaluation. A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital. However, a rate of return larger than the cost of capital is usually required. The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modelled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous (not linked to the company's activities). The cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity. It is commonly equated using the CAPM formula (below), although articles such as Stulz 1995 question the validity of using a local CAPM versus an international CAPM- also considering whether markets are fully integrated or segmented (if fully integrated, there would be no need for a local CAPM). Once cost of debt and cost of equity have been determined, their blend, the weighted-average cost of capital (WACC), can be calculated. This WACC can then be used as a discount rate for a project's projected cash flows.
Cost of debt
The cost of debt is computed by taking the rate on a risk free bond whose duration matches the term structure of the corporate debt, then adding a default premium. This default premium will rise as the amount of debt increases (since, all other things being equal, the risk rises as the amount of debt rises). Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). Thus, for profitable firms, debt is discounted by the tax rate. The formula can be written as (Rf + credit risk rate)(1-T), where T is the corporate tax rate and Rf is the risk free rate. The yield to maturity can be used as an approximation of the cost of capital.
Cost of capital
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Cost of equity
Cost of equity = Risk free rate of return + Premium expected for risk Cost of equity = Risk free rate of return + Beta x (market rate of return- risk free rate of return) Where Beta= sensitivity to movements in the relevant market: Where: EsThe expected return for a security RfThe expected risk-free return in that market (government bond yield) sThe sensitivity to market risk for the security RMThe historical return of the stock market/ equity market(RM-Rf)The risk premium of market assets over risk free assets. The risk free rate is taken from the lowest yielding bonds in the particular market, such as government bonds.
Expected return
The expected return (or required rate of return for investors) can be calculated with the "dividend capitalization model", which is
Comments
The models state that investors will expect a return that is the risk-free return plus the security's sensitivity to market risk times the market risk premium. The risk premium varies over time and place, but in some developed countries during the twentieth century it has averaged around 5%. The equity market real capital gain return has been about the same as annual real GDP growth. The capital gains on the Dow Jones Industrial Average have been 1.6% per year over the period 1910-2005. [2] The dividends have increased the total "real" return on average equity to the double, about 3.2%. The sensitivity to market risk () is unique for each firm and depends on everything from management to its business and capital structure. This value cannot be known "ex ante" (beforehand), but can be estimated from ex post (past) returns and past experience with similar firms. Cost of retained earnings/cost of internal equity Note that retained earnings are a component of equity, and therefore the cost of retained earnings (internal equity) is equal to the cost of equity as explained above. Dividends (earnings that are paid to investors and not retained) are a component of the return on capital to equity holders, and influence the cost of capital through that mechanism.
Weighted average cost of capital

The Weighted Average Cost of Capital (WACC) is used in finance to measure a firm's cost of capital. The total capital for a firm is the value of its equity (for a firm without outstanding warrants and options, this is the same as the company's market capitalization) plus the cost of its debt (the cost of debt should be continually updated as the cost of debt changes as a result of interest rate changes). Notice that the "equity" in the debt to equity ratio is the market value of all equity, not the shareholders' equity on the balance sheet.To calculate the firms weighted cost of capital, we must first calculate the costs of the individual financing sources: Cost of Debt, Cost of Preference Capital and Cost of Equity Cap.. Calculation of WACC is an iterative procedure which requires estimation of the fair market value of equity capital.[3]
Cost of capital
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Capital structure
Because of tax advantages on debt issuance, it will be cheaper to issue debt rather than new equity (this is only true for profitable firms, tax breaks are available only to profitable firms). At some point, however, the cost of issuing new debt will be greater than the cost of issuing new equity. This is because adding debt increases the default risk and thus the interest rate that the company must pay in order to borrow money. By utilizing too much debt in its capital structure, this increased default risk can also drive up the costs for other sources (such as retained earnings and preferred stock) as well. Management must identify the "optimal mix" of financing the capital structure where the cost of capital is minimized so that the firm's value can be maximized. The Thomson Financial league tables show that global debt issuance exceeds equity issuance with a 90 to 10 margin.weighted average cost of capital
Modigliani-Miller theorem
If there were no tax advantages for issuing debt, and equity could be freely issued, Miller and Modigliani showed that, under certain assumptions, the value of a leveraged firm and the value of an unleveraged firm should be the same.
References
[1] Brealy &al. "Principles of Corporate Finance", Chapter 10 [2] http:/ / home. earthlink. net/ ~intelligentbear/ com-dj-infl. htm [3] Business Valuation Glossary - WACC Calculation using an Iterative Procedure (http:/ / www. valuadder. com/ glossary/ weighted-average-cost-capital. html)
Further reading
Modigliani, F.; Miller, M. (1958). "The Cost of Capital, Corporation Finance and the Theory of Investment". American Economic Review (American Economic Association) 48 (3): 261297. JSTOR1809766. Rosenbaum, Joshua; Joshua Pearl (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. ISBN0-470-44220-4. Yee, Kenton K. (2000). "Aggregation, Dividend Irrelevancy, and Earnings-Value Relations". Contemporary Accounting Research 22 (2): 453480. doi:10.1506/GEH4-WNJR-G58F-UM0U. SSRN667781.
Diminution in value
683
Diminution in value
Diminution in value is a legal term of art used when calculating damages in a legal dispute, and describes a measure of value lost due to a circumstance or set of circumstances that caused the loss. Specifically, it measures the value of something before and after the causative act or omission creating the lost value in order to calculate compensatory damages.[1] In legal damages theories, diminution in value is often calculated for compensatory special damages when a loss is monetarily quantifiable, and for restitution or disgorgement damages when the loss has unfairly enriched a wrongdoer.[1]
Examples
Compensatory damages
Tort example Person P has an apple cart which wrongdoer W runs over with a car. P depends upon the cart for selling apples as their sole source of income. P is able to salvage some of the parts from the damaged cart and gets the cart fixed using the salvaged parts. P goes back to selling apples the next week, but finds her customers have started to go elsewhere for their apples since she was not available for the week her cart was being repaired. In order to win back her customers P advertises her return and also sells her apples for a discount for a week. P wants to recover the diminution in value of their business from W. In order to do this P must determine the cost of the repairs and damaged apples, their lost opportunity cost or profit loss (how much profit they would have made during the week they were unable to sell apples), the advertising costs, and the lost profit from having to sell at a discount for a week. To determine the diminution in value of her business, P calculates: the cost to repair the damaged cart, less the cost of salvageable parts, plus the cost of the apples lost, plus the lost profits for the week it takes to repair the cart, plus the advertising costs, plus the profit loss of discounted apples sold for one week. Mixed contract and tort example Person P buys a dividend-bearing and interest-bearing contract from insurer B. P dies some years later, but B does not inform P's heirs of the contract's existence. At P's death there is 1 million dollars in the contract fund, and the contract is still active but not yet mature. A short time after P's death, B wrongfully stops paying interest on the contract, and while dividends continue to accrue on the amount then in the contract fund, B wrongfully does not roll such dividends back into the contract fund. Instead, B places the dividends into a separate account. Some years later P's heirs discover the contract and eventually recover the dividends B paid into the separate account, but not the interest lost on the contract fund after B removed the dividends, and not the greater amount of dividends that would have been paid but for B's removal of dividends in the first place. P's heirs sue B to recover their losses as damages. To calculate their loss, P's heirs begin with the value of the contract fund at P's death: $1 million
Diminution in value then calculate the dividend amounts and interest that B should have paid had B continued to roll dividends back into the fund. To do this P's heirs must first calculate the amount in dividends that should have been paid into the fund at each regular dividend interval, then calculate how much interest should have been paid for each of those intervals, e.g.: Year 1: $1,000,000 in fund + $10,000 dividends + $80,800 interest = $1,090,800 Year 2: $1,090,800 in fund + $12,000 dividends + $66,168 interest = $1,168,968 etc., until all payment periods are accounted for. When P's heirs have added up what they lost they'll have discovered the difference between what they would have had B not acted wrongfully, and what they ended up with: the diminution in value of the contract fund.
684
Restitution or Disgorgement
Adding to the example above, B kept both P's interest and dividends for its own use for a period of years and used these monies to invest in ventures which in turn earned profit and further interest for B. Thus B's misappropriation of P's funds not only deprived P and P's heirs of P's property, but further enriched B because B made a profit from its wrongful use and earned interest on that profit. In this example, calculating the diminution in value of the contract fund that occurred by B's wrongdoing is helpful to a legal tribunal or settlement negotiation in discovering not only the value of property lost, but the initial enrichment value to B. It may not be possible to account for B's total enrichment in the fullness of time with a high degree of accuracy, but if B's profits made using P's money are calculable, the measure of B's profit disgorgement may accurately reflect a fair restitution for P when added to damages from the diminution of the contract fund. Therefore, calculating the diminution in value of P's property is a primary factor in calculating either restitution or disgorgement damages, or both, in a case such as in this example.
External links
Example of usage in real property damage: Courtney vs. Publix, Florida District Court of Appeal, (2d Cir.), No. 2D00-1485, 2001.FindLaw [2]; and Kanner, Equity in Toxic Tort Litigation: Unjust Enrichment and the Poor. Law & Policy, Vol. 26, No. 2, pp. 209-230, April 2004.SSRN abstract [3] and Law & Policy Journal [4] Example of usage in state legislation: North Carolina General Assembly, Auto Insurance/Diminution in Value, 2009.[5] Example of usage in bankruptcy and creditors' rights: Stuart, Court Denial of Request For Adequate Protection Does Not Trigger Superpriority Status, 2000.FindLaw [6] Legal terms glossary (Wiktionary) [7] Zalma and Wickert, First-Party Diminution In Value Cases In All 50 States. [8] Zalma, A Review of Diminution in Value Cases in the United States, 2008.[9]
Diminution in value
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References
[1] [2] [3] [4] [5] [6] [7] [8] [9] Black's Law Dictionary, 6th edition, West Publishing Co., 1990, p. 458, 390-92. http:/ / caselaw. findlaw. com/ scripts/ getcase. pl?court=fl& vol=2D00-1485& invol=1 http:/ / ssrn. com/ abstract=568236 http:/ / www. wiley. com/ bw/ journal. asp?ref=0265-8240 http:/ / www. ncga. state. nc. us/ Sessions/ 2009/ Bills/ Senate/ PDF/ S660v1. pdf http:/ / library. findlaw. com/ 2000/ Jun/ 1/ 131173. html http:/ / en. wiktionary. org/ wiki/ Appendix:Glossary_of_legal_terms http:/ / www. mwl-law. com/ CM/ Resources/ First-Party-Dimuinution. pdf http:/ / zalma. com/ DIM-ARTICLE. HTM
Expected value
In probability theory, the expected value (or expectation, or mathematical expectation, or mean, or the first moment) of a random variable is the weighted average of all possible values that this random variable can take on. The weights used in computing this average correspond to the probabilities in case of a discrete random variable, or densities in case of a continuous random variable. From a rigorous theoretical standpoint, the expected value is the integral of the random variable with respect to its probability measure.[1] [2] [3] It is possible to construct an expected value equal to the probability of an event by taking the expectation of an indicator function that is one if the event has occurred and zero otherwise. This relationship can be used to translate properties of expected values into properties of probabilities, e.g. using the law of large numbers to justify estimating probabilities by frequencies.
Definition
Discrete random variable, finite case
Suppose random variable X can take value x1 with probability p1, value x2 with probability p2, and so on, up to value xk with probability pk. Then the expectation of this random variable X is defined as Since all probabilities pi add up to one: p1 + p2 + ... + pk = 1, the expected value can be viewed as the weighted average, with pis being the weights:
If all outcomes xi are equally likely (that is, p1 = p2 = ... = pk), then the weighted average turns into the simple average. This is intuitive: the expected value of a random variable is the average of all values it can take; thus the expected value is what you expect to happen on average. If the outcomes xi are not equiprobable, then the simple average ought to be replaced with the weighted average, which takes into account the fact that some outcomes are more likely than the others. The intuition however remains the same: the expected value of X is what you expect to happen on average.
Expected value
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Example 1. Let X represent the outcome of a roll of a six-sided die. More specifically, X will be the number of pips showing on the top face of the die after the toss. The possible values for X are 1, 2, 3, 4, 5, 6, all equally likely (each having the probability of 16). The expectation of X is
An illustration of the convergence of sequence averages of rolls of a die to the expected value of 3.5 as the number of rolls (trials) grows.
If you roll the die n times and compute the average (mean) of the results, then as n grows, the average will almost surely converge to the expected value, a fact known as the strong law of large numbers. One example sequence of ten rolls of the die is 2, 3, 1, 2, 5, 6, 2, 2, 2, 6, which has the average of 3.1, with the distance of 0.4 from the expected value of 3.5. The convergence is relatively slow: the probability that the average falls within the range 3.5 0.1 is 21.6% for ten rolls, 46.1% for a hundred rolls and 93.7% for a thousand rolls. See the figure for an illustration of the averages of longer sequences of rolls of the die and how they converge to the expected value of 3.5. More generally, the rate of convergence can be roughly quantified by e.g. Chebyshev's inequality and the Berry-Esseen theorem. Example 2. The roulette game consists of a small ball and a wheel with 38 numbered pockets around the edge. As the wheel is spun, the ball bounces around randomly until it settles down in one of the pockets. Suppose random variable X represents the (monetary) outcome of a $1 bet on a single number ("straight up" bet). If the bet wins (which happens with probability 138), the payoff is $35; otherwise the player loses the bet. The expected profit from such a bet will be
Expected value
687
Discrete random variable, countable case

Let X be a discrete random variable taking values x1, x2, ... with probabilities p1, p2, ... respectively. Then the expected value of this random variable is the infinite sum
provided that this series converges absolutely (that is, the sum must remain finite if we were to replace all xi's with their absolute values). If this series does not converge absolutely, we say that the expected value of X does not exist. For example, suppose random variable X takes values 1, 2, 3, 4, ..., with respective probabilities c12, c22, c32, c42, ..., where c = 62 is a normalizing constant that ensures the probabilities sum up to one. Then the infinite sum
converges and its sum is equal to ln(2) 0.69315. However it would be incorrect to claim that the expected value of X is equal to this numberin fact E[X] does not exist, as this series does not converge absolutely (see harmonic series).
Univariate continuous random variable

If the probability distribution of X admits a probability density function f(x), then the expected value can be computed as
General definition
In general, if X is a random variable defined on a probability space (, , P), then the expected value of X, denoted by E[X], X, X or E[X], is defined as Lebesgue integral
When this integral exists, it is defined as the expectation of X. Note that not all random variables have a finite expected value, since the integral may not converge absolutely; furthermore, for some it is not defined at all (e.g., Cauchy distribution). Two variables with the same probability distribution will have the same expected value, if it is defined. It follows directly from the discrete case definition that if X is a constant random variable, i.e. X = b for some fixed real number b, then the expected value of X is also b. The expected value of an arbitrary function of X, g(X), with respect to the probability density function (x) is given by the inner product of and g:
This is sometimes called the law of the unconscious statistician. Using representations as RiemannStieltjes integral and integration by parts the formula can be restated as As a special case let denote a positive real number, then if if , .
Expected value
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In particular, for = 1, this reduces to:
if Pr[X 0] = 1, where F is the cumulative distribution function of X.
Conventional terminology
When one speaks of the "expected price", "expected height", etc. one means the expected value of a random variable that is a price, a height, etc. When one speaks of the "expected number of attempts needed to get one successful attempt", one might conservatively approximate it as the reciprocal of the probability of success for such an attempt. Cf. expected value of the geometric distribution.
Properties
Constants
The expected value of a constant is equal to the constant itself; i.e., if c is a constant, then E[c] = c.
Monotonicity
If X and Y are random variables such that X Y almost surely, then E[X] E[Y].
Linearity
The expected value operator (or expectation operator) E is linear in the sense that
Note that the second result is valid even if X is not statistically independent of Y. Combining the results from previous three equations, we can see that
for any two random variables X and Y (which need to be defined on the same probability space) and any real numbers and .
Expected value
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Iterated expectation
Iterated expectation for discrete random variables For any two discrete random variables X, Y one may define the conditional expectation:[4]
which means that E[X|Y](y) is a function of y. Then the expectation of X satisfies
Hence, the following equation holds:[5]
that is,
The right hand side of this equation is referred to as the iterated expectation and is also sometimes called the tower rule or the tower property. This proposition is treated in law of total expectation. Iterated expectation for continuous random variables In the continuous case, the results are completely analogous. The definition of conditional expectation would use inequalities, density functions, and integrals to replace equalities, mass functions, and summations, respectively. However, the main result still holds:
Inequality
If a random variable X is always less than or equal to another random variable Y, the expectation of X is less than or equal to that of Y: If X Y, then E[X] E[Y]. In particular, if we set Y to |X| we know X Y and X Y. Therefore we know E[X] E[Y] and E[-X] E[Y]. From the linearity of expectation we know -E[X] E[Y].
Expected value Therefore the absolute value of expectation of a random variable is less than or equal to the expectation of its absolute value:
690
Non-multiplicativity
If one considers the joint probability density function of X and Y, say j(x,y), then the expectation of XY is
In general, the expected value operator is not multiplicative, i.e. E[XY] is not necessarily equal to E[X]E[Y]. In fact, the amount by which multiplicativity fails is called the covariance:
Thus multiplicativity holds precisely when Cov(X, Y) = 0, in which case X and Y are said to be uncorrelated (independent variables are a notable case of uncorrelated variables). Now if X and Y are independent, then by definition j(x,y) = (x)g(y) where and g are the marginal PDFs for X and Y. Then
and Cov(X, Y) = 0. Observe that independence of X and Y is required only to write j(x,y) = (x)g(y), and this is required to establish the second equality above. The third equality follows from a basic application of the Fubini-Tonelli theorem.
Functional non-invariance
In general, the expectation operator and functions of random variables do not commute; that is
A notable inequality concerning this topic is Jensen's inequality, involving expected values of convex (or concave) functions.
Uses and applications

The expected values of the powers of X are called the moments of X; the moments about the mean of X are expected values of powers of X E[X]. The moments of some random variables can be used to specify their distributions, via their moment generating functions. To empirically estimate the expected value of a random variable, one repeatedly measures observations of the variable and computes the arithmetic mean of the results. If the expected value exists, this procedure estimates the true expected value in an unbiased manner and has the property of minimizing the sum of the squares of the residuals (the sum of the squared differences between the observations and the estimate). The law of large numbers demonstrates (under fairly mild conditions) that, as the size of the sample gets larger, the variance of this estimate gets smaller. This property is often exploited in a wide variety of applications, including general problems of statistical estimation and machine learning, to estimate (probabilistic) quantities of interest via Monte Carlo methods, since most quantities of interest can be written in terms of expectation, e.g. where is the indicator function for set , i.e. .
Expected value In classical mechanics, the center of mass is an analogous concept to expectation. For example, suppose X is a discrete random variable with values xi and corresponding probabilities pi. Now consider a weightless rod on which are placed weights, at locations xi along the rod and having masses pi (whose sum is one). The point at which the rod balances is E[X]. Expected values can also be used to compute the variance, by means of the computational formula for the variance
691
A very important application of the expectation value is in the field of quantum mechanics. The expectation value of a quantum mechanical operator uncertainty in operating on a quantum state vector is written as . . The can be calculated using the formula
Expectation of matrices
If is an matrix, then the expected value of the matrix is defined as the matrix of expected values:
This is utilized in covariance matrices.
Formulas for special cases

Discrete distribution taking only non-negative integer values
When a random variable takes only values in expectation (even when the expectation is infinite): we can use the following formula for computing its
Proof:
interchanging the order of summation, we have
as claimed. This result can be a useful computational shortcut. For example, suppose we toss a coin where the probability of heads is p. How many tosses can we expect until the first heads (not including the heads itself)? Let X be this number. Note that we are counting only the tails and not the heads which ends the experiment; in particular, we can have X = 0. The expectation of X may be computed by . This is because the number of
tosses is at least i exactly when the first i tosses yielded tails. This matches the expectation of a random variable with an Exponential distribution. We used the formula for Geometric progression:
Expected value
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Continuous distribution taking non-negative values

Analogously with the discrete case above, when a continuous random variable X takes only non-negative values, we can use the following formula for computing its expectation (even when the expectation is infinite):
Proof: It is first assumed that X has a density
. We present two techniques:
Using integration by parts (a special case of Section 1.4 above):
and the bracket vanishes because[6] Using an interchange in order of integration:
as
In case no density exists, it is seen that
History
The idea of the expected value originated in the middle of the 17th century from the study of the so-called problem of points. This problem is: how to divide the stakes in a fair way between two players who have to end their game before it's properly finished? This problem had been debated for centuries, and many conflicting proposals and solutions had been suggested over the years, when it was posed in 1654 to Blaise Pascal by a French nobleman chevalier de Mr. de Mr claimed that this problem couldn't be solved and that it showed just how flawed mathematics was when it came to its application to the real world. Pascal, being a mathematician, got provoked and determined to solve the problem once and for all. He began to discuss the problem in a now famous series of letters to Pierre de Fermat. Soon enough they both independently came up with a solution. They solved the problem in different computational ways but their results were identical because their computations were based on the same fundamental principle. The principle is that the value of a future gain should be directly proportional to the chance of getting it. This principle seemed to have come absolutely natural to both of them. They were very pleased by the fact that they had found essentially the same solution and this in turn made them absolutely convinced they had solved the problem conclusively. However, they did not publish their findings. They only informed a small circle of mutual scientific friends in Paris about it.[7] Three years later, in 1657, a Dutch mathematician Christiaan Huygens, who had just visited Paris, published a treatise (see Huygens (1657)) "De ratiociniis in ludo ale" on probability theory. In this book he considered the problem of points and presented a solution based on the same principle as the solutions of Pascal and Fermat. Huygens also extended the concept of expectation by adding rules for how to calculate expectations in more complicated situations than the original problem (e.g., for three or more players). In this sense this book can be seen as the first successful attempt of laying down the foundations of the theory of probability. In the foreword to his book, Huygens wrote: "It should be said, also, that for some time some of the best mathematicians of France have occupied themselves with this kind of calculus so that no one should attribute to me the honour of the first invention. This does not belong to me. But these savants, although they put each other to the test by proposing to each other many questions difficult to solve, have hidden their methods. I have had therefore to examine and go deeply for myself into this matter by beginning with the elements, and it is impossible for me for this reason to affirm that I have even started from the same principle. But finally I have found that my answers in
Expected value many cases do not differ from theirs." (cited by Edwards (2002)). Thus, Huygens learned about de Mr's problem in 1655 during his visit to France; later on in 1656 from his correspondence with Carcavi he learned that his method was essentially the same as Pascal's; so that before his book went to press in 1657 he knew about Pascal's priority in this subject. Neither Pascal nor Huygens used the term "expectation" in its modern sense. In particular, Huygens writes: "That my Chance or Expectation to win any thing is worth just such a Sum, as wou'd procure me in the same Chance and Expectation at a fair Lay. ... If I expect a or b, and have an equal Chance of gaining them, my Expectation is worth a+b2." More than a hundred years later, in 1814, Pierre-Simon Laplace published his tract "Thorie analytique des probabilits", where the concept of expected value was defined explicitly: ... this advantage in the theory of chance is the product of the sum hoped for by the probability of obtaining it; it is the partial sum which ought to result when we do not wish to run the risks of the event in supposing that the division is made proportional to the probabilities. This division is the only equitable one when all strange circumstances are eliminated; because an equal degree of probability gives an equal right for the sum hoped for. We will call this advantage mathematical hope. The use of letter E to denote expected value goes back to W.A. Whitworth (1901) "Choice and chance". The symbol has become popular since for English writers it meant "Expectation", for Germans "Erwartungswert", and for French "Esprance mathmatique".[8]
693
Notes
[1] Sheldon M Ross (2007). "2.4 Expectation of a random variable" (http:/ / books. google. com/ books?id=12Pk5zZFirEC& pg=PA38). Introduction to probability models (9th ed.). Academic Press. p.38 ff. ISBN0125980620. . [2] {{cite book |title=The art of probability for scientists and engineers |author=Richard W Hamming |chapter=2.5 Random variables, mean a The expected value does not exist for some distributions with large "tails", such as the Cauchy distribution. [3] For a discussion of the Cauchy distribution, see Richard W Hamming (1991). "Example 8.71 The Cauchy distribution" (http:/ / books. google. com/ books?id=jX_F-77TA3gC& printsec=frontcover& dq=isbn:0201406861& cd=1#v=onepage& q=Cauchy& f=false). The art of probability for scientists and engineers. Addison-Wesley. p.290 ff. ISBN0201406861. . "Sampling from the Cauchy distribution and averaging gets you nowhere one sample has the same distribution as the average of 1000 samples!" [4] Sheldon M Ross. "Chapter 3: Conditional probability and conditional expectation" (http:/ / books. google. com/ books?id=12Pk5zZFirEC& pg=PA97). cited work. p.97 ff. ISBN0125980620. . [5] Sheldon M Ross. "3.4: Computing expectations by conditioning" (http:/ / books. google. com/ books?id=12Pk5zZFirEC& pg=PA105). cited work. p.105 ff. ISBN0125980620. . [6] http:/ / en. wikipedia. org/ wiki/ Cumulative_distribution_function#Properties_2 [7] "Ore, Pascal and the Invention of Probability Theory", The American Mathematical Monthly, Vol 67, No 5 (May, 1960), pp 409-419 [8] "Earliest uses of symbols in probability and statistics" (http:/ / jeff560. tripod. com/ stat. html). .
Literature
Edwards, A.W.F (2002). Pascal's arithmetical triangle: the story of a mathematical idea (2nd ed.). JHU Press. ISBN0-8018-6946-3. Huygens, Christiaan (1657). De ratiociniis in ludo ale (English translation, published in 1714: (http://www. york.ac.uk/depts/maths/histstat/huygens.pdf)).
Inflation
694
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy.[2] [3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4]
Inflation rates around the world in 2007
Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions),[5] and encouraging investment in non-monetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.[7] [8] Today, most mainstream economists favor a low, steady rate of inflation.[9] Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[10] The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.[11]
History
Increases in the quantity of money or in the overall money supply (or debasement of the means of exchange) have occurred in many different societies throughout history, changing with different forms of money used.[12] [13] For instance, when gold was used as currency, the government could collect gold coins, melt them down, mix them with other metals such as silver, copper or lead, and reissue them at the same nominal value. By diluting the gold with other metals, Annual inflation rates in the United States from 1666 to 2004. the government could issue more coins without also needing to increase the amount of gold used to make them. When the cost of each coin is lowered in this way, the government profits from an increase in seigniorage.[14] This practice would increase the money supply but at the
Inflation same time the relative value of each coin would be lowered. As the relative value of the coins becomes less, consumers would need to give more coins in exchange for the same goods and services as before. These goods and services would experience a price increase as the value of each coin is reduced.[15] Historically, infusions of gold or silver into an economy also led to inflation. From the second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle referred to as the "price revolution",[16] [17] with prices on average rising perhaps sixfold over 150 years. This was largely caused by the sudden influx of gold and silver from the New World into Habsburg Spain.[18] The silver spread throughout a previously cash-starved Europe and caused widespread inflation.[19] [20] Demographic factors also contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic. By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. Following the proliferation of private banknote currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable banknotes outstripped the quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency, and not to a rise in the price of goods.[21] This relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate what effect a currency devaluation (later termed monetary inflation) has on the price of goods (later termed price inflation, and eventually just inflation).[22] The adoption of fiat currency (paper money) by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply of paper money have taken place in a number of countries, producing hyperinflations -- episodes of extreme inflation rates much higher than those observed in earlier periods of commodity money. The hyperinflation in the Weimar Republic of Germany is a notable example.
695
Related definitions
The term "inflation" originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today use the term "inflation" to refer to a rise in the price level. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which may also for clarity be called 'price inflation'.[23] Economists generally agree that in the long run, inflation is caused by increases in the money supply. However, in the short and medium term, inflation is largely dependent on supply and demand pressures in the economy.[24] Other economic concepts related to inflation include: deflation a fall in the general price level; disinflation a decrease in the rate of inflation; hyperinflation an out-of-control inflationary spiral; stagflation a combination of inflation, slow economic growth and high unemployment; and reflation an attempt to raise the general level of prices to counteract deflationary pressures. Since there are many possible measures of the price level, there are many possible measures of price inflation. Most frequently, the term "inflation" refers to a rise in a broad price index representing the overall price level for goods and services in the economy. The Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCEPI) and the GDP deflator are some examples of broad price indices. However, "inflation" may also be used to describe a rising price level within a narrower set of assets, goods or services within the economy, such as commodities (including food, fuel, metals), financial assets (such as stocks, bonds and real estate), services (such as entertainment and health care), or labor. The Reuters-CRB Index (CCI), the Producer Price Index, and Employment
Inflation Cost Index (ECI) are examples of narrow price indices used to measure price inflation in particular sectors of the economy. Core inflation is a measure of inflation for a subset of consumer prices that excludes food and energy prices, which rise and fall more than other prices in the short term. The Federal Reserve Board pays particular attention to the core inflation rate to get a better estimate of long-term future inflation trends overall.[25]
696
Measures
Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index.[26] The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer".[4] The inflation rate is the percentage rate of change of a price index over time. For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is
CPI inflation (year-on-year) in the United States from 1914 to 2010.
The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007.[27] Other widely used price indices for calculating price inflation include the following: Producer price indices (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index. Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee. Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy. Other common measures of inflation are: GDP deflator is a measure of the price of all the goods and services included in gross domestic product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure. Regional inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
Inflation Historical inflation Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology. Asset price inflation is an undue increase in the prices of real or financial assets, such as stock (equity) and real estate. While there is no widely accepted index of this type, some central bankers have suggested that it would be better to aim at stabilizing a wider general price level inflation measure that includes some asset prices, instead of stabilizing CPI or core inflation only. The reason is that by raising interest rates when stock prices or real estate prices rise, and lowering them when these asset prices fall, central banks might be more successful in avoiding bubbles and crashes in asset prices.
697
Issues in measuring
Measuring inflation in an economy requires objective means of differentiating changes in nominal prices on a common set of goods and services, and distinguishing them from those price shifts resulting from changes in value such as volume, quality, or performance. For example, if the price of a 10oz. can of corn changes from $0.90 to $1.00 over the course of a year, with no change in quality, then this price difference represents inflation. This single price change would not, however, represent general inflation in an overall economy. To measure overall inflation, the price change of a large "basket" of representative goods and services is measured. This is the purpose of a price index, which is the combined price of a "basket" of many goods and services. The combined price is the sum of the weighted average prices of items in the "basket". A weighted price is calculated by multiplying the unit price of an item to the number of those items the average consumer purchases. Weighted pricing is a necessary means to measuring the impact of individual unit price changes on the economy's overall inflation. The Consumer Price Index, for example, uses data collected by surveying households to determine what proportion of the typical consumer's overall spending is spent on specific goods and services, and weights the average prices of those items accordingly. Those weighted average prices are combined to calculate the overall price. To better relate price changes over time, indexes typically choose a "base year" price and assign it a value of 100. Index prices in subsequent years are then expressed in relation to the base year price.[11] While comparing inflation measures for various periods one has to take into consideration the base effect as well. Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods and services from the present are compared with goods and services from the past. Over time, adjustments are made to the type of goods and services selected in order to reflect changes in the sorts of goods and services purchased by 'typical consumers'. New products may be introduced, older products disappear, the quality of existing products may change, and consumer preferences can shift. Both the sorts of goods and services which are included in the "basket" and the weighted price used in inflation measures will be changed over time in order to keep pace with the changing marketplace. Inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost shifts. For example, home heating costs are expected to rise in colder months, and seasonal adjustments are often used when measuring for inflation to compensate for cyclical spikes in energy or fuel demand. Inflation numbers may be averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. When looking at inflation, economic institutions may focus only on certain kinds of prices, or special indices, such as the core inflation index which is used by central banks to formulate monetary policy. Most inflation indices are calculated from weighted averages of selected price changes. This necessarily introduces distortion, and can lead to legitimate disputes about what the true inflation rate is. This problem can be overcome by including all available price changes in the calculation, and then choosing the median value.[28]
Inflation
698
Effects
General
An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services.[29] The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. For example, with inflation, lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments.[11] Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature (e.g. loans and bonds). Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate (approximately [30] ). For example if you take a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that you are paying for the loan is 3%. It would also hold true that if you had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% you would have a real interest rate of -14%. Banks and other lenders adjust for this inflation risk either by including an inflation premium in the costs of lending the money by creating a higher initial stated interest rate or by setting the interest at a variable rate. As the rate of inflation decreases, this has the opposite (negative) effect on borrowers.
Negative
High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation.[11] Uncertainty about the future purchasing power of money discourages investment and saving.[31] And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation. With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation.[11] This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation. Cost-push inflation High inflation can prompt employees to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a wage spiral.[32] In a sense, inflation begets further inflationary expectations, which beget further inflation. Hoarding People buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods. Social unrest and revolts
Inflation Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the 20102011 Tunisian revolution[33] and the 2011 Egyptian revolution,[34] according to many observators including Robert Zoellick,[35] president of the World Bank. Tunisian president Zine El Abidine Ben Ali was ousted, Egyptian President Hosni Mubarak was also ousted after only 18 days of demonstrations, and protests soon spread in many countries of North Africa and Middle East. Hyperinflation If inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply goods. Hyperinflation can lead to the abandonment of the use of the country's currency, leading to the inefficiencies of barter. Allocative efficiency A change in the supply or demand for a good will normally cause its relative price to change, signaling to buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, price changes due to genuine relative price signals are difficult to distinguish from price changes due to general inflation, so agents are slow to respond to them. The result is a loss of allocative efficiency. Shoe leather cost High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed in order to carry out transactions this means that more "trips to the bank" are necessary in order to make withdrawals, proverbially wearing out the "shoe leather" with each trip. Menu costs With high inflation, firms must change their prices often in order to keep up with economy-wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, or implicitly. Business cycles According to the Austrian Business Cycle Theory, inflation sets off the business cycle. Austrian economists hold this to be the most damaging effect of inflation. According to Austrian theory, artificially low interest rates and the associated increase in the money supply lead to reckless, speculative borrowing, resulting in clusters of malinvestments, which eventually have to be liquidated as they become unsustainable.[36]
699
Positive
Labor-market adjustments Keynesians believe that nominal wages are slow to adjust downwards. This can lead to prolonged disequilibrium and high unemployment in the labor market. Since inflation would lower the real wage if nominal wages are kept constant, Keynesians argue that some inflation is good for the economy, as it would allow labor markets to reach equilibrium faster. Room to maneuver The primary tools for controlling the money supply are the ability to set the discount rate, the rate at which banks can borrow from the central bank, and open market operations which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) in order to stimulate the economy - this situation is known as a liquidity trap. A moderate level of inflation tends to ensure that nominal interest rates stay
Inflation sufficiently above zero so that if the need arises the bank can cut the nominal interest rate. Mundell-Tobin effect The Nobel laureate Robert Mundell noted that moderate inflation would induce savers to substitute lending for some money holding as a means to finance future spending. That substitution would cause market clearing real interest rates to fall.[37] The lower real rate of interest would induce more borrowing to finance investment. In a similar vein, Nobel laureate James Tobin noted that such inflation would cause businesses to substitute investment in physical capital (plant, equipment, and inventories) for money balances in their asset portfolios. That substitution would mean choosing the making of investments with lower rates of real return. (The rates of return are lower because the investments with higher rates of return were already being made before.)[38] The two related effects are known as the Mundell-Tobin effect. Unless the economy is already overinvesting according to models of economic growth theory, that extra investment resulting from the effect would be seen as positive. Instability with Deflation Economist S.C. Tsaing noted that once substantial deflation is expected, two important effects will appear; both a result of money holding substituting for lending as a vehicle for saving.[39] The first was that continually falling prices and the resulting incentive to hoard money will cause instability resulting from the likely increasing fear, while money hoards grow in value, that the value of those hoards are at risk, as people realize that a movement to trade those money hoards for real goods and assets will quickly drive those prices up. Any movement to spend those hoards "once started would become a tremendous avalanche, which could rampage for a long time before it would spend itself."[40] Thus, a regime of long-term deflation is likely to be interrupted by periodic spikes of rapid inflation and consequent real economic disruptions. Moderate and stable inflation would avoid such a seesawing of price movements. Financial Market Inefficiency with Deflation The second effect noted by Tsaing is that when savers have substituted money holding for lending on financial markets, the role of those markets in channeling savings into investment is undermined. With nominal interest rates driven to zero, or near zero, from the competition with a high return money asset, there would be no price mechanism in whatever is left of those markets. With financial markets effectively euthanized, the remaining goods and physical asset prices would move in perverse directions. For example, an increased desire to save could not push interest rates further down (and thereby stimulate investment) but would instead cause additional money hoarding, driving consumer prices further down and making investment in consumer goods production thereby less attractive. Moderate inflation, once its expectation is incorporated into nominal interest rates, would give those interest rates room to go both up and down in response to shifting investment opportunities, or savers' preferences, and thus allow financial markets to function in a more normal fashion.
700
Inflation
701
Causes
Historically, a great deal of economic literature was concerned with the question of what causes inflation and what effect it has. There were different schools of thought as to the causes of inflation. Most can be divided into two broad areas: quality theories of inflation and quantity theories of inflation. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the quantity equation of money, that relates the money supply, its velocity, and the nominal value of exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.
The Bank of England, central bank of the United Kingdom, monitors causes and attempts to control inflation.
Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. Consequently, there is now broad agreement among economists that in the long run, the inflation rate is essentially dependent on the growth rate of money supply. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.[24] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian economists. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trend-line. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.
Keynesian view
Keynesian economic theory proposes that changes in money supply do not directly affect prices, and that visible inflation is the result of pressures in the economy expressing themselves in prices. The supply of money is a major, but not the only, cause of inflation. There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":[41] Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. Another example stems from unexpectedly high Insured Losses, either legitimate (catastrophes) or fraudulent (which might be particularly prevalent in times of recession). Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover inflation. Demand-pull theory states that the rate of inflation accelerates whenever aggregate demand is increased beyond the ability of the economy to produce (its potential output). Hence, any factor that increases aggregate demand can cause inflation.[42] However, in the long run, aggregate demand can be held above productive capacity only by increasing the quantity of money in circulation faster than the real growth rate of the economy. Another (although much less common) cause can be a rapid decline in the demand for money, as happened in Europe during the Black Death, or
Inflation in the Japanese occupied territories just before the defeat of Japan in 1945. The effect of money on inflation is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively. This sometimes leads to hyperinflation, a condition where prices can double in a month or less. Money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economists, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians, the money supply is only one determinant of aggregate demand. Some Keynesian economists also disagree with the notion that central banks fully control the money supply, arguing that central banks have little control, since the money supply adapts to the demand for bank credit issued by commercial banks. This is known as the theory of endogenous money, and has been advocated strongly by post-Keynesians as far back as the 1960s. It has today become a central focus of Taylor rule advocates. This position is not universally accepted banks create money by making loans, but the aggregate volume of these loans diminishes as real interest rates increase. Thus, central banks can influence the money supply by making money cheaper or more expensive, thus increasing or decreasing its production. A fundamental concept in inflation analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore, some level of inflation could be considered desirable in order to minimize unemployment. The Phillips curve model described the U.S. experience well in the 1960s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s. Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) because of such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model. Another concept of note is the potential output (sometimes called the "natural gross domestic product"), a level of GDP, where the economy is at its optimal level of production given institutional and natural constraints. (This level of output corresponds to the Non-Accelerating Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-in inflation worsens. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation.[43] However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change because of policy: for example, high unemployment under British Prime Minister Margaret Thatcher might have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed (also see unemployment), unable to find jobs that fit their skills. A rise in structural unemployment implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating inflation.
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Monetarist view
Monetarists believe the most significant factor influencing inflation or deflation is how fast the money supply grows or shrinks. They consider fiscal policy, or government spending and taxation, as ineffective in controlling inflation.[44] According to the famous monetarist economist Milton Friedman, "Inflation is always and everywhere a monetary phenomenon."[45] Some monetarists, however, will qualify this by making an exception for very short-term circumstances. Monetarists assert that the empirical study of monetary CPI, Real GDP, M2 (log scale, indexed to 1960) and Money history shows that inflation has always been a Velocity. Monetarism posits that the growth rate of money is approximately equal to inflation plus real GDP growth. monetary phenomenon. The quantity theory of money, simply stated, says that any change in the amount of money in a system will change the price level. This theory begins with the equation of exchange:
where is the nominal quantity of money. is the velocity of money in final expenditures; is the general price level; is an index of the real value of final expenditures; In this formula, the general price level is related to the level of real economic activity (Q), the quantity of money (M) and the velocity of money (V). The formula is an identity because the velocity of money (V) is defined to be the ratio of final nominal expenditure ( ) to the quantity of money (M). Monetarists assume that the velocity of money is unaffected by monetary policy (at least in the long run), and the real value of output is determined in the long run by the productive capacity of the economy. Under these assumptions, the primary driver of the change in the general price level is changes in the quantity of money. With exogenous velocity (that is, velocity being determined externally and not being influenced by monetary policy), the money supply determines the value of nominal output (which equals final expenditure) in the short run. In practice, velocity is not exogenous in the short run, and so the formula does not necessarily imply a stable short-run relationship between the money supply and nominal output. However, in the long run, changes in velocity are assumed to be determined by the evolution of the payments mechanism. If velocity is relatively unaffected by monetary policy, the long-run rate of increase in prices (the inflation rate) is equal to the long run growth rate of the money supply plus the exogenous long-run rate of velocity growth minus the long run growth rate of real output.[7]
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Unemployment
A connection between inflation and unemployment has been drawn since the emergence of large scale unemployment in the 19th century, and connections continue to be drawn today. In Marxian economics, the unemployed serve as a reserve army of labour, which restrain wage inflation. In the 20th century, similar concepts in Keynesian economics include the NAIRU (Non-Accelerating Inflation Rate of Unemployment) and the Phillips curve.
Rational expectations theory

Rational expectations theory holds that economic actors look rationally into the future when trying to maximize their well-being, and do not respond solely to immediate opportunity costs and pressures. In this view, while generally grounded in monetarism, future expectations and strategies are important for inflation as well. A core assertion of rational expectations theory is that actors will seek to "head off" central-bank decisions by acting in ways that fulfill predictions of higher inflation. This means that central banks must establish their credibility in fighting inflation, or economic actors will make bets that the central bank will expand the money supply rapidly enough to prevent recession, even at the expense of exacerbating inflation. Thus, if a central bank has a reputation as being "soft" on inflation, when it announces a new policy of fighting inflation with restrictive monetary growth economic agents will not believe that the policy will persist; their inflationary expectations will remain high, and so will inflation. On the other hand, if the central bank has a reputation of being "tough" on inflation, then such a policy announcement will be believed and inflationary expectations will come down rapidly, thus allowing inflation itself to come down rapidly with minimal economic disruption.
Austrian view
For more details on this topic, see The Austrian view of inflation and monetary inflation The Austrian School asserts that inflation is an increase in the money supply, rising prices are merely consequences and this semantic difference is important in defining inflation.[46] Austrians stress that inflation affects prices in various degree, i.e. that prices rise more sharply in some sectors than in other sectors of the economy. The reason for the disparity is that excess money will be concentrated to certain sectors, such as housing, stocks or health care. Because of this disparity, Austrians argue that the aggregate price level can be very misleading when observing the effects of inflation. Austrian economists measure inflation by calculating the growth of new units of money that are available for immediate use in exchange, that have been created over time.[47] [48] [49]
Real bills doctrine

Within the context of a fixed specie basis for money, one important controversy was between the quantity theory of money and the real bills doctrine (RBD). Within this context, quantity theory applies to the level of fractional reserve accounting allowed against specie, generally gold, held by a bank. Currency and banking schools of economics argue the RBD, that banks should also be able to issue currency against bills of trading, which is "real bills" that they buy from merchants. This theory was important in the 19th century in debates between "Banking" and "Currency" schools of monetary soundness, and in the formation of the Federal Reserve. In the wake of the collapse of the international gold standard post 1913, and the move towards deficit financing of government, RBD has remained a minor topic, primarily of interest in limited contexts, such as currency boards. It is generally held in ill repute today, with Frederic Mishkin, a governor of the Federal Reserve going so far as to say it had been "completely discredited." The debate between currency, or quantity theory, and banking schools in Britain during the 19th century prefigures current questions about the credibility of money in the present. In the 19th century the banking school had greater influence in policy in the United States and Great Britain, while the currency school had more influence "on the continent", that is in non-British countries, particularly in the Latin Monetary Union and the earlier Scandinavia monetary union.
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Anti-classical or backing theory

Another issue associated with classical political economy is the anti-classical hypothesis of money, or "backing theory". The backing theory argues that the value of money is determined by the assets and liabilities of the issuing agency.[50] Unlike the Quantity Theory of classical political economy, the backing theory argues that issuing authorities can issue money without causing inflation so long as the money issuer has sufficient assets to cover redemptions. There are very few backing theorists, making quantity theory the dominant theory explaining inflation.
Controlling inflation
A variety of policies have been used to control inflation.
Monetary policy
Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping the federal funds lending rate at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy. There are a number of methods that have been suggested to control The U.S. effective federal funds rate charted over fifty years. inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand).
Fixed exchange rates

Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. Under the Bretton Woods agreement, most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Bretton Woods agreement broke down in the early 1970s, countries gradually turned to floating exchange rates. However, in the later part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation was used in many countries in South America in the later part of the 20th century (e.g. Argentina (1991-2002), Bolivia, Brazil, and Chile).
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Gold standard
The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself has no innate value, but is accepted by traders because it can be redeemed for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver. The gold standard was partially abandoned via the international Under a gold standard, paper notes are adoption of the Bretton Woods System. Under this system all other convertible into pre-set, fixed quantities of gold. major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton Woods system broke down in 1971, causing most countries to switch to fiat money money backed only by the laws of the country. Economies based on the gold standard rarely experience inflation above 2 percent annually.[51] Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.[52] Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining,[53] [54] which some believe contributed to the Great Depression.[54] [55] [56]
Wage and price controls

Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. More successful examples include the Prices and Incomes Accord in Australia and the Wassenaar Agreement in the Netherlands. In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term. Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed (see creative destruction).
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Cost-of-living allowance
The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements (such as social security) are tied to a cost-of-living index, typically to the consumer price index.[57] A cost-of-living allowance (COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in low inflation economies. During hyperinflation they are adjusted more often.[57] They may also be tied to a cost-of-living index that varies by geographic location if the employee moves. Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments or cost-of-living increases because of their similarity to increases tied to externally determined indexes. Many economists and compensation analysts consider the idea of predetermined future "cost of living increases" to be misleading for two reasons: (1) For most recent periods in the industrialized world, average wages have increased faster than most calculated cost-of-living indexes, reflecting the influence of rising productivity and worker bargaining power rather than simply living costs, and (2) most cost-of-living indexes are not forward-looking, but instead compare current or historical data.
Penalty units
If laws are written with actual monetary values, and inflation occurs, then those values can fall behind, and make the values trivial. It would take a lot of effort to rewrite all the laws to keep up with inflation. A better way is to define all fines in terms of Penalty units, and redefine the that single PU value as required.
Notes
[1] See: Wyplosz & Burda 1997 (Glossary); Blanchard 2000 (Glossary) Barro 1997 (Glossary) Abel & Bernanke 1995 (Glossary) [2] Why price stability? (http:/ / www. sedlabanki. is/ ?PageID=195), Central Bank of Iceland, Accessed on September 11, 2008. [3] Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429. The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements. [4] Mankiw 2002, pp.2232 [5] Mankiw 2002, pp.238255 [6] Robert Barro and Vittorio Grilli (1994), European Macroeconomics, Ch. 8, p. 139, Fig. 8.1. Macmillan, ISBN 0333577647. [7] Mankiw 2002, pp.81107 [8] Abel & Bernanke 2005, pp.266269 [9] Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007). (http:/ / econjwatch. org/ articles/ death-and-taxes-including-inflation-the-public-versus-economists) p.56 [10] " Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others (http:/ / www. atypon-link. com/ AEAP/ doi/ abs/ 10. 1257/ 089533003772034934)" Lars E.O. Svensson, Journal of Economic Perspectives, Volume 17, Issue 4 Fall 2003, p145-166 [11] Taylor, Timothy (2008). Principles of Economics. Freeload Press. ISBN193078905X. [12] Dobson, Roger (January 27, 2002). "How Alexander caused a great Babylon inflation" (http:/ / www. webcitation. org/ 5ovyhfeCD). The Independent. Archived from the original (http:/ / www. independent. co. uk/ news/ world/ europe/ how-alexander-caused-a-great-babylon-inflation-671072. html) on 2010-04-12. . Retrieved 2010-04-12 [13] Harl, Kenneth W. (June 19, 1996). Coinage in the Roman Economy, 300 B.C. to A.D. 700. Baltimore: The Johns Hopkins University Press. ISBN0801852919 [14] "Annual Report (2006), Royal Canadian Mint, p. 4" (http:/ / www. mint. ca/ royalcanadianmintpublic/ RcmImageLibrary. aspx?filename=RCM_AR06_E. pdf). Mint.ca. . Retrieved 2011-05-21. [15] Frank Shostak, " Commodity Prices and Inflation: What's the connection", Mises Institute (http:/ / mises. org/ story/ 3018)
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[16] Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650 Harvard Economic Studies, 43 (Cambridge, Massachusetts: Harvard University Press, 1934) [17] John Munro: The Monetary Origins of the 'Price Revolution':South Germany Silver Mining, Merchant Banking, and Venetian Commerce, 1470-1540, Toronto 2003 (http:/ / www. chass. utoronto. ca/ ecipa/ archive/ UT-ECIPA-MUNRO-99-02. pdf) [18] Walton, Timothy R. (1994). The Spanish Treasure Fleets. Pineapple Press (FL). p.85. ISBN1-56164-049-2. [19] The Price Revolution in Europe: Empirical Results from a Structural Vectorautoregression Model. Peter Kugler and Peter Bernholz, University of Basel, 2007 (http:/ / www. wwz. unibas. ch/ makro/ arbpapiere/ The Price Revolutiona. pdf) (Demonstrates that it was the increased supply of precious metals that caused it and notes the obvious logical flaws in the contrary arguments that have become fashionable in recent decades) [20] Tracy, James D. (1994). Handbook of European History 1400-1600: Late Middle Ages, Renaissance, and Reformation. Boston: Brill Academic Publishers. p.655. ISBN90-04-09762-7. [21] Michael F. Bryan, " On the Origin and Evolution of the Word 'Inflation' (http:/ / www. clevelandfed. org/ research/ Commentary/ 1997/ 1015. pdf)" [22] Mark Blaug, " Economic Theory in Retrospect (http:/ / books. google. com/ books?id=4nd6alor2goC& pg=PA127& lpg=PA127& dq=bullionist+ inflation& source=web& ots=mG3_PT_O6q& sig=ViD-klPJPpaZxCBjdcPKh9zlwyU& hl=en& sa=X& oi=book_result& resnum=5& ct=result#PPA128,M1)", pg. 129: "...this was the cause of inflation, or, to use the language of the day, 'the depreciation of banknotes.'" [23] Michael F. Bryan, On the Origin and Evolution of the Word "Inflation" (http:/ / www. clevelandfed. org/ research/ Commentary/ 1997/ 1015. pdf) [24] Federal Reserve Board's semiannual Monetary Policy Report to the Congress (http:/ / www. federalreserve. gov/ boarddocs/ hh/ 2004/ july/ testimony. htm) Roundtable (http:/ / www. federalreserve. gov/ BOARDDOCS/ Speeches/ 2003/ 20030723/ Economics) Introductory statement by Jean-Claude Trichet on July 1, 2004 (http:/ / www. ecb. int/ press/ pressconf/ 2004/ html/ is040701. en. html) [25] Kiley, Michael J. (2008) (PDF). Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices (http:/ / www. federalreserve. gov/ Pubs/ feds/ 2008/ 200838/ 200838pap. pdf). Federal Reserve Board. . [26] See: Taylor & Hall 1993; Blanchard 2000; Barro 1997 [27] The numbers reported here refer to the US Consumer Price Index for All Urban Consumers, All Items, series CPIAUCNS, from base level 100 in base year 1982. They were downloaded from the FRED database (http:/ / research. stlouisfed. org/ fred2/ series/ CPIAUCNS?cid=9) at the Federal Reserve Bank of St. Louis on August 8, 2008. [28] "Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation" (http:/ / www. clevelandfed. org/ Research/ commentary/ 1991/ 1201. pdf) (PDF). . Retrieved 2011-05-21. [29] Mankiw 2002, pp.81107 [30] The formula R = N-I approximates the correct answer as long as both the nominal interest rate and the inflation rate are small. The correct equation is r = n/i where r, n and i are expressed as ratios (e.g. 1.2 for +20%, 0.8 for -20%). [31] Bulkley, George (March 1981). "Personal Savings and Anticipated Inflation" (http:/ / www. jstor. org/ pss/ 2231702). The Economic Journal 91 (361): 124135. doi:10.2307/2231702. . Retrieved 2008-09-30. [32] Encyclopedia Britannica (http:/ / www. britannica. com/ EBchecked/ topic/ 287700/ inflation/ 3512/ The-cost-push-theory), "The cost-push theory". [33] "Les Egyptiens souffrent aussi de l'acclration de l'inflation", Cline Jeancourt-Galignani - La Tribune, February 10, 2011 [34] AFP (27 January 2011). "Egypt protests a ticking time bomb: Analysts" (http:/ / www. thenewage. co. za/ 8894-1007-53-Egypt_protests_a_ticking_time_bomb_Analysts). The New Age. . Retrieved 29 January 2011. [35] "Les prix alimentaires proches de la cote d'alerte" - Le Figaro, with AFP, February 20, 2011 [36] Thorsten Polleit, " Inflation Is a Policy that Cannot Last (http:/ / mises. org/ story/ 2901)", Mises Institute [37] Mundell, James, Journal of Political Economy, LXXI (1963), 280-83 "Inflation and Real Interest" [38] Tobin, J. Econometrica, V 33, (1965), 671-84 "Money and Economic Growth" [39] Tsaing, S.C., Journal of Money, Credit and Banking, I(1969), 266-80 "A Critical Note on the Optimum Supply of Money" [40] (p272) [41] Robert J. Gordon (1988), Macroeconomics: Theory and Policy, 2nd ed., Chap. 22.4, 'Modern theories of inflation'. McGraw-Hill. [42] O'Sullivan, Arthur; Sheffrin, Steven M. (2003) [January 2002]. Economics: Principles in Action (http:/ / www. amazon. com/ Economics-Principles-Action-OSullivan/ dp/ 0130630853). The Wall Street Journal:Classroom Edition (2nd ed.). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall: Addison Wesley Longman. p.341. ISBN0130630853. . Retrieved May 3, 2009. [43] Coe, David T. Nominal Wages. The NAIRU and Wage Flexibility. (http:/ / www. oecd. org/ dataoecd/ 59/ 19/ 33917832. pdf). Organisation for Economic Co-operation and Development. . [44] Lagass, Paul (2000). "Monetarism". The Columbia Encyclopedia (6th ed.). New York: Columbia University Press. ISBN0-7876-5015-3. [45] Friedman, Milton. A Monetary History of the United States 1867-1960 (1963). [46] Shostak, Ph. D, Frank (2002-03-02). "Defining Inflation" (http:/ / mises. org/ story/ 908). Mises Institute. . Retrieved 2008-09-20. [47] Ludwig von Mises Institute, " True Money Supply (http:/ / mises. org/ content/ nofed/ chart. aspx?series=TMS)"
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[48] Joseph T. Salerno, (1987), Austrian Economic Newsletter, " The "True" Money Supply: A Measure of the Medium of Exchange in the U.S. Economy (http:/ / www. mises. org/ journals/ aen/ aen6_4_1. pdf)" [49] Frank Shostak, (2000), " The Mystery of the Money Supply Definition (http:/ / www. mises. org/ journals/ qjae/ pdf/ qjae3_4_3. pdf)" [50] Workingpapers (http:/ / www. econ. ucla. edu/ workingpapers/ wp830. pdf) [51] White, Lawrence H.. "Inflation by Lawrence H. White, accessed April 13, 2011" (http:/ / www. econlib. org/ library/ Enc/ Inflation. html). Econlib.org. . Retrieved 2011-05-21. [52] Bordo, M. (2002) "Gold Standard" (http:/ / www. econlib. org/ library/ Enc/ GoldStandard. html) Concise Encyclopedia of Economics [53] Barsky, Robert B; J Bradford DeLong (1991). "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard" (http:/ / ideas. repec. org/ a/ tpr/ qjecon/ v106y1991i3p815-36. html). Quarterly Journal of Economics 106 (3): 81536. doi:10.2307/2937928. JSTOR2937928. . Retrieved 2008-09-27. [54] DeLong, Brad. "Why Not the Gold Standard?" (http:/ / www. j-bradford-delong. net/ Politics/ whynotthegoldstandard. html). . Retrieved 2008-09-25. [55] Hamilton, J.D. (December 12, 2005) "The gold standard and the Great Depression" (http:/ / www. econbrowser. com/ archives/ 2005/ 12/ the_gold_standa. html) Econbrowser, citing "The Role of the International Gold Standard in Propagating the Great Depression," published in Contemporary Policy Issues in 1988 [56] Warburton, C. "The Monetary Disequilibrium Hypothesis," in Depression, Inflation, and Monetary Policy, Selected papers, 1945-1953 (Johns Hopkins Press, 1966), pp. 25-35. [57] Flanagan, Tammy (2006-09-08). "COLA Wars" (http:/ / www. govexec. com/ dailyfed/ 0906/ 090806rp. htm). Government Executive. National Journal Group. . Retrieved 2008-09-23.
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References
Abel, Andrew; Bernanke, Ben (2005). Macroeconomics (5th ed.). Pearson Barro, Robert J. (1997). Macroeconomics. Cambridge, Mass: MIT Press. p.895. ISBN0-262-02436-5 Blanchard, Olivier (2000). Macroeconomics (2nd ed.). Englewood Cliffs, N.J: Prentice Hall. ISBN013013306x Mankiw, N. Gregory (2002). Macroeconomics (5th ed.). Worth Hall, Robert E.; Taylor, John B. (1993). Macroeconomics. New York: W.W. Norton. p.637. ISBN0-393-96307-1 Burda, Michael C.; Wyplosz, Charles (1997). Macroeconomics: a European text. Oxford [Oxfordshire]: Oxford University Press. ISBN0-19-877468-0
Further reading
Auernheimer, Leonardo, "The Honest Government's Guide to the Revenue From the Creation of Money," Journal of Political Economy, Vol. 82, No. 3, May/June 1974, pp. 598-606. Baumol, William J. and Alan S. Blinder, Macroeconomics: Principles and Policy, Tenth edition. Thomson South-Western, 2006. ISBN 0-324-22114-2 Friedman, Milton, Nobel lecture: Inflation and unemployment (http://www.hilbertcorporation.com.ar/ nobellecturemf.pdf) 1977 Hazlitt, Henry, What You Should Know About Inflation (http://mises.org/books/inflation.pdf) Laguerodie, Stephanie and Vergara, Francisco, The Theory of Price Controls (from Review of Political Economy) (http://www.franciscovergara.com/PriceControls.doc) Mishkin, Frederic S., The Economics of Money, Banking, and Financial Markets, New York, Harper Collins, 1995. Murphy, Robert P., Is Inflation Harmless or Even Good? (http://mises.org/daily/5172/ Is-Inflation-Harmless-or-Even-Good), Mises Institute Nenovsky. N, (2007). Exchange Rate and Inflation: France and Bulgaria in the Interwar Period and the Contribution of Albert Aftalion (1874-1956) (http://www.nikolaynenovsky.com/uploads/file/Aftalion_en. pdf).Bulgarian National Bank,(2006) Vasudevan, Ramaa, " What is the relation between inflation and unemployment? (http://www.dollarsandsense. org/archives/2006/0906drdollar.html)," in Dollars & Sense, September/October 2006
Inflation Federal Reserve Bank of Boston, "Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective" (http://www.bos.frb.org/economic/conf/conf53/index.htm), Conference Series 53, June 911, 2008, Chatham, Massachusetts. (Also cf. Phillips curve article)
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External links
NASA inflation calculator (http://cost.jsc.nasa.gov/inflateGDP.html) United States Bureau of Labor Statistics Consumer Price Index homepage (http://www.bls.gov/cpi/) Inflation 1290-2006 (http://www.riksbank.com/templates/Page.aspx?id=27404) - Based on the historical Consumer Price Index of the Swedish Riksbank Inflation Calculator (http://www.bls.gov/data/inflation_calculator.htm) Summary of current international inflation figures - CPI and HICP (http://www.global-rates.com/ economic-indicators/inflation/inflation.aspx) Summary of current inflation in Euro Area - CPI and HICP (http://www.rivaluta.it/inflazione.asp?T=EA16)
Net asset value

Net asset value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. However, the term may also be used as a synonym for book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors and, thereby, represent the net asset value per share.[1] Net asset values and other accounting and recordkeeping activities are the result of the process of Fund Accounting, sometimes called securities accounting, investment accounting and/or portfolio accounting. Fund Accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued on a regular schedule such as daily, weekly or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valuing assets and liabilities for the purposes of calculating net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulatory and/or accounting principles that may apply. For example, for US registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices (meant to represent fair value),[2] typically 4:00 PM Eastern Time. For US registered money market funds, investments are often carried or valued at 'amortized cost' as opposed to market value for expedience and other purposes, provided various requirements are continually met.[3] At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are 'closed' enabling a variety of information to be calculated and produced including the net asset value per share.
Open-ended funds
Net asset value is most commonly used in the context of open-ended funds. Shares and interests in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash.
Net asset value As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240MM, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6 of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses. The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as US$160MM (and the NAV per share as $160), the investor would have been given 250,000 shares and would become entitled to 1/5 of the fund's value. In contrast, closed-end funds are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV.
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Valuation of assets in open-ended funds

The NAV of a collective investment scheme (such as a US mutual fund or a hedge fund) is calculated by reference to the total value of the fund's portfolio (its assets) less its accrued liabilities (money owed to lending banks, fees owed to investment managers and service providers and other liabilities).[4] The portfolio's assets are generally valued by objective criteria established at the outset of the fund. Where assets are traded on a securities exchange or cleared through a clearing firm, the most common method of valuation is to use the market value of the assets in the portfolio (using, for example, the closing bid price or last traded price). The value of OTC derivatives may be provided by the counterparty to the derivative, who may be trading similar derivatives with other parties. Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods subject to a fund's directors or trustees is usually used.
Businesses
Turning to operating companies as opposed to investment companies (mutual funds), in determining whether shares in a public company are a cheap or expensive investment, one tool used by investors is a comparison of the company's current market capitalization (being the price at which the market values the company) with its NAV. The NAV may be below the market price for the following reasons: The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV. Also, accounting principles and basis of presentation of amounts in financial statements vary around the globe, further blurring the comparability of companies in various jurisdictions. The current value of a company's assets likely differ than the historical cost financial statements used in the NAV calculation (and financial statement values and related principles of accounting vary from Certain assets, such as goodwill (which broadly represents a company's ability to make future profits), are not necessarily included on a balance sheet and so will not appear in an NAV calculation. A company's market value will not always be greater than its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007. Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern. In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value, the historical cost or the amortised cost of the company's assets, or an appropriate combination of the three.
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Real estate investment trusts

NAV is one of the valuation indices of real estate investment trusts (REITs - pronounced "Reets"). NAV is normally quoted "per investment unit" where the value is divided by the number of total outstanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per-unit NAV serves as the yardstick for assessment. The NAV index is synonymous to the adjusted price-to-book ratio applied in the world of stocks in which factors such as unrealized losses/gains of owned properties and brand values are reflected. News companies such as PropertyMall typically report on a REITs NAV when the company reports it.[5]
Variable insurance and variable annuity contracts

Variable universal life insurance policies and variable annuity contracts often are structured somewhat similar to mutual funds, and they may vary in value as securities and markets fluctuate. Typically, these insurance or annuity products issue 'units' of ownership to policyholders/annuitants in exchange for their investmentsimilar to shares of a mutual fund. Also similar to a fund, the assets, liabilities and net assets of these product entities are valued periodically resulting in an asset unit value or AUV or UAV per share - analogous to NAV for a fund.
References
[1] [2] [3] [4] [5] (http:/ / www. raymondjames. com/ gloss. htm#n) Raymond James, Glossary of Investment Terms, August 9th, 2011 AICPA Audit and Accounting Guide - Investment Companies May 1, 2007. A Guide To Understanding Mutual Funds, Investment Company Institute; http:/ / www. ici. org/ pdf/ bro_understanding_mfs_p. pdf. CFA Institute. (2008). Derivatives and Alternative Investments. pg 177. Boston: Pearson Custom Publishing. ISBN 0-536-34228-8. http:/ / www. propertymall. com/ press/ article/ 24597
External links
Investopedia: NAV (http://www.investopedia.com/terms/n/nav.asp)
Net present value
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Net present value

In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis - taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) - is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,
where t - the time of the cash flow i - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital - the net cash flow (the amount of cash, inflow minus outflow) at time t. For educational purposes, commonly placed to the left of the sum to emphasize its role as (minus) the investment. The result of this formula if multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay will be the present value but in case where the cash flows are not equal in amount then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV purpose.[2] is
The discount rate

The rate used to discount future cash flows to the present value is a key variable of this process. A firm's weighted average cost of capital (after tax) is often used, but many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors. A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term debt. Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn five percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative. Related to this concept is to use the firm's Reinvestment Rate. Reinvestment rate can be defined as the rate of return for the firm's investments on average. When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital.
Net present value An NPV calculated using variable discount rates (if they are known for the duration of the investment) better reflects the real situation than one calculated from a constant discount rate for the entire investment duration. Refer to the tutorial article written by Samuel Baker[3] for more detailed relationship between the NPV value and the discount rate. For some professional investors, their investment funds are committed to target a specified rate of return. In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired rate of return. To some extent, the selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would probably be a better choice. Using variable rates over time, or discounting "guaranteed" cash flows differently from "at risk" cash flows may be a superior methodology, but is seldom used in practice. Using the discount rate to adjust for risk is often difficult to do in practice (especially internationally), and is difficult to do well. An alternative to using discount factor to adjust for risk is to explicitly correct the cash flows for the risk elements using rNPV or a similar method, then discount at the firm's rate.
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NPV in decision making

NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if a positive value, the project is in the status of discounted cash inflow in the time of t. If is is a negative value, the
project is in the status of discounted cash outflow in the time of t. Appropriately risked projects with a positive NPV could be accepted. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost, i.e. comparison with other available investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.
If... NPV >0 NPV <0 NPV =0 It means... the investment would add value to the firm the investment would subtract value from the firm the project may be accepted Then...
the project should be rejected
the investment would neither We should be indifferent in the decision whether to accept or reject the project. This project adds no gain nor lose value for the firm monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.
Example
A corporation must decide whether to introduce a new product line. The new product will have startup costs, operational costs, and incoming cash flows over six years. This project will have an immediate (t=0) cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 16 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 each for years 16. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%. The present value (PV) can be calculated for each year:
Net present value
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Year T=0
Cash flow
Present value -$100,000
T=1
$22,727
T=2
$20,661
T=3
$18,783
T=4
$17,075
T=5
$15,523
T=6
$14,112
The sum of all these present values is the net present value, which equals $8,881.52. Since the NPV is greater than zero, it would be better to invest in the project than to do nothing, and the corporation should invest in this project if there is no mutually exclusive alternative with a higher NPV. The same example in Excel formulae: NPV(rate,net_inflow)+initial_investment PV(rate,year_number,yearly_net_inflow)
More realistic problems would need to consider other factors, generally including the calculation of taxes, uneven cash flows, and Terminal Value as well as the availability of alternate investment opportunities.
Net present value
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Common pitfalls
If, for example, the are generally negative late in the project (e.g., an industrial or mining project might have clean-up and restoration costs), than at that stage the company owes money, so a high discount rate is not cautious but too optimistic. Some people see this as a problem with NPV. A way to avoid this problem is to include explicit provision for financing any losses after the initial investment, that is, explicitly calculate the cost of financing such losses. Another common pitfall is to adjust for risk by adding a premium to the discount rate. Whilst a bank might charge a higher rate of interest for a risky project, that does not mean that this is a valid approach to adjusting a net present value for risk, although it can be a reasonable approximation in some specific cases. One reason such an approach may not work well can be seen from the following: if some risk is incurred resulting in some losses, then a discount rate in the NPV will reduce the impact of such losses below their true financial cost. A rigorous approach to risk requires identifying and valuing risks explicitly, e.g. by actuarial or Monte Carlo techniques, and explicitly calculating the cost of financing any losses incurred. Yet another issue can result from the compounding of the risk premium. R is a composite of the risk free rate and the risk premium. As a result, future cash flows are discounted by both the risk-free rate as well as the risk premium and this effect is compounded by each subsequent cash flow. This compounding results in a much lower NPV than might be otherwise calculated. The certainty equivalent model can be used to account for the risk premium without compounding its effect on present value. Another issue with relying on NPV is that it does not provide an overall picture of the gain or loss of executing a certain project. To see a percentage gain relative to the investments for the project, usually, Internal rate of return or other efficiency measures are used as a complement to NPV. Non specialist users frequently make the error of computing NPV based on cash flows after interest. This is wrong because it double counts the time value of money. Free Cash flow should be used as the basis for NPV computations.
History
Net present value as a valuation methodology dates at least to the 19th century. Karl Marx refers to NPV as fictitious capital, and the calculation as capitalising, writing:[4] The forming of a fictitious capital is called capitalising. Every periodically repeated income is capitalised by calculating it on the average rate of interest, as an income which would be realised by a capital at this rate of interest. In mainstream neo-classical economics, NPV was formalized and popularized by Irving Fisher, in his 1907 The Rate of Interest and became included in textbooks from the 1950s onwards, starting in finance texts.[5] [6]
Alternative capital budgeting methods

Adjusted present value (APV): adjusted present value, is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing. Accounting rate of return (ARR): a ratio similar to IRR and MIRR Cost-benefit analysis: which includes issues other than cash, such as time savings. Internal rate of return: which calculates the rate of return of a project while disregarding the absolute amount of money to be gained. Modified internal rate of return (MIRR): similar to IRR, but it makes explicit assumptions about the reinvestment of the cash flows. Sometimes it is called Growth Rate of Return. Payback period: which measures the time required for the cash inflows to equal the original outlay. It measures risk, not return.
Net present value Real option method: which attempts to value managerial flexibility that is assumed away in NPV.
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References
[1] Lin, Grier C. I.; Nagalingam, Sev V. (2000). CIM justification and optimisation. London: Taylor & Francis. pp.36. ISBN0-7484-0858-4. [2] Khan, M.Y. (1993). Theory & Problems in Financial Management. Boston: McGraw Hill Higher Education. ISBN9780074636831. [3] Baker, Samuel L. (2000). "Perils of the Internal Rate of Return" (http:/ / hspm. sph. sc. edu/ COURSES/ ECON/ invest/ invest. html). . Retrieved January 12, 2007. [4] Karl Marx, Capital, Volume 3, 1909 edition, p. 548 [5] Bichler, Shimshon; Nitzan, Jonathan (July 2010), Systemic Fear, Modern Finance and the Future of Capitalism (http:/ / bnarchives. yorku. ca/ 289/ 03/ 20100700_bn_systemic_fear_modern_finance_future_of_capitalism. pdf), Jerusalem and Montreal, pp.811 (for discussion of history of use of NPV as "capitalisation"), [6] Nitzan, Jonathan; Bichler, Shimshon (2009), Capital as Power. A Study of Order and Creorder., RIPE Series in Global Political Economy, New York and London: Routledge
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen (that is foregone). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.[1] The opportunity cost is also the cost of the forgone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice".[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs. The concept of opportunity cost was first developed in 1914 by Friedrich von Wieser in his book "Theorie der gesellschaftlichen Wirtschaft".[4]
Opportunity costs in consumption

Opportunity cost is assessed in not only monetary or material terms, but also in terms of anything which is of value. For example, a person who desires to watch each of two television programs being broadcast simultaneously, and does not have the means to make a recording of one, can watch only one of the desired programs. Therefore, the opportunity cost of watching Dallas could be not enjoying the other program (such as Dynasty). If an individual records one program while watching the other, the opportunity cost will be the time that the individual spends watching one program versus the other. In a restaurant situation, the opportunity cost of eating steak could be trying the salmon. The opportunity cost of ordering both meals could be twofold: the extra $20 to buy the second meal, and his reputation with his peers, as he may be thought of as greedy or extravagant for ordering two meals. A family might decide to use a short period of vacation time to visit Disneyland rather than doing household improvements. The opportunity cost of having happier children could therefore be a remodeled bathroom. In environmental protection, opportunity cost is also applicable. This has been demonstrated in the legislation that required the carcinogenic aromatics (mainly reformate) to be largely eliminated from gasoline. Unfortunately, this required refineries to install equipment at a cost of hundreds of millions of dollars and pass the cost to the consumer. The absolute number of cancer cases attributed to exposure to gasoline, however, is low, estimated a few cases per year in the U.S. Thus, the decision to require fewer aromatics has been criticized on the grounds of opportunity cost: the hundreds of millions of dollars spent on process redesign could have been spent on other, more fruitful ways of reducing deaths caused by cancer or automobiles.[5] These actions (or strictly, the best one of them) are the opportunity cost of reduction of aromatics in gasoline.
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Opportunity costs in production

Opportunity costs may be assessed in the decision-making process of production. If the workers on a farm can produce either one million pounds of wheat or two million pounds of barley, then the opportunity cost of producing one pound of wheat is the two pounds of barley forgone. Firms would make rational decisions by weighing the sacrifices involved.
Explicit costs
Explicit costs are opportunity costs that involve direct monetary payment by producers. The opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. For instance, a firm spends $100 on electrical power consumed, the opportunity cost is $100. The firm has sacrificed $100, which could have been spent on other factors of production.
Implicit costs
Implicit costs are the opportunity costs that involve only factors of production that a producer already owns. They are equivalent to what the factors could earn for the firm in alternative uses, either operated within the firm or rent out to other firms. For example, a firm pays $300 a month all year for rent on a warehouse that only holds product for six months each year. The firm could rent the warehouse out for the unused six months, at any price (assuming a year-long lease requirement), and that would be the cost that could be spent on other factors of production.
Non-monetary opportunity costs

Opportunity costs are not always measured in monetary units or being able to produce one good over another. For instance, and individual could choose not to mow his or her lawn, in an attempt to create a prarie land for additional wild life. Neighbors of this individual may see this as unsightly, and want the lawn to be mowed. In this case, the opportunity cost of additional wild life is unhappy neighbors.
Evaluation
The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Assessing opportunity costs is fundamental to assessing the true cost of any course of action. In the case where there is no explicit accounting or monetary cost (price) attached to a course of action, or the explicit accounting or monetary cost is low, then, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all. The unseen opportunity costs then become the implicit hidden costs of that course of action. Accounting cost includes only costs that have been explicitly incurred, whereas, economic cost includes opportunity costs. Similarly, this is a major difference between economic profit and accounting profit; opportunity cost being a variable in the calculation of economic profit. Note that opportunity cost is not the sum of the available alternatives when those alternatives are, in turn, mutually exclusive to each other. The opportunity cost of a city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land. Use for any one of those purposes would preclude the possibility to implement any of the other. However, most opportunities are difficult to compare. Opportunity cost has been seen as the foundation of the marginal theory of value as well as the theory of time and money. In some cases, it may be possible to have more of everything by making different choices; for instance, when an economy is within its production possibility frontier. In microeconomic models this is unusual, because individuals are assumed to maximize utility, but it is a feature of Keynesian macroeconomics. In these circumstances, opportunity cost is a less useful concept.
Opportunity cost
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References
[1] "Opportunity Cost" (http:/ / www. investopedia. com/ terms/ o/ opportunitycost. asp). Investopedia. . Retrieved 2010-09-18. [2] James M. Buchanan (2008). "Opportunity cost" (http:/ / www. dictionaryofeconomics. com/ search_results?q=opportunity+ cost& edition=current& button_search=GO). The New Palgrave Dictionary of Economics Online (Second ed.). . Retrieved 2010-09-18. [3] "Opportunity Cost" (http:/ / www. economist. com/ research/ Economics/ alphabetic. cfm?letter=O#opportunitycost). Economics A-Z. The Economist. . Retrieved 2010-09-18. [4] Friedrich von Wieser (1927). A. Ford Hinrichs (translator). ed. Social Economics (http:/ / mises. org/ books/ Social_Economics_Wieser. pdf). New York: Adelphi. . Retrieved 2011-10-07. Friedrich von Wieser (November 1914) (in German). Theorie der gesellschaftlichen Wirtschaft [Theory of Social Economics]. Original publication. [5] Harold A. Wittcoff; Bryan G. Reuben; Jeffery S. Plotkin (2004). Industrial Organic Chemicals. Wiley. ISBN9780471443858.
External links
The Opportunity Cost of Economics Education (http://www.nytimes.com/2005/09/01/business/01scene. html) by Robert H. Frank Opportunity Cost Example & Analysis (http://www.youtube.com/watch?v=ezOdQUzLVAo)
Stock valuation
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of their intrinsic value of the stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria what the market will pay for the stock, without any necessary notion of intrinsic value. These can be combined as "predictions of future cash flows/profits (fundamental)", together with "what will the market pay for these profits?". These can be seen as "supply and demand" sides what underlies the supply (of stock), and what drives the (market) demand for stock? In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories.
Fundamental criteria (fair value)

The most theoretically sound stock valuation method, called income valuation or the discounted cash flow (DCF) method, involves discounting of the profits (dividends, earnings, or cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposal.[1] The discounted rate normally includes a risk premium which is commonly based on the capital asset pricing model. In July 2010, a Delaware court ruled on appropriate inputs to use in discounted cash flow analysis in a dispute between shareholders and a company over the proper fair value of the stock. In this case the shareholders' model provided value of $139 per share and the company's model provided $89 per share. Contested inputs included the terminal growth rate, the equity risk premium, and beta.[2]
Stock Valuation Methods

Stocks have two types of valuations. One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of
Stock valuation stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand). Both of these values change over time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks. The fundamental valuation is the valuation that people use to justify stock prices. The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices. The other way stocks are valued is based on supply and demand. The more people that want to buy the stock, the higher its price will be. And conversely, the more people that want to sell the stock, the lower the price will be. This form of valuation is very hard to understand or predict, and it often drives the short-term stock market trends. There are many different ways to value stocks. The key is to take each approach into account while formulating an overall opinion of the stock. If the valuation of a company is lower or higher than other similar stocks, then the next step would be to determine the reasons. Earnings Per Share (EPS). EPS is the total net income of the company divided by the number of shares outstanding. They usually have a GAAP EPS number (which means that it is computed using all of mutually agreed upon accounting rules) and a Pro Forma EPS figure (which means that they have adjusted the income to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses). The most important thing to look for in the EPS figure is the overall quality of earnings. Make sure the company is not trying to manipulate their EPS numbers to make it look like they are more profitable. Also, look at the growth in EPS over the past several quarters / years to understand how volatile their EPS is, and to see if they are an underachiever or an overachiever. In other words, have they consistently beaten expectations or are they constantly restating and lowering their forecasts? The EPS number that most analysts use is the pro forma EPS. To compute this number, use the net income that excludes any one-time gains or losses and excludes any non-cash expenses like stock options or amortization of goodwill. Then divide this number by the number of fully diluted shares outstanding. You can easily find historical EPS figures and to see forecasts for the next 12 years by visiting free financial sites such as Yahoo Finance (enter the ticker and then click on "estimates"). By doing your fundamental investment research you'll be able to arrive at your own EPS forecasts, which you can then apply to the other valuation techniques below. Price to Earnings (P/E). Now that you have several EPS figures (historical and forecasts), you'll be able to look at the most common valuation technique used by analysts, the price to earnings ratio, or P/E. To compute this figure, take the stock price and divide it by the annual EPS figure. For example, if the stock is trading at $10 and the EPS is $0.50, the P/E is 20 times. To get a good feeling of what P/E multiple a stock trades at, be sure to look at the historical and forward ratios. Historical P/Es are computed by taking the current price divided by the sum of the EPS for the last four quarters, or for the previous year. You should also look at the historical trends of the P/E by viewing a chart of its historical P/E over the last several years (you can find on most finance sites like Yahoo Finance). Specifically you want to find out what range the P/E has traded in so that you can determine if the current P/E is high or low versus its historical average. Forward P/Es reflect the future growth of the company into the figure. Forward P/Es are computed by taking the current stock price divided by the sum of the EPS estimates for the next four quarters, or for the EPS estimate for next calendar of fiscal year or two. P/Es change constantly. If there is a large price change in a stock you are watching, or if the earnings (EPS) estimates change, the ratio is recomputed.
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Stock valuation Growth Rate. Valuations rely very heavily on the expected growth rate of a company. One must look at the historical growth rate of both sales and income to get a feeling for the type of future growth expected. However, companies are constantly changing, as well as the economy, so solely using historical growth rates to predict the future is not an acceptable form of valuation. Instead, they are used as guidelines for what future growth could look like if similar circumstances are encountered by the company. Calculating the future growth rate requires personal investment research. This may take form in listening to the company's quarterly conference call or reading press release or other company article that discusses the company's growth guidance. However, although companies are in the best position to forecast their own growth, they are far from accurate, and unforeseen events could cause rapid changes in the economy and in the company's industry. And for any valuation technique, it's important to look at a range of forecast values. For example, if the company being valued has been growing earnings between 5 and 10% each year for the last 5 years, but believes that it will grow 15 - 20% this year, a more conservative growth rate of 10 - 15% would be appropriate in valuations. Another example would be for a company that has been going through restructuring. They may have been growing earnings at 10 - 15% over the past several quarters / years because of cost cutting, but their sales growth could be only 0 - 5%. This would signal that their earnings growth will probably slow when the cost cutting has fully taken effect. Therefore, forecasting an earnings growth closer to the 0 - 5% rate would be more appropriate rather than the 15 20%. Nonetheless, the growth rate method of valuations relies heavily on gut feel to make a forecast. This is why analysts often make inaccurate forecasts, and also why familiarity with a company is essential before making a forecast. Price Earnings to Growth (PEG) Ratio. This valuation technique has really become popular over the past decade or so. It is better than just looking at a P/E because it takes three factors into account; the price, earnings, and earnings growth rates. To compute the PEG ratio, divide the Forward P/E by the expected earnings growth rate (you can also use historical P/E and historical growth rate to see where it's traded in the past). This will yield a ratio that is usually expressed as a percentage. The theory goes that as the percentage rises over 100% the stock becomes more and more overvalued, and as the PEG ratio falls below 100% the stock becomes more and more undervalued. The theory is based on a belief that P/E ratios should approximate the long-term growth rate of a company's earnings. Whether or not this is true will never be proven and the theory is therefore just a rule of thumb to use in the overall valuation process. Here's an example of how to use the PEG ratio. Say you are comparing two stocks that you are thinking about buying. Stock A is trading at a forward P/E of 15 and expected to grow at 20%. Stock B is trading at a forward P/E of 30 and expected to grow at 25%. The PEG ratio for Stock A is 75% (15/20) and for Stock B is 120% (30/25). According to the PEG ratio, Stock A is a better purchase because it has a lower PEG ratio, or in other words, you can purchase its future earnings growth for a lower relative price than that of Stock B. Nerbrand Z. Given that investments are subject to revisions of future expectations the Nerbrand Z utilises uncertainty of consensus estimates to assess how much earnings forecasts can be revised in standard deviation terms before P/E rations return to normalised levels. This calculation is best done with I/B/E/S consensus estimates. The market tend to focus on the 12 month forward P/E level but this ratio is dependent on earnings estimates which are never homogenous. Hence there is a standard deviation of 12 month forward earnings estimates. The Nerbrand z is therefore expressed as
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where H[P/E] = normalised P/E, e.g. a 5 year historical average of 12 month forward P/E ratios. E12 = mean 12 month forward earnings estimates stdev(E12) = standard deviation of 12 month forward earnings estimates.
Stock valuation A negative number indicates that earnings can be downgraded before valuations normalise. As such, a negative number indicate a valuation adjusted earnings buffer. For example, if the 12 month forward mean EPS forecast is $10, the price of the equity is $100, the historical average P/E ratio is 15, the standard deviation of EPS forecast is 2 then the Nerbrand Z is -1.67. That is, 12 month forward consensus earnings estimates could be downgraded by 1.67 standard deviation before P/E ratio would go back to 15. Return on Invested Capital (ROIC). This valuation technique measures how much money the company makes each year per dollar of invested capital. Invested Capital is the amount of money invested in the company by both stockholders and debtors. The ratio is expressed as a percent and you should look for a percent that approximates the level of growth that you expect. In its simplest definition, this ratio measures the investment return that management is able to get for its capital. The higher the number, the better the return. To compute the ratio, take the pro forma net income (same one used in the EPS figure mentioned above) and divide it by the invested capital. Invested capital can be estimated by adding together the stockholders equity, the total long and short term debt and accounts payable, and then subtracting accounts receivable and cash (all of these numbers can be found on the company's latest quarterly balance sheet). This ratio is much more useful when you compare it to other companies that you are valuing. Return on Assets (ROA). Similar to ROIC, ROA, expressed as a percent, measures the company's ability to make money from its assets. To measure the ROA, take the pro forma net income divided by the total assets. However, because of very common irregularities in balance sheets (due to things like Goodwill, write-offs, discontinuations, etc.) this ratio is not always a good indicator of the company's potential. If the ratio is higher or lower than you expected, be sure to look closely at the assets to see what could be over or understating the figure. Price to Sales (P/S). This figure is useful because it compares the current stock price to the annual sales. In other words, it tells you how much the stock costs per dollar of sales earned. To compute it, take the current stock price divided by the annual sales per share. The annual sales per share should be calculated by taking the net sales for the last four quarters divided by the fully diluted shares outstanding (both of these figures can be found by looking at the press releases or quarterly reports). The price to sales ratio is useful, but it does not take into account any debt the company has. For example, if a company is heavily financed by debt instead of equity, then the sales per share will seem high (the P/S will be lower). All things equal, a lower P/S ratio is better. However, this ratio is best looked at when comparing more than one company. Market Cap. Market Cap, which is short for Market Capitalization, is the value of all of the company's stock. To measure it, multiply the current stock price by the fully diluted shares outstanding. Remember, the market cap is only the value of the stock. To get a more complete picture, you'll want to look at the Enterprise Value. Enterprise Value (EV). Enterprise Value is equal to the total value of the company, as it is trading for on the stock market. To compute it, add the market cap (see above) and the total net debt of the company. The total net debt is equal to total long and short term debt plus accounts payable, minus accounts receivable, minus cash. The Enterprise Value is the best approximation of what a company is worth at any point in time because it takes into account the actual stock price instead of balance sheet prices. When analysts say that a company is a "billion dollar" company, they are often referring to its total enterprise value. Enterprise Value fluctuates rapidly based on stock price changes. EV to Sales. This ratio measures the total company value as compared to its annual sales. A high ratio means that the company's value is much more than its sales. To compute it, divide the EV by the net sales for the last four quarters. This ratio is especially useful when valuing companies that do not have earnings, or that are going through unusually rough times. For example, if a company is facing restructuring and it is currently losing money, then the P/E ratio would be irrelevant. However, by applying a EV to Sales ratio, you could compute what that company could trade for when its restructuring is over and its earnings are back to normal. EBITDA. EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is one of the best measures of a company's cash flow and is used for valuing both public and private companies. To compute EBITDA, use a companies income statement, take the net income and then add back interest, taxes, depreciation, amortization
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Stock valuation and any other non-cash or one-time charges. This leaves you with a number that approximates how much cash the company is producing. EBITDA is a very popular figure because it can easily be compared across companies, even if all of the companies are not profitable. EV to EBITDA. This is perhaps one of the best measurements of whether or not a company is cheap or expensive. To compute, divide the EV by EBITDA (see above for calculations). The higher the number, the more expensive the company is. However, remember that more expensive companies are often valued higher because they are growing faster or because they are a higher quality company. With that said, the best way to use EV/EBITDA is to compare it to that of other similar companies.
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Approximate valuation approaches

Average growth approximation: Assuming that two stocks have the same earnings growth, the one with a lower P/E is a better value. The P/E method is perhaps the most commonly used valuation method in the stock brokerage industry.[3] [4] By using comparison firms, a target price/earnings (or P/E) ratio is selected for the company, and then the future earnings of the company are estimated. The valuation's fair price is simply estimated earnings times target P/E. This model is essentially the same model as Gordon's model, if k-g is estimated as the dividend payout ratio (D/E) divided by the target P/E ratio. Constant growth approximation: The Gordon model or Gordon's growth model[5] is the best known of a class of discounted dividend models. It assumes that dividends will increase at a constant growth rate (less than the discount rate) forever. The valuation is given by the formula: . and the following table defines each symbol:
Symbol Meaning estimated stock price last dividend paid discount rate Units $ or or $ or or %
the growth rate of the dividends %
[6] Limited high-growth period approximation: When a stock has a significantly higher growth rate than its peers, it is sometimes assumed that the earnings growth rate will be sustained for a short time (say, 5 years), and then the growth rate will revert to the mean. This is probably the most rigorous approximation that is practical.[7] While these DCF models are commonly used, the uncertainty in these values is hardly ever discussed. Note that the models diverge for and hence are extremely sensitive to the difference of dividend growth to discount factor. One might argue that an analyst can justify any value (and that would usually be one close to the current price supporting his call) by fine-tuning the growth/discount assumptions. Implied Growth Models One can use the Gordon model or the limited high-growth period approximation model to impute an implied growth estimate. To do this, one takes the average P/E and average growth for a comparison index, uses the current (or forward) P/E of the stock in question, and calculates what growth rate would be needed for the two valuation equations to be equal. This gives you an estimate of the "break-even" growth rate for the stock's current P/E ratio. (Note : we are using earnings not dividends here because dividend policies vary and may be influenced by many factors including tax treatment).
Stock valuation Imputed growth acceleration ratio Subsequently, one can divide this imputed growth estimate by recent historical growth rates. If the resulting ratio is greater than one, it implies that the stock would need to experience accelerated growth relative to its prior recent historical growth to justify its current P/E (higher values suggest potential overvaluation). If the resulting ratio is less than one, it implies that either the market expects growth to slow for this stock or that the stock could sustain its current P/E with lower than historical growth (lower values suggest potential undervaluation). Comparison of the IGAR across stocks in the same industry may give estimates of relative value. IGAR averages across an industry may give estimates of relative expected changes in industry growth (eg. the market's imputed expectation that an industry is about to "take-off" or stagnate). Naturally, any differences in IGAR between stocks in the same industry may be due to differences in fundamentals, and would require further specific analysis.
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Market criteria (potential price)

Some feel that if the stock is listed in a well organized stock market, with a large volume of transactions, the listed price will be close to the estimated fair value. This is called the efficient market hypothesis. On the other hand, studies made in the field of behavioral finance tend to show that deviations from the fair price are rather common, and sometimes quite large. Thus, in addition to fundamental economic criteria, market criteria also have to be taken into account market-based valuation. Valuing a stock is not only to estimate its fair value, but also to determine its potential price range, taking into account market behavior aspects. One of the behavioral valuation tools is the stock image, a coefficient that bridges the theoretical fair value and the market price.
Keynes's view
In the view of noted economist John Maynard Keynes, stock valuation is not an estimate of the fair value of stocks, but rather a convention, which serves to provide the necessary stability and liquidity for investment, so long as the convention does not break down:[8] Certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur. How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice? In practice, we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention though it does not, of course, work out so simply lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. ... Nevertheless the above conventional method of calculation will be compatible with a considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention. Thus investment becomes reasonably 'safe' for the individual investor over short periods, and hence over a succession of short periods however many, if he can fairly rely on there being no breakdown in the convention and on his therefore having an opportunity to revise his judgment and change his investment, before there has been time for much to happen. Investments which are 'fixed' for the community are thus made 'liquid' for the individual. The General Theory, Chapter 12
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References
[1] William F. Sharpe, "Investments", Prentice-Hall, 1978, pp. 300 et.seq. [2] Delaware Provides Guidance Regarding Discounted Cash Flow Analysis (http:/ / blogs. law. harvard. edu/ corpgov/ 2010/ 07/ 16/ delaware-provides-guidance-regarding-discounted-cash-flow-analysis/ ). Harvard Law School Forum on Corporate Governance and Financial Regulation. [3] Imam, Shahed, Richard Barker and Colin Clubb. 2008. The Use of Valuation Models by UK Investment Analysts. European Accounting Review. 17(3):503-535 [4] Demirakos, E. G., Strong, N. and Walker, M. (2004) What valuation models do analysts use?. Accounting Horizons 18 , pp. 221-240 [5] Corporate Finance, Stephen Ross, Randolph Westerfield, and Jeffery Jaffe, Irwin, 1990, pp. 115-130. [6] http:/ / www. fool. co. uk/ qualiport/ 2000/ qualiport000628. htm [7] Discounted Cash Flow Calculator for Stock Valuation (http:/ / www. moneychimp. com/ articles/ valuation/ dcf. htm) [8] The Uncomfortable Dance Between V'ers and U'ers (http:/ / www. pimco. com/ LeftNav/ Featured+ Market+ Commentary/ FF/ 2009/ McCulley+ 10-09+ The+ Uncomfortable+ Dance+ Between+ Vers+ and+ Uers. htm), Paul McCulley, PIMCO
External links
Development of the PE Valuation Method (http://www.investingator.org/PEND-stock-investing.html) MIT Open Course Ware (http://ocw.mit.edu/OcwWeb/Sloan-School-of-Management/ 15-414Financial-ManagementSummer2003/LectureNotes/index.htm) International Association of CPAs, Attorneys, and Management (IACAM) (http://www.iacam.org/) (Free Business Valuation E-Book Guidebook)
Valuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.
Valuation overview
Valuation of financial assets is done using one or more of these types of models: 1. Absolute value models that determine the present value of an asset's expected future cash flows. These kinds of models take two general forms: multi-period models such as discounted cash flow models or single-period models such as the Gordon model. These models rely on mathematics rather than price observation. 2. Relative value models determine value based on the observation of market prices of similar assets. 3. Option pricing models are used for certain types of financial assets (e.g., warrants, put options, call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black-Scholes-Merton models and lattice models. Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value. The meanings of these terms differ. For instance, when an analyst believes a stock's intrinsic value is greater (less) than its market price, an analyst makes a "buy" ("sell") recommendation. Moreover, an asset's intrinsic value may be subject to personal opinion and vary among analysts. For a comprehensive discussion on financial valuation see Aswath Damodaran, Investment Valuation, (New York: John Wiley & Sons, 2002).
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Business valuation
Businesses or fractional interests in businesses may be valued for various purposes such as mergers and acquisitions, sale of securities, and taxable events. An accurate valuation of privately owned companies largely depends on the reliability of the firm's historic financial information. Public company financial statements are audited by Certified Public Accountants (US), Chartered Certified Accountants (ACCA) or Chartered Accountants (UK and Canada) and overseen by a government regulator. Alternatively, private firms do not have government oversightunless operating in a regulated industryand are usually not required to have their financial statements audited. Moreover, managers of private firms often prepare their financial statements to minimize profits and, therefore, taxes. Alternatively, managers of public firms tend to want higher profits to increase their stock price. Therefore, a firm's historic financial information may not be accurate and can lead to over- and undervaluation. In an acquisition, a buyer often performs due diligence to verify the seller's information. Financial statements prepared in accordance with generally accepted accounting principles (GAAP) show many assets based on their historic costs rather than at their current market values. For instance, a firm's balance sheet will usually show the value of land it owns at what the firm paid for it rather than at its current market value. But under GAAP requirements, a firm must show the fair values (which usually approximates market value) of some types of assets such as financial instruments that are held for sale rather than at their original cost. When a firm is required to show some of its assets at fair value, some call this process "mark-to-market." But reporting asset values on financial statements at fair values gives managers ample opportunity to slant asset values upward to artificially increase profits and their stock prices. Managers may be motivated to alter earnings upward so they can earn bonuses. Despite the risk of manager bias, equity investors and creditors prefer to know the market values of a firm's assetsrather than their historical costsbecause current values give them better information to make decisions.
Common business valuation methods

Discounted cash flows method This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value). This concept of discounting future money is commonly known as the time value of money. For instance, an asset that matures and pays $1 in one year is worth less than $1 today. The size of the discount is based on an opportunity cost of capital and it is expressed as a percentage. Some people call this percentage a discount rate. The idea of opportunity cost can be illustrated in an example. A person with only $100 to invest can make just one $100 investment even when presented with two or more investment choices. If this person is later offered an alternative investment choice, the investor has lost the opportunity to make that second investment since the $100 is spent to buy the first opportunity. This example illustrates that money is limited and people make choices in how to spend it. By making a choice, they give up other opportunities. In finance theory, the amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. Classic economic theory maintains that people are rational and averse to risk. They, therefore, need an incentive to accept risk. The incentive in finance comes in the form of higher expected returns after buying a risky asset. In other words, the more risky the investment, the more return investors want from that investment. Using the same example as above, assume the first investment opportunity is a government bond that will pay interest of 5% per year and the principal and interest payments are guaranteed by the government. Alternatively, the second investment opportunity is a bond issued by small company and that bond also pays annual interest of 5%. If given a choice between the two bonds, virtually all investors would buy the government bond rather than the small-firm bond because the first is less risky while paying the same interest rate as the riskier second bond. In this case, an investor has no incentive to buy the riskier second bond. Furthermore, in order to attract capital from investors, the small firm issuing the second bond must pay an interest rate higher than 5% that the government bond pays.
Valuation (finance) Otherwise, no investor is likely to buy that bond and, therefore, the firm will be unable to raise capital. But by offering to pay an interest rate more than 5% the firm gives investors an incentive to buy a riskier bond. For a valuation using the discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the capital markets. Next, one makes a calculation to compute the present value of the future cash flows. Guideline companies method This method determines the value of a firm by observing the prices of similar companies (guideline companies) that sold in the market. Those sales could be shares of stock or sales of entire firms. The observed prices serve as valuation benchmarks. From the prices, one calculates price multiples such as the price-to-earnings or price-to-book value ratios. Next, one or more price multiples are used to value the firm. For example, the average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value. Many price multiples can be calculated. Most are based on a financial statement element such as a firm's earnings (price-to-earnings) or book value (price-to-book value) but multiples can be based on other factors such as price-per-subscriber. Net asset value method The third common method of estimating the value of a company looks to the assets and liabilities of the business. At a minimum, a solvent company could shut down operations, sell off the assets, and pay the creditors. Any cash that would remain establishes a floor value for the company. This method is known as the net asset value or cost method. Normally, the discounted cash flows of a well-performing exceed this floor value. However, some companies are "worth more dead than alive", such as weakly performing companies that own many tangible assets. This method can also be used to value heterogeneous portfolios of investments, as well as non-profit companies for which discounted cash flow analysis is not relevant. The valuation premise normally used is that of an orderly liquidation of the assets, although some valuation scenarios (e.g. purchase price allocation) imply an "in-use" valuation such as depreciated replacement cost new. An alternative approach to the net asset value method is the excess earnings method. This method was first described in ARM34, and later refined by the U.S. Internal Revenue Service's Revenue Ruling 68-609. The excess earnings method has the appraiser identify the value of tangible assets, estimate an appropriate return on those tangible assets, and subtract that return from the total return for the business, leaving the "excess" return, which is presumed to come from the intangible assets. An appropriate capitalization rate is applied to the excess return, resulting in the value of those intangible assets. That value is added to the value of the tangible assets and any non-operating assets, and the total is the value estimate for the business as a whole. Professional sports has a different net asset value method which sometimes can break down and cause team to make horrible decisions while signing players (see Buffalo Sabres/Ville Leino).
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Usage
In finance, valuation analysis is required for many reasons including tax assessment, wills and estates, divorce settlements, business analysis, and basic bookkeeping and accounting. Since the value of things fluctuates over time, valuations are as of a specific date e.g., the end of the accounting quarter or year. They may alternatively be mark-to-market estimates of the current value of assets or liabilities as of this minute or this day for the purposes of managing portfolios and associated financial risk (for example, within large financial firms including investment banks and stockbrokers). Some balance sheet items are much easier to value than others. Publicly traded stocks and bonds have prices that are quoted frequently and readily available. Other assets are harder to value. For instance, private firms that have no frequently quoted price. Additionally, financial instruments that have prices that are partly dependent on theoretical
Valuation (finance) models of one kind or another are difficult to value. For example, options are generally valued using the Black-Scholes model while the liabilities of life assurance firms are valued using the theory of present value. Intangible business assets, like goodwill and intellectual property, are open to a wide range of value interpretations. It is possible and conventional for financial professionals to make their own estimates of the valuations of assets or liabilities that they are interested in. Their calculations are of various kinds including analyses of companies that focus on price-to-book, price-to-earnings, price-to-cash-flow and present value calculations, and analyses of bonds that focus on credit ratings, assessments of default risk, risk premia and levels of real interest rates. All of these approaches may be thought of as creating estimates of value that compete for credibility with the prevailing share or bond prices, where applicable, and may or may not result in buying or selling by market participants. Where the valuation is for the purpose of a merger or acquisition the respective businesses make available further detailed financial information, usually on the completion of a Non-disclosure agreement. It is important to note that valuation is part art and science because it requires judgment and assumptions: 1. There are different circumstances and purposes to value an asset (e.g. distressed firm, tax purposes, mergers & acquisitions, financial reporting). Such differences can lead to different valuation methods or different interpretations of the method results. 2. All valuation models and methods have limitations (e.g., degree of complexity, relevance of observations, mathematical form). 3. Model inputs can vary significantly because of necessary judgment and differing assumptions. Users of valuations benefit when key information, assumptions, and limitations are disclosed to them. Then they can weigh the degree of reliability of the result and make their decision.
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Valuation of a suffering company

Additional adjustments to a valuation approach, whether it is market-, income- or asset-based, may be necessary in some instances. These involve: excess or restricted cash other non-operating assets and liabilities lack of marketability discount of shares control premium or lack of control discount above or below market leases excess salaries in the case of private companies.
There are other adjustments to the financial statements that have to be made when valuing a distressed company. Andrew Miller identifies typical adjustments used to recast the financial statements that include: working capital adjustment deferred capital expenditures cost of goods sold adjustment non-recurring professional fees and costs certain non-operating income/expense items.[1]
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Valuation of intangible assets

Valuation models can be used to value intangible assets such as patents, copyrights, software, trade secrets, and customer relationships. Since few sales of benchmark intangible assets can ever be observed, one often values these sorts of assets using either a present value model or estimating the costs to recreate it. Regardless of the method, the process is often time consuming and costly. Valuations of intangible assets are often necessary for financial reporting and intellectual property transactions. Stock markets give indirectly an estimate of a corporation's intangible asset value. It can be reckoned as the difference between its market capitalisation and its book value (by including only hard assets in it).
Valuation of mining projects

In mining, valuation is the process of determining the value or worth of a mining property. Mining valuations are sometimes required for IPOs, fairness opinions, litigation, mergers & acquisitions and shareholder related matters. In valuation of a mining project or mining property, fair market value is the standard of value to be used. The CIMVal Standards are a recognised standard for valuation of mining projects and is also recognised by the Toronto Stock Exchange (Venture). The standards spearheaded by Spence & Roscoe, stress the use of the cost approach, market approach and the income approach, depending on the stage of development of the mining property or project.
Asset pricing models

See also Modern portfolio theory Capital asset pricing model (CAPM) Arbitrage pricing theory (APT) Black-Scholes (for options) Single-index model Markov Switching Multifractal
References
[1] Joseph Swanson and Peter Marshall, Houlihan Lokey and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide to CorRestructuring, Andrew Millers Valuation of a Distressed Company page 24. ISBN 9781905121311
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Employment-related income & funding sources

In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment.[1] Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum. The terms retirement plan or superannuation refer to a pension granted upon retirement.[2] Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Called retirement plans in the United States, they are commonly known as pension schemes in the United Kingdom and Ireland and superannuation plans or super[3] in Australia and New Zealand. Retirement pensions are typically in the form of a guaranteed life annuity, thus insuring against the risk of longevity. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also fund pensions. Occupational pensions are a form of deferred compensation, usually advantageous to employee and employer for tax reasons. Many pensions also contain an additional insurance aspect, since they often will pay benefits to survivors or disabled beneficiaries. Other vehicles (certain lottery payouts, for example, or an annuity) may provide a similar stream of payments. The common use of the term pension is to describe the payments a person receives upon retirement, usually under pre-determined legal and/or contractual terms. A recipient of a retirement pension is known as a pensioner or retiree.
Types of pensions
Employment-based pensions (retirement plans)
A retirement plan is an arrangement to provide people with an income during retirement when they are no longer earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund during their employment in order to receive defined benefits upon retirement. It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as a retirement income. Funding can be provided in other ways, such as from labor unions, government agencies, or self-funded schemes. Pension plans are therefore a form of "deferred compensation". A SSAS is a type of employment-based Pension in the UK.
Social and state pensions

Many countries have created funds for their citizens and residents to provide income when they retire (or in some cases become disabled). Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. A basic state pension is a "contribution based" benefit, and depends on an individual's contribution history. For examples, see National Insurance in the UK, or Social Security in the USA. Many countries have also put in place a "social pension". These are regular, tax-funded non-contributory cash transfers paid to older people. Over 80 countries have social pensions.[4] Examples are the Old Age Grant in South Africa and the Universal Superannuation scheme in New Zealand.
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Disability pensions
Some pension plans will provide for members in the event they suffer a disability. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age.
Benefits
Retirement plans may be classified as defined benefit or defined contribution according to how the benefits are determined.[4] A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized. Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution plans. They are often referred to as hybrid plans. Such plan designs have become increasingly popular in the US since the 1990s. Examples include Cash Balance and Pension Equity plans.
Defined benefit plans

A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. In the US, 26 U.S.C.414(j) [5] specifies a defined benefit plan to be any pension plan that is not a defined contribution plan (see below) where a defined contribution plan is any plan with individual accounts. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan. Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government workers, by the government itself. A traditional form of defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate. The final accrued amount is available as a monthly pension or a lump sum, but usually monthly. The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. A simple example is a Dollars Times Service plan design that provides a certain amount per month based on the time an employee works for a company. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service. While this type of plan is popular among unionized workers, Final Average Pay (FAP) remains the most common type of defined benefit plan offered in the United States. In FAP plans, the average salary over the final years of an employee's career determines the benefit amount. Averaging salary over a number of years means that the calculation is averaging different dollars. For example, if salary is averaged over five years, and retirement is in 2009, then salary in 2004 in 2004 dollars is averaged with salary in 2005 dollars, etc., with 2004 dollars being worth more than the dollars of succeeding years. The pension is then paid in first year of retirement dollars, in this example 2009 dollars, with the lowest value of any dollars in the calculation. Thus inflation in the salary averaging years has a considerable impact on purchasing power and cost, both being reduced equally by inflation This effect of inflation can be eliminated by converting salaries in the averaging years to first year of retirement dollars, and then averaging. In the United Kingdom, benefits are typically indexed for inflation (known as Retail Prices Index (RPI)) as required by law for registered pension plans.[6] Inflation during an employee's retirement affects the purchasing power of the pension; the higher the inflation rate, the lower the purchasing power of a fixed annual pension. This effect can be mitigated by providing annual increases to the pension at the rate of inflation (usually capped, for instance at 5% in any given year). This method is advantageous for the employee since it stabilizes the purchasing power of pensions
Pensions, retirement plans & Superannuation to some extent. If the pension plan allows for early retirement, payments are often reduced to recognize that the retirees will receive the payouts for longer periods of time. In the United States, under the Employee Retirement Income Security Act of 1974, any reduction factor less than or equal to the actuarial early retirement reduction factor is acceptable.[7] Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age (usually age 65). Companies would rather hire younger employees at lower wages. Some of those provisions come in the form of additional temporary or supplemental benefits, which are payable to a certain age, usually before attaining normal retirement age.[8] Funding Defined benefit plans may be either funded or unfunded. In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as Pay-as-you-go (PAYGO or PAYG).[9] The social security systems of many European countries are unfunded, having benefits paid directly out of current taxes and social security contributions, although several countries have hybrid systems which are partially funded. Spain set up the Social Security Reserve Fund and France set up the Pensions Reserve Fund; in Canada the wage-based retirement plan (CPP) is funded, with assets managed by the CPP Investment Board while the U.S. Social Security system is funded by investment in special U.S. Treasury Bonds. In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. In many countries, such as the USA, the UK and Australia, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans (in Australia they are mandatory). In the United States, non-church-based private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans and provide timely and uninterrupted payment of pension benefits. Criticisms Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: in other words it costs more to fund the pension for older employees than for younger ones (an "age bias"). Defined benefit pensions tend to be less portable than defined contribution plans, even if the plan allows a lump sum cash benefit at termination. Most plans, however, pay their benefits as an annuity, so retirees do not bear the risk of low investment returns on contributions or of outliving their retirement income. The open-ended nature of these risks to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans over recent years. The risks to the employer can sometimes be mitigated by discretionary elements in the benefit structure, for instance in the rate of increase granted on accrued pensions, both before and after retirement.
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Pensions, retirement plans & Superannuation The age bias, reduced portability and open ended risk make defined benefit plans better suited to large employers with less mobile workforces, such as the public sector (which has open-ended support from taxpayers). This coupled with a lack of foresight on the employers part means a large proportion of the workforce are kept in the dark over future investment schemes. Defined benefit plans are sometimes criticized as being paternalistic as they enable employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. However they are typically more valuable than defined contribution plans in most circumstances and for most employees (mainly because the employer tends to pay higher contributions than under defined contribution plans), so such criticism is rarely harsh. The "cost" of a defined benefit plan is not easily calculated, and requires an actuary or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and lifespan of the employees, the returns to be earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation in the U.S. So, for this arrangement, the benefit is relatively secure but the contribution is uncertain even when estimated by a professional. Examples Many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll or other taxes. The United States Social Security system is similar to a defined benefit pension arrangement, albeit one that is constructed differently than a pension offered by a private employer. Individuals that have worked in the UK and have paid certain levels of national insurance deductions can expect an income from the state pension scheme after their normal retirement. The state pension is currently divided into two parts: the basic state pension, State Second [tier] Pension scheme called S2P. Individuals will qualify for the basic state pension if they have completed sufficient years contribution to their national insurance record. The S2P pension scheme is earnings related and depends on earnings in each year as to how much an individual can expect to receive. It is possible for an individual to forgo the S2P payment from the state, in lieu of a payment made to an appropriate pension scheme of their choice, during their working life. For more details see UK pension provision.
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Defined contribution plans

In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan. Money contributed can either be from employee salary deferral or from employer contributions. The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you do not need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable. In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement to use the bulk of the fund to purchase an annuity.)
Pensions, retirement plans & Superannuation The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown (until calculated). Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers. Examples In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see 26 U.S.C.414(i) [10]). Examples of defined contribution plans in the United States include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain agetypically the year the employee reaches 59.5 years old-- (with a small number of exceptions) without incurring a substantial penalty. In the US, defined contribution plans are subject to IRS limits on how much can be contributed, known as the section 415 limit. In 2009, the total deferral amount, including employee contribution plus employer contribution, was limited to $49,000 or 100% of compensation, whichever is less. The employee-only limit in 2009 is $16,500 with a $5,500 catch-up. These numbers may increase each year and are indexed to compensate for the effects of inflation.
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Hybrid and cash balance plans

Hybrid plan designs combine the features of defined benefit and defined contribution plan designs. A cash balance plan is a defined benefit plan made by the employer, with the help of consulting actuaries (like Kwasha Lipton, who it is said created the cash balance plan) to appear as if they were defined contribution plans. They have notional balances in hypothetical accounts where, typically, each year the plan administrator will contribute an amount equal to a certain percentage of each participant's salary; a second contribution, called interest credit, is made as well. These are not actual contributions and further discussion is beyond the scope of this entry suffice it to say that there is currently much controversy. In general, they are usually treated as defined benefit plans for tax, accounting and regulatory purposes. As with defined benefit plans, investment risk in hybrid designs is largely borne by the plan sponsor. As with defined contribution designs, plan benefits are expressed in the terms of a notional account balance, and are usually paid as cash balances upon termination of employment. These features make them more portable than traditional defined benefit plans and perhaps more attractive to a more highly mobile workforce. Target benefit plans are defined contribution plans made to match (or resemble) defined benefit plans.
Contrasting types of retirement plans

Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts. This debate parallels the discussion currently going on in the U.S., where many Republican leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan.
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Financing
There are various ways in which a pension may be financed. Defined contribution pensions, by definition, are funded, as the "guarantee" made to employees is that specified (defined) contributions will be made during an individual's working life.
History
Widows' funds were among the first pension type arrangement to appear, for example Duke Ernest the Pious of Gotha founded a widows' fund for clergy in 1645 and another for teachers in 1662.[11] 'Various schemes of provision for ministers' widows were then established throughout Europe at about the start of the eighteenth century, some based on a single premium others based on yearly premiums to be distributed as benefits in the same year.'[12]
Germany
As part of Otto von Bismarck's social legislation, the Old Age and Disability Insurance Bill was enacted in 1889. The Old Age Pension program, financed by a tax on workers, was originally designed to provide a pension annuity for workers who reached the age of 70 years, though this was lowered to 65 years in 1916. It is sometimes claimed that at the time life expectancy for the average Prussian was 45 years; in fact this figure ignores the very high infant mortality and high maternal death rate from childbirth of this era. In fact, an adult entering into insurance under the scheme would on average live to 70 years of age, a figure used in the actuarial assumptions included in the legislation.
United States
Public pensions got their start with various 'promises', informal and legislated, made to veterans of the Revolutionary War and, more extensively, the Civil War. They were expanded greatly, and began to be offered by a number of state and local governments during the early Progressive Era in the late nineteenth century. Federal civilian pensions were offered under the Civil Service Retirement System (CSRS), formed in 1920. CSRS provided retirement, disability and survivor benefits for most civilian employees in the US Federal government, until the creation of a new Federal agency, the Federal Employees Retirement System (FERS), in 1987. Pension plans became popular in the United States during World War II, when wage freezes prohibited outright increases in workers' pay. The defined benefit plan had been the most popular and common type of retirement plan in the United States through the 1980s; since that time, defined contribution plans have become the more common type of retirement plan in the United States and many other western countries.
Current challenges
A growing challenge for many nations is population ageing. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In almost all developed countries this means that government and public sector pensions could collapse their economies unless pension systems are reformed or taxes are increased. One method of reforming the pension system is to increase the retirement age. Two exceptions are Australia and Canada, where the pension system is forecast to be solvent for the foreseeable future. In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this. These two nations also have an advantage from their relative openness to immigration. However, their populations are not growing as fast as the U.S., which supplements a high immigration rate with one of the highest birthrates among Western countries. Thus, the population in the U.S. is not aging to the extent as those in Europe, Australia, or Canada.
Pensions, retirement plans & Superannuation Another growing challenge is the recent trend of states and businesses in the United States purposely under-funding their pension schemes in order to push the costs onto the federal government. For example, in 2009, the majority of states have unfunded pension liabilities exceeding all reported state debt. Bradley Belt, former executive director of the PBGC (the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans in the event of bankrupment), testified before a congressional hearing in October 2004, I am particularly concerned with the temptation, and indeed, growing tendency, to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort. Challenges have further been increased by the credit crunch. Total funding of the nation's 100 largest corporate pension plans fell by $303bn in 2008, going from a $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008.[13]
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Pensions by country
General articles on both public and private pension funds by country: Pensions in Canada Pensions in Chile Pensions in India Pensions in Norway Pensions in Pakistan Pensions in the United States Pensions in the United Kingdom
Famous examples of pension systems

Some of the listed systems might also be considered social insurance. Argentina: Administracin Nacional de la Seguridad Social Australia: Superannuation in Australia - Private occupational pensions Social Security - Public pensions Canada: Canada Pension Plan Old Age Security Quebec Pension Plan Registered Retirement Savings Plan Saskatchewan Pension Plan Hong Kong - Mandatory Provident Fund Finland - Kansanelkelaitos India - Employees' Provident Fund Organisation of India Japan - National Pension Malaysia - Employees Provident Fund Mexico - Mexico Pension Plan Netherlands - Algemene Ouderdoms Wet
New Zealand - KiwiSaver Singapore - Central Provident Fund
Pensions, retirement plans & Superannuation Sweden - Social Security United Kingdom: UK pension provision (generally) Self-invested personal pensions United States: Public employee pensions Retirement plans in the United States Social Security
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Market structure
The market for pension fund investments is still centered around the U.K.and U.S. economies. Japan and the EU are conspicuous by absence. As of 2005 the U.S. was the largest market for pension fund investments followed by the UK. Pension reforms have gained pace worldwide in recent years and funded arrangements are likely to play an increasingly important role in delivering retirement income security and also affect securities markets in future years.
Obtaining survey data on pensions

Numerous worldwide health, aging and retirement surveys contain questions pertaining to pensions. The Meta Data Repository [14] - created by the non-profit RAND Corporation and sponsored by the National Institute on Aging at the National Institutes of Health - provides access to meta data for these questions as well as links to obtain respondent data from the originating surveys.
Notes
[1] [2] [3] [4] [5] [6] Princeton WordNet, http:/ / wordnetweb. princeton. edu/ perl/ webwn?s=pension, viewed 24 December 2008 Princeton WordNet, http:/ / wordnetweb. princeton. edu/ perl/ webwn?s=superannuation, viewed 24 December 2008 "Industry SuperFunds - Home" (http:/ / www. industrysuper. com/ ). Industrysuper.com. . Retrieved 2010-09-17. "Private Pensions/Les pensions prives" (http:/ / www. oecd. org/ dataoecd/ 0/ 49/ 38356329. pdf) (PDF). . Retrieved 2010-09-17. http:/ / www. law. cornell. edu/ uscode/ 26/ 414. html#j "The Pensions Advisory Service" (http:/ / www. pensionsadvisoryservice. org. uk/ Pension_Rights/ Pension_Increases/ ). The Pensions Advisory Service. . Retrieved 2010-09-17. [7] Early Retirement Provisions in Defined Benefit Pension Plans. Ann C. Foster http:/ / www. bls. gov/ opub/ cwc/ archive/ winter1996art3. pdf [8] Qualified Domestic Relations Order Handbook By Gary A. Shulman p.199-200 Published by: Aspen Publishers Online, 1999 ISBN 0735506655, ISBN 9780735506657 [9] "Unfunded Pension Plans" (http:/ / stats. oecd. org/ glossary/ detail. asp?ID=5310) OECD Glossary of Statistical Terms . Retrieved 26 January 2009. [10] http:/ / www. law. cornell. edu/ uscode/ 26/ 414. html#i [11] Haberman, Steven (1995). History of Actuarial Science, vol. 1 (http:/ / www. worldcat. org/ oclc/ 468359649). London: William Pickering. pp.xlviii. ISBN1851961607. . [12] Hald, A. (1990). A History of Probability and Statistics and Their Applications Before 1750 (http:/ / www. worldcat. org/ oclc/ 19629739). John Wiley and Sons. ISBN9780471502302. . [13] Largest U.S. pension plans' assets fall $217 billion short, http:/ / www. usatoday. com/ money/ perfi/ retirement/ 2009-03-11-pension-plan-assets-short_N. htm, USA Today, citing a report by Watson Wyatt, 10 March 2009. [14] http:/ / metadata. rand. org
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References
"Doing it Offshore" - an independent guide to pension planning offshore (http://www.whichoffshore.com/ offshore-retirement-planning/) The Canadian Museum of Civilisation - The History of Canada's Public Pensions (http://www.civilization.ca/ cmc/exhibitions/hist/pensions/cpp1sp_e.shtml) Pension Benefit Guaranty Corporation (PBGC) (http://www.pbgc.gov/) - A United States government organisation A Global Perspective on Aging and Pensions (http://knowledge.allianz.com/en/special/aging_populations. html), Allianz Knowledge, February 2008 Administration on Aging (Pension Counseling ) (http://www.aoa.gov/prof/aoaprog/pensioncounseling/ pencounseling.asp) - A United States government organisation Pensions and Capital Stewardship Project (http://www.law.harvard.edu/programs/lwp/LWPpensions_about. html) at the Labour and Worklife Program (http://www.law.harvard.edu/programs/lwp), Harvard Law School - A United States' organisation. "Actuarially Speaking: A Plain Language Summary of Actuarial Methods and Practices for Public Employee Pension and Other Post-Employment Benefits," (http://www.library.ca.gov/crb/08/08-003.pdf) from the California Research Bureau (CRB) at the California State Library (http://www.library.ca.gov/index.html) Creating a Retirement Plan (http://articles.moneycentral.msn.com/retirementandwills/createaplan/ createaplan.aspx) Articles on MSN Money Provisions on pensions for migrant workers within the European Union (http://ec.europa.eu/ employment_social/social_security_schemes/eulisses/jetspeed/) Is your pension secure? (http://www.consumerreports.org/cro/money/retirement-planning/ is-your-pension-secure/overview/is-your-pension-secure-ov.htm?resultPageIndex=1&resultIndex=1& searchTerm=cash balance), Consumer Reports How to plan for and decide on a pension (http://www.bbc.co.uk/raw/money/saving_up/) impartial advice from BBC raw
Cash balance plan
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Cash balance plan

A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. The hypothetical nature of the individual accounts was crucial in the early adoption of such plans because it enabled conversion of traditional plans without declaring a plan termination.
Basics
The employees' accounts earn a fixed rate of return that can change over a period of time from year to year. Although it works much like a defined contribution plan, it is actually a defined benefit plan for legal purposes. In 2003, over 20% of US workers with defined benefit plans were in cash balance plans, according to Bureau of Labor Statistics data. Most of these plans resulted from conversions from traditional defined benefit plans. The status of such plans was in legal limbo (see below), and the number of conversions slowed. However, legislation was recently passed that cleared the way for plan sponsors to adopt cash balance plans.
Conversion controversy
Cash balance conversions have been controversial and have raised the ire of workers and their advocates. In 2005 the Government Accountability Office (GAO) released a report analyzing the effects of cash balance conversions on worker benefits. They found that in a typical conversion the cash balance plan would provide lower benefits for most workers than if the defined benefit plan had remained unchanged and the worker had stayed in their job until retirement age. This decline in benefits tends to be largest for older workers. This is because in a traditional plan, where benefits are based on final average pay, the "value" of the benefits accrues much faster for older workers than for younger workers. In contrast, in a DC or cash balance plan, all workers contribute at the same rate, and a dollar contributed by a younger worker is actually more valuable because it has more time to compound before retirement. Thus some argue that cash balance plans hurt workers. On the other hand, this may not be the relevant comparison. If the alternative to cash balance conversion is that the plan is frozen or terminated (with the vested balance going to the worker), all workers would be much worse off than in a cash balance conversion. This is a realistic possibility; tens of thousands of defined benefit plans have been frozen and/or terminated in the last two decades, far more than have been converted to cash balance plans. Likewise, for the many employees who leave their job before retirement (whether voluntarily or not), many would be better off under the cash balance conversion than under the original defined benefit plan. In addition, about half of cash balance conversions have grandfathered in some or all of the existing participants in the defined benefit plan.
Types of pensions
The ubiquitous 401(k) plan is an example of a defined contribution plan because the Internal Revenue Code 414(i) states [t]hat the term defined contribution plan means any plan that provides retirement benefits to a worker based solely on the amount contributed to the (workers individual) account and any (investment) income, gains net of any expenses and losses. Under the definition of accrued benefit under Code 411(a)(7)(ii) in the case of a plan that is not a defined benefit plan, [the term accrued benefit] means the balance [in] the employees [individual] account. On the other hand for defined benefit plans, Section 411(a)(7)(i) states that accrued benefit means the employees [] annual benefit as it is determined under the plan expressed in the form of an [annuity] commencing at normal retirement age. Finally, the Codes definition for defined benefit plans are all plans that are not defined contribution plans. Cash balance plans are defined benefit plans that look like defined contribution plans. A workers right to a pension in a defined benefit plan represents a contingent and hence uncertain financial obligation to the employer sponsoring
Cash balance plan the plan. Section 412 of the Code requires the employer to make annual contributions to the plan to ensure that the plan assets will be sufficient to pay the promised benefits later at retirement. As part of this process the plan is required to have an actuary perform annual actuarial valuations in which the present value of each workers accrued benefit is estimated and then each present value for each worker covered by the plan is added up so that the minimum annual contribution can be determined. The actuarial present values for the accrued benefit for each worker is the lump sum dollar amount that represents the financial value of the employers liability on the date of the valuation. It does not include the future accrual of pension benefits nor does it include the effect of projected future salary increases. Thus the lump sum value for each worker is not based on that workers projected final salary at retirement, but only the workers salary on the date of valuation.
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Design of plans
Some cash balance plans communicate to workers that these actuarial present values are hypothetical accounts because upon termination of service, the employer will give the former worker the option to take all his money from the pension plan out. In reality, if both the worker and employer agree, even in a normal defined benefit plan a former worker may take away all his money from the pension plan. There are no legal differences in this portability aspect between a traditional defined benefit plan and a cash balance plan. A typical design for a cash balance plan would provide each worker a hypothetical account and pay credits in the current year of say 5% of current salary. In addition, the cash balance plan would provide an interest credit of say 6% of the prior years balance in each workers hypothetical account so that the current years balance would be the sum of the prior years balance and the current years pay credit and an interest credit on prior years balance. For a worker who starts at age 25 with a $2000 a month starting salary, he would start with a zero account balance and the first years pay credit would be $1200 leaving him with an end of first year balance of $1200 in his hypothetical account. Because his beginning of first year balance was zero, his interest credit for the first year is also zero. In his second year, with a 3.5% salary increase his monthly salary would be $2070 on his 26th birthday. The 5% pay credit for this second year would be $1242. Because his second year hypothetical account starts the year with a $1200 balance, the interest credit at 6% would be $72. Adding the beginning balance of $1200 to the $1242 pay credit and $72 interest credit would give an ending balance in the hypothetical account of $2514 ($2514 = $1200 + $1242 + $72) for the second year. Repeat this process for each ensuing year until termination. This creates a hypothetical account balance from which the legally required benefit -- an annuity payable for the life of the participant or beneficiary who elects to commence payment at normal retirement age(NRA) -- can be calculated. This is due to requirement that benefits be definitely determinable found in the IRS Regulations Section 1.401.
Lump sum calculation cases

In 1993, the Third Circuit decided in Goldman v. First National Bank of Boston that the terminated worker did not demonstrate that the adoption of the cash balance plan violated age discrimination rules. In 2000, the Eleventh Circuit in Lyons v. Georgia Pacific and the Second Circuit in Esden v. Bank of Boston decided that the employer violated rules for calculating lump sums, and a district court in Eaton vs. Onan Corp. decided that adopting the cash balance plan did not violate age discrimination rules. In early 2003, the First Circuit in Campbell v. BankBoston did not decide that the employer violated the age discrimination rules against a former worker because the former worker made a procedural error and brought the issue up late. Then in summer of 2003, the Seventh Circuit in Berger v. Xerox Corp. Retirement Plan, decided that the lump sum calculation for workers terminating service prior to retirement who were covered by the defendant cash balance pension plan cannot violate the rules for defined benefit plans and in a district court in Illinois in Cooper vs. IBM Personal Pension Plan, decided that the very design of the cash balance plan the issue that the Campbell court only reached in dicta had indeed violated the age discrimination rules because the rate of benefit accruals did
Cash balance plan decrease on account the attainment of any age. The Lump Sum cases all held that because cash balance plans were defined benefit plans, they had to abide by the rules for defined benefit plans when the employer calculates the lump sum actuarial present value by first accruing the account balance to normal retirement age and then converting the account balance at retirement age into a life annuity before then discounting back to the current date at a statutorily required discount rate. Because these cash balance plans were designed to look like defined contribution plans, the defendants asserted that these cash balance pension plans were not true defined benefit plans but were hybrid plans instead. Therefore, because, they were hybrids and looked like defined contribution plans and because workers are only entitled to the actual balance in defined contribution plans, the plaintiffs should get lump sums equal only to their hypothetical account balances. In Berger v. Xerox, Judge Richard Posner in a stinging phrase for hybrid read unlawful held that the lump sum amounts should have been larger. So the cash balance plan is not an exotic hybrid plan in the eyes of the law but remained in the defined benefit part of the pension taxonomy. This process of taking the account balance forward from the terminated workers current age up to the workers normal retirement age, before discounting back to the current age is sometimes called the whipsaw. If the interest rate used for discounting back is lower than the rate used for interest credits on the hypothetical account balances, then the legally required lump sum values would be higher than the workers account balance in his hypothetical account.
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The age discrimination cases

Proponents of cash balance plans advocate that these plans do not violate the age discrimination statutes applicable to defined benefit pension plans. The statutes forbid in virtually the same words any plan from reducing the rate of benefit accrual for any worker on account of the attainment of any age. Although the Code defines the accrued benefit for any worker covered by defined benefit plans as expressed in the form of an annual benefit commencing at normal retirement age and defines normal retirement benefit as the greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age, the supporters of such cash balance plans still argue that the terms accrued benefit and rate of benefit accrual are ambiguous or undefined. In Onan Corp., District Court Judge Hamilton agreed with the supporters of cash balance plans and held that the cash balance plan design did not violate age discrimination because the terms rate of benefit accrual and accrued benefit were not defined in the relevant statutes. He then engaged in an exercise of statutory construction that Professor Edward Zelinsky found fault with. But the terms accrued benefit and rate of benefit accrual have long been very familiar and unambiguous to pension actuaries. It was because the terms were so unambiguous to actuaries that they could construct the initial balances in each workers hypothetical account for these new cash balance pension plans. Also, 411(a)(1)(7) of the Code defines accrued benefit. Thus pension actuaries are very familiar with changes in accrual rate factors used in a traditional defined benefit pension plans formula. In Cooper, District Court Judge Murphy came to the opposite conclusion because to him, the terms accrued benefit and rate of benefit accrual were not ambiguous. Because benefits accrued at a decreasing rate solely based on increases in age, the plan design of the cash balance plan violated the age discrimination statutes. If this rule is upheld, then all flat rate pay credit design cash balance plans would violate age discrimination. A plan sponsor could avoid these problems by setting up a cash balance plan with steadily increasing or age graded rates for pay credits. This has the same economic effect as adopting a career average salary traditional defined benefit plan. Murphy has just been reversed.[1]
Cash balance plan
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Legislative developments
Because of the troublesome age discrimination suits and misunderstanding and frustration by older workers covered by such plans, Congress, notably Senator Charles Grassley (R) of Iowa, has a proposal to statutorily fix the problem. It involves outlawing "wearaway". The Pension Protection Act of 2006 was signed into law in August 2006 and prospectively made the flat salary credit type plans immune from age discrimination. Also the use of a higher interest rate for calculation of lump sums is now allowed as the new law eliminates the whipsaw. The act only fixes age discrimination prospectively.
References
[1] money.cnn.com (http:/ / money. cnn. com/ services/ tickerheadlines/ for5/ 200608071228DOWJONESDJONLINE000424_FORTUNE5. htm)
GAO report on cash balance conversions (http://www.gao.gov/new.items/d0642.pdf) Berger v. Xerox, 338 F.3d 755 (7th Cir., 2003) Judge Richard Posner Cooper v. IBM, 274 F.Supp.2d 1010 (S.D. Ill. 2003) Judge Murphy Campbell v. Bank of Boston, 274 F.3d 1 (1st Cir. 2003) Judge Lynch
Defined benefit pension plan

In economics, a defined benefit pension plan is a major type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending on investment returns. It is 'defined' in the sense that the formula for computing the employer's contribution is known in advance.[1] In the United States, 26 U.S.C.414(j) [5] specifies a defined benefit plan to be any pension plan that is not a defined contribution plan where a defined contribution plan is any plan with individual accounts. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan. The most common type of formula used is based on the employees terminal earnings. Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a workers career. In recent years, a new type of defined benefit plan, a cash balance plan, has become more prevalent for larger companies. Under this type of plan, benefits are computed as a percentage of each employees account balance. Employers specify a contributionusually based on a percentage of the employees earningsand a rate of interest on that contribution that will provide a predetermined amount at retirement, usually in the form of a lump sum. In the private sector, defined benefit plans are typically funded exclusively by employer contributions. For very small companies with one owner and a handful of younger employees, the business owner generally receives a high percentage of the benefits. In the public sector, defined benefit plans often require employee contributions.[2] [3] Many companies with these plans face a deficit between the money currently in their plans and the total amount of their pension obligations.[4] Contributions may be made by the employee, the employer, or both. The employer bears the investment risk.[5]
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Overview
When participating in a defined benefit pension plan, an employer promises to pay their employees a specific benefit for life beginning at retirement. The benefit is calculated in advance using a formula based on age, earnings, and years of service. In the United States, the maximum retirement benefit permitted in 2011 under a defined benefit plan is $195,000 (up from $185,000 in 2008). Defined benefit pension plans currently do not have contribution limits.[6] The liability of the pension lies with the employer who is responsible for making the decisions. Employer contributions to a defined benefit pension plan are based on a formula that calculates the contributions needed to meet the defined benefit. These contributions are actuarially determined taking into consideration the employee's life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover.[6] Employees are always entitled to the vested accrued benefit earned to date and if an employee leaves the company before retirement, the benefits earned so far are frozen and held in a trust for the employee until retirement age. The defined benefit pension plan must allow its vested employees to receive their benefits no later than the 60th day after the end of the plan year in which they have been employed for ten years or leave their employer. Employees who reach age 65 or the specified retirement age in their plan can also collect the benefits. Starting in 2002, the maximum benefit is now reduced for retirement prior to age 62, and increased for retirement after age 65.[6] The plan cannot force you to receive your benefits before normal retirement age unless you have less than $5,000 vested in the plan. However, you must begin to receive your benefits no later than April 1 following the last year of employment or age 70, whichever is later.[6] Defined benefit plans distribute their benefits through life annuities. In a life annuity, employees receive equal periodic benefit payments (monthly, quarterly, etc.) for the rest of their lives. A defined benefit pension plan allows joint distributions so a surviving spouse can still receive 50 percent of your payment.[6] In the United States, 88 percent of public employees are covered by a defined benefit pension plan.[7] In the United States, Federal public sector plans are governed by the Tax Code and Federal law, while state and local public sector plans are governed by the Tax Code and state law. Thus the funding requirements, benefits, plan solvency, and participant rights and obligations vary significantly. Private sector plans are governed by the Employee Retirement Income Security Act (ERISA) of 1974. This law contains provisions rooted in the Tax Code and enforced by the Internal Revenue Service, but, in Title I of ERISA, also provides a body of Federal law governing employee benefit plans that preempts state law. Rooted in the principles of trust law, Title I of ERISA governs the fiduciary conduct and reporting requirements of private sector employee benefits plans through a system of exclusively Federal rights and remedies. Title I is administered by the Employee Benefits Security Administration (EBSA) at the United States Department of Labor. EBSA is led by the Assistant Secretary of Labor for Employee Benefits, a Sub-Cabinet level position requiring nomination by the President of the United States and confirmation by the United States Senate. The current Assistant Secretary of Labor for Employee Benefits and head of the Employee Benefits Security Administration is the Hon. Phyllis Borzi. Past Assistant Secretaries include the Hon. Bradford P. Campbell, the Hon. Ann L. Combs and the Hon. Olena Berg-Lacy.
Benefit Plan
Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government workers, by the government itself. A traditional form of a defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate. The final accrued amount is available as a monthly pension or a lump sum. The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. A simple example is a Dollars Times Service plan design
Defined benefit pension plan that provides a certain amount per month based on the time an employee works for a company. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service. While this type of plan is popular among unionized workers, Final Average Pay (FAP) remains the most common type of defined benefit plan offered in the United States. In FAP plans, the average salary over the final years of an employee's career determines the benefit amount. In the United Kingdom, benefits are typically indexed for inflation (known as Retail Prices Index (RPI)) as required by law for registered pension plans.[8] Inflation during an employee's retirement affects the purchasing power of the pension; the higher the inflation rate, the lower the purchasing power of a fixed annual pension. This effect can be mitigated by providing annual increases to the pension at the rate of inflation (usually capped, for instance at 5% in any given year). This method is advantageous for the employee since it stabilizes the purchasing power of pensions to some extent. If the pension plan allows for early retirement, payments are often reduced to recognize that the retirees will receive the payouts for longer periods of time. In the US, (under the ERISA rules), any reduction factor less than or equal to the actuarial early retirement reduction factor is acceptable.[9] Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age (usually age 65). Some of those provisions come in the form of additional temporary or supplemental benefits, which are payable to a certain age, usually before attaining normal retirement age.[10]
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Funding
Defined benefit plans may be either funded or unfunded. In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as Pay-as-you-go (PAYGO or PAYG).[11] The social security system in the USA and most European countries are unfunded, having benefits paid directly out of current taxes and social security contributions. In some countries, such as Germany, Austria and Sweden, company run retirement plans are often unfunded. In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. In many countries, such as the USA, the UK and Australia, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans (in Australia they are mandatory). In the United States, private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans and provide timely and uninterrupted payment of pension benefits.
Advantages and drawbacks

Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: in other words it costs more to fund the pension for older employees than for younger ones (an "age bias"). Defined benefit pensions tend to be less portable than defined contribution plans, even if the plan allows a
Defined benefit pension plan lump sum cash benefit at termination. Most plans, however, pay their benefits as an annuity, so retirees do not bear the risk of low investment returns on contributions or of outliving their retirement income. The open-ended nature of these risks to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans over recent years. The risks to the employer can sometimes be mitigated by discretionary elements in the benefit structure, for instance in the rate of increase granted on accrued pensions, both before and after retirement. The age bias, reduced portability and open ended risk make defined benefit plans better suited to large employers with less mobile workforces, such as the public sector (which has open-ended support from taxpayers). Defined benefit plans are sometimes criticized as being paternalistic as they enable employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. However they are typically more valuable than defined contribution plans in most circumstances and for most employees (mainly because the employer tends to pay higher contributions than under defined contribution plans), so such criticism is rarely harsh. The "cost" of a defined benefit plan is not easily calculated, and requires an actuary or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and lifespan of the employees, the returns to be earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation in the U.S. So, for this arrangement, the benefit is relatively secure but the contribution is uncertain even when estimated by a professional.
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Examples
Many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll or other taxes. The United States Social Security system is similar to a defined benefit pension arrangement, albeit one that is constructed differently than a pension offered by a private employer. Individuals that have worked in the UK and have paid certain levels of national insurance deductions can expect an income from the state pension scheme after their normal retirement. The state pension is currently divided into two parts: the basic state pension, State Second [tier] Pension scheme called S2P. Individuals will qualify for the basic state pension if they have completed sufficient years contribution to their national insurance record. The S2P pension scheme is earnings related and depends on earnings in each year as to how much an individual can expect to receive. It is possible for an individual to forgo the S2P payment from the state, in lieu of a payment made to an appropriate pension scheme of their choice, during their working life. For more details see UK pension provision.
References
[1] "defined benefit plan" (http:/ / www. businessdictionary. com/ definition/ defined-benefit-plan. html). definition. http:/ / www. businessdictionary. com. . Retrieved 2009-05-08. [2] "BLS Information" (http:/ / www. bls. gov/ bls/ glossary. htm). Glossary. U.S. Bureau of Labor Statistics Division of Information Services. February 28, 2008. . Retrieved 2009-05-05. [3] "Glossary" (http:/ / www. citibank. com/ bahrain/ gcb/ invest/ glossary. htm). Bahrain Investment Center:Glossary of Terms. Citibank. . Retrieved 2009-05-08. [4] "Glossary of Terms" (http:/ / www. goodyearnegotiations. com/ quick_facts/ terms. html). Quick Facts. Goodyear. . Retrieved 2009-05-08. [5] "defined benefit plan" (http:/ / www. investorwords. com/ 1374/ defined_benefit_plan. html). definition. investorwords.com. . Retrieved 2009-05-08. [6] "What is a Defined Benefit Pension Plan?" (http:/ / www. newyorklife. com/ cda/ 0,3254,11545,00. html). Channels:Tax center. New York Life Precision Information, LLC. 2009. . Retrieved 2009-05-09. [7] "City employees' golden years start too soon" (http:/ / www. statesman. com/ opinion/ content/ editorial/ stories/ 05/ 07/ 0507pensions_edit. html). Opinion: EDITORIAL. statesman.com. Thursday, May 07, 2009. . Retrieved 2009-05-10. [8] The Pensions Advisory Service (http:/ / www. pensionsadvisoryservice. org. uk/ Pension_Rights/ Pension_Increases/ ). [9] Early Retirement Provisions in Defined Benefit Pension Plans. Ann C. Foster http:/ / www. bls. gov/ opub/ cwc/ archive/ winter1996art3. pdf

[10] Qualified Domestic Relations Order Handbook By Gary A. Shulman pp. 199-200 Published by: Aspen Publishers Online, 1999 ISBN 0735506655, ISBN 9780735506657. [11] "Unfunded Pension Plans" (http:/ / stats. oecd. org/ glossary/ detail. asp?ID=5310) OECD Glossary of Statistical Terms (retrieved 26 January 2009).
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External links
Defined benefit pension plan in glossary (http://www.bls.gov/bls/glossary.htm), U.S. Bureau of Labor Statistics Division of Information Services Defined Benefit Pension Plan in Glossary of Terms (http://www.goodyearnegotiations.com/quick_facts/terms. html), Goodyear Glossary (http://www.citibank.com/bahrain/gcb/invest/glossary.htm), Citibank Defined benefit plan (http://www.businessdictionary.com/definition/defined-benefit-plan.html), Business Dictionary Defined benefit plan (http://www.investorwords.com/1374/defined_benefit_plan.html), Investorwords What is a Defined Benefit Pension Plan? (http://www.newyorklife.com/cda/0,3254,11545,00.html), New York Life Retirement Plans, Benefits & Savings (http://www.dol.gov/dol/topic/retirement/typesofplans.htm), U.S. Department of Labor Defined benefit plans continue to fall: Study (http://www.businessinsurance.com/cgi-bin/news. pl?post_date=2009-05-11&id=16161), Business insurance
Defined contribution plan

In economics, a defined contribution plan is a type of retirement plan in which the amount of the employer's annual contribution is specified.[1] Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer.[2] In the United States, 26 U.S.C.414(i) [10] specifies a defined contribution plan as a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participants account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participants account.
Overview
In a defined contribution plan, fixed contributions are paid into an individual account by employers and employees. The contributions are then invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan. Money contributed can either be from employee salary deferral or from employer contributions. The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because
Defined contribution plan of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you don't need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable. In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement to use the bulk of the fund to purchase an annuity.) The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown (until calculated). Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.
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Examples
Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain agetypically the year the employee reaches 59.5 years old(with a small number of exceptions) without incurring a substantial penalty. In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see 26 U.S.C.414(i) [10]). Defined contribution plans are subject to IRS limits on how much can be contributed, known as the section 415 limit. In 2006, the total deferral amount, including employee contribution plus employer contribution, was limited to $44,000 ($46,000 in 2008) or 100% of compensation, whichever is less. The employee-only limit in 2009 is $16,500 with a $5,500 catch-up. These numbers continue to be increased each year and are indexed to compensate for the effects of inflation.
References
[1] Taylor, Don (May 21, 2009). "Retirement plans for small businesses" (http:/ / www. bankrate. com/ finance/ money-guides/ retirement-plans-for-small-businesses-1. aspx). Small Business. Bankrate.com. . Retrieved 2009-05-23. [2] "BLS Information" (http:/ / www. bls. gov/ bls/ glossary. htm). Glossary. U.S. Bureau of Labor Statistics Division of Information Services. February 28, 2008. . Retrieved 2009-05-05.
External links
Defined contribution plan in glossary (http://www.bls.gov/bls/glossary.htm), U.S. Bureau of Labor Statistics Division of Information Services Small-business retirement plans (http://www.bankrate.com/finance/money-guides/ retirement-plans-for-small-businesses-1.aspx), Bankrate Not So Golden (http://www.hreonline.com/HRE/story.jsp?storyId=210530724), Human Resource Executive Online How Worthless is Your 401(k)? (http://www.newsweek.com/id/198617), Newsweek
Defined contribution plan Putnam chief Reynolds leads effort to fix DC plans (http://www.investmentnews.com/apps/pbcs.dll/ article?AID=/20090510/REG/305109969/1031/RETIREMENT), Investment News
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Deferred compensation
Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a date after which that income is actually earned. Examples of deferred compensation include pensions, retirement plans, and stock options. The primary benefit of most deferred compensation is the deferral of tax to the date(s) at which the employee actually receives the income.
USA
In the US, Section 409A now imposes fairly detailed requirements on the timing of deferral elections and of distributions with the cudgel of imposing additional tax on the taxpayer prior to actual receipt of the deferred income if these requirements are not complied with. Reference: Dictionary.com [1] This is not tax or legal advice. Any questions relating to a specific situation should be referred to qualified counsel. While technically deferred compensation is any arrangement where an employee receives wages after they have earned them, the more common use of the phrase refers to a specific part of the tax code that provides a special benefit to corporate executives and other highly compensated corporate employees. What is deferred compensation? Deferred compensation is a written agreement between an employer and an employee where the employee voluntarily agrees to have part of their compensation withheld by the company, invested on their behalf, and given to them at some pre-specified point in the future. Deferred compensation is also sometimes referred to as deferred comp, DC, non-qualified deferred comp, NQDC or golden handcuffs. Who gets deferred comp? Deferred comp is only available to senior management and other highly compensated employees of companies. Although DC isn't restricted to public companies, there must be a serious risk that a key employee could leave for a competitor and deferred comp is a "sweetener" to try and entice them to stay. If a company is closely held (i.e. owned by a family, or a small group of related people), the IRS will look much more closely at the potential risk to the company. A top producing salesman for a pharmaceutical company could easily find work at a number of good competitors. A parent who jointly owns a business with their children is highly unlikely to leave to go to a competitor. There must be a "substantial risk of forfeiture," or a strong possibility that the employee might leave, for the plan to be tax-deferred. Among other things, the IRS may want to see an independent (unrelated) Board of Directors' evaluation of the arrangement. When is deferred comp used? ERISA, the Employee Retirement Income Security Act of 1974, created qualified plans. (They "qualify" to be considered part of ERISA). ERISA, which is too complicated to get into in this article, has a few important points that need to be mentioned, because what a non-qualified deferred comp plan is partially defined by what it's not - an ERISA plan. 1) Assets in plans that fall under ERISA (for example, a 401(k) plan) must be put in a trust for a sole benefit of its employees. If a company goes bankrupt, creditors aren't allowed to get assets inside the company's ERISA plan. Deferred comp, because it doesn't fall under ERISA, is a general asset of the corporation. While the corporation may choose to not invade those assets as a courtesy, legally they're allowed to and may be forced to give deferred compensation assets to creditors in the case of a bankruptcy. A special kind of trust called a rabbi trust (because it was first used in the compensation plan for a rabbi) may be used. A rabbi trust puts a "fence" around the money inside the corporation and protects it from being raided for most uses other than the corporation's bankruptcy/insolvency. However, plan participants may not receive a guarantee that they'll be paid prior to creditors being paid in case of insolvency. 2) ERISA plans may not discriminate in favor of highly compensated employees on a percentage basis. If the president of the company is making $1,000,000/year and a
Deferred compensation clerk is making $30,000, and the company declares a 25% profit sharing contribution, the president of the company gets to count the first $230,000 only (2008 limit) and put $57,500 into his account and $7,500 into the clerk's account. For the president, $57,500 represents only 5.75% of total income that grows tax deferred, and if the company wants to provide an additional tax incentive, DC may be an option. 3) Federal income tax rates change on a regular basis. If an executive is assuming tax rates will be higher at the time they retire, they should calculate whether or not deferred comp is appropriate. The top federal tax rate in 1975 was 70%. In 2008, it was 35%. If an executive defers compensation at 35% and ends up paying 70%, that was a bad idea. If the reverse is true, it was brilliant. Unfortunately, only time will tell, but the decision to pay the taxes once the rates have changed is irreversible so careful consideration must be given. Where are deferred comp agreements made? Plans are usually put in place either at the request of executives or as an incentive by the Board of Directors. They're drafted by lawyers, recorded in the Board minutes with parameters defined. There's a doctrine called constructive receipt, which means an executive can't have control of the investment choices or the option to receive the money whenever he wants. If he's allowed to do either of those 2 things or both, he often has to pay taxes on it right away. For example: if an executive says "With my deferred comp money, buy 1,000 shares of Microsoft stock" that's usually too specific to be allowed. If he says "Put 25% of my money in large cap stocks" that's a much broader parameter. Again, ask legal counsel for specific requirements. How do the taxes work? In an ERISA-qualified plan (like a 401(k) plan), the company's contribution to the plan is deductiable to the plan as soon as it's made, but not taxable to the participants until it's withdrawn. So if a company puts $1,000,000 into a 401(k) plan for employees, it writes off $1,000,000 that year. If the company is in the 25% bracket, the contribution actually $750,000 (because they didn't pay $250,000 in taxes - 25% of 1M). In a deferred comp plan, the company doesn't get to deduct the taxes in the year the contribution is made, they deduct them the year the contribution becomes non-forfeitable. For example, if ABC company allows SVP John Smith to defer $200,000 of his compensation in 1990, which he will have the right to withdraw for the first time in the year 2000, ABC puts the money away for John in 1990, John pays taxes on it in 2000. If John keeps working there after 2000, it doesn't matter because he was allowed to receive it (or "constructively received") the money in 2000. Other circumstances around deferred comp. Most of the provisions around deferred comp are related to circumstances the employee's control (such as voluntary termination), however deferred comp often has a clause that says in the case of the employee's death or permanent disability, the plan will immediately vest and the employee (or estate) can get the money.
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See Also
IRS web site [2] IRS article [3]
References
[1] http:/ / dictionary. reference. com/ search?q=Deferred%20compensation [2] http:/ / www. irs. gov [3] http:/ / www. irs. gov/ newsroom/ article/ 0,,id=172883,00. html
Royalties
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Royalties
Royalties (sometimes, running royalties, or private sector taxes) are usage-based payments made by one party (the "licensee") to another (the "licensor") for the right to ongoing use of an asset, sometimes an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation.[1] [2] [3] [4] [5] [6] [7] A royalty interest is the right to collect a stream of future royalty payments, often used in the oil industry and music industry to describe a percentage ownership of future production or revenues from a given leasehold, which may be divested from the original owner of the asset.[8]
Royalty cheque.
A license agreement defines the terms under which a resource or property such as petroleum, minerals, patents, trademarks, and copyrights are licensed by one party to another, either without restriction or subject to a limitation on term, business or geographic territory, type of product, etc. License agreements can be regulated, particularly where a government is the resource owner, or they can be private contracts that follow a general structure. However, certain types of franchise agreements have comparable provisions.
Non-renewable resource royalties

The owner of petroleum and mineral resources may licence a party to extract those resources while paying a resource rent, or a royalty on the value or the resultant profits. When a government is the owner of the resource the terms of the licence and the royalty rate are typically legislated or regulated. An example from Canada's North is the federal Frontier Lands petroleum royalty regime. The royalty rate is determined as an incremental rate from 15% of gross revenues until costs have been recovered, at which point the royalty rate increases to 30% of net revenues or 5% of gross revenues. In this manner risks and profits are shared between the government of Canada (as resource owner) and the petroleum developer. This attractive royalty rate is intended to encourage oil and gas exploration in the remote Canadian frontier lands where costs and risks are higher than other locations. In many jurisdictions oil and gas royalty interests are considered real property under the NAICS classification code and qualify for a 1031 like-kind exchange.[9]
Patent royalties
A patent[4] [5] gives the owner an exclusive right to prevent others from practicing the patented technology in the country issuing the patent for the term of the patent. The right may be enforced in a lawsuit for monetary damages and/or imprisonment for violation on the patent. In accordance with a patent license, royalties are paid to the patent owner in exchange for the right to practice one or more of the four basic patent rights: to manufacture with, to use, to sell, or to advertise for sale of a patented technology. Patent rights may be divided and licensed out in various ways, on an exclusive or nonexclusive basis. The license may be subject to limitations as to time or territory. A license may encompass an entire technology or it may involve a mere component or improvement on a technology. In the United States, "reasonable" royalties may be imposed, both after-the-fact and prospectively, by a court as a remedy for infringement.
Royalties
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Patent royalty rates

Patent royalty rates are influenced by the importance of the patent and its value to the products. Some realms of business have conventions regarding royalty rates and other license terms. Royalties are often computed as a percentage of the value of the finished product made by using the patent. To illustrate, the following are prevalent rates for gross sales within the United States pharmaceutical industry:[10] a pending patent on a strong business plan, royalties of the order of 1% issued patent, 1%+ to 2% the pharmaceutical with pre-clinical testing, 23% with clinical trials, 34% proven drug with US FDA approval, 57% drug with market share, 810%
Royalty rates may also be affected by whether a patent is strong (i.e. broadly written, seemingly valid) or weak; whether it is a fundamental patent or merely a slight improvement on a known technology; whether substitute technologies are available or an ability to work around the patent; the extent of the contribution of the patented technology to the value of the final product and whether there are other patents that must also be licensed (in which case there is a practical limit on how much royalty can be paid to license each). With regards to the actual rates of royalty payments in the industry, the Licensing Economics Review,[11] [12] reported in 2002 that in a review of 458 license agreements, over a 16-year period, it found that an average royalty rate of 7.0%. However, the range extended from 0% to 50%. All of these agreements may not have been at "arms length". In the Arab countries, it may be found, that a royalty as a percentage of sales may be difficult to transact; a flat fee may be preferred as percentages may be interpreted as percentage of profit.[13]
Know-how royalties
In addition to licensing the applicable patents, a company may need to learn how to manufacture a product. This knowledge, standing alone or together with a patent license, may be obtained through a know-how license. Know-how is trade secret information in combination with data, techniques, or human and intellectual expertise, that helps a company exploit a licensed technology. Know-how may help a company achieve better operational efficiency, manufacturing productivity, or product/system quality. Know-how royalties may be stated as distinct from patent royalties since their periods of validity vary. The rates vary widely.
Trademark royalties
Trademarks are words, logos, slogans, sounds, or other distinctive expressions that distinguish the source, origin, or sponsorship of a good or service (in which they are generally known as service marks). Trademarks offer the public a means of identifying and assuring themselves of the quality of the good or service. They may bring consumers a sense of security, integrity, belonging, and a variety of intangible appeals. The value that inures to a trademark in terms of public recognition and acceptance is known as goodwill. A trademark right is an exclusive right to sell or market under that mark within a geographic territory. The rights may be licensed to allow a company other than the owner to sell goods or services under the mark. A company may seek to license a trademark it did not create in order to achieve instant name recognition rather than accepting the cost and risk of entering the market under its own brand that the public does not necessarily know or accept. Licensing a trademark allows the company to take advantage of already-established goodwill and brand identification. Like patent royalties, trademark royalties may be assessed and divided in a variety of different ways, and are expressed as a percentage of sales volume or income, or a fixed fee per unit sold. When negotiating rates, one way
Royalties companies value a trademark is to assess the additional profit they will make from increased sales and higher prices (sometimes known as the "relief from royalty") method. Trademark rights and royalties are often tied up in a variety of other arrangements. Trademarks are often applied to an entire brand of products and not just a single one. Because trademark law has as a public interest goal the protection of a consumer, in terms of getting what they are paying for, trademark licenses are only effective if the company owning the trademark also obtains some assurance in return that the goods will meet its quality standards. When the rights of trademark are licensed along with a know-how, supplies, pooled advertising, etc., the result is often a franchise relationship. Franchise relationships may not specifically assign royalty payments to the trademark license, but may involve monthly fees and percentages of sales, among other payments.
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Trademark royalty rates

In a long-running dispute in the United States involving the valuation of the DHL trademark of DHL Corporation,[14] it was reported that experts employed by the IRS surveyed a wide range of businesses and found a broad range of royalties for trademark use from a low of 0.7% to a high of 15%.
Franchises
While a payment to employ a trademark licence is a royalty, it is accompanied by a "guided usage manual", the use of which may be audited from time to time. However, this becomes a supervisory task when the mark is used in a franchise agreement for the sale of goods or services carrying the reputation of the mark. For a franchise, it is said, a fee is paid, even though it comprises a royalty element. To be a franchise, the agreement must be a composite of three items: the right to use a trademark to offer, sell or distribute goods or services (the trademark element) payment of a required royalty or fee (the fee element) significant assistance or control with respect to the franchisees business (the supervisory element) One of the above three items must not apply for the franchise agreement to be considered a trademark agreement (and its laws and conventions). In a franchise, for which there is no convention, laws apply concerning training, brand support, operating systems/support and technical support in a written format ("Disclosure").[15]
Copyright
Copyright law gives the owner the right to prevent others from copying, creating derivative works, or publicly performing their works. Copyrights, like patent rights, can be divided in many different ways, by the right implicated, by specific geographic or market territories, or by more specific criteria. Each may be the subject of a separate license and royalty arrangements. Copyright royalties are often very specific to the nature of work and field of endeavor. With respect to music, royalties for performance rights in the United States are set by the Library of Congress' Copyright Royalty Board. Mechanical rights to recordings of a performance are usually managed by one of several performance rights organizations. Payments from these organizations to performing artists are known as residuals. Royalty free music provides more direct compensation to the artists. In 1999, recording artists formed the Recording Artists' Coalition to repeal supposedly "technical revisions" to American copyright statutes which would have classified all "sound recordings" as "works for hire", effectively assigning artists' copyrights to record labels.[16] [17] Book authors may sell their copyright to the publisher. Alternatively, they might receive as a royalty a certain amount per book sold. It is common in the UK for example, for authors to receive a 10% royalty on book sales. Some photographers and musicians may choose to publish their works for a one-time payment. This is known as a royalty-free license.
Royalties
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Book publishing royalties

Except in the rarity of cases where book writers can demand high advances and royalties, an author's royalty rate is dictated by their publisher. All book-publishing royalties are paid by the publisher. For the predominant case, the publishers advance an amount (part of the royalty) which can constitute the bulk of the authors total income plus whatever little flows from the "running royalty" stream. Some costs may be attributed to the advance paid, which depletes further advances to be paid or from the running royalty paid. The author and the publisher can independently draw up the agreement that binds them or alongside an agent representing the author. There are many risks for the author definition of cover price, the retail price, "net price", the discounts on the sale, the bulk sales on the POD (publish on demand) platform, the term of the agreement, audit of the publishers accounts in case of impropriety, etc. which an agent can provide. The following illustrates the income to an author on the basis chosen for royalty, particularly in POD which minimizes losses from inventorying and is based on computer technologies.
Retail Basis Cover Price Discount to Booksellers Wholesale Price, $ 15.00 50% 7.50 Net Basis 15.00 50% 7.50 3.50 4.00 20% 0.20x4 0.80
Printing Cost,$ (200 pp Book) 3.50 Net Income,$ Royalty Rate Royalty Calcn. Royalty,$ 4.00 20% 0.20x15 3.00
|+ Book-publishing Royalties - "Net" and "Retail" Compared Hardback royalties on the published price of trade books usually range from 10% to 12.5%, with 15% for more important authors. On paperback it is usually 7.5% to 10%, going up to 12.5% only in exceptional cases. All the royalties displayed below are on the "cover price". Paying 15% to the author can mean that the other 85% of the cost pays for editing and proof-reading, printing and binding, overheads, and the profits (if any) to the publisher. The publishing company pays no royalty on bulk purchases of books since the buying price may be a third of the cover price sold on an singles basis. In the US there is no "maximum retail price" for books (whereas there is in the UK) which can serve as a calculation basis.
Music royalties
Unlike other forms of intellectual property, music royalties have a strong linkage to individuals composers (score), songwriters (lyrics) and writers of musical plays in that they can own the exclusive copyright to created music and can license it for performance independent of corporates. Recording companies and the performing artists that create a "sound recording" of the music enjoy a separate set of copyrights and royalties from the sale of recordings and from their digital transmission (depending on national laws). With the advent of pop music and major innovations in technology in the communication and presentations of media, the subject of music royalties has become a complex field with considerable change in the making. A musical composition obtains protection in copyright law immediate to its reduction to tangible form a score on paper or a taping; but it is not protected from infringed use unless registered with the copyright authority; for instance, the Copyright Office in the United States, administered by the Library of Congress. No person or entity,
Royalties other than the copyright owner, can use or employ the music for gain without obtaining a license from the composer/songwriter. Inherently, as copyright, it confers on its owner, a distinctive "bundle" of five exclusive rights: (a) to make copies of the songs through print or recordings (b) to distribute them to the public for profit (c) to the "public performance right"; live or through a recording (d) to create a derivative work to include elements of the original music; and (e) to "display" it (not very relevant in context). Where the score and the lyric of a composition are contributions of different persons, each of them is an equal owner of such rights. These exclusivities have led to the evolution of distinct commercial terminology used in the music industry. They take four forms: (1) royalties from "print rights" (2) mechanical royalties from the recording of composed music on CDs and tape (3) performance royalties from the performance of the compositions/songs on stage or television through artists and bands, and (4) synch (for synchronization) royalties from using or adapting the musical score in the movies, television advertisements, etc. and With the advent of the internet, an additional set of royalties has come into play: the digital rights from simulcasting, webcasting, streaming, downloading, and online "on-demand service". In the following the terms "composer" and "songwriter" (either lyric or score) are synonymous.
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Print rights in music

Brief history While the focus here is on royalty rates pertaining to music marketed in the print form or "sheet music", its discussion is a prelude to the much more important and larger sources of royalty income today from music sold in media such as CDs, television and the internet. Sheet music is the first form of music to which royalties were applied, which was then gradually extended to other formats. Any performance of music by singers or bands requires that it be first reduced to its written sheet form from which the "song" (score) and its lyric are read. Otherwise, the authenticity of its origin, essential for copyright claims will be lost as has been the case with folk songs and American "westerns" propagated by the aural tradition. The ability to print music arises from a series of technological developments in print and art histories over a long span of time (from the 11th to the 18th century) of which two will be highlighted. The first, and commercially successful, invention was the development of the "movable type" printing press, the Gutenberg press in the 15th century. It was used to print the well-known Gutenberg bible and later the printing system enabled printed music. Printed music, till then, tended to be one line chants. The difficulty in using movable type for music is that all the elements must align the note head must be properly aligned with the staff, lest it have an unintended meaning. Musical notation was well developed by then, originating around 1025. Guido d'Arezzo developed a system of pitch notation using lines and spaces. Until this time, only two lines had been used. Guido expanded this system to four lines, and initiated the idea of ledger lines by adding lines above or below these lines as needed. He used square notes called neumes. This system eliminated any uncertainty of pitch which existed at that time. Guido also developed a system of clefs, which became the basis for our clef system: bass clef, treble clef, and so on.
Royalties (Co-existing civilizations used other forms of notation). In Europe, the major consumers of printed music in the 17th and 18th centuries were the royal courts for both solemn and festive occasions. Music was also employed for entertainment, both by the courts and the nobility. Composers made their livings from commissioned work, and worked as conductors, performers and tutors of music or through appointments to the courts. To a certain extent, music publishers also paid composers for rights to print music, but this was not royalty as it is generally understood today. The European Church was also a large user of music, both religious and secular. However, performances were largely based on hand-written music or aural training. American contribution: The Origins of Music Copyright and Royalties Till the mid-18th century American popular music largely consisted of songs from the British Isles, whose lyric and score were sometimes available in engraved prints. Mass production of music was not possible till the movable type was introduced. Music with this type was first printed in the US in 1750.[18] At the beginning the type consisted of the notehead, stem and staff which were combined into a single font. Later the fonts were made up of the notehead, stems and flags attached to the staff line. Prints till that time existed only on engraved plates. The first federal law on copyright was enacted in the US Copyright Act of 1790 which made it possible to give protection to original scores and lyrics. America's most prominent contribution is jazz and all the music styles which preceded and co-exist with it its variations on church music, African-American work songs, cornfield hollers, wind bands in funeral procession, blues, rag, etc. and of innovations in church music, rhythmic variations, stamping, tapping of feet, strutting, shuffling, wailing, laments and spiritual ecstasy. Until its recent sophistication, jazz was not amenable to written form, and thus not copyrightable, due to its improvisational element and the fact that many of the creators of this form could not read or write music.[19] It was its precursor, minstrelsy which came to be written and royalties were paid for the use of popular music. Blackface minstrelsy, in which white men parodied black music of the day with blackened faces was the first distinctly theatrical form. In the 1830s and 1840s, it was at the core of the rise of an American music industry. For several decades it provided the means through which white America saw black America. The blackfaces were not products of the American South, but first prevailed in the midwest and the north, starting in low-level white establishments, and later moving to upscale theaters. White, working-class northerners could identify with the characters portrayed in early performances with images of "white slavery" and "wage slavery".[20] In 1845, the blackfaces purged their shows of low humor. Christy's Minstrels, formed by C.F. Christy, among the major minstrels of that time, was to epitomize the songs of its most renknowned composer, Stephen Foster. Stephen Foster was the pre-eminent songwriter in the United States of that time. His songs, such as "Oh! Susanna", "Camptown Races", "My Old Kentucky Home", "Beautiful Dreamer" and "Swanee River") remain popular 150 years after their composition and have worldwide appreciation.[21] Foster had little formal music training. While he was able to publish several songs before he was twenty, his sophistication came from Henry Kleber and Dan Rice. Kleber was a classically trained German immigrant, and Rice was a popular blackface performer who befriended Foster. But it was his joining the Christy Minstrels which made him and his songs, North American favorites. W.C. Peters was the first major publisher of Fosters works, but Foster saw very little of the profits. "Oh, Susanna" was an overnight success and a Goldrush favorite but Foster received just $100 from his publisher for it, in part due to his lack of interest in money and the free gifts of music he gave to him. Foster's first love lay in writing music and its success. Foster did later contract with Christy, with $15 each for "Old Folks at Home" and "Farewell my Lilly Dear". "Oh, Susanna" also led Foster to two New York publishers, Firth, Pond and Co. and F.D. Benson who contracted with him to pay royalty at 2 cents for every printed copy sold by them.[22]
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Royalties Minstrelsy slowly gave way to songs generated by the American Civil War, followed by the rise of Tin Pan Alley and Parlour music,[23] both of which led to an explosion of sheet music, greatly aided by the emergence of the player piano. While the player piano was to make inroads deep into the 20th century, more and more music was reproduced through radio and the phonograph, leading to new forms of royalty payments, but leading to the decline of sheet music. American innovations in church music also provided royalties to its creators. While Stephen Foster is often credited as the originator of print music in America, William Billings is the real father of American music. In 1782, of the 264 music compositions in print, 226 were his church-related compositions. Similarly, Billings was the composer of a quarter of the 200 anthems published till 1810. He, or his family, saw no royalties although the Copyright Act of 1790 was in place by then. Church music plays a significant part in American print royalties. When the Lutheran Church split from the Catholic Church in the 16th century, more than religion changed. Martin Luther wanted his entire congregation to take part in the music of his services, not just the choir. This new chorale style finds its way in both present church music and jazz.
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Print royalties (music)

The royalty rate for printing a book, or its download,(a novel, lyrics or music) for sale varies from 820% of the suggested retail sales value, typically 1214%, for a new writer. The payment is made by the publisher and corresponds to the agreement (license) between the writer and the publisher as with other music royalties. The agreement is typically non-exclusive to the publisher and the term may vary from 35 years. Established writers favor certain publishers and usually receive higher royalties. All of the royalty does not accrue to the writer. It is shared with the publisher on of book sales income on a 50:50 basis. Publishing encompasses the whole area of administering, exploiting and promotion of the musical work, not just the print rights; in forms as piano and vocal arrangements, as folios, movies and obtaining foreign publication, etc. If a book involved is a play, it might be dramatized. The right to dramatize is a separate right known as a grand right. This income is shared by the many personalities and organizations who come together to offer the play: the playwright, composer of the music played, producer, director of the play and so forth. There is no convention to the royalties paid for grand rights and it is freely negotiated between the publisher and the mentioned participants. If the writers work is only part of a publication, then the royalty paid is pro-rata, a facet which is more often met in a book of lyrics or in a book of hymns and sometimes in an anthology. Church music that is, music that is based on written work is important particularly in the Americas and in some other countries of Europe. Examples are hymns, anthems and songbooks. Unlike novels and plays, hymns are sung with regularity. Very often, the hymns and songs are sung from lyrics in a book, or more common nowadays, from the work projected on computer screen. When the lyrics from a song are so projected, the same copyright laws apply as if sheet music or the hymn books have been purchased. A lyric reprint license is required by Federal copyright law to compensate the songwriter for using their work. By license the author exempts the songs sung in worship; however, songs sung (even in worship) from reproductions as photocopies or from projections are subject to license. In the US, the Christian Copyright Licensing Incorporated is the collection agency for royalties but song or hymn writers have to be registered with them and the songs identified.[24]
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Foreign publishing
Viewed from a US perspective, foreign publishing involves two basic types of publishing sub-publishing and co-publishing occurrences in one or more territories outside that of basic origin. Sub-publishing, itself, is one of two forms: sub-publishers who merely license out the original work or those which make and sell the products which are the subject of the license, such as print books and records (with local artists performing the work). Sub-publishers who produce and market a product retain 1015% of the marked retail price and remit the balance to the main publisher with whom they have the copyright license. Those sub-publishers who merely license out the work earn between 1525%.[25] Co-publishing takes place when there is more than one publisher and it arises usually when there is more than one writer on a work. Each writer then has his or her own publishing company who together then become Co-publishers.
Mechanical royalties
The term "mechanical" and mechanical license has its origins in the "piano rolls" on which music was recorded in the early part of the 20th Century. Although its concept is now primarily oriented to royalty income from sale of compact discs (CDs), its scope is wider and covers any copyrighted audio composition that is rendered mechanically; that is, without human performers: tape recordings music videos ringtones MIDI files downloaded tracks DVDs, VHS, UMDs computer games musical toys etc.
The United States treatment of mechanical royalties is in sharp contrast to international practice. In the United States, while the right to use copyrighted music for making records for public distribution (for private use) is an exclusive right of the composer, the Copyright Act provides that once the music is so recorded, anyone else can record the composition/song without a negotiated license but on the payment of the statutory compulsory royalty. Thus, its use by different artists could lead to several separately-owned copyrighted "sound recordings". The following is a partial segment of the compulsory rates as they have applied from 1998 to 2007 in the United States.[26] The royalty rates in the table comprise of two elements: (i) a minimum rate applies for a duration equivalent to 5 minutes, or less, of a musical composition/song and (ii) a per-minute rate if the composition exceeds it, whichever is greater.
Compulsory Mechanical Royalty Rates - United States

Period Royalty Rate
01-01-1998 12-31-1999 7.10 cents or 1.35 cents/min 01-01-2000 12-31-2001 7.55 cents or 1.43 cents/min 01-01-2002 12-31-2003 8.00 cents or 1.55 cents/min 01-01-2004 12-31-2005 8.50 cents or 1.65 cents/min 01-01-2006 12-31-2007 9.10 cents or 1.75 cents/min
In the predominant case, the composer assigns the song copyright to a publishing company under a "publishing agreement" which makes the publisher exclusive owner of the composition. The publisher's role is to promote the
Royalties music by extending the written music to recordings of vocal, instrumental and orchestral arrangements and to administer the collection of royalties (which, as will shortly be seen, is in reality done by specialized companies). The publisher also licenses 'subpublishers' domestically and in other countries to similarly promote the music and administer the collection of royalties. In a fair publishing agreement, every 100 units of currency that flows to the publisher gets divided as follows: 50 units go to the songwriter and 50 units to the publisher minus operating and administrative fees and applicable taxes. However, the music writer obtains a further 25 units from the publisher's share, if the music writer retains a portion of the music publishing rights (as a co-publisher). In effect, the co-publishing agreement is a 50/50 share of royalties in favor of the songwriter if administrative costs of publishing are disregarded. This is near international practice. When a company (recording label) records the composed music, say, on a CD master, it obtains a distinctly separate copyright to the sound recording, with all the exclusivities that flow to such copyright. The main obligation of the recording label to the songwriter and her publisher is to pay the contracted royalties on the license received. While the compulsory rates remain unaffected, recording companies, in the U.S., will, typically, negotiate to pay not more than 75% of the compulsory rate where the songwriter is also the recording artist[27] and will further (in the U.S.) extend that to a maximum of 10 songs, even though the marketed recording may carry more than that number. This 'reduced rate' results from the incorporation of a "controlled composition" clause in the licensing contract[28] since the composer as recording artist is seen to control the content of the recording. Mechanical royalties for music produced outside of the United States are negotiated there being no compulsory licensing and royalty payments to the composer and her publisher for recordings are based on the wholesale, retail, or "suggested retail value" of the marketed CDs. Recording artists earn royalties only from the sale of CDs and tapes and, as will be seen later, from sales arising from digital rights. Where the song-writer is also the recording artist, royalties from CD sales add to those from the recording contract. In the U.S., recording artists earn royalties amounting to 10%25% (of the suggested retail price of the recording[29] depending on their popularity but such is before deductions for "packaging", "breakage", "promotion sales" and holdback for "returns", which act to significantly reduce net royalty incomes. In the U.S., the Harry Fox Agency, HFA, is the predominant licensor, collector and distributor for mechanical royalties, although there are several small competing organizations. For its operations, it charges about 6% as commission. HFA, like its counterparts in other countries, is a state-approved quasi-monopoly and is expected to act in the interests of the composers/song-writers and thus obtains the right to audit record company sales. In the UK the Mechanical-Copyright Protection Society, MCPS (now in alliance with PRS), acts to collect (and distribute) royalties to composers, songwriters and publishers for CDs and for digital formats. It is a not-for-profit organization which funds its work through a commissions on aggregate revenues. The royalty rate for licensing tracks is 6.5% of retail price (or 8.5% of the published wholesale price). In Europe, the major licensing and mechanical royalty collection societies are: SACEM in France[30] GEMA in Germany[31] SFA in Italy[32] SACEM acts collectively for "francophone" countries in Africa. The UK society also has strong links with English-speaking African countries. Mechanical societies for other countries can be found at the main national collection societies.[33] The mechanical royalty rate paid to the publisher in Europe is about 6.5% on the PPD (published price to dealers).[34]
758
Royalties Record companies are responsible for paying royalties to those artists who have performed for a recording based on the sale of CDs by retailers.
759
Performance royalties
"Performance" in the music industry can include any of the following: a performance of a song or composition live, recorded or broadcast a live performance by any musician a performance by any musician through a recording on physical media performance through the playing of recorded music music performed through the web (digital transmissions)
It is useful to treat these royalties under two classifications: (a) those associated with conventional forms of music distribution which have prevailed for most part of the 20th Century, and (b) those from emerging 'digital rights' associated with newer forms of communication, entertainment and media technologies (from 'ring tones' to 'downloads' to 'live internet streaming'. Conventional forms of royalty payment In the conventional context, royalties are paid to composers and publishers and record labels for public performances of their music on vehicles such as the jukebox, stage, radio or TV. Users of music need to obtain a "performing rights license" from music societies as will be explained shortly to use the music. Performing rights extend both to live and recorded music played in such diverse areas as cafs, skating rinks, etc. Licensing is generally done by music societies called "Performing Rights Organizations" (PROs), some of which are government-approved or government-owned, to which the composer, the publisher, performer (in some cases) or the record label have subscribed. The diagram on the right titled "The Performance Rights Complex"[35] shows the general sequences by which a song or a composition gets to be titled a "performance" and which brings royalties to song-writers/publishers, performing artists and record labels. How, and to whom, royalties are paid is different in the United States from what it is, for example, in the UK. Most countries have "practices" more in common with the UK than the US. In the United Kingdom there are three principal organizations: (i) PPL (for Phonographic Performance Ltd) (ii) PRS (for Performing Rights Society), and (iii) MCPS (for Mechanical Copyright Protection Society) who license music (to music-users) and act as royalty collection and distribution agencies for their members. PPL which is claimed to be the largest in the world[36] issues performance licenses to all UK radio, TV and broadcast stations, as also to such diverse users as clubs and bars who employ sound recordings (tapes, CDs), in entertaining the public and collects and distributes royalties to the "record label" for the sound recording and to "featured UK performers" in the recording. Performers do not earn from sound recordings on video and film. PRS, which is now in alliance with MCPS,[37] collects royalties from music-users and distributes them directly to "song-writers" and "publishers" whose works are performed live, on radio or on TV on a 50:50 basis. MCPS licenses music for broadcast in the range 3 to 5.25% of net advertising revenues.[38]
Royalties MCPS also collects and disburses mechanical royalties to writers and publishers in a manner similar to PRS. Although allied, they serve, for now, as separate organizations for membership. The next diagram shows the sequences in the licensing of performances and the royalty collection and distribution process in the UK.[35] Every song or recording has a unique identity by which they are licensed and tracked. Details of songs or recordings are notified to the PROs directly, or through Catco, an electronic tracking system. It needs to be clarified that while blanket licenses are commonly issued to music-users, the latter are responsible for "usage returns" the actual frequency of performances under the license which then becomes the basis for the PRO to apportion royalties to writers, publishers and record labels. ("DIY indies" are "do-it-yourself" independent song-writers and, often, the performers as well who record and publish under their own labels). In the UK, music is licensed (and royalties paid on it) at the track level. There is also a separate organization in the UK called VPL, which is the collecting society set up by the record industry in 1984 to grant licenses to users of music videos, e.g. broadcasters, program-makers, video jukebox system suppliers.[39] The licensing income collected from users is paid out to the society's members after administrative costs are deducted. There are different models for royalty collection in the European countries. In some of them, mechanical and performing rights are administered jointly. SACEM (France), SABAM (Belgium), GEMA (Germany) and JASRAC (Japan) work that way. In the United States, in contrast, the ASCAP, BMI (Broadcast Music, Inc) and SESAC (Society of European Stage Authors & Composers) are the three principal Performance Rights Organizations (PROs), although smaller societies exist. The royalty that is paid to the composer and publisher is determined by the method of assessment used by the PRO to gage the utilization of the music, there being no external metrics as in mechanical royalties or the reporting system used in the UK. Very basically, a PRO aggregates the royalties that are due to all of the composers/songwriters "who are its members" and each composer and publisher is paid royalties based on the assessed frequency of the musics performance, post deductions of charges (which are many). The PROs are audited agencies. They "directly" pay the songwriter and the publisher their respective shares. (If part of the publisher's share is retained by the songwriter, the publisher pays the songwriter that part of the publisher's share). Typically, the PRO negotiates blanket licenses with radio stations, television networks and other "music users", each of whom receives the right to perform any of the music in the repertoire of the PRO for a set sum of money. PROs use different types of surveys to determine the frequency of usage of a composition/song. ASCAP uses random sampling, SESAC utilizes cue sheets for TV performances and digital pattern recognition for radio performances while BMI employs more scientific methods. In the United States only the composer and the publisher are paid performance royalties and not performing artists (digital rights being a different matter). Likewise, the record label, whose music is used in a performance, is not entitled to royalties in the US on the premise that performances lead sales of records.
760
Royalties Where a performance has co-writers along with the composer/songwriter as in a musical play they will share the royalty.
761
Royalties in digital distribution

The term "digital music" typically applies to Internet and wireless (mobile) technologies. Digital music files can be identified by serial numbers embedded in the data ('watermarking') or natural patterns in the data ("fingerprinting"). Digital music have begun to give music a different direction by their capacities to internationally distribute the music for instant hearing or storage by private and public persons. Digital music is generally expected to become the predominant form by which music is 'used' in the longer term. Nonetheless, compact discs will continue to be the major form of musical reach and storage for the present. For example, revenues from the sales of CDs in the US in 2007 far outweighed that from digital downloads, representing some 85% of music sales, or 81 million units per quarter.[40] Also, as the following data illustrates, the amount of music (tracks) available on CDs (stored music) is extremely large compared to what is available in digital format:[41] PPLs CatCo holds details of over 7 million recordings There are 15 million published works with ISWC codes (and many more without) The Gracenote database[42] (CDDB) holds details of 51 million tracks Around half a million new tracks are formally released every year.
In contrast to: RealNetworks license 60,000 albums for home entertainment services. The USA digital jukebox suppliers license about 200,000 tracks. There are over 2 million on XM Satellite Radio (Sirius has over 500,000). UK Inspired Broadcast Network jukebox THE music offers 2 million tracks. RedDotNets kiosk system has over 2.5 million tracks online. There are about 6 million retail tracks on iTunes Music Store. Kazaa[43] has about 1 million tracks. Last.fm[44] has a music-discovery database of 60 million titles.
Nonetheless, there has been a decline in CD sales since 2000 in the US (perhaps less so in the EU). At the same time, digital tracks legally downloaded from the internet continue to be a growing force, track downloads totalling 417.3 million units in the first half of 2007 a 48.5% increase over the corresponding period last year according to Nielsen SoundScan.[45] Apple Inc's sale of over 100 million iPods and the strong presence of iTunes and eMusic (a subscription service) in the US, and now in EU and in other 18 countries, testify to the strong emergence of digital music. This is further emphasized by the large presence of internet broadcasts of live and internet-only radio stations ("streamed music"). They represent the "buy" and "listen" choices. US regulatory provisions Regulatory provisions in the US, EU and elsewhere is in a state of flux, continuously being challenged by developments in technology; thus almost any regulation stated here exists in a tentative format. The US Copyright Act of 1976 identified musical works and sound recordings eligible for copyright protection. The term musical work refers to the notes and lyrics of a song or a piece of music, while a sound recording results from its fixation on physical media. Copyright owners of musical works are granted exclusive rights to license over-the-air radio and TV broadcasts, entitling them royalties, which are, as said earlier, collected and distributed by the PROs. Under the Act, record companies and recording artists are, presently, not entitled to royalties from radio and TV broadcasts of their music, except in the case of digital services and webcasts where copyright owners and performers obtain royalties (see later). This is in contrast to international standards where performers also obtain royalties from over-the-air and digital broadcasting.
Royalties In 1995, the Congress introduced the Digital Performance Right in Sound Recordings Act (DPRA), which became effective Feb 1, 1996. This Act granted owners of sound recordings the exclusive license to perform the copyrighted work publicly by means of digital audio transmissions but it exempted non-subscription services (and some other services). Where the rights owner could not voluntarily reach agreement with the broadcaster, it could avail of compulsory licensing provisions. Under the Act, the compulsory royalty (the royalty schedule follows) was to be shared in the manner: 50% to the record companies, 45% to featured artists, 2 % to non-featured musicians through American Federation of Musicians (AFM) in the United States and Canada[46] and 2% for non-featured vocalists through American Federation of Television and Radio Artists (AFTRA).[47] United States Congress also created a new compulsory license for certain subscription digital audio services, which transmit sound recordings via cable television and Direct-broadcast satellite (DBS) on a non-interactive basis in the absence of a voluntary negotiation and agreement. In 1998, the Congress amended DPRA to create the Digital Millennium Copyright Act (DMCA) by redefining the above-noted subscription services of DPRA as preexisting subscription services and expanded the statutory license to include new categories of digital audio services that may operate under the license. In effect, DMCA created three categories of licensees: 1. pre-existing satellite digital audio radio services 2. new subscription services, and 3. eligible non-subscription transmission services. In addition to the above, a fourth license was created permit webcasters to make ephemeral recordings of a sound recording (temporary copies) to facilitate streaming but with a royalty to be paid. Non-subscription webcasting royalties have also to be shared between record companies and performers in the proportions set out under DPRA. The Table below titled SUMMARY OF STATUTORY ROYALTY RATES FOR DIGITAL WEBCASTING UNITED STATES encapsulates the royalties set for non-interactive webcasting. To qualify for compulsory licensing under non-subscription services, the webcasting needs to fit the following six criteria: it is non-interactive it does not exceed the sound recording performance complement it is accompanied by information on the song title and recording artist it does not publish a program schedule or specify the songs to be transmitted it does not automatically switch from one program channel to another, and it does not allow a user to request songs to be played particularly for that user.
762
An inter-active service is one which allows a listener to receive a specially created internet stream in which she dictates the songs to be played by selecting songs from the website menu. Such a service would take the website out from under the compulsory license and require negotiations with the copyright owners. However, a service is non-interactive if it permits people to request songs which are then played to the public at large. Nonetheless, several rules apply such as, within any three-hour period, three cuts from a CD, but no more than two cuts consecutively can be played, or a site can play four songs from any singer from a boxed CD-set, but no more than three cuts consecutively. The SoundExchange, a non-profit organization, is defined under the legislation to act on behalf of record companies (including the majors) to license performance and reproduction rights and negotiate royalties with the broadcasters. It is governed by a board of artist and label representatives. Services include track level accounting of performances to all members and collection and distribution of foreign royalties to all members.[48] In the absence of a voluntary agreement between the SoundExchange and the broadcasters, Copyright Arbitration Royalty Panel (CARP) was authorized to set the statutory rates as could prevail between a "willing buyer" and
Royalties "willing sellers". SoundExchange handles only the collection of royalties from "compulsory licenses" for non-interactive streaming services that use satellite, cable or internet methods of distribution. To recap, under the law three types of licenses are required for streaming of musical recordings: (a) a performance license applicable for underlying words( lyrics) and music (score) (b) a performance license applicable to the streaming the sound recording (c) a storage license for the passage of a sound recording through a file server The royalties for the first of the above two licenses are obtained from SoundExchange and the third from the PROs. Failure to make required payments constitutes copyright infringement and is subject to statutory damages. Both broadcasters involved in webcasting and pure-Internet non-broadcasters are required to pay these royalties under the rules framed under the Act. All webcasters are also required to be registered with the United States Copyright Office. SUMMARY OF STATUTORY ROYALTY RATES FOR DIGITAL WEBCASTING - UNITED STATES[49]
1. Webcaster DMCA Compliant Service Performance Fee (per performance) 0.07 Ephemeral Licence Fee
763
(a)Simultaneous internet retransmission of over-the-air AM or FM radio broadcasts (b)All other internet transmission
9% of performance fees due 9% of performance fees due
0.14
2. Commercial Broadcaster DMCA Compliant Service Performance Fee (per performance) 0.07 Ephemeral Licence Fee
0.14
3. Non-CPB, non-commercial broadcasts: DMCA Compliant Service Performance Fee (per performance) 0.02 Ephemeral Licence Fee
0.05
Royalties
764
4. Business Establishment Service: DMCA Compliant Service Performance Fee (per performance) Statutorily Exempt Ephemeral Licence Fee
(a)Simultaneous internet retransmission of over-the-air AM or FM radio broadcasts Minimum Fee
10% of gross proceeds
All Cases
$500 per year for each licensee
UK legislation The United Kingdom adopted the European Copyright Directive (EUCD) in 2003 and the meaning of broadcast performance was broadened to cover "communicating to the public". This then included music distribution through the internet and the transmission of ringtones to mobiles. Thus a music download was a "copy" of proprietary music and hence required to be licensed. After a prolonged battle on royalties between online music companies such as AOL, Napster and the recording companies (but not all of them), represented by the British Phonographic Industry (BPI), and organizations representing the interests of songwriters (MCPS and PRS) a compromise was reached, leading to a subsequent 3-year interim legislation (2007) adopted by the UK Copyright Tribunal under the Copyright, Designs and Patents Act 1988.[50] The legislation, referring to a new JOL (Joint Online License), applies only to music purchased within UK. The applicable royalties are given in the Table below which, interestingly, also includes music downloads and music services through mobile devices. This path-breaking legislation is expected to become the model for EU (which is yet to develop comprehensive legislation), and perhaps even extend to the US. Note that the new legislation includes the distinction between downloads of musical tracks from iTunes and other stores, which were considered "sales" and the webcasts considered "performances". In brief, the compromise reached is that songwriters will receive 8% of gross revenues (definition follows), less VAT, as royalty for each track downloaded bridging the demand of the artists demanding a 12% royalty rate (what was, otherwise, the norm for a CD) and music companies holding out for 6.5%, slightly higher than the 5.7% paid for a 79p track sold by iTunes.[51] A minimum of four pence will be paid, in the new legislation, if tracks are discounted. The terms used in the legislated Table are explained following it.
Digital Royalties - Interim Settlement, United Kingdom - 2007

Service Royalty Rate 8% Minimum
Permanent Download
0.04 per download - reducing by degrees for larger bundles of tracks, or certain older tracks, to 0.02 (in respect of a bundle 0f 30 tracks+) Mobile subscription: 0.60/subscriber/month PC subscription: 0.40/subscriber/month Limited Subscription: 0.20/subscriber/month All others: 0.0022 per musical work communicated to the public Subscription: 0.0022 per musical work (if not subscription); if the service is subscription, minimum to be negotiated
Limited Download or On Demand Service
8%
Special Webcasting (premium or 8% interactive service where 50%+ of content is by single band/artist) Premium or interactive webcasting 6.5%
Subscription: 0.22/subscriber/month;otherwise, 0.00085 per musical work communicated to the public
Royalties
765
6.5% Subscription 0.22/subscriber/month; otherwise 0.0006/musical work communicated to the public
Pure webcasting
Service Mobile or Permanent downloads and other mobile services
Royalty Rate and Minimum Rates and minima as per services above, except that: For mobile Permanent Downloads, revenue is reduced by 15% For all other Mobile services revenue is reduced by 7.5% The above reductions to apply until prices converge with non-mobile services.
Not all music providers in the UK were part of the compromise that led to the legislation. For those not participating - principally, AOL, Yahoo! and RealNetworks - the Tribunal set the royalty rate for pure webcasting at 5.75%. UK legislation recognizes the term online as referring to downloading digital files from the internet and mobile network operators. Offline is the term used for the delivery of music through physical media such as a CD or a DVD. A stream is a file of continuous music listened to through a consumers receiving device with no playable copy of the music remaining. Permanent Downloads are transfers (sale) of music from a website to a computer or mobile telephone for permanent retention and use whenever the purchaser wishes, analogous to the purchase of a CD. A Limited Download is similar to a permanent download but differs from it in that the consumers use of the copy is in some way restricted by associated technology; for instance, becomes unusable when the subscription ends (say, through an encoding, such as DRM, of the downloaded music). On-demand streaming is music streamed to the listener on the computer or mobile to enable her to listen to the music once, twice or a number of times during the period of subscription to the service. Pure Webcasting is where the user receives a stream of pre-programmed music chosen "by the music service provider". It is non-interactive to the extent that even pausing or skipping of tracks is not possible. Premium and Interactive Webcasting are personalized subscription services intermediate between pure webcasting and downloading. Special webcasting is a service where the user can choose a stream of music, the majority of which comprises works from one source an artist, group or particular concert. Simulcasting, although not in the Table above, is the simultaneous re-transmission by a licensed transmission of the program of a radio or TV station over the internet of an otherwise traditional broadcast. The person receiving the simulcast normally makes no permanent copy of it. It is defined in the legislation as an offline service. Gross Revenue, which is comprehensively defined in the legislation, summarized here, means, all revenue received (or receivable) by the licensee from Users, all revenue received through advertisements associated with the music service, sponsorship fees, commissions from third parties and revenue arising from barter or contra deals. No deductions are permitted except for refunds of unused music due to technical faults. The advertising revenue which is shared between the artist and music provider is defined as: when the advertising is in-stream; when the music offered forms the only content of a page featuring advertising (excluding the advertisement itself); and when the music offered forms more than 75% of a page featuring advertising (excluding the advertisement itself).
Royalties
766
Synchronization royalties
The term synchronization comes from the early days of the talkies when music was first synchronized with film. The terminology originated in US industry but has now spread worldwide. Because it would be impractical to join music to film or images without making a "copy" of the music, it is clear that some sort of license is needed but the legal argument is difficult to construct. In the UK and elsewhere, with the exception of the US,, there is apparently no legal prohibition to the combination of audio and visual images and no explicit statutory right for the collection of synch royalties. In the US, however, the Copyright Act defines the audiovisual format as that of combining images with music for use in machines but there is no explicit rate set such as the "compulsory royalty rate" for copying music but there are instances of courts implying the synchronization right,[52] fuller version at[53] but even so, it is an amorphous colloquial commercial term of acceptance. Synchronization royalties("synch licenses") are paid for the use of copyrighted music in (largely) audiovisual productions, such as in DVDs, movies, and advertisements. Music used in news tracks are also synch licenses. Synchronization can extend to live media performances, such as plays and live theatre. They become extremely important for new media - the usage of music in the form of mp3, wav, flac files and for usage in webcasts, embedded media in microchips (e.g. karaoke), etc. but the legal conventions are yet to be drawn. Synchronization royalties are due to the composer/song-writer or his/her publisher. They are strictly contractual in nature and vary greatly in amount depending on the subjective importance of the music, the mode of production and the media used. The royalty payable is that of mutual acceptance but is conditioned by industry practice. It is useful to note in this connection the concept of the "needle drop" (now laser drop) in that the synch royalty becomes payable every time the needle drops 'on the record player' in a public performance! All openings and closings, every cut to advertisements, every cut back from ads, all re-runs shown by every TV company, in every country in the world generates a "synchro", although a single payment may be renegotiable in advance.[54] There is a category of royalty free music in the field of synchronization. This refers to the use of music in a "library" for which a one-time royalty has been negotiated. It is an alternative to needle-drop negotiation. In terms of numbers, royalties can range from, say. $5002000 for a "festival-use license" to $250,000 or more for a movie film score. For low budget films, which are deemed less than $2 million, the royalties range from 3%6%[55] or could be per song per usage.
Audio Home Recording Act of 1992

In the US, the Audio Home Recording Act became effective law in October 1992 and established a historic compromise between the consumer electronics industry (devices) and the music industry (content) after a long period of contention on how royalties should be applied.[56] This is an additional royalty payment to the print, mechanical, performance and synchronization royalties discussed in other sections of this coverage. In brief, the Act confirms the consumers' right to use (noncommercial use) and retailers' retailers right to sell all digital audio formats without fear of copyright infringement lawsuits. Also no copyright lawsuit may be based on the manufacture, importation, distribution, or sale of digital or analog recording devices or media. As part of this compromise, however, digital audio recording devices must include a system that prohibits serial copying and manufacturers or importers must pay a modest royalty on new digital audio recording devices and media. The Serial Copy Management System (SCMS) or its alternatives, permits first-generation digital-to-digital copies of prerecorded music and other audio works but prohibits multi-generation or "serial" copies of those copies. SCMS is automatically implemented in DAT, MiniDisc and DCC recorders. U.S. manufacturers and importers must make payments as follows: for digital audio recording devices, 2% of the wholesale price, with a floor of $1 royalty payment per device and a ceiling of $8 per device, and 3% of the wholesale price for media.
Royalties Only the first person to manufacture and distribute or to import and distribute must pay the royalty. The law does not impose any royalty on consumers or retailers. The Act applies only to "digital audio recording devices", defined as devices that are designed or marketed primarily for making digital audio recordings for private use (whether or not incorporated in some other device). Royalty payments from digital audio recording technology are divided into two funds: two-thirds of the royalties paid goes into a Sound Recordings Fund with a small percentages of this fund earmarked for non-featured artists and backup musicians, 40% of the remainder for featured artists and the balance to record companies. one-third goes into a Musical Works Fund, to be split 50/50 between songwriters and publishers. Royalty payments are administered through the US Music Industry. Featured Artist and Sound Recording Copyright Owner(Record Label) royalties are administered by the Alliance of Artists and Recording Companies. Non-Featured Artist royalties are administered by the AFM/AFTRA Intellectual Property Rights Distribution Fund. Writer royalties are administered through ASCAP, BMI, and SESAC. Publisher royalties are administered through Harry Fox. Although technically these royalties are claimed at the United States Copyright Office by an Interested Copyright Party, the Copyright Office has no way to administer or calculate the royalties to the earning parties, thus the royalties have been claimed by the aforementioned organizations since 1992 on behalf of the music industry then independently administer these funds. Royalty payments are calculated based on methodologies by the administering company, on sales data only.
767
Art royalties
Resale royalty or droit de suite
Gone or almost gone is the time when the art collector was the focal point of a painting. The artist is now not satisfied with recognition by the value his/her artwork gets by increasing value but wants to receive a part of that resale of increase- known as droit de suite whilst alive or for his heirs, thus obtaining a moral right implied by the copyright claim otherwise legal in a musical creation or in the sale of a book. As of May 2011 the scheme is ,at a national level, restricted to the EU. The European commissions ec.europa webpage on Resale royalty states that,under the heading 'Indicative list of third countries (Article 7.2)' : 'A letter was sent to Member States on March 1, 2006 requesting that they provide a list of third countries which meet these requirements and that they also provide evidence of application. To date the Commission has not been supplied with evidence for any third country which demonstrates that they qualify for inclusion on this list.'[57] [The emphasis is from the European commission web page.] Whether 'resale royalties' exist as a meaningful encyclopedia whole world classification category class is a bit doubtful; Should this droit de suite section be retitled to something more specific to the EU? There are very few common facets to the various national schemes. Some prescribe a minimum amount that the artwork must receive before the artist can invoke resale rights (the hammer price or equivalent). Some countries prescribe and others such as Australia, do not prescribe, the maximum royalty that can be received. Most do prescribe the calculation basis of the royalty. Some country's make the usage of the royalty compulsory. Some country's prescribe a sole monopoly collection service agency, while others like the UK and France, allow multiple agencies. Some schemes involve varying degrees of retrospective application and other schemes such as Australia's are not retrospective at all. In some cases, for example Germany, a openly tax-like use is made of the "royalties"; Half of the money collected is redistributed to fund public programs. Whether this German levy on the resale of art can be called a "royalty" is open to question. The New Zealand and Canadian governments have not proceeded with any sort of artist resale scheme. The Australian scheme is not retrospective and individual usage of the right (by Australian artists) is not compulsory.
Royalties Details of the Australian scheme can be gotten from[58] the website of the sole appointed Australian agency; The "Copyright Agency Limited". The UK scheme is in the context of common-law countries an oddity; No other common-law country has mandated an individual economic right where actual usage of the right is a compulsory duty for the individual right holder. Whether the common law conception of an individual economic right as an "individual right of control of usage" is compatible with the Code Civil origins of droit de suite is open to question. The payment agency may be a collection society whom pays the artist after costs and a fixed commission. Or It may be collected by the individual artist as she/he sees fit. The UK is a recent member of the Group and prescribes a sliding scale for the calculation of royalty as follows: The portion of the sale price Royalty Rate[59] From 0 to 50,000 a royalty rate of 4% From 50,000.01 to 200,000, 3% From 200,000.01 to 350,000, 1% From 350,000.01 to 500,000, 0.5% Exceeding 500,000 0.25% Maximum royalty paid, the equivalent of Sterling 12, 500.
768
In the UK, only living artists have this right now. Heirs will receive royalties as prescribed by the EU Directive only from 2012. France, which introduced this right in 1920, the living artist or heirs receive royalty 70 years of the death of the artist. In California law, heirs receive royalty for 20 years. The royalty applies to any work of graphic or plastic art such as a ceramic, collage, drawing, engraving, glassware, lithograph, painting, photograph, picture, print, sculpture, tapestry. However, a copy of a work is not to be regarded as a work unless the copy is one of a limited number made by the artist or under the artist's authority. In Christieon the resale of a work bought directly from the artist and then resold within 3 years for a value of 10,000 or less. The artist retains the copyright unless the artist is commissioned, or is an employee as with magazine illustrators or book cover artists when the publisher is assigned the ownership of the copyright. In the UK an artist cannot waive their resale rights; nor can they agree to share or repay resale royalties, for example, to their dealer or a client of their dealer's. In Australia artists have a case by case right (under clause 22/23 of the Act) to refuse consent to the usage of the right by the appointed collection society and in Australia artists may make payments to other citizens as they see fit . An artist cannot assign their resale right to anyone else, except to a qualifying body under the regulations, such as a charity. Whether resale royalties are of net economic benefit to artists is a highly contested area. Many economic studies have seriously questioned the assumptions underlying the argument that resale royalties have net benefits to artists. Many modelings have suggested that resale royalties could be actually harmful to living artists economic positions.[60] Australia's chief advocate for the adoption of artist resale royalties the collection society, Viscopy, commissioned in 2004 a report from Access Economics to model the likely impact of their scheme. In the resulting report, Access Economics warned that the claim of net benefit to artists was: "based upon extremely unrealistic assumptions, in particular the assumption that seller and buyer behaviour would be completely unaffected by the introduction of RRR [ARR]" and that, "Access Economics considers that the results of this analysis are both unhelpful and potentially misleading."[61]
Royalties
769
Artwork royalties
An artwork is usually a copyrighted article which be mass produced for sale, such as greeting cards. They are both seasonal and on occasion. In the UK it is estimated that one billion pounds are spent on greeting cards every year, with the average person sending 55 cards per year. The royalty range is 25% with an upfront royalty. Other artwork royalties are as under <http://www.nolo.com/legal-encyclopedia/article-30093.html>: Greeting cards and gift wrap: 2% to 5% Household items such as cups, sheets, towels: 3% to 8% Fabrics, apparel (T-shirts, caps, decals): 2% to 10% Posters and prints: 10% or more Toys and dolls: 3% to 8%
Software royalties
There is simply too much computer software to consider the royalties applicable to each. The following is a guide to royalty rates: *Computer Software: 10.5% (average), 6.8% (median) *Internet: 11.7% (average), 7.5% (median) For the development of customer-specific software one will have to consider: * Total software development cost * Break-even cost (if the software can be sold to many agencies) * Ownership of code (if the client's, he bears the development cost) * Life of the software (usually short or requiring maintenance) * Risk in development (high, commanding A high price) Normally, it is estimated that 55%70% of total project cost is spent in development, especially in the initial version. This high proportion is because new products require "basic foundation development" (R&D, refining/defining business processes, etc.). Marketing software typically consumes 20%40% of the budget. To estimate profit, it can be assumed that large companies will make a profit between 515%[62]
Other royalty arrangements

The term "royalty" also covers areas outside of IP and technology licensing, such as oil, gas, and mineral royalties paid to the owner of a property by a resources development company in exchange for the right to exploit the resource. In a business project the promoter, financier, LHS enabled the transaction but are no longer actively interested may have a royalty right to a portion of the income, or profits, of the business. This sort of royalty is often expressed as a contract right to receive money based on a royalty formula, rather than an actual ownership interest in the business. In some businesses this sort of royalty is sometimes called an override.
Royalties
770
Alliances and partnerships

Royalties may exist in technological alliances and partnerships. The latter is more than mere access to secret technical or a trade right to accomplish an objective. It is, in the last decade of the past century, and the first of this one of the major means of technology transfer. Its importance for the licensor and the licensee lies in its access to markets and raw materials, and labor,when the international trend is towards globalization. There are three main groups when it comes to technological alliances. They are Joint-ventures (sometimes abbreviated JV), the Franchises and Strategic Alliances (SA).[63] [64] Joint-ventures are usually between companies long in contact with a purpose. JVs are very formal forms of association, and depending on the country where they are situated, subject to a rigid code of rules, in which the public may or may not have an opportunity to participate in capital; partly depending on the size of capital required, and partly on Governmental regulations. They usually revolve around products and normally involve an inventive step. Franchises revolve around services and they are closely connected with trademarks, an example of which is McDonald's. Although franchises have no convention like trademarks or copyrights they can be mistaken as a trademark-copyright in agreements. The franchisor has close control over the franchisee, which, in legal terms cannot be tie-ins such as frachisee located in an areas owned by the franchisor. Strategic Alliances can involve a project (such as bridge building). a product or a service. As the name implies, is more a matter of 'marriage of convenience' when two parties want to associate to take up a particular (but modest) short-term task but generally are uncomfortable with the other. But the strategic alliance could be a test of compatibility for the forming of a joint venture company and a precedent step. Note that all of these ventures s could be in a third county. JVs and franchises are rarely found formed within a county. They largely involve third countries. On occasion, a JV or SA may be wholly oriented to research and development, typically involving multiple organizations working on an agreed form of engagement. The Airbus is an example of such. Technical Assistance and Technical Service in technology transfer Firms in developing countries often are asked by the supplier of know-how or patent licensing to consider Technical Service (TS)and Technical Assistance (TA) as elements of the technology transfer process and to pay "royalty" on them. TS and TA are associated with the IP (Intellectual Property) transferred and, sometimes, dependent on its acquisition but they are, by no means, IP.[65] TA and TS may also be the sole part of the transfer or the tranferor of the IP, their concurrent supplier. They are seldom met with in the developed countries, which sometimes view even know-how as similar to TS. TS comprises services which are the specialized knowledge of firms or acquired by them for operating a special process. It is often a "bundle" of services which can by itself meet an objective or help in meeting it. It is delivered over time, at end of which the acquirer becomes proficient to be independent of the service. In this process, no consideration is given on whether the transfer of the proprietary element has been concluded or not. On the other hand, Technical Assistance is a package of assistance given on a short timetable. It can range variously from procurement of equipment for a project, inspection services on behalf of the buyer, the training of buyer's personnel and the supply technical or managerial staff. Again, TA is independent of IP services. The payment for these services is a fee, not a royalty. The TS fee is dependent on how many of the specialized staff of its supplier are required and over what period of time. Sometimes, the "learning" capacity to whom the TS is supplied is involved. In any case, the cost per Service-Hour should be calculated and evaluated. Note that in selecting a TS supplier (often the IP Supplier), experience and dependency are critical. In the case of TA there is usually a plurality of firms and choice is feasible.
Royalties
771
Approaches to royalty rate

Intellectual property
The rate of royalty applied in a given case is determined by various factors, the most notable of which are: Market drivers and demand structure Territorial extent of rights Exclusivity of rights Level of innovation and stage of development (see The Technology Life Cycle) Sustainability of the technology Degree and competitive availability of other technologies Inherent risk Strategic need The portfolio of rights negotiated Fundability Deal-reward structure (negotiation strength)
To correctly gauge royalty rates, the following criteria must be taken into consideration: The transaction is at "arms-length" There is a willing buyer and a willing seller The transaction is not under compulsion
Rate determination and illustrative royalties

There are three general approaches to assess the applicable royalty rate in the licensing of intellectual property. They are[66] 1. The Cost Approach 2. The Comparable Market Approach 3. The Income Approach For a fair evaluation of the royalty rate, the relationship of the parties to the contract should: be at "arms-length" (related parties such as the subsidiary and the parent company need to transact as though they were independent parties) be viewed as acting free and without compulsion Cost approach The Cost Approach considers the several elements of cost that may have been entered to create the intellectual property and to seek a royalty rate that will recapture the expense of its development and obtain a return that is commensurate with its expected life. Costs considered could include R&D expenditures, pilot-plant and test-marketing costs, technology upgrading expenses, patent application expenditure and the like. The method has limited utility since the technology is not priced competitively on "what the market can bear" principles or in the context of the price of similar technologies. More importantly, by lacking optimization (through additional expense), it may earn benefits below its potential. However, the method may be appropriate when a technology is licensed out during its R&D phase as happens with venture capital investments or it is licensed out during one of the stages of clinical trials of a pharmaceutical. In the former case, the venture capitalist obtains an equity position in the company (developing the technology) in exchange for financing a part of the development cost (recovering it, and obtaining an appropriate margin, when the company gets acquired or it goes public through the IPO route).
Royalties Recovery of costs, with opportunity of gain, is also feasible when development can be followed stage-wise as shown below for a pharmaceutical undergoing clinical trials (the licensee pays higher royalties for the product as it moves through the normal stages of its development):
Success State of development Royalty rates,% ---------------------------Pre-clinical success 0-5 in-vitro Phase I Phase II (safety) (efficacy) 5-10 100 healthy people 8-15 300 subjects 10-20 several thousand patients regulatory body approval --------------Nature ----------------------
772
Phase III (effectiveness) Launched product 20+
A similar approach is used when custom software is licensed (an in-license, i.e. an incoming license). The product is accepted on a royalty schedule depending on the software meeting set stage-wise specifications with acceptable error levels in performance tests. Comparable market approach Here the cost and the risk of development are disregarded. The royalty rate is determined from comparing competing or similar technologies in an industry, modified by considerations of useful "remaining life" of the technology in that industry and contracting elements such as exclusivity provisions, front-end royalties, field of use restrictions, geographic limitations and the "technology bundle" (the mix of patents, know-how, trade-mark rights, etc.) accompanying it. Although widely used, the prime difficulty with this method is obtaining access to data on comparable technologies and the terms of the agreements that incorporate them. Fortunately, there are several recognized organizations, among them, RoyaltySource, Royaltystat, Knowledge Express, ktMINE etc. (see "Royalty Rate Websites" listed at the end of this article) who have comprehensive information on both royalty rates and the principal terms of the agreements of which they are a part. There are also IP-related organizations, such as the Licensing Executives Society, which enable its members to access and share privately assembled data. The two tables shown below are drawn, selectively, from information that is available with an IP-related organization and on-line.[67] [68] The first depicts the range and distribution of royalty rates in agreements. The second shows the royalty rate ranges in select technology sectors (latter data sourced from: Dan McGavock of IPC Group, Chicago, USA).
Royalty Distribution Analysis in Industry

Industry Automotive Computers Licenses (nos.) 35 68 Min. Royalty,% 1.0 0.2 0.0 0.5 0.1 0.3 0.5 0.1 0.0 Max. Royalty,% 15.0 15.0 17.0 15.0 77.0 40.0 26 40.0 70.0 Average,% 4.7 5.2 5.5 4.3 5.8 11.7 5.2 7.0 10.5 Median,% 4.0 4.0 5.0 4.0 4.8 7.5 4.6 5.1 6.8
Consumer Gds 90 Electronics Healthcare Internet Mach.Tools. Pharma/Bio Software 132 280 47 84 328 119
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Royalty Rate Segmentation in Some Technology Sectors

Industry Aerospace Chemical Computer Electronics Healthcare 3.3% 0-2% 50% 16.5% 62.5% 2-5% 50% 58.1% 31.3% 50.0% 51.7% 32.1% 37.3% 24.3% 6.3% 25.0% 45.0% 29.3% 23.6% 12.5% 1.1% 0.7% 25.0% 0.8% 0.4% 5-10% 10-15% 15-20% 20-25%
Pharmaceuticals 23.6% Telecom 40.0%
Commercial sources also provide information that is invaluable for making comparisons. The following table provides typical information that is obtainable, for instance, from Royaltystat:[69] Sample License Parameters Reference: SIC Code: SEC Filer: SEC Filing: Agreement Type: Licensor: Licensee: Lump-Sum Pay: Duration: Territory: 7787 Effective Date: 10/01/1998 2870 SEC Filed Date: 07/26/2005 Eden Bioscience Corp Royalty Rate: 2.000 (%) 10-Q Royalty Base: Net Sales Patent Exclusive: Yes Cornell Research Foundation, Inc. Eden Bioscience Corp. Research support is $150,000 for 1 year. 17 year(s) Worldwide
Coverage : Exclusive patent license to make, have made, use and sell products incorporating biological materials, including genes, proteins and
peptide fragments, expression systems, cells, and antibodies, for the field of plant disease
The comparability between transactions requires a comparison of the significant economic conditions that may affect the contracting parties: Similarity of geographies Relevant date Same industry Market size and its economic development; Contracting or expanding markets Market activity: whether wholesale, retail, other Relative market shares of contracting entities Location-specific costs of production and distribution Competitive environment in each geography Fair alternatives to contracting parties
Royalties Income approach The Income approach focuses on the licensor estimating the profits generated by the licensee and obtaining an appropriate share of the generated profit. It is unrelated to costs of technology development or the costs of competing technologies. The approach requires the licensee (or licensor): (a) to generate a cash-flow projection of incomes and expenses over the life-span of the license under an agreed scenario of incomes and costs (b) determining the Net Present Value, NPV of the profit stream, based on a selected discount factor, and c) negotiating the division of such profit between the licensor and the licensee. The NPV of a future income is always lower than its current value because an income in the future is attended by risk. In other words, an income in the future needs to be discounted, in some manner, to obtain its present equivalent. The factor by which a future income is reduced is known as the 'discount rate'. Thus, $1.00 received a year from now is worth $0.9091 at a 10% discount rate, and its discounted value will be still lower two years down the line. The actual discount factor used depends on the risk assumed by the principal gainer in the transaction. For instance, a mature technology worked in different geographies, will carry a lower risk of non-performance (thus, a lower discount rate) than a technology being applied for the first time. A similar situation arises when there is the option of working the technology in one of two different regions; the risk elements in each region would be different. The method is treated in greater detail, using illustrative data, in Royalty Assessment. The licensor's share of the income is usually set by the "25% rule of thumb", which is said to be even used by tax authorities in the US and Europe for arms-length transactions. The share is on the operating profit of the licensee firm. Even where such division is held contentious, the rule can still be the starting point of negotiations. Following are three aspects that are important for the profit: (a) the profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employs such as fixed and working capital and the returns from intangible assets such as distribution systems, trained workforce, etc. Allowances need to be made for them. (b) profits are also generated by thrusts in the general economy, gains from infrastructure, and the basket of licensed rights patents, trademark, know-how. A lower royalty rate may apply in an advanced country where large market volumes can be commanded, or where protection to the technology is more secure than in an emerging economy (or perhaps, for other reasons, the inverse). (c) the royalty rate is only one aspect of the negotiation. Contractual provisions such as an exclusive license, rights to sub-license, warranties on the performance of technology etc may enhance the advantages to the licensee, which is not compensated by the 25% metric. The basic advantage of this approach, which is perhaps the most widely applied, is that the royalty rate can be negotiated without comparative data on how other agreements have been transacted. In fact, it is almost ideal for a case where precedent does not exist. It is, perhaps, relevant to note that the IRS also uses these three methods, in modified form, to assess the attributable income, or division of income, from a royalty-based transaction between a US company and its foreign subsidiary (since US law requires that a foreign subsidiary pay an appropriate royalty to the parent company).[70]
774
Royalties
775
Other compensation modes

Royalties are only one among many ways of compensating owners for use of an asset. Others include: buying the asset outright, possibly with a leaseback arrangement offering the licensor an equity position in the licensee company staged milestone payments (as in drug development and commissioned software arrangements) lump sum payment made to the licensor in one or more installments cross-licensing agreements with or without cash payments, and entering into a strategic alliance or Joint Venture.
In discussing the licensing of Intellectual Property, the terms valuation and evaluation need to be understood in their rigorous terms. Evaluation is the process of assessing a license in terms of the specific metrics of a particular negotiation, which may include its circumstances, the geographical spread of licensed rights, product range, market width, licensee competitiveness, growth prospects, etc. On the other hand, valuation is the fair market value (FMV) of the asset trademark, patent or know-how at which it can be sold between a willing buyer and willing seller in the context of best awareness of circumstances. The FMV of the IP, where assessable, may itself be a metric for evaluation. If an emerging company is listed on the stock market, the market value of its intellectual property can be estimated from the data of the balance sheet using the equivalence: Market Capitalization = Net Working Capital + Net Fixed Assets + Routine Intangible Assets + IP where the IP is the residual after deducting the other components from the market valuation of the stock. One of the most significant intangibles may be the work-force. The method may be quite useful for valuing trademarks of a listed company if it is mainly or the only IP in play (franchising companies).
External links
"Royalty Rate Websites" [71] "CPT page on Royalties on patents for health care inventions" [72] "Free online calculator for U.S. mechanical royalties" [73]
References
[1] "Focus: Tax and Intellectual Property April 2004" (http:/ / www. aar. com. au/ pubs/ tax/ fotaxapr04. htm). Allens Arthur Robinson. . Retrieved 2007-09-13. [2] "Royalty (definition)" (http:/ / dictionary. law. com/ Default. aspx?selected=1870& bold=). law.com. . Retrieved 2007-09-13. [3] Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer), United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7 [4] Guidelines for Evaluation of Transfer of Technology Agreements, United Nations, New York, 1979 [5] Licensing Guide for Developing Countries, World Intellectual Property Organization (WIPO), Geneva, 1977, ISBN 92-805-0395-2 [6] UNIDO International Workshop on Technology Transfer Negotiation and Plant Level Technology Needs Assessment, 78 December 1999, New Delhi. [7] Dave Tyrrell. "Intellectual Property & Licensing" (http:/ / www. vertexips. com/ information/ articles/ licensing. html). Vertex. . Retrieved 2007-09-14. [8] "Royalty interest (definition)" (http:/ / www. glossary. oilfield. slb. com/ Display. cfm?Term=royalty interest). Schlumberger. . Retrieved 2007-09-13. [9] http:/ / www. oilgas1031. com/ [10] "Ranges of royalty rates, and royalty guidelines, U.S. Pharmaceutical Industry" (http:/ / www. cptech. org/ ip/ health/ royalties/ ). . Retrieved 2007-07-19. [11] The Royalty Rate Journal of Intellectual Property, December 2002, p. 8. [12] "Sample: License Parameters" (http:/ / www. intellectualpropertyanalysis. com/ article4. html). . Retrieved 2007-10-26.
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[13] Mallat, Chibli. "Joint ventures in Lebanese and European law" (http:/ / www. mallat. com/ articles/ joint_ventures. htm). mallat.com. . Retrieved 29 November 2010. [14] "DHL Corporation and Subsidiaries vs. Commissioner of Internal Revenue, Docket Nos. 19570-95, 26103-95, United States Tax Court." (http:/ / www. ausinc. com/ news/ More_on_Trademark. pdf) (PDF). . Retrieved 2007-09-09. [15] Dicenstein_brands_2005-2.pdf [16] "Four little words" (http:/ / www. salon. com/ entertainment/ music/ feature/ 2000/ 08/ 28/ work_for_hire/ print. html). . Retrieved 2007-03-15. [17] "Don Henley Speaks on Behalf of Recording Artists" (http:/ / web. archive. org/ web/ 20060117191640/ http:/ / www. yourcongress. com/ ViewArticle. asp?article_id=1263). Archived from the original (http:/ / www. yourcongress. com/ ViewArticle. asp?article_id=1263) on 2006-01-17. . Retrieved 2007-03-15. [18] "Printing & Publishing of Music - A Short History & How it is Done" (http:/ / parlorsongs. com/ insearch/ printing/ printing. php). . Retrieved 2008-08-13. [19] Carter Harman, A Popular History of Music, Dell Publishing Company, New York, 1956 [20] Song Sheets to Software: A Guide to Print Music, Software, and Web Sites for Musicians, Elizabeth C. Axford, Scarecrow Press, 2004,ISBN 0810850273, 9780810850279 [21] (The score and some digital versions of Stephen Foster's songs can be sampled here (http:/ / www. sibeliusmusic. com/ index. php?sm=home. score& ?scoreid=127497). [22] Elizabeth C. Axford, Song Sheets to Software: A Guide to Print Music, Software, and Web Sites for Musicians, Scarecrow Press, 2004,ISBN 0810850273, 9780810850279 [23] "Printing & Publishing of Music. A Short History & How it is Done" (http:/ / parlorsongs. com/ insearch/ printing/ printing. php). parlorsongs.com. . Retrieved 29 November 2010. [24] "Christian Copyright Licensing Incorporated" (http:/ / www. ccli. com). ccli.com. . [25] Alan S. Bergman, The Language of the Music Business (http:/ / www. alanbergman. com/ musicbusinesslanguage. pdf) [26] "Compulsory Rates for Mechanical royalties" (http:/ / www. copyright. gov/ carp/ m200a. html). . Retrieved 2007-10-15. [27] "'Reduced Rate' Royalties" (http:/ / www. ascap. com/ musicbiz/ money-clauses. html). . Retrieved 2007-10-29. [28] "Royalties on Controlled Composition" (http:/ / www. ascap. com/ musicbiz/ money-clauses. html). . Retrieved 2007-10-29. [29] http:/ / www. ascap. com/ musicbiz/ money-recording. html [30] "SACEM homepage" (http:/ / www. sacem. fr/ cms) (in French). . Retrieved 29 November 2010. [31] "GEMA homepage" (http:/ / www. gema. de/ ) (in German). . Retrieved 29 November 2010. [32] "?" (http:/ / www. scfitalia. it/ webnew/ ). . [33] "The main national collection societies" (http:/ / www. bemuso. com/ musicbiz/ collectionsocieties. html#themainnationalcollectionsocieties). bemuso.com. . Retrieved 2010-12-03. [34] "Language of the Music Business" (http:/ / www. alanbergman. com/ articles. htm). . Retrieved 2007-10-29. [35] "Diagram courtesy" (http:/ / www. bemuso. com). bemuso.com. . [36] PPL (http:/ / www. ppluk. com/ ) [37] "PRS for Music homepage" (http:/ / www. prsformusic. com/ Pages/ default. aspx). . Retrieved 29 November 2010. [38] "Songwriters challenge UK online royalty rate" (http:/ / www. theregister. co. uk/ 2005/ 12/ 07/ uk_music_downloads_royalty_dispute/ ). . Retrieved 2007-12-18. [39] VPL (http:/ / www. ppluk. com/ ) [40] Smith, Ethan (2007-03-21). "Sale of Music Long in Decline" (http:/ / online. wsj. com/ public/ article/ SB117444575607043728-oEugjUqEtTo1hWJawejgR3LjRAw_20080320. html?mod=rss_free). The Wall Street Journal. . Retrieved 2007-12-20. [41] "What is Digital Distribution" (http:/ / www. bemuso. com/ musicbiz/ digitaldistribution. html#whatisdigitaldistribution). . Retrieved 2010-12-03. [42] "Gracenote homepage" (http:/ / www. gracenote. com). . [43] Download Music - Music Downloads and mp3 downloads from Kazaa.com (http:/ / www. kazaa. com/ ) [44] Last.fm - Listen to internet radio and the largest music catalogue online (http:/ / last. fm/ ) [45] "U.S. H1 Album Sales Down 15.1%" (http:/ / www. billboard. biz/ bbbiz/ content_display/ industry/ e3idb123582ebc7d42b3f8bee9123801556). . Retrieved 2007-12-22. [46] "American Federation of Musicians" (http:/ / www. afm. org/ public/ home/ index. php)). . Retrieved 2008-02-24. [47] "American Federation of Television and Radio Artists" (http:/ / www. aftra. org). . Retrieved 2008-02-24. [48] "The Sound Exchange" (http:/ / www. soundexchange. com). . Retrieved 2008-02-29. [49] "SECTION 114 (f)2 and 112(e)" (http:/ / www. copyright. gov/ carp/ webcasting_rates_a. pdf) (PDF). . Retrieved 2007-12-19. [50] "Interim Settlement of Digital Royalty Rates (Music), United Kingdom" (http:/ / www. ipo. gov. uk/ ctribunaldownloadingdecision. pdf) (PDF). . Retrieved 2007-12-19. [51] "Artists bid for CD parity on digital royalties" (http:/ / www. pcpro. co. uk/ news/ 78202/ artists-bid-for-cd-parity-on-digital-royalties. html. ). . Retrieved 2008-02-24. [52] Clintons (http:/ / www. clintons. co. uk/ ?news_id=38) [53] (http:/ / www. ca9. uscourts. gov/ ca9/ newopinions. nsf/ 6128717C16DB42D8882573C400597DC7/ $file/ 0655102. pdf?openelement)
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[54] "Current UK Limited Synchronisation Licence example" (http:/ / i. current. com/ pdf/ music_sync_uk. pdf). i.current.com. . Retrieved 29 November 2010. [55] Songwriting Articles - Publishing by Nancy VanReece (http:/ / www. musesmuse. com/ pubart. html) [56] United States Code: Title 17,1001. Definitions | LII / Legal Information Institute (http:/ / www. law. cornell. edu/ uscode/ 17/ usc_sec_17_00001001----000-. html) [57] http:/ / ec. europa. eu/ internal_market/ copyright/ resale-right/ resale-right_en. htm [58] "About the artists resale royalty scheme" (http:/ / www. resaleroyalty. org. au/ ). resaleroyalty.org.au. . Retrieved 29 November 2010. [59] "DACS homepage" (http:/ / www. Dacs. com) (in Russian). . Retrieved 29 November 2010. [60] name="Kirstein, R./Schmidtchen, D. (2001); Do Artists Benefit from Resale Royalties? An Economic Analysis of a New EU Directive. In: Deffains, B./Kirat, T. (eds.): Law and Economics in Civil Law Countries; The Economics of Legal Relationships Vol. 6, Elsevier Science, Amsterdam et al., 231-248." [61] "?" (http:/ / www. arts. gov. au/ __data/ assets/ pdf_file/ . . . / Viscopy_Access_Economics. pdf). arts.gov.au. . [62] "Software Royalty Rates Details" (http:/ / www. nwds-ak. com/ WebResources/ WebDesign/ RoyaltyRates/ RoyaltyRatesDetails. aspx). North West Data Solutions. . Retrieved 29 November 2010. [63] Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer),1996 United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7 [64] Patterns of Internationalization for Developing Country Enterprises, United Nations Industrial Organization, Vienna, Austria 2008, ISBN 978-92-1-106302-7 [65] Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer),1996 United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7, pp 260-261 [66] "?" (http:/ / www. bvappraisers. org/ contentdocs/ Conference/ Royalty_Rates_in_Intellectual_Property_Valuation. pdf). bvappraisers.org. . [67] Goldscheider, Robert; John Jarosz and Carla Mulhern (Dec 2002). "Use Of The 25 Per Cent Rule In Valuing IP" (http:/ / lesanz. org. au/ membership/ royaltyrates. html). . Retrieved 2007-09-20. [68] David G. Weiler. "Valuing Your Intellectual Property for Strategic Alliances and Financing" (http:/ / www. njsbdc. com/ SciTech/ scitech120804weiler. ppt). . Retrieved 2007-09-20. [69] "Sample: License Parameters" (http:/ / www. royaltystat. com/ royaltystat. cfm). . Retrieved 2007-09-26. [70] "Treasury Evaluations" (http:/ / www. intltaxlaw. com/ shared/ transfer/ regs. htm). . Retrieved 2007-09-27. [71] http:/ / www. usa-canada. les. org/ licensing/ #royalty. htm [72] http:/ / www. cptech. org/ ip/ health/ royalties/ [73] http:/ / dashbook. com/ CalculatorMechanical. aspx
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Severance package
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Severance package
A severance package is pay and benefits an employee receives when they leave employment at a company. In addition to the employee's remaining regular pay, it may include some of the following: An additional payment based on months of service Payment for unused vacation time or sick leave. A payment in lieu of a required notice period. Medical, dental or life insurance Retirement (e.g., 401K) benefits Stock options Assistance in searching for new work, such as access to employment services or help in producing a rsum.
Severance packages are most typically offered for employees who are laid off or retire. Severance pay was instituted to help protect the newly unemployed. Sometimes, they may be offered for people who resign, regardless of the circumstances; or are fired. Policies for severance packages are often found in a company's employee handbook, and in many countries are subject to strict government regulation. Severance contracts often stipulate that the employee will not sue the employer for wrongful dismissal or attempt to collect on unemployment benefits, and that if the employee does so, then they must return the severance money.
United States
Severance agreements are more than just a "thank you" payment from an employer. They could prevent an employee from working for a competitor and waive any right to possibly pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. It is important to review a severance agreement carefully and contact an employment attorney to assist with the review. A recent ruling in the Western District of Michigan held that severance pay is not subject to FICA taxes.[1]
Puerto Rico
Employers are required to pay severance pay after an employee working in Puerto Rico is terminated.[2] [3] Employees are not permitted to waive this payment.[4] Severance pay is not required if the employee was terminated with "just cause."[3] Just cause is satisfied in any of the following situations: The employee had a pattern of improper or disorderly conduct; the employee worked inefficiently, belatedly, negligently, or at a level of poor quality; the employee repeatedly violated the employer's reasonable and written rules; the employer had a full, temporary, or partial closing of operations; the employer had technological or reorganization changes, changes in the nature of the product made, and changes in services rendered; or the employer reduce the number of employees due to an actual or expected decrease in production, sales, or profits.[5] An employee with less than five years of employment with the employer must receive a severance payment equal to two months of salary plus an additional one week of salary for each year of employment. An employee with more than five years but less than fifteen years of employment must receive a severance payment equal to three months of salary plus an additional two weeks of salary for each year of employment. An employee with more than fifteen years of service must receive a severance payment equal to six months of salary plus an additional three weeks of salary for each year employment.[6]
Severance package
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References
[1] Judge Rules FICA Tax on Severance Pay is Improper | author=Thomas A. McKinney (http:/ / www. law-cm. com/ blog/ 7-municipal/ 55) [2] Cheskin, Mark R.; Ramirez, Maria Eugenia (September 11, 2006). "Puerto Rico Labor Laws: Recent Amendments to Christmas Bonus Act and Law 80" (http:/ / www. hhlaw. com/ files/ Publication/ 8a233ca7-0f09-42d2-bd3a-20097d52be13/ Presentation/ PublicationAttachment/ 8751f571-4b37-4bd8-b247-6bb0f1044d54/ Cheskin_Ramirez_9_11_06. pdf) (PDF). Hogan & Hartson, L.L.P. . [3] Puerto Rico Law 80. Sections 185a-185l. [4] Puerto Rico Law 80. Section 185i. [5] Puerto Rico Law 80. Section 185b. [6] Puerto Rico Law 128.
External links
"Severance package" (http://jobsearchtech.about.com/od/careerplanning/l/aa120400.htm) at jobsearchtech.about.com (USA specific) "Severance Agreement" (http://www.law-cm.com/severance-agreements) at (New Jersey specific)
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Government-related income & funding sources

Social Security
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance (OASDI) program.[1] The original Social Security Act[2] (1935) and the current version of the Act, as amended[3] encompass several social welfare and social insurance programs. The larger and better known programs are: Federal Old-Age (Retirement), Survivors, and Disability Insurance Unemployment benefits Temporary Assistance for Needy Families Health Insurance for Aged and Disabled (Medicare) Grants to States for Medical Assistance Programs (Medicaid) State Children's Health Insurance Program (SCHIP) Supplemental Security Income (SSI) Patient Protection and Affordable Care Act
A Social Security card issued in Florida in 1983
Social Security is a social insurance program that is primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Tax deposits are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, or the Federal Supplementary Medical Insurance Trust Fund.[4] The main part of the program is sometimes abbreviated OASDI (Old Age, Survivors, and Disability Insurance) or RSDI (Retirement, Survivors, and Disability Insurance). When initially signed into law by President Franklin D. Roosevelt in 1935 as part of his New Deal, the term Social Security covered unemployment insurance as well. The term, in everyday speech, is used to refer only to the benefits for retirement, disability, survivorship, and death, which are the four main benefits provided by traditional private-sector pension plans. In 2004 the U.S. Social Security system paid out almost $500 billion in benefits.[5] By dollars paid, the U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget, with 20.8% for social security, compared to 20.5% for discretionary defense and 20.1% for Medicare/Medicaid.[6] Social Security is currently the largest social insurance program in the U.S. where in 2003 combined spending for all social insurance programs constituted 37% of government expenditure and 7% of the gross domestic product.[7] Social Security is currently estimated to keep roughly 40 percent of all Americans age 65 or older out of poverty.[8] The Social Security Administration is headquartered in Woodlawn, Maryland, just to the west of Baltimore. The 2011 annual report by the program's Board of Trustees noted the following: in 2010, 54 million people were receiving Social Security benefits, while 157 million people were paying into the fund; of those receiving benefits, 44 million were receiving retirement benefits and 10 million disability benefits. In 2011, there will be 56 million beneficiaries and 158 million workers paying in. In 2010, total income was $781.1 billion and expenditures were $712.5 billion, which meant a total net increase in assets of $68.6 billion. Assets in 2010 were $2.6 trillion, an amount that is expected to be adequate to cover the next 10 years. In 2023, total income and interest earned on assets
Social Security are projected to no longer cover expenditures for Social Security, as demographic shifts burden the system. By 2035, the ratio of potential retirees to working age persons will be 37 percent there will be less than three potential income earners for every retiree in the population. The trust fund would then be exhausted by 2036 without legislative action.[9] Proposals to privatize Social Security recently became part of the Social Security debate during the Bill Clinton and George W. Bush presidencies.
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History
A limited form of the Social Security program began as a measure to implement "social insurance" during the Great Depression of the 1930s, when poverty rates among senior citizens exceeded 50 percent.[10]
Creation: The Social Security Act

The Social Security Act was drafted during Roosevelt's first term by the President's Committee on Economic Security, under Frances Perkins, and passed by Congress as part of the New Deal. The act was an attempt to limit what were seen as dangers in the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. By signing this act on August 14, 1935, President Roosevelt became the first president to advocate federal assistance for the elderly.[12]
Provisions of the Act
The Act is formally cited as the Social Security Act, ch. 531, 49Stat.620, now codified as 42 U.S.C.ch.7 [13]. The Act provided benefits to retirees and the unemployed, and a lump-sum benefit at death. Payments to current retirees are financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer. The act also gave money to states to provide assistance to aged individuals (Title I), for unemployment insurance (Title III), Aid to Families with Dependent Children (Title IV), Maternal and Child Welfare (Title V), public health services (Title VI), and the blind (Title X).[12]
President Roosevelt signs the Social Security Act, at approximately 3:30 pm EST on August 14, [11] 1935. Standing with Roosevelt are Rep. Robert Doughton (D-NC); unknown person in shadow; Sen. Robert Wagner (D-NY); Rep. John Dingell (D-MI); unknown man in bowtie; the Secretary of Labor, Frances Perkins; Sen. Pat Harrison (D-MS); and Rep. David Lewis (D-MD).
Initial opposition
Social Security was controversial when originally proposed, with one point of opposition being that it would allegedly cause a loss of jobs. However, proponents argued that there was in fact an advantage: it would encourage older workers to retire, thereby creating opportunities for younger people to find jobs, which would lower the unemployment rate. Most women and minorities were excluded from the benefits of unemployment insurance and old age pensions. Employment definitions reflected typical white male categories and patterns.[14] Job categories that were not covered by the act included workers in agricultural labor, domestic service, government employees, and many teachers, nurses, hospital employees, librarians, and social workers.[15] The act also denied coverage to individuals who worked intermittently.[16] These jobs were dominated by women and minorities. For example, women made up 90 percent of domestic labor in 1940 and two-thirds of all employed black women were in domestic service.[17] Exclusions exempted nearly half of the working population.[16] Nearly two-thirds of all African Americans in the
Social Security labor force, 70 to 80 percent in some areas in the South, and just over half of all women employed were not covered by Social Security.[18] [19] At the time, the NAACP protested the Social Security Act, describing it as a sieve with holes just big enough for the majority of Negroes to fall through.[19] Some have suggested that this discrimination resulted from the powerful position of Southern Democrats on two of the committees pivotal for the Acts creation, the Senate Finance Committee and the House Ways and Means Committee. Southern congressmen supported Social Security as a means to bring needed relief to areas in the South that were especially hurt by the Great Depression but wished to avoid legislation which might interfere with the racial status quo in the South. The solution to this dilemma was to pass a bill that both included exclusions and granted authority to the states rather than the national government (such as the states' power in Aid to Dependent Children). Others have argued that exclusions of job categories such as agriculture were frequently left out of new social security systems worldwide because of the administrative difficulties in covering these workers.[19] Social Security reinforced traditional views of family life.[20] Women generally qualified for benefits only through their husbands or children.[20] Mothers pensions (Title IV) based entitlements on the presumption that mothers would be unemployed.[20] Historical discrimination in the system can also be seen with regard to Aid to Dependent Children. Since this money was allocated to the states to distribute, some localities assessed black families as needing less money than white families. These low grant levels made it impossible for African American mothers to not work: one requirement of the program.[21] Some states also excluded children born out of wedlock, an exclusion which affected African American women more than white women.[22] One study determined that 14.4% of eligible white individuals received funding, but only 1.5 percent of eligible black individuals received these benefits.[19]
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Debates on the constitutionality of the Act

In the 1930s, the Supreme Court struck down many pieces of Roosevelt's New Deal legislation, including the Railroad Retirement Act. The Court threw out a centerpiece of the New Deal, the National Industrial Recovery Act, the Agricultural Adjustment Act, and New York State's minimum-wage law. President Roosevelt responded with an attempt to pack the court via the Judiciary Reorganization Bill of 1937. On February 5, 1937, he sent a special message to Congress proposing legislation granting the President new powers to add additional judges to all federal courts whenever there were sitting judges age 70 or older who refused to retire.[23] The practical effect of this proposal was that the President would get to appoint six new Justices to the Supreme Court (and 44 judges to lower federal courts), thus instantly tipping the political balance on the Court dramatically in his favor. The debate on this proposal was heated and widespread, and lasted over six months. Beginning with a set of decisions in March, April, and May, 1937 (including the Social Security Act cases), the Court would sustain a series of New Deal legislation.[24] Two Supreme Court rulings affirmed the constitutionality of the Social Security Act. Steward Machine Company v. Davis, 301 U.S, 548[25] (1937) held, in a 54 decision, that, given the exigencies of the Great Depression, "[It] is too late today for the argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the nation to relieve the unemployed and their dependents is a use for any purpose narrower than the promotion of the general welfare". The arguments opposed to the Social Security Act (articulated by justices Butler, McReynolds, and Sutherland in their opinions) were that the social security act went beyond the powers that were granted to the federal government in the Constitution. They argued that, by imposing a tax on employers that could be avoided only by contributing to a state unemployment-compensation fund, the federal government was essentially forcing each state to establish an unemployment-compensation fund that would meet its criteria, and that the federal government had no power to enact such a program. Helvering v. Davis, 301 U.S. 619 (1937), decided on the same day as Steward, upheld the program because "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way". That is, the Social Security Tax was constitutional as a mere
Social Security exercise of Congress's general taxation powers.
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Implementation
Payroll taxes were first collected in 1937, also the year in which the first benefits were paid, namely the lump-sum death benefit paid to 53,236 beneficiaries. The first reported Social Security payment was to Ernest Ackerman, who retired only one day after Social Security began. Five cents were withheld from his pay during that period, and he received a lump-sum payout of seventeen cents from Social Security.[26] The first monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92.[27]
Ida May Fuller, the first recipient
Expansion and evolution

Further information: List of Social Security legislation (United States) The provisions of Social Security have been changing since the 1930s, shifting in response to economic worries as well as concerns over changing gender roles and the position of minorities. Officials have responded more to the concerns of women than those of minority groups.[28] Social Security gradually moved toward universal coverage. By 1950, debates moved away from which occupational groups should be included to how to provide more adequate coverage.[29] Changes in Social Security have reflected a balance between promoting equality and efforts to provide adequate protection.[30] In 1940, benefits paid totaled $35 million. These rose to $961 million in 1950, $11.2 billion in 1960, $31.9 billion in 1970, $120.5 billion in 1980, and $247.8 billion in 1990 (all figures in nominal dollars, not adjusted for inflation). In 2004, $492 billion of benefits were paid to 47.5 million beneficiaries.[31] In 2009, nearly 51 million Americans received $650 billion in Social Security benefits. 1939 Amendments Economic concerns One reason for the proposed changes in 1939 was a growing concern over the impact that the reserves created by the 1935 act were having on the economy. The Recession of 1937 was blamed on the government, tied to the abrupt decrease in government spending and the $2 billion that had been collected in Social Security taxes.[32] Benefits became available in 1940 instead of 1942 and changes to the benefit formula increased the amount of benefits available to all recipients in the early years of Social Security.[33] These two policies combined to shrink the size of the reserves. The original Act had conceived of the program as paying benefits out of a large reserve. This Act shifted the conception of Social Security into something of a hybrid system; while reserves would still accumulate, most early beneficiaries would receive benefits on the pay-as-you-go system. Just as importantly, the changes also delayed planned rises in contribution rates. Ironically if these had been left in place they would have come into effect during the wartime boom in wages and would have arguably helped to temper wartime inflation.[34]
Social Security Creation of the Social Security Trust Fund The amendments established a trust fund for any surplus funds. The managing trustee of this fund is the Secretary of the Treasury. The money could be invested in both non-marketable and marketable securities.[35] The move toward family protection Calls for reform of Social Security emerged within a few years of the 1935 Act. Even as early as 1936, some believed that women were not getting enough support. Worried that a lack of assistance might push women back into the work force, these individuals wanted Social Security changes that would prevent this. In an effort to protect the family, therefore, some called for reform which tied women's aid more concretely to their dependency on their husbands.[36] Others expressed apprehension about the complicated administrative practices of Social Security.[37] Concerns about the size of the reserve fund of the retirement program, emphasized by a recession in 1937 led to further calls for change.[38] These amendments, however, avoided the question of the large numbers of workers in excluded categories.[39] Instead, the amendments of 1939 made family protection a part of Social Security. This included increased federal funding for the Aid to Dependent Children and raised the maximum age of children eligible to receive money under the Aid to Dependent Children to 18. The amendment added wives, elderly widows, and dependent survivors of covered male workers to those who could receive old age pensions. These individuals had previously been granted lump sum payments upon only death or coverage through the Aid to Dependent Children program. If a married wage-earning womans own benefit was worth less than 50% of her husbands benefit, she was treated as a wife, not a worker.[40] If a woman who was covered by Social Security died, however, her dependents were ineligible for her benefits.[41] Since support for widows was dependent on the husband being a covered worker, African American widows were severely underrepresented and unaided by these changes.[42] In order to assure fiscal conservatives who worried about the costs of adding family protection policies, the benefits for single workers were decreased and lump-sum death payments were abolished.[43] FICA In the original 1935 law, the benefit provisions were in Title II of the Act (which is why Social Security is sometimes referred to as the "Title II" program.) The taxing provisions were in a separate title (Title VIII) (for reasons related to the constitutionality of the 1935 Act). As part of the 1939 Amendments, the Title VIII taxing provisions were taken out of the Social Security Act and placed in the Internal Revenue Code and renamed the Federal Insurance Contributions Act (FICA). Social Security payroll taxes thus often referred to as "FICA taxes." Since FICA taxes do not fund "retirement accounts" analogous to investment accounts such as IRAs, it has been argued that returns on these contributions are not comparable to returns on private investment instruments. But because Social Security contributions are nonetheless arguably analogous to pooled insurance premiums[44] (as they protect workers and covered family members against loss of income from the A poster for the expansion of the Social Security wage earner's retirement, disability, or death) it may be appropriate to Act compare the return on the "risk pool of funds" garnered by Social Security with the return on the "risk pool of funds" garnered by a for-profit commercial insurance company. Like any insurance program, Social Security "spreads risk". For example, a worker who becomes disabled at a young age could receive a large return relative to the amount they contributed in FICA before becoming disabled, since disability benefits can continue for life. As in private insurance plans,
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Social Security everyone in the particular insurance pool is insured against the same risks, but not everyone will benefit to the same extent. The analogy to insurance, however, is limited[45] by the fact that paying FICA taxes creates no legal right to benefits and by the extent to which Social Security is, in fact, funded by FICA taxes. The 2010 "Obama-GOP tax deal", for example, cut FICA taxes with the impact on Social Security's solvency neutralized by a transfer from general revenues. These transfers add to the general budget deficit like general program spending.[46] [47] Amendments of the 1950s After years of debates about the inclusion of domestic labor, household employees working at least two days a week for the same person were added in 1950, along with nonprofit workers and the self-employed. Hotel workers, laundry workers, all agricultural workers, and state and local government employees were added in 1954.[48] In 1956, the tax rate was raised to 4.0 percent (2.0 percent for the employer, 2.0 percent for the employee) and disability benefits were added. Also in 1956, women were allowed to retire at 62 with benefits reduced by 25 percent. Widows of covered workers were allowed to retire at 62 without the reduction in benefits.[49] Amendments of the 1960s In 1961, retirement at age 62 was extended to men, and the tax rate was increased to 6.0%. In 1962, the changing role of the female worker was acknowledged when benefits of covered women could be collected by dependent husbands, widowers, and children. These individuals, however, had to be able to prove their dependency.[50] Medicare and Medicaid were added in 1965 by the Social Security Act of 1965, part of President Lyndon B. Johnson's "Great Society" program. In 1965, the age at which widows could begin collecting benefits was reduced to 60. Widowers were not included in this change. When divorce, rather than death, became the major cause of marriages ending, divorces were added to the list of recipients. Divorces over the age of 65 who had been married for at least 20 years, remained unmarried, and could demonstrate dependency on their ex-husbands received benefits.[51] The government adopted a unified budget in the Johnson administration in 1968. This change resulted in a single measure of the fiscal status of the government, based on the sum of all government activity.[52] The surplus in Social Security trust funds offsets the total debt, making it appear much smaller than it otherwise would. Amendments of the 1970s
Same brochure (pages 2 and 3) Brochure from 1961 with basic advice about Social Security cards (pages 1 and 4)
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1972 Amendments In June 1972, both houses of the United States Congress approved by overwhelming majorities 20% increases in benefits for 27.8 million Americans. The average payment per month rose from $133 to $166. The bill also set up a
Social Security cost-of-living adjustment (COLA) to take effect in 1975. This adjustment would be made on a yearly basis if the Consumer Price Index (CPI) increased by 3% or more.[53] This addition was an attempt to index benefits to inflation so that benefits would rise automatically. If inflation was 5%, the goal was to automatically increase benefits by 5% so their real value didn't decline. A technical error in the formula caused these adjustments to overcompensate for inflation, a technical mistake which has been called double-indexing. The COLAs actually caused benefits to increase at twice the rate of inflation. In October 1972, a $5 billion piece of Social Security legislation was enacted which expanded the Social Security program. For example, minimum monthly benefits of individuals employed in low income positions for at least 30 years were raised. Increases were also made to the pensions of 3.8 million widows and dependent widowers.[53] These amendments also established the Supplemental Security Income (SSI). SSI is not a Social Security benefit, but a welfare program, because the elderly and disabled poor are entitled to SSI regardless of work history. Likewise, SSI is not an entitlement, because there is no right to SSI payments. The negative financial outlook Throughout the 1950s and 1960s, during the phase-in period of Social Security, Congress was able to grant generous benefit increases because the system had perpetual short-run surpluses. Congressional amendments to Social Security took place in even numbered years (election years) because the bills were politically popular, but by the late 1970s, this era was over. For the next three decades, projections of Social Security's finances would show large, long-term deficits, and in the early 1980s, the program flirted with immediate insolvency. From this point on, amendments to Social Security would take place in odd numbered years (years that were not election years) because Social Security reform now meant tax increases and benefit reductions. Social Security became known as the "Third Rail of American Politics." Touching it meant political death. Several effects came together in the years following the 1972 amendments which rapidly changed the outlook on Social Security's long-term financial picture from positive to problematic. By the 1970s, the phase-in period, during which workers were paying taxes but few were collecting benefits, was largely over, and the ratio of elderly population to the working population was increasing. These developments brought questions about the capacity of the long term financial structure based on a pay-as-you-go program. During the Carter administration, the economy suffered double-digit inflation, coupled with very high interest rates, oil and energy crises, high unemployment and slow economic growth. Productivity growth in the United States had declined to an average annual rate of 1%, compared to 3.2% during the 1960s. There was also a growing federal budget deficit which increased to $66 billion. The 1970s are described as a period of stagflation, meaning economic stagnation coupled with price inflation, as well as higher interest rates. Price inflation (a rise in the general level of prices) creates uncertainty in budgeting and planning and makes labor strikes for pay raises more likely. These underlying negative trends were exacerbated by a colossal mathematical error made in the 1972 amendments establishing the COLAs. The mathematical error which overcompensated for inflation was particularly detrimental given the double-digit inflation of this period, and the error led to benefit increases that were nowhere near financially sustainable. The high inflation, double-indexing, and lower than expected wage growth was financial disaster for Social Security. 1977 Amendments To combat the declining financial outlook, in 1977 Congress passed and Carter signed legislation fixing the double-indexing mistake. This amendment also altered the tax formulas to raise more money,[54] increasing withholding from 2% to 6.15%.[55] With these changes, President Carter remarked, "Now this legislation will guarantee that from 1980 to the year 2030, the Social Security funds will be sound."[56] This turned out not to be the case. The financial picture declined almost immediately and by the early 1980s, the system was again in crisis.
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Social Security Amendments of the 1980s After the 1977 amendments, the economic assumptions surrounding Social Security projections continued to be overly optimistic as the program moved toward a crisis. For example, COLAs were attached to increases in the CPI. This meant that they changed with prices, instead of wages. Before the 1970s, wage measurements exceeded changes in price. In the 1970s, however, this reversed and real wages decreased. This meant that FICA revenues could not keep up with the increasing benefits that were being given out. Continued high unemployment levels also lowered the amount of Social Security tax that could be collected. These two developments were decreasing the Social Security Trust Fund reserves.[57] In 1982, projections indicated that the Social Security Trust Fund would run out of money by 1983, and there was talk of the system being unable to pay benefits.[58] The National Commission on Social Security Reform, chaired by Alan Greenspan, was created to address the crisis. The 1983 Amendments The National Commission on Social Security Reform (NCSSR), chaired by Alan Greenspan, was empaneled to investigate the long-run solvency of Social Security. The 1983 Amendments to the SSA were based on the NCSSR's Final Report.[59] The NCSSR recommended enacting a six-month delay in the COLA and changing the tax-rate schedules for the years between 1984 and 1990.[60] It also proposed an income tax on the Social Security benefits of higher-income individuals. This meant that benefits in excess of a household income threshold, generally $25,000 for singles and $32,000 for couples (the precise formula computes and compares three different measures) became taxable. These changes were important for generating revenue in the short term. Also of concern was the long-term prospect for Social Security because of demographic considerations. Of particular concern was the issue of what would happen when people born during the postWorld War II baby boom retired. The NCSSR made several recommendations for addressing the issue.[61] Under the 1983 amendments to Social Security, a previously enacted increase in the payroll tax rate was accelerated, additional employees were added to the system, the full-benefit retirement age was slowly increased, and up to one-half of the value of the Social Security benefit was made potentially taxable income.[62] [63] The 1983 Amendments and the Social Security Trust Fund The 1983 Amendments also included a provision to exclude the Social Security Trust Fund from the unified budget (In political jargon, it was proposed to be taken off-budget. Yet today Social Security is treated like all the other trust funds of the Unified Budget. It is a political way of using a cash budget instead of the more appropriate accrual budget (for all the budgets in the U.S. government), and a way of disguising total debt.[64] This provision also provided for the exemption of Social Security and portions of the Medicare trust funds from any general budget cuts beginning in 1993.[52] This change was one way of trying to protect Social Security funds for the future. As a result of these changes, particularly the tax increases, the Social Security system began to generate a large short-term surplus of funds, intended to cover the added retirement costs of the "baby boomers." Congress invested these surpluses into special series, non-marketable U.S. Treasury securities held by the Social Security Trust Fund. Under the law, the government bonds held by Social Security are backed by the full faith and credit of the U.S. government. The Supreme Court and the evolution of Social Security The Supreme Court has established that no one has any legal right to Social Security benefits. The Court decided, in Flemming v. Nestor (1960), that "entitlement to Social Security benefits is not a contractual right". In that case, Ephram Nestor, a Bulgarian immigrant to the United States who made contributions for covered wages for the statutorily required "quarters of coverage" was nonetheless denied benefits after being deported in 1956 for being a member of the Communist party. The case specifically held:
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Social Security 2. A person covered by the Social Security Act has not such a right in old-age benefit payments as would make every defeasance of "accrued" interests violative of the Due Process Clause of the Fifth Amendment. Pp. 608611. (a) The noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits are based on his contractual premium payments. Pp. 608610. (b) To engraft upon the Social Security System a concept of "accrued property rights" would deprive it of the flexibility and [363 U.S. 603, 604] boldness in adjustment to ever-changing conditions which it demands and which Congress probably had in mind when it expressly reserved the right to alter, amend or repeal any provision of the Act. Pp. 610611. 3. Section 202 (n) of the Act cannot be condemned as so lacking in rational justification as to offend due process. Pp. 611612. 4. Termination of appellee's benefits under 202 (n) does not amount to punishing him without a trial, in violation of Art. III, 2, cl. 3, of the Constitution or the Sixth Amendment; nor is 202 (n) a bill of attainder or ex post facto law, since its purpose is not punitive. Pp. 612621.[65] The Supreme Court was also responsible for major changes in Social Security. Many of these cases were pivotal in changing the assumptions about differences in wage earning among men and women in the Social Security system.[65] Goldberg v. Kelly (1970): The Supreme Court ruled that the due process clause of the Fourteenth Amendment required there to be an evidentiary hearing before a recipient can be deprived of government benefits.[30] Weinberger v. Wiesenfeld (1975): A widower claimed that he was entitled to his deceased wifes benefit, even though he had not been dependent on his wife. The court upheld his claims, stating that automatically granting widows the benefits and denying them to widowers violated equal protection in the Fourteenth Amendment.[66] Dates of coverage for various workers 1935 All workers in commerce and industry (except railroads) under age 65. 1939 Age restriction eliminated; seamen, bank employees added; additional domestic workers and food-processing workers removed 1946 Railroad and Social Security earnings combined to determine eligibility for and amount of survivor benefits. 1950 Regularly employed farm and domestic workers. Nonfarm self-employed (except professional groups). Federal civilian employees not under retirement system. Americans employed outside United States by American employer. Puerto Rico and Virgin Islands. At the option of the State, State and local government employees not under retirement system. Nonprofit organizations could elect coverage for their employees (other than ministers). 1951 Railroad workers with less than 10 years of service, for all benefits. (After October 1951, coverage is retroactive to 1937.) 1954 Farm self-employed. Professional self-employed except lawyers, dentists, doctors, and other medical groups. Additional regularly employed farm and domestic workers. Homeworkers. State and local government employees (except firemen and policemen) under retirement system if agreed to by referendum. Ministers could elect coverage as self-employed. 1956 Members of the uniformed services. Remainder of professional self-employed except doctors. By referendum, firemen and policemen in designated States. 1965 Interns. Self-employed doctors. Tips. 1967 Ministers (unless exemption is claimed on grounds of conscience or religious principles). Firemen under retirement system in all States. 1972 Members of a religious order subject to a vow of poverty. 1983 All federal civilian employees hired after 1983; members of Congress, the President and Vice-President and federal judges; all employees of nonprofit organizations. Covered state and local government employees prohibited from opting out of Social Security. 1990 Employees of state and local governments not covered under a retirement plan.[67]
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Social Security
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Benefits
The largest component of OASDI is the payment of retirement benefits. Throughout a worker's career, the Social Security Administration keeps track of his or her earnings. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. For the entire history of Social Security, benefits have been paid almost entirely by using revenue from payroll taxes. This is why Social Security is referred to as a pay-as-you-go system. Around 2017, payroll tax revenue is projected to be insufficient to cover Social Security benefits and the system will begin to withdraw money from the Social Security Trust Fund. The existence and economic significance of the Social Security Trust Fund is a subject of considerable dispute because its assets are special Treasury bonds; i.e. the money in the trust fund has been lent back to the federal government to pay for other expenses.
Totals By Year
Year Beneficiaries Dollars 1937 53,236 $1,278,000 1938 213,670 $10,478,000 1939 174,839 $13,896,000 1940 222,488 $35,000,000 1950 3,477,243 $961,000,000 1960 14,844,589 $11,245,000,000 1970 26,228,629 $31,863,000,000 1980 35,584,955 $120,511,000,000 1990 39,832,125 $247,796,000,000 1995 43,387,259 $332,553,000,000 1996 43,736,836 $347,088,000,000 1997 43,971,086 $361,970,000,000 1998 44,245,731 $374,990,000,000 1999 44,595,624 $385,768,000,000 2000 45,414,794 $407,644,000,000 2001 45,877,506 $431,949,000,000 2002 46,444,317 $453,746,000,000 2003 47,038,486 $470,778,000,000 2004 47,687,693 $493,263,000,000 2005 48,434,436 $520,748,000,000 2006 49,122,624 $546,238,000,000 2007 49,864,838 $584,939,000,000 2008 50,898,244 $615,344,000,000
Primary Insurance Amount

A worker's retirement income benefit is based on his Primary Insurance Amount, or PIA. The PIA is the average of the highest 35 years of the worker's covered earnings (before deduction for FICA). Covered earnings in any year are limited by that year's Social Security Wage Base, the maximum earnings that could be subject to the OASDI portion of FICA payroll tax ($106,800 in 2010[68] ). If the worker has fewer than 35 years of covered earnings, zeros are used to bring the total number of years of earnings up to 35. Years of covered work more than 2 years before the year the worker turns 62 are indexed upward to reflect the increase in the national wage via the average wage index (AWI) from the time at which the earnings were covered in the past to the value of the AWI two years before the worker turns 62 (which is the most recent year available at the date the worker turns 62). One-twelfth of this 35-year
Social Security average is the average indexed monthly earnings (AIME). The PIA then is 90 percent of the AIME up to the first (low) bendpoint, and 32 percent of the excess of AIME over the first bendpoint but not in excess of the second (high) bendpoint, plus 15 percent of the AIME in excess of the second bendpoint. Bendpoints designate the point at which the rates of return on a beneficiary's AIME change.[69] [70] In 2008, the bendpoints for calculating the PIA are a change from 90% to 32% at $711 and a change to 15% at $4,288.[70] [71] This PIA is then adjusted by automatic cost-of-living adjustments annually starting with the year the worker turns 62. Similar computations based on career average earnings determine disability and survivor benefits. These alternate computations average less years of earnings when the worker dies or is disabled before age 62 and use different base years for the inflation adjustments.
790
Normal retirement age

The earliest age at which (reduced) benefits are payable is 62. Full retirement benefits depend on a retiree's year of birth.[72] Those born before 1938 have a normal retirement age of 65. Normal retirement age increases by two months for each ensuing year of birth until the 1943 year of birth, when it stays at age 66 years until the year of birth 1955. Thereafter the normal retirement age increases again by two months for each year ending in the 1960 year of birth, when normal retirement age stops at age 67 for all born thereafter. Since the retirement age increases each year it is important to look at how the rest of the world is vastly approaching retirement age also. The breakdown in the more well known countries is as follows: Europe, Northern America, Australia, New Zealand, and Japan has increased from 8 percent in the 1950s to 14 percent in 2000, and is predicted to reach 26 percent in 2050. The reason for these high percentages is a result of a decline in the death and fertility rates.[73] A worker who starts benefits before normal retirement age has their benefit reduced based on the number of months before normal retirement age they start benefits. This reduction is 5/9 of 1% for each month up to 36 and then 5/12 of 1% for each additional month. This formula gives an 80% benefit at age 62 for a worker with a normal retirement age of 65, a 75% benefit at age 62 for a worker with a normal retirement age of 66, and a 70% benefit at age 62 for a worker with a normal retirement age of 67. A worker who delays starting retirement benefits past normal retirement age earns delayed retirement credits that increase their benefit until they reach age 70. These credits are also applied to their widow(er)'s benefit. Children and spouse benefits are not affected by these credits. The normal retirement age for widow(er) benefits shifts the year-of-birth schedule upward by two years, so that those widow(er)s born before 1940 have age 65 as their normal retirement age.
Spouse's benefit
Any current spouse is eligible, and divorced or former spouses are eligible generally if the marriage lasts for at least 10 years. (Civil marriages of same sex couples are not recognized by OASDI for spousal benefits because the federal DOMA law excludes them for federal recognition.) While it is arithmetically possible for one worker to generate spousal benefits for up to five of his/her spouses that he/she may have, each must be in succession after a proper divorce for each after a marriage of at least ten years. Because age 70 is the latest retirement age, and because no state recognizes marriage before teenage years, there are no more than 5 successive spousal benefits in ten-year intervals. This spousal retirement benefit is half the PIA of the worker; this is different from the spousal survivor benefit, which is the full PIA. The benefit is the product of the PIA, times one half, times the early-retirement factor if the spouse is younger than normal retirement age. There is no increase for starting spousal benefits after normal retirement age. This can occur if there is a married couple in which the younger person is the only worker and is more than 5 years younger. Only after the worker applies for retirement benefits may the non-working spouse apply for spousal retirement benefits. Note that, since the passage of the Senior Citizens' Freedom to Work Act, in 2000, the spouse and children of a worker who has reached normal retirement age can receive benefits on the worker's record whether the worker is receiving benefits or not. Thus a worker can delay retirement without affecting spousal and children's benefits. The
Social Security worker may have to begin receipt of benefits, to allow the spousal/children's benefits to begin, and then subsequently suspend his/her own benefits in order to continue the postponement of benefits in exchange for an increased benefit amount.
791
Widow(er)'s benefits
If a worker covered by Social Security dies, a surviving spouse can receive survivors' benefits. In some instances, survivors' benefits are available even to a divorced spouse. A father or mother with minor or disabled children in his or her care can receive benefits which are not actuarially reduced. The earliest age for a nondisabled widow(er)'s benefit is age 60. The benefit is equal to the worker's full retirement benefit for spouses who are at, or older than, normal retirement age. If the surviving spouse starts benefits before normal retirement age, there is an actuarial reduction.[74] If the worker earned delayed retirement credits by waiting to start benefits after their normal retirement age, the surviving spouse will have those credits applied to their benefit.
Children's benefits
Children of a retired, disabled or deceased worker receive benefits as a "dependent" or "survivor" if they are under the age of 18, or between 18 and 19 and have not yet graduated from high school, or are over the age of 18 and were disabled before the age of 22.[74] In a landmark case, the 8th Circuit U.S. Court of Appeals decided that a child is entitled to survivor benefits even though she was born two years after her father's death, having been conceived by in vitro fertilization.[75]
Disability
A worker who has worked long enough and recently enough (based on "quarters of coverage" within the recent past) to be covered can receive disability benefits. These benefits start after five full calendar months of disability, regardless of his or her age. The eligibility formula requires a certain number of credits (based on earnings) to have been earned overall, and a certain number within the ten years immediately preceding the disability, but with more-lenient provisions for younger workers who become disabled before having had a chance to compile a long earnings history. The worker must be unable to continue in his or her previous job and unable to adjust to other work, with age, education, and work experience taken into account; furthermore, the disability must be long-term, lasting 12 months, expected to last 12 months, resulting in death, or expected to result in death.[76] As with the retirement benefit, the amount of the disability benefit payable depends on the worker's age and record of covered earnings. Supplemental Security Income (SSI) uses the same disability criteria as the insured social security disability program, but SSI is not based upon insurance coverage. Instead, a system of means-testing is used to determine whether the claimants' income and net worth fall below certain income and asset thresholds. Severely disabled children may qualify for SSI. Standards for child disability are different from those for adults. Disability determination at the Social Security Administration has created the largest system of administrative courts in the United States. Depending on the state of residence, a claimant whose initial application for benefits is denied can request reconsideration or a hearing before an Administrative Law Judge (ALJ). Such hearings sometimes involve participation of an independent vocational expert (VE) or medical expert (ME), as called upon by the ALJ. Reconsideration involves a re-examination of the evidence and, in some cases, the opportunity for a hearing before a (non-attorney) disability hearing officer. The hearing officer then issues a decision in writing, providing justification for his/her finding. If the claimant is denied at the reconsideration stage, (s)he may request a hearing before an Administrative Law Judge. In some states, SSA has implemented a pilot program that eliminates the reconsideration step and allows claimants to appeal an initial denial directly to an Administrative Law Judge.
Social Security Because the number of applications for Social Security is very large (approximately 650,000 applications per year), the number of hearings requested by claimants often exceeds the capacity of Administrative Law Judges. The number of hearings requested and availability of Administrative Law Judges varies geographically across the United States. In some areas of the country, it is possible for a claimant to have a hearing with an Administrative Law Judge within 90 days of his/her request. In other areas, waiting times of 18 months are not uncommon. After the hearing, the Administrative Law Judge (ALJ) issues a decision in writing. The decision can be Fully Favorable (the ALJ finds the claimant disabled as of the date that (s) he alleges in the application through the present), Partially Favorable (the ALJ finds the claimant disabled at some point, but not as of the date alleged in the application; OR the ALJ finds that the claimant was disabled but has improved), or Unfavorable (the ALJ finds that the claimant was not disabled at all). Claimants can appeal Partially Favorable and Unfavorable decisions to Social Security's Appeals Council, which is in Virginia. The Appeals Council does not hold hearings; it accepts written briefs. Response time from the Appeals Council can range from 12 weeks to more than 3 years. If the claimant disagrees with the Appeals Council's decision, (s)he can appeal the case in the federal district court for his/her jurisdiction. As in most federal court cases, an unfavorable district court decision can be appealed to the appropriate United States Court of Appeals, and an unfavorable appellate court decision can be appealed to the United States Supreme Court.
792
Current operation
Joining and quitting
Obtaining a Social Security number for a child is voluntary.[77] Further, there is no general legal requirement that individuals join the Social Security program. Although the Social Security Act itself does not require a person to have a Social Security Number (SSN) to live and work in the United States,[78] the Internal Revenue Code does generally require the use of the social security number by individuals for federal tax purposes: The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary [of the Treasury or his delegate], be used as the identifying number for such individual for purposes of this title.[79] Importantly, most parents apply for Social Security numbers for their dependent children in order to [80] include them on their income tax returns as a dependent. Everyone filing a tax return, as taxpayer or spouse, must have a Social Security Number or Taxpayer Identification Number (TIN) since the IRS is unable to process returns or post payments for anyone without an SSN or TIN. The FICA taxes are imposed on all workers and self-employed persons. Employers are required[81] to report wages for covered employment to Social Security for processing Forms W-2 and W-3. There are some specific wages which are not a part of the Social Security program (discussed below). Internal Revenue Code provisions section 3101 [82] imposes payroll taxes on individuals and employer matching taxes. Section 3102[83] mandates that employers deduct these payroll taxes from workers' wages before they are paid. Generally, the payroll tax is imposed on everyone in employment earning "wages" as defined in 3121 [84] of the Internal Revenue Code.[85] and also taxes[86] net earnings from self-employment.[87]
Social Security
793
Trust fund
Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury (technically, the "Federal Old-Age and Survivors Insurance Trust Fund", as established by 42 U.S.C.401(a) [88]). Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is invested in special series, non-marketable U.S. Government bonds, thus the Social Security Trust Fund indirectly finances the federal government's general purpose deficit spending. In 2007, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $2.2 trillion.[89] The Trust Fund is regarded by some as an accounting trick which holds no economic significance. Others argue that it has specific legal significance because the Treasury securities it holds are backed by the "full faith and credit" of the U.S. government, which has an obligation to repay its debt. The Social Security Administration's authority to make benefit payments as granted by Congress extends only to its current revenues and existing Trust Fund balance, i.e., redemption of its holdings of Treasury securities. Therefore, Social Security's ability to make full payments once annual benefits exceed revenues depends in part on the federal government's ability to make good on the bonds that it has issued to the Social Security trust funds. As with any other federal obligation, the federal government's ability to repay Social Security is based on the power to tax and the commitment of the Congress to meet its obligations. In 2009 the Office of the Chief Actuary of the Social Security Administration calculated an unfunded obligation of $15.1 trillion for the Social Security program. The unfunded obligation is the difference between the present value of the cost of Social Security and the present value of the assets in the Trust Fund and the future scheduled tax income of the program. In the Actuarial Note explaining the calculation, the Office of the Chief Actuary wrote that "The term obligation is used in lieu of the term liability, because liability generally indicates a contractual obligation (as in the case of private pensions and insurance) that cannot be altered by the plan sponsor without the agreement of the plan participants."[90] [91]
Office of Disability Adjudication and Review (ODAR)

"The Office of Hearings and Appeals (OHA) administers the hearings and appeals program for the Social Security Administration (SSA). Administrative Law Judges (ALJs) conduct hearings and issue decisions. The Appeals Council considers appeals from hearing decisions, and acts as the final level of administrative review for the Social Security Administration."[92] In 2006, OHA was renamed to ODAR.[93]
Benefit payout comparisons

The current formula used in calculating the benefit level (primary insurance amount or PIA) is very progressive so that sizable benefits could be obtained with much less than the forty to thirty five years of covered wages. Workers who spend their entire careers in covered employment would be unfairly treated relative to workers who spend the first half of their careers not covered (as in municipal employment) by OASDI but are covered by an alternative plan. These people who later switch into covered employment would be entitled to both the alternative non OASDI pension (presumably from a state or municipality) and get an Old Age retirement benefit from Social Security. The progressivity of the PIA formula would in effect allow these workers to double dip. Therefore, there are two provisions that mitigate the effect of the double dipping: one for those who obtain OASDI benefits from a spouse who is a covered worker and the other for those who split their careers in covered and noncovered employment. This latter double dip has a claw back factor which starts at maximum at 10 years and grades out to zero at 30 years so that there is no clawback for those with 30 years or more of covered wages. This is to prevent those with abnormally low AIMEs due to few years of covered status from being treated as lifetime (say 44 years) career low wage earners with low AIMEs.
Social Security
794
International agreements
People sometimes relocate from one country to another, either permanently or on a limited-time basis. This presents challenges to businesses, governments, and individuals seeking to ensure future benefits or having to deal with taxation authorities in multiple countries. To that end, the Social Security Administration has signed treaties, often referred to as Totalization Agreements, with other social insurance programs in various foreign countries.[94] Overall, these agreements serve two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country. The following countries have signed totalization agreements with the SSA (and the date the agreement became effective):[95]
Italy (November 1, 1978) Germany (December 1, 1979) Switzerland (November 1, 1980) Belgium (July 1, 1984) Norway (July 1, 1984) Canada (August 1, 1984) United Kingdom (January 1, 1985) Sweden (January 1, 1987) Spain (April 1, 1988) France (July 1, 1988) Portugal (August 1, 1989) Netherlands (November 1, 1990) Austria (November 1, 1991) Finland (November 1, 1992) Ireland (September 1, 1993) Luxembourg (November 1, 1993) Greece (September 1, 1994) South Korea (April 1, 2001) Chile (December 1, 2001) Australia (October 1, 2002) Japan (October 1, 2005) Denmark (October 1, 2008) Czech Republic (January 1, 2009) Poland (March 1, 2009) Mexico (Signed on June 29, 2004, but not yet in effect)
Social Security number

A side effect of the Social Security program in the United States has been the near-universal adoption of the program's identification number, the Social Security number, as the national identification number in the United States. The social security number, or SSN, is issued pursuant to section 205(c)(2) of the Social Security Act, codified as 42 U.S.C.405(c)(2) [96]. The government originally stated that the SSN would not be a means of identification, but currently a multitude of U.S. entities use the Social Security number as a personal identifier. These include government agencies such as the Internal Revenue Service, the military (which prints it on service members' dog tags and uses it in a number of ways to identify personnel, including the name, rank and "serial number" one would furnish the enemy as a POW) as well as private agencies such as banks, colleges and universities, health insurance companies, and employers. The Social Security Administration admits that the Social Security Act does not require a person to have a Social Security Number to live and work in the United States, nor does it require an SSN simply for the purpose of having one.[78] The Privacy Act of 1974 was in part intended to limit usage of the Social Security number as a means of identification. Paragraph (1) of subsection (a) of section 7 of the Privacy Act, an uncodified provision, states in part: (1) It shall be unlawful for any Federal, State or local government agency to deny to any individual any right, benefit, or privilege provided by law because of such individual's refusal to disclose his social security account number. However, paragraph (2) of subsection (a) of section 7 of the Privacy Act provides in part: (2) the provisions of paragraph (1) of this subsection shall not apply with respect to
Social Security (A) any disclosure which is required by Federal statute, or (B) the disclosure of a social security number to any Federal, State, or local agency maintaining a system of records in existence and operating before January 1, 1975, if such disclosure was required under statute or regulation adopted prior to such date to verify the identity of an individual.[97] The exceptions under section 7 of the Privacy Act include the Internal Revenue Code requirement that social security numbers be used as taxpayer identification numbers for individuals.[98]
795
Demographic and revenue projections

In each year since 1982, OASDI tax receipts, interest payments and other income have exceeded benefit payments and other expenditures, for example by more than $150 billion in 2004.[99] As the "baby boomers" move out of the work force and into retirement, however, expenses will come to exceed tax receipts and then, after several more years, will exceed all system income, including interest. At that point the system will begin drawing on its Treasury Notes, and will continue to pay benefits at the current levels until the Trust Fund is exhausted. At that point, benefits will be reduced to about three-fourths of current levels unless additional revenue is found. In 2005, this exhaustion of the Trust Fund was projected to occur in 2041 (by the Social Security Administration[100] ) or 2052 (by the Congressional Budget Office[101] ). Thereafter, however, the projection for the date of this event was moved up by a few years after the recession worsened the system's financial picture. The 2011 OASDI Trustees Report stated: Annual cost exceeded non-interest income in 2010 and is projected to continue to be larger throughout the remainder of the 75-year valuation period. Nevertheless, from 2010 through 2022, total trust fund income, including interest income, is more than is necessary to cover costs, so trust fund assets will continue to grow during that time period. Beginning in 2023, trust fund assets will diminish until they become exhausted in 2036. Non-interest income is projected to be sufficient to support expenditures at a level of 77 percent of scheduled benefits after trust fund exhaustion in 2036, and then to decline to 74 percent of scheduled benefits in 2085.[102] In 2007, the Social Security Trustees suggested that either the payroll tax could increase to 16.41 percent in 2041 and steadily increased to 17.60 percent in 2081 or a cut in benefits by 25 percent in 2041 and steadily increased to an overall cut of 30 percent in 2081.[103] The Social Security Administration projects that the demographic situation will stabilize. The cash flow deficit in the Social Security system will have leveled off as a share of the economy. This projection has come into question. Some demographers argue that life expectancy will improve more than projected by the Social Security Trustees, a development that would make solvency worse. Some economists believe future productivity growth will be higher than the current projections by the Social Security Trustees. In this case, the Social Security shortfall would be smaller than currently projected. Tables published by the government's National Center for Health Statistics show that life expectancy at birth was 47.3 years in 1900, rose to 68.2 by 1950 and reached 77.3 in 2002. The latest annual report of the Social Security trustees projects that life expectancy will increase just six years in the next seven decades, to 83 in 2075. A separate set of projections, by the Census Bureau, shows more rapid growth. ("Social Security Underestimates Future Life Spans, Critics Say"[104] ) The Census Bureau projection is that the longer life spans projected for 2075 by the Social Security Administration will be reached in 2050. Other experts, however, think that the past gains in life expectancy cannot be repeated, and add that the adverse effect on the system's finances may be partly offset if health improvements induce people to stay in the workforce longer. Actuarial science, of the kind used to project the future solvency of social security, is by nature inexact. The SSA actually makes three predictions: optimistic, midline, and pessimistic (until the late 1980s it made 4 projections). The
Social Security Social Security crisis that was developing prior to the 1983 reforms resulted from midline projections that turned out to be too optimistic. It has been argued that the overly pessimistic projections of the mid to late 1990s were partly the result of the low economic growth (according to actuary David Langer) assumptions which resulted in the projected exhaustion date being pushed back (from 2028 to 2042) with each successive Trustee's report. During the heavy-boom years of the '90s, the midline projections were too pessimistic. Obviously, projecting out 75 years is a significant challenge and, as such, the actual situation might be much better or much worse than predicted. The Social Security Advisory Board has on three occasions since 1999 appointed a Technical Advisory Panel to review the methods and assumptions used in the annual projections for the Social Security trust funds. The most recent report of the Technical Advisory Panel, released in June 2008 with a copyright date of October 2007, includes a number of recommendations for improving the Social Security projections.[105] [106] Increased spending for Social Security will occur at the same time as increases in Medicare, as a result of the aging of the baby boomers. One projection illustrates the relationship between the two programs: From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7% of national income (gross domestic product) to 13%. Two-thirds of the increase occurs in Medicare.[107]
796
Online benefits estimate

On July 22, 2008 the Social Security Administration introduced a new online benefits estimator.[108] [109] A worker who has enough Social Security credits to qualify for benefits, but who is not currently receiving benefits on his or her own Social Security record and who is not a Medicare beneficiary, can obtain an estimate of the retirement benefit that will be provided, for different assumptions about age at retirement.
Taxation
Tax on wages and self-employment income
Benefits are funded by taxes imposed on wages of employees and self-employed persons. As explained below, in the case of employment, the employer and employee are each responsible for one half of the Social Security tax, with the employee's half being withheld from the employee's pay check. In the case of self-employed persons (i.e., independent contractors), the self-employed person is responsible for the entire amount of Social Security tax. The Federal Insurance Contributions Act (FICA) (codified in the Internal Revenue Code) imposes a Social Security withholding tax equal to 6.20% of the gross wage amount, up to but not exceeding the Social Security Wage Base ($97,500 for 2007; $102,000 for 2008; and $106,800 for 2009, 2010, and 2011). The same 6.20% tax is imposed on employers. For 2011, the employee's contribution was reduced to 4.2%, while the employer's portion remained at 6.2%.[110] For each calendar year for which the worker is assessed the FICA contribution, the SSA credits those wages as that year's covered wages. The income cutoff is adjusted yearly for inflation and other factors. A separate payroll tax of 1.45% of an employee's income is paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding a total tax rate of 2.90%. There is no maximum limit on this portion of the tax. This portion of the tax is used to fund the Medicare program, which is primarily responsible for providing health benefits to retirees. The combined tax rate of these two federal programs was 15.30% (7.65% paid by the employee and 7.65% paid by the employer) and dropped to 13.30% (5.65% paid by the employee and 7.65% paid by the employer) in 2011. For self-employed workers (who technically are not employees and are deemed not to be earning "wages" for Federal tax purposes), the self-employment tax, imposed by the Self-Employment Contributions Act of 1954, codified as Chapter 2 of Subtitle A of the Internal Revenue Code, 26 U.S.C.1401 [111]1403 [112], is 15.3% of "net earnings from self-employment."[113] In essence, a self-employed individual pays both the employee and employer share of the tax, although half of the self-employment tax (the "employer share") is deductible when
Social Security calculating the individual's federal income tax.[114] [115] If an employee has overpaid payroll taxes by having more than one job or switching jobs during the year, the excess taxes will be refunded when the employee files his federal income tax return. Any excess taxes paid by employers, however, are not refundable to the employers. Wages not subject to tax Workers are not required to pay Social Security taxes on wages from certain types of work:[116] Wages received by certain state or local government workers participating in their employers' alternative retirement system. Net annual earnings from self-employment of less than $400. Wages received for service as an election worker, if less than $1,400 a year (in 2008). Wages received for working as a household employee, if less than $1,700 per year (in 20092010). Wages received by college students working under Federal Work Study programs, graduate students receiving stipends while working as teaching assistants, research assistants, or on fellowships, and most postdoctoral researchers. Eliminated starting January 2011. Earnings received for serving as a minister (or for similar religious service) if the person has a conscientious objection to public insurance because of personal religious considerations, but only for "qualified services" performed for a religious organization. Other minor exceptions.
797
Federal income taxation of benefits

The benefits received by retirees were not originally taxed as income in the year of receipt. Beginning in tax year 1984, with the Reagan-era reforms to repair the system's projected insolvency, retirees with incomes over $25,000 (in the case of married persons filing separately who did not live with the spouse at any time during the year, and for persons filing as "single"), or with combined incomes over $32,000 (if married filing jointly) or, in certain cases, any income amount (if married filing separately from the spouse in a year in which the taxpayer lived with the spouse at any time) generally saw part of the retiree benefits subject to Federal income tax. In 1984, the portion of the benefits potentially subject to tax was 50%.[117] Under the Deficit Reduction Act of 1993, the portion of benefits potentially subject to tax was increased to 85% beginning with the 1994 tax year.[118]
Criticism of the program

Claim that it discriminates against the poor and the middle class
Critics, such as libertarian Nobel Laureate economist Milton Friedman, say that Social Security redistributes wealth from the poor to the wealthy.[119] [120] Workers must pay 12.4 percent, including a 6.2 percent employer contribution, on their wages below the Social Security Wage Base ($106,800, in 2010), but no tax on income in excess of this amount.[121] Therefore, high earners pay a lower percentage of their total income because of the income caps; because of this, payroll taxes are often viewed as being regressive. Furthermore, wealthier individuals generally have higher life expectancies and thus may expect to receive larger benefits for a longer period than poorer taxpayers.[122] A single individual who dies before age 62, who is more likely to be poor, receives no retirement benefits despite his years of paying Social Security tax. On the other hand, an individual who lives to age 100, who is more likely to be wealthy, is guaranteed payments that are more than he paid into the system.[123] An NBER volume edited by Martin Feldstein and Jeffrey Liebman called The Distributional Aspects of Social Security points out that members of racial minorities with lower than average life expectancies and lower than average rates of marriage may also suffer from the program on average.
Social Security Supporters of Social Security say that despite its regressive tax formula, Social Security benefits are calculated using a progressive benefit formula that replaces a much higher percentage of low-income workers' pre-retirement income than that of higher-income workers (although these low-income workers pay a higher percentage of their pre-retirement income).[124] They also point to numerous studies that show that, relative to high-income workers, Social Security disability and survivor benefits paid on behalf of low-income workers more than offset any retirement benefits that may be lost because of shorter life expectancy.[125] [126] [127] Other research asserts that survivor benefits, allegedly an offset, actually exacerbate the problem because survivor benefits are denied to single individuals, including widow(er)s married less than nine months (except in certain situations),[128] divorced widow(er)s married less than 10 years,[129] and co-habiting or same-sex couples, unless they are legally married in their state of residence.[122] [130] [131] [132] [133] Unmarried individuals tend to be less wealthy and minorities.[134]
798
Claim that politicians exempted themselves from the tax

Critics of Social Security have said that the politicians who created Social Security exempted themselves from having to pay the Social Security tax.[135] Indeed, when the federal government created Social Security, all federal employees, including the President and members of Congress, were exempt from having to pay the Social Security tax, and they received no Social Security benefits. This law was changed by the Social Security Amendments of 1983, which brought within the Social Security system all members of Congress, the President and the Vice President, federal judges, and certain executive-level political appointees, as well as all federal employees hired in any capacity on or after January 1, 1984.[136] Many state and local government workers, however, are exempt from Social Security taxes because they contribute instead to alternative retirement systems set up by their employers.[137]
Claim that the government lied about the maximum tax

George Mason University economics professor Walter E. Williams claimed that the federal government has broken its own promise regarding the maximum Social Security tax.[138] Williams used data from the federal government to back up his claim. According to a 1936 pamphlet on the Social Security website, the federal government promised the following maximum level of taxation for Social Security, "... beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay."[139] However, according to the Social Security website, by the year 2008, the tax rate was 6.2% each for the employer and employee, and the maximum income level that was subject to the tax was $102,000 raising the bar to $6,324 maximum contribution by both employee and employer (total $12,648).[140] In 2005, Williams wrote, "Had Congress lived up to those promises, where $3,000 was the maximum earnings subject to Social Security tax, controlling for inflation, today's $50,000-a-year wage earner would pay about $700 in Social Security taxes, as opposed to the more than $3,000 that he pays today." [138] According to the Social Security website, "The tax rate in the original 1935 law was 1% each on the employer and the employee, on the first $3,000 of earnings. This rate was increased on a regular schedule in four steps so that by 1949 the rate would be 3% each on the first $3,000. The figure was never $1,400, and the rate was never fixed for all time at 1%."[141]
Claim that it gives a low rate of return

Critics of Social Security [142] claim that it gives a low rate of return, compared to what is obtained through private retirement accounts. For example, critics point out [142] that under the Social Security laws as they existed at that time, several thousand employees of Galveston County, Texas were allowed to opt out of the Social Security program in the early 1980s, and have their money placed in a private retirement plan instead. While employees who earned $50,000 per year would have collected $1,302 per month in Social Security benefits, the private plan paid them $6,843 per month. While employees who earned $20,000 per year would have collected $775 per month in
Social Security Social Security benefits, the private plan paid them $2,740 per month, at interest rates prevailing in 1996.[142] While some advocates of privatization of Social Security point to the Galveston pension plan as a model for Social Security reform, critics point to a GAO report[143] to the House Ways and Means Committee, which indicates that, for low and middle income employees, particularly those with shorter work histories, the outcome may be less favorable.
799
Claim that it is a Ponzi scheme

See also: Criticism of Social Security as a pyramid or Ponzi scheme. Critics have drawn parallels between Social Security and Ponzi schemes,[144] [145] [146] e.g.: ...the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those "early investors" who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits. As with Ponzis scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two. As with Ponzis scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When todays young workers retire, they will receive returns far below what private investments could provide.[147] Michael Tanner Paul Krugman has also echoed this 'Ponzi Scheme' allegation. Commenting on the redistributionary nature of Social Security, Krugman once wrote "Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)." [148] One criticism of the analogy is that while Ponzi schemes and Social Security have similar structures (in particular, a sustainability problem when the number of new people paying in is declining), they have different transparencies. In a Ponzi scheme the fact there is no return generating mechanism beyond just contributions from new entrants is obscured[149] whereas Social Security payouts have always been openly underwritten by incoming tax revenue.[150] Private sector Ponzi schemes cannot be sustained indefinitely, whereas Social Security's benefits can theoretically always be sustained by raising taxes on new participants and reducing promised payouts. Because of these and other issues, Robert E. Wright calls Social Security a "quasi" pyramid scheme in his book, Fubarnomics.
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800
Estimated net Social Security benefits under differing circumstances

In 2004, Urban Institute economists C. Eugene Steuerle and Adam Carasso created a Web-based Social Security benefits calculator.[151] Using this calculator it is possible to estimate net Social Security benefits (i.e., estimated lifetime benefits minus estimated lifetime FICA taxes paid) for different types of recipients. In the book Democrats and Republicans Rhetoric and Reality Joseph Fried used the calculator to create graphical depictions of the estimated net benefits of men and women who were at different wage levels, single and married (with stay-at-home spouses), Single men with different wages and retirement dates and retiring in different years. These graphs vividly show that generalizations about Social Security benefits may be of little predictive value for any given worker, due to the wide disparity of net benefits for people at different income levels and in different demographic groups. For example, the graph below (Figure 168) shows the impact of wage level and retirement date on a male worker. As income goes up, net benefits get smaller even negative. However, the impact is much greater for the future retiree (in 2045) than for the current retiree (2005). The male earning $95,000 per year and retiring in 2045 is estimated to lose over $200,000 by participating in the Social Security system.[152] In the next graph (Figure 165) the depicted net benefits are averaged for people turning age 65 anytime during the years 2005 through 2045. (In other words, the disparities shown are not related to retirement.) However, we do see the impact of gender and wage level. Because women tend to live longer, they generally collect Social Security benefits for a longer time. As a result, they get a higher net benefit, on average, no matter what the wage level.[153]
Impact of gender and wage levels on net SS benefits
Social Security
801 The next image (Figure 166) shows estimated net benefits for married men and women at different wage levels. In this particular scenario it is assumed that the spouse has little or no earnings and, thus, will be entitled to collect a spousal retirement benefit. According to Fried:
"Two significant factors are evident: First, every column in Figure 166 depicts a net benefit that is higher than any column in Figure 165. In other words, the average married person (with a stay-at-home spouse) gets Net lifetime SS benefits of married men and women where only one person works a greater benefit per FICA tax dollar paid than does the average single person no matter what the gender or wage level. Second, there is only limited progressivity among married workers with stay-at-home spouses. Review Figure 166 carefully: The net benefits drop as the wage levels increase from $50,000 to $95,000; however, they increase as the wage levels grow from $5,000 to $50,000. In fact, net benefits are lowest for those earning just $5,000 per year."[154] The last graph shown (Figure 167) is a combination of Figures 165 and 166. In this graph it is very clear why generalizations about the value of Social Security benefits are meaningless. At the $95,000 wage level a married person could be a big winner getting net benefits of about $165,000. On the other hand, he could lose an estimated $152,000 in net benefits if he remains single. Altogether, there is a "swing" of over $300,000 based upon the marriage decision (and the division of earnings between the spouses). In addition there is a large disparity between the high net benefits of the married person earning $95,000 ($165,152) versus the relatively low net benefits of the man or woman earning just $5,000 ($30,025 or $41,890, depending on gender). In other words, the high earner, in this scenario, gets a far greater return on his FICA tax investment than does the low earner.[155]
Social Security
802
In the book How Social Security Picks Your Pocket other factors affecting Social Security net benefits are identified: Generally, people who work for more than 35 years get a lower net benefit all other factors being equal. People who do not live long after retirement age get a much lower net benefit. Finally, people who derive a high percentage of income from non-wage sources get high Social Security net benefits because they appear to be "poor," when they are not. The progressive benefit formula for Social Security is blind to the income a worker may have from non-wage sources, such as spousal support, dividends and interest, or rental income.[156]
Comparison of net SS benefits
Current controversies
Proposals to reform of the Social Security system have led to heated debate, centering around funding of the program. In particular, proposals to privatize funding have caused great controversy.
Contrast with private pensions

Although Social Security is sometimes compared to private pensions, the two systems are different in a number of respects. It has been argued that Social Security is an insurance plan as opposed to a retirement plan. Unlike a pension, for example, Social Security pays disability benefits. A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund; and a private system is not universal. Social Security cannot "prefund" by investing in marketable assets such as equities, because federal law prohibits it from investing in assets other than those backed by the U.S. government. As a result, its investments to date have been limited to "special" non-negotiable securities issued by the U.S. Treasury, although some argue that debt issued by the Federal National Mortgage Association and other quasi-governmental organizations could meet legal standards. Social Security cannot by law invest in private equities, although some other countries (such as Canada) and some states permit their pension funds to invest in private equities. As a universal system, Social Security generally operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. When there is an excess of taxes withheld over benefits paid, and by law this excess is invested in Treasury securities (not in private equities) as described above. Two broad categories of private pension plans are "defined benefit pension plans" and "defined contribution pension plans." Of these two, Social Security is more similar to a defined benefit pension plan. In a defined benefit pension plan, the benefits ultimately received are based on some sort of pre-determined formula (such as one based on years worked and highest salary earned). Defined benefit pension plans generally do not include separate accounts for each participant. By contrast, in a defined contribution pension plan each participant has a specific account with funds put into that account (by the employer or the participant, or both), and the ultimate benefit is based on the amount in that account at the time of retirement. Some have proposed that the Social Security system be modified to provide for the option of individual accounts (in effect, to make the system, at least in part, more like a defined contribution pension
Social Security plan). Specifically, on February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address.[157] He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing. See Social Security debate (United States). Both "defined benefit" and "defined contribution" private pension plans are governed by the Employee Retirement Income Security Act (ERISA), which requires employers to provide minimum levels of funding to support "defined benefits" pensions. The purpose is to protect the workers from corporate mismanagement and outright bankruptcy, although in practice many private pension funds have fallen short in recent years. In terms of financial structure, the current Social Security system is analogous to an underfunded "defined benefit" pension ("underfunded" meaning not that it is in trouble, but that its "savings" are not enough to pay future benefits without collecting future tax revenues).
803
Court interpretation of the Act to provide benefits

The United States Court of Appeals for the Seventh Circuit has indicated that the Social Security Act has a moral purpose and should be liberally interpreted in favor of claimants when deciding what counted as covered wages for purposes of meeting the quarters of coverage requirement to make a worker eligible for benefits.[158] That court has also stated: ". . . [T]he regulations should be liberally applied in favor of beneficiaries" when deciding a case in favor of a felon who had his disability payments retroactively terminated upon incarceration.[159] According to the court, that the Social Security Act "should be liberally construed in favor of those seeking its benefits can not be doubted."[160] The hope behind this statute is to save men and women from the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey's end is near.[161]
Constitutionality
The constitutionality of Social Security is intricately linked to the evolving nature of Supreme Court jurisprudence on federal power (the 20th century saw a dramatic increase in allowed congressional action). When Social Security was first passed, there were significant questions over its constitutionality as the Court had found another pension scheme, the original Railroad Retirement Act, to violate the due process clause of the Fifth Amendment. Some, such as University of Chicago law professor Richard Epstein and Robert Nozick, have argued that Social Security should be unconstitutional. In the 1937 U.S. Supreme Court case of Helvering v. Davis,[162] the Court examined the constitutionality of Social Security when George Davis of the Edison Electric Illuminating Company of Boston sued in connection with the Social Security tax. The U.S. District Court for the District of Massachusetts first upheld the tax. The District Court judgment was reversed by the Circuit Court of Appeals. Commissioner Guy Helvering of the Bureau of Internal Revenue (now the Internal Revenue Service) took the case to the Supreme Court, and the Court upheld the validity of the tax. During the 1930s President Franklin Delano Roosevelt was in the midst of promoting the passage of a large number of social welfare programs under the New Deal and the High Court struck down many of those programs (such as the Civilian Conservation Corps and the National Recovery Act) as unconstitutional. Modified versions of the affected programs were afterwards approved by the Court, including Social Security. When Helvering v. Davis was argued before the Court, the larger issue of constitutionality of the old-age insurance portion of Social Security was not decided. The case was limited to whether the payroll tax was a suitable use of Congress's taxing power. Despite this, no serious challenges regarding the system's constitutionality are now being litigated, and Congress's spending power may be more coextensive, as shown in cases like South Dakota v. Dole[163] during the Reagan Administration.
Social Security
804
Fraud and abuse

Social security number theft
Because Social Security Numbers have become useful in identity theft and other forms of crime, various schemes have been perpetrated to acquire valid Social Security Numbers and related identity information. In February 2006, the Social Security Administration received several reports of an email message being circulated addressed to Dear Social Security Number And Card owner and purporting to be from the Social Security Administration. The message informs the reader that someone illegally is using your Social Security number and assuming your identity and directs the reader to a website designed to look like Social Securitys Internet website. I am outraged that someone would target an unsuspecting public in this manner, said Commissioner Jo Anne B. Barnhart. I have asked the Inspector General to use all the resources at his command to find and prosecute whoever is perpetrating this fraud.[164] Once directed to the phony website, the individual is reportedly asked to confirm his or her identity with Social Security and bank information. Specific information about the individuals credit card number, expiration date and PIN is then requested. Whether on our online website or by phone, Social Security will never ask you for your credit card information or your PIN Commissioner Jo Anne B. Barnhart reported. Social Security Administration Inspector General OCarroll recommended people always take precautions when giving out personal information. You should never provide your Social Security number or other personal information over the Internet or by telephone unless you are extremely confident of the source to whom you are providing the information, OCarroll said. See Press Release [165].
Fraud in the acquisition and use of benefits

Given the vast size of the program, fraud occurs. The Social Security Administration has its own investigatory group, Continuing Disability Investigations (CDI). In addition, the Social Security Administration may request investigatory assistance from other federal law enforcement agencies including the Office of the Inspector General and the FBI.
Restrictions on potentially deceptive communications

Because of the importance of Social Security to millions of Americans, many direct-mail marketers packaged their mailings to resemble official communications from the Social Security Administration, hoping that recipients would be more likely to open them. In response, Congress amended the Social Security Act in 1988 to prohibit the private use of the phrase "Social Security" and several related terms in any way that would convey a false impression of approval from the Social Security Administration. The constitutionality of this law (42 U.S.C.1140 [166]) was upheld in United Seniors Association, Inc. v. Social Security Administration, 423 F.3d 397 (4th Cir. 2005), cert den 547 U.S. 1162; 126 S.Ct. 2346 (2006) (text at Findlaw).[167]
Public economics
Consumption smoothing and the annuity market Life annuity
Social Security provides insurance for the possibility of living longer than expected, when a person has consumed all the resources saved for retirement. Annuity is one answer to such an eventuality. A person will buy an annuity and will pay a certain amount during his working life up to around 65 and then receive benefits in return upon retirement. The larger the premium, the larger the benefits he will receive when all the other things remain same. The second concept of consumption smoothing means that a person reduces his consumption when he is earning at the highest level and saves for the years when he will be old and not able to earn at this level but wants to achieve a certain level
Social Security of consumption for him or his family. A risk averse person will be willing to buy an annuity and reduce his consumption in return for a guaranteed level of income after his retirement and for his family after his death. But this has some problems like adverse selection due to asymmetric information.[168]
805
Economize on decision making and administrative costs

It means that in order to properly decide what amount of money one should save and how to invest so that its returns can be used in the old age for ones benefits. These are difficult things and by joining the social security relieve one from these issues but still problem with government program remains that it will not satisfy the choices of many people. In the same manner, the supply side has to deal with the issues of moral hazard, adverse selection and for this purpose they want a lot of information on life expectancies in order to determine annuities. Annuities also have to pay to the sales people high commissions. But making compulsory to join for everyone in a program saves all these costs.[168]
Income redistribution
This is so planned that the benefits are lesser for the people with high income averages and high for the low income people. In this way, social security redistributes the incomes. Moreover, there is also intergenerational redistribution of income also. In the pay as you go system, the present generation of workers pays for the benefits of the earlier generation.[168]
Saving behavior
Social security affects the saving behavior of the people in three different ways. In the wealth substitution effect when a person is paying for his social security, it is expected that he will save less because he knows that in the event of his old age social security will take care of him. In the retirement effect, increases the savings because people would like to retire earlier and this will induce them to save more because now they have to pay for more years after retirement. The bequest effect also increases saving. Because people want to save for children, when they will pay for social security, this will decrease resources and they will save.[168]
Improved income status of the aged

Social security has decreased poverty in the elderly people. During 1974-2003, the median real income among the population above 15 increased by 30% and in the population over 65 this increase was 45%. But still the problem persists and still the women especially widows are likely to experience economic stress. [168]
Social Security Solvency: Cost and Benefit Analysis

A cost and benefit analysis is given here in order to make the Social Security solvent and maintain the current system.
Raising the maximum taxable earning levels

At present the limit is $106, 800. But if the cap is lifted and it includes all taxable income, it will be able to tackle the problem of increasing benefits, from an increase of revenues. A benefit of lifting the cap on the taxable income, but not increasing the benefits make some suggest that the revenue from high income earners will lead to solvency of social security.[168]
Social Security
806
Increasing retirement age

Because the life expectancy has increased and will increase further, even in the absence of other demographic factors the retirement age must be increased to maintain a sustainable system. Since payments began in 1940, life expectancy has increased by 5.1 years for men and 6 for women, yet the retirement age has only been increased by 2 years. To make expected time in retirement the same as in 1940, the retirement age would have to be increased to 73.[169] If the retirement age is increased to 68 it will increase the payroll tax by 0.52 percentage point but it still falls far short of required 3.5 percentage point increase in payroll tax. The cost will be more working years and less leisure and benefit will be that payroll tax will be slightly low.[168]
Reducing cost of living adjustment(COLA)

At present, a retirees benefit is each year increased by the cost of living measured in CPI. According to some economists the CPI overestimates the price increases so it is appropriate to adjust benefits less than CPI (Boskin et al., 1998). If the benefits adjustments is delinked from CPI and it will reduce cost of living and the reduction in cost of living will increase benefits by 0.79 dollar for every dollar reduced.[168]
Changing of the benefit formula

At present, AIME is calculated on the average of 35 years of earnings, as discussed earlier, if the retirement is increased to 68 then the average for calculation of AIME may be increased to 38 years earnings. It will decrease the lifetime earnings and it will decrease the benefits. This would increase the payroll tax by 0.26 percentage points. Another variant of this can be, now AIME uses the indexing based on average wage growth for 35 years but if it was based on CPI then it will also reduce the benefits. It will help in sustainable solvency because the wages tend to rise more as compared to prices. In order to help the poor, the lowest income 30% of the retirees may be given benefits based on wage indexing and all the rest on price indexing or the mix of both indexes.[168]
References
[1] 42 U.S. 401, Law.cornell.edu (http:/ / www. law. cornell. edu/ uscode/ 42/ 401. html#a,) retrieved January 4, 2010. [2] Social Security Act of 1935 "Legislative History 1935 Social Security Act" (http:/ / www. socialsecurity. gov/ history/ 35actinx. html). . Retrieved November 8, 2006. [3] [42 USC 7] "US CodeTitle 42The Public Health and Welfare" (http:/ / web. archive. org/ web/ 20061012002738/ http:/ / www. access. gpo. gov/ uscode/ title42/ chapter7_. html). Archived from the original (http:/ / www. access. gpo. gov/ uscode/ title42/ chapter7_. html) on October 12, 2006. . Retrieved November 8, 2006. [4] "42 USC 401, Trust Funds" (http:/ / www. law. cornell. edu/ uscode/ html/ uscode42/ usc_sec_42_00000401----000-. html). . Retrieved November 8, 2006.four [5] "OASDI Expenditures" (http:/ / web. archive. org/ web/ 20050306003217/ http:/ / www. ssa. gov/ OACT/ STATS/ t4a3Outgo. html). Archived from the original (http:/ / www. ssa. gov/ OACT/ STATS/ t4a3Outgo. html) on March 6, 2005. . Retrieved December 3, 2005. [6] Mid-session review, budget of the U.S. Government, Fiscal Year 2009 (http:/ / www. whitehouse. gov/ omb/ budget/ fy2009/ pdf/ 09msr. pdf) [7] Feldstein, M. (2005). Rethinking social insurance. American Economic Review, 95(1), pp. 124. [8] 45. Orr, D. (November December, 2004). "Social Security Isn't Broken: So Why the Rush To 'Fix ' It? In C. Sturr & R. Vasudevan (Eds.), 2007, Current Economic Issues. Boston: Economic Affairs Bureau. [9] "2011 Annual Report by the Social Security Board of Trustees" (http:/ / journalistsresource. org/ studies/ government/ politics/ social-security-report-2011/ ). Journalist's Resource.org. . [10] "A Reader's Companion to American History: Poverty" (http:/ / college. hmco. com/ history/ readerscomp/ rcah/ html/ ah_070900_poverty. htm). . Retrieved March 17, 2006. [11] "History 1930" (http:/ / www. ssa. gov/ history/ 1930. html). Social Security Administration. . Retrieved May 21, 2009. [12] Achenbaum, Andrew (1986). Social Security Visions and Revisions. New York: Cambridge University Press. p. 25-6. [13] http:/ / www. law. cornell. edu/ uscode/ 42/ usc_sup_01_42_10_7. html [14] Mink, Gwendolyn (1995). The Wages of Motherhood: Inequality in the Welfare State, 19171942. Ithaca: Cornell University Press. p. 127. [15] Quadagno, Jill (1994). The Color of Welfare: How Racism Undermined the War on Poverty. New York: Oxford University Press. p. 7. [16] Kessler-Harris, Alice, 2001. pp. 130-1. [17] Kessler-Harris, Alice, 2001. p. 146. [18] Kessler-Harris, Alice, 2001. p.157.
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[19] Katznelson, Ira. When Welfare was White: The untold history of racial inequality in twentieth century America. New York: W.W. Norton, 2005. pp. 43-8. [20] Mink, Gwendolyn. The Wages of Motherhood, 1995. pp. 126-130. [21] Mink, 1995, p. 142. [22] Mink 1995, p. 143. [23] Supremecourthistory.org (http:/ / www. supremecourthistory. org/ 01_society/ 01. html) [24] "Social Security Administration" (http:/ / www. ssa. gov/ history/ court. html). Ssa.gov. . Retrieved 2011-09-11. [25] "Steward Machine Company vs. Davis, 301 U.S, 548" (http:/ / www. oyez. org/ oyez/ resource/ case/ 368/ ). . Retrieved December 3, 2005. [26] First Payments of Social Security (http:/ / www. ssa. gov/ history/ briefhistory3. html#firstcheck), Social Security Administration. [27] Research Note #3: Details of Ida May Fuller's Payroll Tax Contributions (https:/ / www. socialsecurity. gov/ history/ idapayroll. html), Social Security Administration. [28] Achenbaum, Andrew. Social Security Visions and Revisions, 1986. p. 124. [29] Kessler-Harris, Alice. In Pursuit of Equity, 2001. p. 156. [30] Achenbaum 1986. p. 130. [31] p. 19 (http:/ / www. socialsecurity. gov/ history/ pdf/ 2007historybooklet. pdf) [32] Achenbaum 1986, p. 30 [33] Achenbaum 1986, p. 33 [34] Berstein, Merton and Joan (1988). Social Security: The System That Works. New York City: Basic Books. p. 10. [35] SSA.gov (http:/ / www. ssa. gov/ history/ BudgetTreatment), budget treatment [36] Mink, Gwendolyn. The Wages of Motherhood, 1995. p. 134. [37] Achenbaum, Andrew. Social Security Visions and Revisions. p. 30 [38] Achenbaum 1986, pp. 27, 30. [39] Kessler-Harris, Alice. In Pursuit of Equity, 2001. p. 134. [40] Mink, Gwendolyn. The Wages of Motherhood, 1995. pp. 135-6. [41] Kessler-Harris, Alice. In Pursuit of Equity, 2001. p. 141. [42] Mink, Gwendolyn. The Wages of Motherhood, 1995. p. 137. [43] Achenbaum, Andrew. Social Security Visions and Revisions, 1986. p. 34. [44] Jonathan Chait, Blocking Move (http:/ / www. tnr. com/ article/ blocking-move) The New Republic March 21, 2005 [45] Will Wilkinson, Social Security and the Insurance Illusion (http:/ / www. thefreemanonline. org/ featured/ social-security-and-the-insurance-illusion/ ) Foundation for Economic Education 55:7 September 2005 See also: Theda Skocpol, Social Policy in the United States: Future Possibilities in Historical Perspective, (Princeton University Press: 1995) p. 162: "The ideology that Altmeyer and other Social Security administrators fashioned for the old-age security system was individualistic and based on a (technically quite false) analogy to private savings or insurance." [46] Dean Baker Social Security tax cut: A deal breaker (http:/ / thehill. com/ blogs/ congress-blog/ economy-a-budget/ 132919-social-security-tax-cut-a-deal-breaker) The Hill December 9, 2010 [47] Jennifer Steinhauer For Some in G.O.P., a Tax Cut Not Worth Embracing (http:/ / www. nytimes. com/ 2011/ 08/ 26/ us/ politics/ 26dems. html) The New York Times August 25, 2011 [48] Kessler-Harris 2001. p. 150. [49] Kessler-Harris 2001, p. 161. [50] Kessler-Harris, Alice. In Pursuit of Equity, 2001. p. 161. [51] Achenbaum, Andrew. Social Security Visions and Revisions, 1986. p. 129. [52] "SSA.gov" (http:/ / www. ssa. gov/ history/ BudgetTreatment. html). SSA.gov. . Retrieved 2011-09-11. [53] Achenbaum 1986. p. 58 [54] Achenbaum 1986, p. 67 [55] Frum, David (2000). How We Got Here: The '70s. New York, New York: Basic Books. p.324. ISBN0465041957. [56] Sylvester J. Schieber and John. B. Shoven, The Real Deal: the History and Future of Social Security. (New Haven and London: Yale University Press, 1999), p. 182. [57] Achenbaum, Andrew. Social Security Visions and Revisions, 1986. p. 68 [58] Sylvester J. Schieber and John. B. Shoven, The Real Deal, 1999, p. 190. [59] "Report of the National Commission on Social Security Reform" (http:/ / www. ssa. gov/ history/ reports/ gspan. html). . Retrieved March 15, 2008. [60] Achenbaum, Andrew. Social Security Visions and Revisions, 1986. p. 87 [61] "Chapter 2 of the 1983 Greenspan Commission on Social Security Reform" (http:/ / www. ssa. gov/ history/ reports/ gspan5. html). . Retrieved March 17, 2006. [62] "Research Notes & Special Studies by the Historian's Office" (http:/ / www. ssa. gov/ history/ taxationofbenefits. html). . Retrieved March 17, 2006. [63] See 26 U.S.C. 86 (http:/ / www. law. cornell. edu/ uscode/ 26/ 86. html). [64] Webb, Roy, (1991). The Stealth Budget: Unfunded Liabilities of the Federal Government, Economic Review (Federal Reserve Bank of Richmond), 77,2 May/June
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[65] Kessler-Harris, Alice. In Pursuit of Equity, 2001. p. 168. [66] Kessler-Harris, Alice. In Pursuit of Equity, 2001. p. 131. [67] "Social Security: Summary of Major Changes in the Cash Benefits Program" (http:/ / www. socialsecurity. gov/ history/ reports/ crsleghist2. html). Social Security Administration. . Retrieved May 21, 2009. [68] "Contribution and Benefit Base" (http:/ / www. ssa. gov/ OACT/ COLA/ cbb. html). Social Security Administration. . Retrieved May 21, 2009. [69] "Social Security Administration "Considerations for Potential Proposals to Change the Earliest Eligibility Age for Retirement"" (http:/ / www. socialsecurity. gov/ policy/ docs/ policybriefs/ pb2007-01. html). Social Security Administration. . Retrieved May 21, 2009. [70] "POMS RS 00605.021" (https:/ / s044a90. ssa. gov/ apps10/ poms. nsf/ lnx/ 0300605021!opendocument). Social Security Administration. . Retrieved May 21, 2009. 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[76] "What We Mean By Disability" (http:/ / www. ssa. gov/ dibplan/ dqualify4. htm). . Retrieved December 3, 2005. [77] "Social Security Numbers For Children" (http:/ / www. ssa. gov/ pubs/ 10023. html). Social Security Administration. November 3, 2008. . Retrieved May 21, 2009. [78] http:/ / home. hiwaay. net/ ~becraft/ ScottSSNLetter. pdf [79] See 26 U.S.C. 6109(d) (http:/ / www. law. cornell. edu/ uscode/ 26/ 6109(d). html). [80] keep "Tax Reform Act of 1986" (http:/ / www. socialsecurity. gov/ history/ ssn/ reagantax. html). . Retrieved November 8, 2006. [81] "26 USC 6051" (http:/ / frwebgate. access. gpo. gov/ cgi-bin/ getdoc. cgi?dbname=browse_usc& docid=Cite:+ 26USC6051). . Retrieved November 8, 2006. 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Retrieved June 26, 2010. [91] "The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds" (http:/ / www. socialsecurity. gov/ OACT/ TR/ 2009/ tr09. pdf) (PDF). Social Security Administration. May 2009. . Retrieved June 27, 2010. [92] SSA.gov (http:/ / www. ssa. gov/ oha/ ) [93] David Traver. "Option.com" (http:/ / ssaconnect. com/ component/ option,com_forum/ Itemid,2/ page,viewtopic/ t,3295/ ). Ssaconnect.com. . Retrieved May 21, 2009. [94] Christians, Allison (June 28, 2006). "Social Security in United States Treaties and Executive Agreements". Internationalen Steuerrecht 43. SSRN822504. [95] "International Agreements" (http:/ / www. ssa. gov/ international/ status. html). . Retrieved January 26, 2009. [96] http:/ / www. law. cornell. edu/ uscode/ 42/ 405. html#c_2 [97] Privacy Act of 1974, Pub. L. No. 93-579, 88 Stat. 1897 (December 31, 1974), sec. 7(a) (emphasis added). [98] 26 U.S.C. 6109(d) (http:/ / www. law. cornell. edu/ uscode/ 26/ 6109. html#d). [99] "OASDI Trust Funds (See above)" (http:/ / www. ssa. gov/ OACT/ STATS/ table4a3. html). . Retrieved December 3, 2005. [100] "Social Security Administration" (http:/ / www. ssa. gov/ OACT/ TRSUM/ trsummary. html). . Retrieved December 3, 2005. [101] "Congressional Budget Office" (http:/ / www. cbo. gov/ showdoc. cfm?index=5666& sequence=0). . Retrieved December 3, 2005. [102] "2011 OASDI Trustees Report" (http:/ / www. ssa. gov/ oact/ tr/ 2011/ II_D_project. html). Social Security Administration. . Retrieved July 29, 2011. [103] "2007 OASDI Trustees Report Conclusions" (http:/ / www. socialsecurity. gov/ OACT/ TR/ TR07/ II_conclu. html). Social Security Administration. April 23, 2007. . Retrieved May 21, 2009. [104] "Social Security Underestimates Future Life Spans, Critics Say" (http:/ / www. heraldtribune. com/ apps/ pbcs. dll/ article?AID=/ 20041231/ ZNYT02/ 412310311). . 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[105] Technical Panel on Assumptions and Methods (2007), "Report to the Social Security Advisory Board," (http:/ / www. ssab. gov/ documents/ 2007_Technical_Panel_Report. PDF) October 2007 [106] Social Security Advisory Board, "Press Release: The Report of the 2007 Technical Panel on Assumptions and Methods," (http:/ / www. ssab. gov/ documents/ SSAB_TPAM_Announcement_60508. pdf) June 5, 2008 [107] Samuelson, Robert J. (January 14, 2005). "It's More Than Social Security" (http:/ / www. washingtonpost. com/ wp-dyn/ articles/ A8100-2005Jan13. html). The Washington Post. . Retrieved December 3, 2005. [108] "Retirement Estimator" (http:/ / www. ssa. gov/ estimator/ ). Ssa.gov. 2011-07-25. . Retrieved 2011-09-11. [109] Taylor, Andrew (July 22, 2008). "Social Security unveils new earnings calculator". USA Today. [110] "2011 Publication 15" (http:/ / www. irs. gov/ pub/ irs-pdf/ p15. pdf) (PDF). . Retrieved 2011-09-11. [111] http:/ / www. law. cornell. edu/ uscode/ 26/ 1401. html [112] http:/ / www. law. cornell. edu/ uscode/ 26/ 1403. html [113] See 26 U.S.C. 1402 (http:/ / www. law. cornell. edu/ uscode/ 26/ 1402. html). [114] "I Am Self-Employed. How Do I Pay Social Security Tax?" (http:/ / ssa-custhelp. ssa. gov/ cgi-bin/ ssa. cfg/ php/ enduser/ std_adp. php?p_faqid=172). Social Security Administration. Retrieved April 28, 2007. [115] "Self-Employment Tax" (http:/ / www. irs. gov/ businesses/ small/ article/ 0,,id=98846,00. html). Internal Revenue Service. Retrieved April 28, 2007. [116] IRS Publications 15, 15-A [117] Page 11, Instructions for 1984 Form 1040, U.S. Individual Income Tax Return, Internal Revenue Service, U.S. Dep't of the Treasury. [118] Page 19, Instructions for 1994 Form 1040, U.S. Individual Income Tax Return, Internal Revenue Service, U.S. Department of the Treasury. [119] "Idea Channel homepage" (http:/ / ideachannel. tv). Ideachannel.tv/. January 29, 2007. . Retrieved May 21, 2009. [120] Friedman, Milton; Friedman, Rose (1980). "Free to Choose. New York: Harcourt, Brace, Jovanovich. pp. 102107. [121] "Perspectives" (http:/ / www. nysscpa. org/ cpajournal/ 2005/ 405/ perspectives/ p17. htm). New York State Society of Certified Public Accountants. . Retrieved May 21, 2009. [122] "Testimony" (http:/ / www. cato. org/ testimony/ ct-mt051705. html). Cato Institute. May 17, 2005. . Retrieved May 21, 2009. [123] "Ask this view" (http:/ / www. niemanwatchdog. org/ index. cfm?fuseaction=ask_this. view& askthisid=0084). Niemanwatchdog.org. January 24, 2005. . Retrieved May 21, 2009. [124] Social Security's benefit formula provides 90% of average indexed monthly earnings (AIME) below the first "bend point", 32% of AIME between the first and second bend points, and 15% of AIME in excess of the second bend point. Primary Insurance Amount (http:/ / www. ssa. gov/ OACT/ COLA/ piaformula. html), Social Security Administration. [125] Cynthia M. Fagnoni, General Accounting Office, "Social Security and Minorities: Current Benefits and Implications of Reform", Testimony before the Subcommittee on Social Security, Committee on Ways and Means, House of Representatives, February 10, 1999. [126] Alexa A. Hendley and Natasha F. Bilimoria, Social Security Administration, "Minorities and Social Security: An Analysis of Racial and Ethnic Differences in the Current Program", Social Security Bulletin, Vol. 62 No. 2, 1999, pp. 5964. [127] General Accounting Office, "Social Security and Minorities: Earnings, Disability Incidence, and Mortality Are Key Factors That Influence Taxes Paid and Benefits Received", Report to the Ranking Minority Member, Subcommittee on Social Security, Committee on Ways and Means, House of Representatives, April 2003. [128] "POMS RS 00207.001.C2" (https:/ / s044a90. ssa. gov/ apps10/ poms. nsf/ lnx/ 0300207001!opendocument#c2). Social Security Administration. . Retrieved May 21, 2009. [129] "POMS RS 00207.001.A2" (https:/ / s044a90. ssa. gov/ apps10/ poms. nsf/ lnx/ 0300207001!opendocument#a2). Social Security Administration. . Retrieved May 21, 2009. [130] "POMS RS 00207.001.C1" (https:/ / s044a90. ssa. gov/ apps10/ poms. nsf/ lnx/ 0300207001!opendocument#c1). Social Security Administration. . Retrieved May 21, 2009. [131] DePaulo, Bella M.; Morris, Wendy L. (2006). "The Unrecognized Stereotyping and Discrimination Against Singles"Current Directions in Psychological Science 15 (5), 251254. [132] Steuerle, C. Eugene; Carasso, Adam (2000). Urban.org "Social Security Benefits and the Language of Guarantees" (http:/ / www. urban. org/ url. cfm?ID=310232). Urban Research Institute. [133] Oberwetter, Brooke (June 13, 2005). "Show" (http:/ / www. reason. com/ news/ show/ 32932. html). Reason. . Retrieved May 21, 2009. [134] "Marriage Wealth" (http:/ / money. cnn. com/ 2006/ 01/ 18/ pf/ marriage_wealth/ index. htm). Money. January 18, 2006. . Retrieved May 21, 2009. [135] "Fact Sheet: Millions Enjoy Ownership and Control Outside Social Security" (http:/ / georgewbush-whitehouse. archives. gov/ news/ releases/ 2005/ 04/ 20050415-4. html). White House. . Retrieved May 21, 2009. [136] SSA's Office of Legislation & Congressional Affairs (November 26, 1984). "Summary of P.L. 98-21, (H.R. 1900) Social Security Amendments of 1983-Signed on April 20, 1983" (http:/ / www. ssa. gov/ history/ 1983amend. html). Social Security Administration. . Retrieved May 28, 2009. [137] "Social Security Administration Retirement Planner: State and Local Government Employment" (http:/ / www. ssa. gov/ retire2/ stateandlocal. htm). Social Security Administration. [138] "Williams" (http:/ / www. jewishworldreview. com/ cols/ williams022305. asp). Jewish World Review. . Retrieved May 21, 2009. [139] "Social Security Numbers" (http:/ / www. ssa. gov/ history/ ssn/ ssb36. html). Social Security Administration. . Retrieved May 21, 2009. [140] "Update 2010" (http:/ / www. ssa. gov/ pubs/ 10003. html). Social Security Administration. November 3, 2008. . Retrieved May 21, 2009.
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[141] "Myths and Misinformation about Social Security" (http:/ / www. ssa. gov/ history/ InternetMyths. html). Social Security Administration. . Retrieved May 21, 2009. [142] NCPA.org (http:/ / www. ncpa. org/ ~ncpa/ ba/ ba215. html) [143] http:/ / www. gao. gov/ archive/ 1999/ he99031. pdf [144] Daniel Indiviglio Perry Is Right: Social Security Is a Lot Like a Ponzi Scheme (http:/ / www. theatlantic. com/ business/ archive/ 2011/ 08/ perry-is-right-social-security-is-a-lot-like-a-ponzi-scheme/ 243633/ ) The Atlantic, August 15, 2011 [145] Laursen, E. (March 12, 2010). "Is Social Security Really a Ponzi Scheme" (http:/ / peoplespension. infoshop. org/ blogs-mu/ 2010/ 03/ 12/ ponzi-scheme/ ). . "The Ponzi epithet for Social Security originated in a 1967 Newsweek column by Paul Samuelson: [...] A growing nation is the greatest Ponzi scheme ever contrived. And that is a fact, not a paradox" [146] "Social Security: The Enron That Politicians Have in the Closet" (http:/ / www. capmag. com/ article. asp?ID=1505). Capitalism Magazine. 23 March 2002. . [147] "Yes, It Is a Ponzi Scheme" (http:/ / www. nationalreview. com/ articles/ 275908/ yes-it-ponzi-scheme-michael-tanner). National Review. 31 August 2011. . [148] Paul R. Krugman, What Consensus? A response to Richard Freeman (http:/ / www. bostonreview. net/ BR21. 6/ krugmann. html) Boston Review December 1996/January 1997 issue [149] Zuckoff, M. (January 7, 2009). "Social Security a Ponzi Scheme? No Way" (http:/ / money. cnn. com/ 2009/ 01/ 06/ news/ economy/ social. security. fortune/ index. htm). Fortune. . "Some commentators are finding a tempting comparison between the Madoff scandal and the Social Security system. Here's why it's wrong." [150] DeWitt, L. (January 2009). "Research Note #25: Ponzi Schemes vs. Social Security" (http:/ / www. ssa. gov/ history/ ponzi. htm). Social Security Administration. . [151] C. Eugene Steuerle and Adam Carasso, "The USA Today Lifetime Social Security and Medicare Benefits Calculator," (Urban Institute, October 1, 2004), from: Urban.org (http:/ / www. urban. org/ publications/ 900746. html) NOTE: The calculator does not include the value or cost of the Social Security disability program. [152] Fried, Joseph, Democrats and Republicans Rhetoric and Reality (New York: Algora Publishing, 2008), 212. [153] Fried, Joseph, Democrats and Republicans Rhetoric and Reality (New York: Algora Publishing, 2008), 205. [154] Fried, Joseph, Democrats and Republicans Rhetoric and Reality (New York: Algora Publishing, 2008), 206. [155] Fried, Joseph, Democrats and Republicans Rhetoric and Reality (New York: Algora Publishing, 2008), 208. [156] Fried, Joseph, How Social Security Picks Your Pocket (New York: Algora Publishing, 2003), 2733. [157] Bush, George W. (February 2, 2005). "State of the Union Address" (http:/ / georgewbush-whitehouse. archives. gov/ news/ releases/ 2005/ 02/ 20050202-11. html). White House Office of the Press Secretary. . Retrieved July 19, 2008. [158] Conklin v. Celebrezze, 319 F.2d 569 (7th Cir. 1963). [159] Dugan v. Sullivan, 957 F.2d 1384, 1389 (7th Cir. 1992) quoting Wyatt v. Barnhart, 349 F.3d 983, 986 (7th Cir. 2003). [160] Carroll v. Social Sec. Bd., 128 F.2d 876 (7th Cir. 1942), citing Helvering v. Davis, 301 U.S. 619, 640645, 57 S.Ct. 904 (1937) (hereinafter Davis). [161] Davis, at 641. [162] 301 U.S. 619 (1937). [163] 483 U.S. 203 (1987). [164] "Phishing Scam" (http:/ / www. ssa. gov/ pressoffice/ pr/ PhishingScam-pr. htm). Ssa.gov. . Retrieved 2011-09-11. [165] http:/ / www. ssa. gov/ pressoffice/ pr/ PhishingScam-pr. htm [166] http:/ / www. law. cornell. edu/ uscode/ 42/ 1140. html [167] "United Seniors Association vs Social Security Administration" (http:/ / caselaw. lp. findlaw. com/ data2/ circs/ 4th/ 041804p. pdf) (PDF). . Retrieved March 17, 2006. [168] Rosen, Harvey S., Gayer, Ted (2008). Public Finance (8th ed.). McGraw-Hill. ISBN978-0-07-125939-2. [169] http:/ / www. urban. org/ uploadedpdf/ 412167-Raising-Social-Security. pdf
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Works referenced Achenbaum, Andrew (1986). Social Security Visions and Revisions. Feldstein, Martin; Jeffrey Liebman (editors) (2002). The Distributional Aspects of Social Security and Social Security Reform. Chicago: University of Chicago Press. Kessler-Harris, Alice (2001). In Pursuit of Equity: Women, Men, and the Quest for Economic Citizenship in 20th Century America. New York City: Oxford University Press. Social Security Administration Beneficiaries and costs information (http://www.ssa.gov/history/briefhistory3. html) Wright, Robert E. (2010). Fubarnomics: A Lighthearted, Serious Look at America's Economic Ills. Buffalo, New York: Prometheus Books.
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Further reading
"Community of Minds: Working Together The $44 Trillion Abyss 2003 Fortune Magazine" (http:// solutions.synearth.net/2003/12/17). Retrieved December 3, 2005. "Social Security Suicide" (http://www.alternet.org/election04/20746/). Retrieved December 3, 2005. Brown, Jeffrey R.; Liebman, Jeffrey B.; Wise, David A. (2009). Social Security Policy in a Changing Environment. University of Chicago Press. ISBN978-0-226-07648-5. "What Does Price Indexing Mean for Social Security Benefits? (explanation of wage indexing versus price indexing)" (http://web.archive.org/web/20051104150159/http://www.bc.edu/centers/crr/facts/jtf_14. pdf) (PDF). Center for Retirement Research. January, 2005. Archived from the original (http://www.bc.edu/ centers/crr/facts/jtf_14.pdf) on November 4, 2005. Retrieved December 3, 2005. "Getting a grip on Social Security: The flaw in the system" (http://rationalrevolution0.tripod.com/blog/index. blog?entry_id=647053). Retrieved December 3, 2005. "Center for American Progress: Social Security by the Numbers (reference guide with stats)" (http://www. americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=306535). Retrieved 2005-12-03. Berkowitz, Edward D.; Kingson, Eric R. Social Security and Medicare: A Policy Primer (http://www.questia. com/PM.qst?a=o&d=15461858) Auburn House. 1993. 214 pp Jenkins, Shirley; et al., eds. Social Security in International Perspective (http://www.questia.com/PM. qst?a=o&d=100533666) Essays in Honor of Eveline M. Burns. Columbia University Press, 1969 Martin, Patricia P.; Weaver, David A. "Social Security: A Program and Policy History," Social Security Bulletin (http://www.ssa.gov/policy/docs/ssb/v66n1/v66n1p1.html), Vol. 66 No. 1, 2005 Myers, Robert J. Social Security. University of Pennsylvania Press. 1993. Schieber, Sylvester J., and John B. Shoven. The Real Deal. Yale University Press 1999. Skidmore, Max J. Social Security and Its Enemies: The Case for America's Most Efficient Insurance Program (http://www.questia.com/PM.qst?a=o&d=8608618). Westview Press, 1999 Tanner, Michael D. Social Security and Its Discontents: Perspectives on Choice (http://www.questia.com/PM. qst?a=o&d=103197527). Cato Institute, 2004. Comment: libertarian criticism Traver, David (2006). Social Security Disability Advocate's Handbook (http://www.jamespublishing.com/ books/ssr.htm). James Publishing. ISBN 1-58012-033-4. Social Security Handbook (http://germaniapublishing.com/), Germania Publishing, 2006. S044a90.ssa.gov Social Security Program Operations Manual System (https://s044a90.ssa.gov/apps10/poms. nsf/partlist!OpenView). Social Security Administration.
External links
OASDI Social Security Administration (http://www.ssa.gov/) Social Security Internet Myths (http://www.ssa.gov/history/InternetMyths.html) Social Security Internet Myths part 2 (http://www.ssa.gov/history/InternetMyths2.html) Social Security benefit calculators (http://www.ssa.gov/planners/calculators.htm) Social Security Advisory Board (http://www.ssab.gov/) Social Security Retirement Questions FAQ (http://www.ssdrc.com/retirementquestions.html) Social Security Administration Office of Disability Adjudication and Review (http://www.ssa.gov/appeals) Congressional Budget Office: Social Security Primer (http://www.cbo.gov/showdoc.cfm?index=3213& sequence=2)
US Government Accountability Office, Social Security Reform: Answers to Key Questions (http://www.gao. gov/cgi-bin/getrpt?GAO-05-193SP) Calculators
Social Security Urban Institute's USA TODAY Lifetime Social Security and Medicare Benefits Calculator (http://www. urban.org/publications/900746.html) CBPP: Rate of Return (June 2005) (http://www.cbpp.org/6-6-05socsec.htm) Social Security Death Index Information (http://www.deathindexes.com/ssdi.html) More information AARP American Association of Retired People (http://www.aarp.org/) TimeLines of US SSI Numbers (http://www.howOLDisit.com/orgOficNumSSI604.html) (Years Numbers States) Social Security Disability Advocacy, Debate, and Professional News (http://www.ssaconnect.com/) Health Hippo: Evaluations of Social Security Disability (http://hippo.findlaw.com/disability.html) Social Security Information Project (http://www.ourfuture.org/socialsecurity) Global Action on Aging (http://www.globalaging.org/) Warning about the perils of stock-exchange "funded" pension systems Commission to Strengthen Social Security (http://www.csss.gov/) Social Security Disability in North Carolina (http://dds.its.state.nc.us/) 75th Anniversary of Social Security at the Franklin D. Roosevelt Presidential Museum and Library (http:// www.fdrlibrary.marist.edu/museum/spexhibitduty.html) Articles Social Security Benefits Vary by Age Taken (http://www.erollover.com/blog/ social-security-income-benefit) NBER paper, Internal Rate of Return coauthored by Olivia Mitchell, member of President's Commission (http://www.nber.org/papers/W6713) Social Security Q & A (http://www.dollarsandsense.org/archives/2005/0505orr.html) by economist Doug Orr from Dollars & Sense magazine Social Security (http://campaigns.wikia.com/wiki/Social_security) at Wikia Time Archives (http://www.time.com/time/archive/collections/0,21428,c_social_security,00.shtml) A Collection regarding Social Security's progression and perception over time Article on impact of raising Social Security tax cap (http://www.dollarsandsense.org/archives/2008/ 0308miller.html) from Dollars & Sense magazine, March/April 2008 The Social Security Administration's Cracked Crystal Ball (http://www.dollarsandsense.org/archives/2004/ 1104econ.html) from Dollars & Sense magazine, November/December 2004 Social Security (http://encarta.msn.com/encyclopedia_761561113/Social_Security.html), article in Encarta Encyclopedia (http://encarta.msn.com/) Arno Tausch (2005) World Bank (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=976586) Pension reforms and development patterns in the world system and in the Wider Europe. A 109 country investigation based on 33 indicators of economic growth, and human, social and ecological well-being, and a European regional case study. A slightly re-worked version of a paper, originally presented to the Conference on Reforming European pension systems. In memory of Professor Franco Modigliani. 24 and 25 September 2004, Castle of Schengen, Luxembourg Institute for European and International Studies
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Supplemental Security Income
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Supplemental Security Income (or SSI) is a United States government program that provides stipends to low-income people who are either aged (65 or older), blind, or disabled.[1] Although administered by the Social Security Administration,[2] SSI is funded from the U.S. Treasury general funds,[1] not the Social Security trust fund. SSI was created in 1974 to replace federal-state adult assistance programs that served the same purpose. The restructuring of these programs was intended to standardize the eligibility requirements and level of benefits.[3] The new federal program was incorporated into Title XVI (Title 16) of the Social Security Act.[4] Today the program provides benefits to 8,002,032 Americans.
History
The legislation creating the program was a result of President Nixon's effort to reform the nation's welfare programs. At that time, each state had similar programs under the Aid to the Blind, Aid to the Permanently and Totally Disabled, and Aid to the Elderly. The Nixon Administration thought these programs should be federalized and run by the Social Security Administration. Thus, SSI was created to eliminate the differences between the states including different disability standards and income and resources requirements, which many perceived as irrational or unfair. President Richard Nixon signed the Social Security Amendments of 1972 on October 30, 1972 which created the SSI Program. The SSI program officially began operations in January 1974 by federalizing states' programs, designating the Social Security Administration (SSA) to administer the SSI program. SSA was selected because it had been administering a nationwide disability program under the Social Security Disability Insurance Benefits (DIB) program since 1956 under the Old Age, Survivors, and Disability Insurance (OASDI) programs associated with FICA payroll taxes.
Eligibility
In order to be eligible to receive SSI benefits, individuals must prove the following:[5] They are 65 or older, blind, or disabled. They legally reside in one of the 50 states, the District of Columbia, Northern Mariana Islands, or are the child of military parent(s) assigned to permanent duty outside of the US, or are a student (certain restrictions apply) temporarily abroad. They have income and resources within certain limits (see subsections). They have applied for the benefits. An individual may be ineligible if he or she is a resident of a public institution from the first day of a month through the last day of the same month,[6] fails to apply for all other benefits for which they may be eligible (including Social Security benefits), has an unsatisfied warrant or violates parole conditions, fails to give SSA permission to contact any financial institution for financial records, or is outside the US for 30 consecutive days (with some exclusions).[5] Numerous restrictions have been placed on who is eligible for the benefit, which is considered a welfare benefit. However, unlike social security benefits (Title II), earned work credits are not a requirement for SSI.[7] If insured for disability and not currently receiving benefits, an applicant for SSI also applies for Social Security Disability Insurance Benefits (DIB), and the standard by which applicants are judged to be disabled is virtually the same for both SSI and DIB The decision as to whether an individual is disabled is made by the various state Disability Determination Services (DDS), which contract with the federal government to make such determinations. Although the DDS's are state agencies, they follow federal rules. This arrangement arose from the inception of OASDI, when some key members of Congress considered the Social Security Disability program should be administered employing federalism, fearing expansion of the federal government.
814
Aged, Disabled, or Blind

In order to be eligible for SSI, a person must meet the definition of being aged, disabled, or blind. Aged - Being deemed aged consists of attaining the age of 65 or older.[5] The Social Security Administration, like the United States Government in general, follows English common law and considers a person to attain an age the day before their birthday.[8] Disabled - Being deemed disabled consists of meeting the general disability definition used by the Social Security Administration: "Disability means inability to engage in any SGA [substantial gainful activity] by reason of any medically determinable physical or mental impairment which can be expected to result in death, or has lasted or can be expected to last for a continuous period of not less than 12 months." "The 1967 amendments specified that workers shall be determined to be under a disability only if the physical or mental impairment or impairments are of such severity that the individual is not only unable to do his previous work but cannot, considering his age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy. This is regardless of whether any of these are true: Such work exists in the immediate area in which the claimant lives. A specific job vacancy exists. The claimant would be hired if they applied for work. "The statute also specifies that 'work which exists in the national economy means work which exists in significant numbers either in the region where such individuals lives or in several regions of the country.'"[9] Substantial gainful activity (SGA), for the year 2010, is the ability to earn $1000 gross income in a month's period for most disabled individuals, and $1640 for those whose disability includes blindness.[10] In addition, children under the age of 18 can be determined to be disabled for SSI purposes "if the individual has a medically determinable impairment or combination of impairments that causes marked or severe functional limitation(s), and can be expected to result in death, or has lasted or can be expected to last for a continuous period of not less than 12 months."[11] Blind - Being deemed blind consists of meeting the following definition: "central visual acuity of 20/200 or less in the better eye with the use of a correcting lens. An eye which has a limitation in the field of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees should also be considered as having a central visual acuity of 20/200 or less."[11] In addition, for SSI purposes, an individual is considered blind regardless of the period of time they are expected to be blind or if they are performing substantial gainful activity.[11]
Income
One of the requirements to receive SSI is that the individual's income must be below certain limits.[12] These limits may vary based on the state in which the individual lives, his/her living arrangement, the number of people living in the residence, and the type of income. The limit varies on all of these factors and is described below, in the section on benefit computation.
Resources
Another requirement for SSI is that the individual's resources are below a certain limit. This amount is $2,000 for a single individual and $3,000 for an individual and their spouse (whether the spouse is eligible for SSI or not), $4,000 for a child applicant with one parent living in the household, and $5,000 for a child applicant with two parents living in the household.[13] However, conditional benefits may be paid if a substantial portion of the resources are considered non-liquid, resources that cannot be sold within 20 working days,[14] if they agree to sell the resources at
Supplemental Security Income their current market value within a specified period and repay the money after the non-liquid property is sold.[15] However, not all actual resources are counted in calculating an individual's or couple's resources for SSI purposes.[16] The resource limits were originally set at $1500 for an individual and $2500 for couples in 1974[17] , and were not linked to inflation. In 1987 the limits were raised to $1800/$2700, in 1988 to $1900/$2850 and in 1989 to $2000/$3000.[18] Under current law they will remain at present levels indefinitely.
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Residency
SSI benefits are not paid solely to US citizens, but may also be paid to aliens legally residing in the United States.[5] Conversely, citizens may find themselves ineligible because they do not currently reside within the United States;[19] exceptions apply for children of military parent(s) who were born overseas, were disabled or became blind overseas, or first applied for benefits overseas[20] and for students studying abroad who were eligible for SSI in the month prior to leaving the US, whose absence will be for less than 1 year, and who are studying to enhance their ability to perform substantial gainful activity, sponsored by an educational institution in the US, and would not be available to the individual in the US.[21] Several restrictions apply to the eligibility of aliens however. These include being in a "qualified alien" category and meeting an exception condition.[22] There are seven categories of qualified aliens based on Department of Homeland Security (DHS) immigration statuses. This includes:[23] those admitted as Lawfully admitted for permanent residence (LAPR) those granted conditional entry pursuant to section (a)(7) of the Immigration and Nationality Act (INA) those paroled into the US under section 212(d)(5) of the INA for a period of at least 1 year those who are refugees admitted to the US under section 207 of the INA those granted asylum under section 208 of the INA those whose deportation is being withheld under sections 243(h) or 241(b)(3) of the INA Cuban/Haitian entrants under section 501(e) of the Refugee Education Assistance Act of 1980.
There are 5 exception conditions. These include:[24] having already been receiving SSI on 8/22/1996 having 40 qualifying credits (using SSI as a supplement to Retirement or Disability Insurance Benefits) when in LAPR status being a veteran, active duty member of the U. S. military service, or being the spouse or dependant child of an individual who is having been lawfully residing in the US on 8/22/1996 and being blind and disabled (excluding aged individuals) being deemed an alien of one of five immigration statuses within 7 years of being eligible for SSI
Benefit details
Payments for SSI are made for the first day of the month, unless the first of the month is on a Weekend or a legal holiday, in which case the payment is made on the first day prior that is not a weekend or a legal holiday. The minimum benefit is $1 (USD).[25] The SSI program, or Title XVI of the Social Security Act 1611, provides monthly federal cash assistance of up to $674 for an individual and $1,011 for a couple (as of 2011) to help meet the costs of basic needs of food, shelter and clothing. In most states, SSI eligibility usually assures concurrent access to important medical coverage under the various state Medicaid programs and sometimes access to Section 8 housing benefits. In some states, supplemental payments are made by the state, increasing the cash assistance available through SSI. For example, the state of California, through its State Supplementation Program (SSP), increases the cash assistance by $171 per month for a disabled or aged individual with access to cooking facilities in 2011, making the total SSI benefit $845 per
Supplemental Security Income month.[26] SSI takes the income and resources of the applicant or recipient into consideration. People who have qualified for Social Security disability benefits may receive SSI during the 5-month waiting period, if they meet the income and resource requirements. The resource limit for single individuals is $2000 and, for married individuals, is $3000. Resources include anything that is cash or can be turned into cash, such as art, mineral rights, stocks or other investments, and real property. In some situations, however, these resources can be excluded. SSI benefits are generally reduced dollar-for-dollar by any unearned income, such as TANF, alimony, unemployment insurance, Social Security Disability or Retirement benefits. Earned income, from wages or self-employment, is treated more favorably; e.g., a person who earns a wage of $750 per month may still be eligible, while someone who receives $750 per month in alimony may be ineligible. It is permissible, subject to regulations, to be employed and yet continue to receive SSI. Even if a person no longer receives SSI, due their wage or self-employment income being too high, they may still be eligible for Medicaid benefits, under what are referred to as 1619 provisions. An examination of eligibility for SSI also considers the income of "deemors," e.g., a spouse who lives with the recipient, a parent or parents who live with a child recipient (recipient under the age of 18) or, in some cases, the sponsor of an alien. SSI is not retroactive, unlike Social Security Disability. Social Security determines the first month of potential eligibility for SSI by the date of the intent to file an application for benefits as expressed to the Social Security Administration, and an application is filed within 60 days of the date of that expressed intention. To begin the process, people wishing to be considered must contact Social Security (there is a toll-free telephone number) to set up a disability interview. No online application for SSI is currently available; however, one may apply for Social Security Disability or Retirement benefits online and add the application for SSI via a telephone-scheduled interview. Calls placed on the last day of the month, where the interview is scheduled for the second week of the following month, will result in SSI eligibility being retroactive to the month in which the call was made to set up the appointment, although the first check will not be received until the next month. For example, a person calls on 31 January to set up an appointment for February. January will be the month-of-application for determination purposes, but the first benefit check will be issued in February. Medicaid benefits usually begin the first month in which both medical and financial requirements are met. An immigrant, in order to qualify for SSI, must have been a legal resident of the United States before the Welfare Reform Act of 1996 took effect (August 22, 1996). Those who arrived after that date may be denied by SSI benefits. However, the regulations governing alien eligibility for SSI are complex and contain many exceptions; for instance, asylees, refugees, spouses of a member of the U.S. military, and some LAPR may be qualified aliens. A person who has been in LAPR status for at least 5 years, has a valid I-551 issued by the Bureau of Citizenship and Immigration, and has been employed in the United States, may qualify. People wishing to learn whether they might qualify for SSI should contact the Social Security Administration to schedule an appointment for an interview. In most states, a fugitive felon that is, someone for whom a felony arrest warrant has been issued and who is still at-large cannot be considered eligible for benefits during any month wherein such status applies. A recent court decision mitigated this rule somewhat in some northeastern states, however, such that: A person who is incarcerated for an entire calendar month is ineligible for benefits. If the person is in a medical facility, where at least 50% of their costs are paid by Medicaid, then their benefit may be reduced to $30.
816
817
Calculation
Calculation of an SSI benefit begins with the Federal Benefit Rate (FBR). The FBR for 2011 is $674.00 for an individual and $1,011 for a couple.[27]
Beneficiaries by age
Age 65 or older - 2,051,848 Between ages 18 64 - 4,691,651 Under age 18 - 1,258,533 Total Beneficiaries 8,002,032
Beneficiaries and Costs

Year Beneficiaries Dollars 1974 - 3,996,064 - $5,096,813,000 1975 - 4,314,275 - $5,716,072,000 1980 - 4,142,017 - $7,714,640,000 1985 - 4,138,021 - $10,749,938,000 1990 - 4,817,127 - $16,132,959,000 1991 - 5,118,470 - $17,95,639,000 1992 - 5,566,189 - $21,682,410,000 1993 - 5,984,330 - $23,991,153,000 1994 - 6,295,786 - $25,291,087,000 1995 - 6,514,134 - $27,037,280,000 1996 - 6,613,718 - $28,252,474,000 1997 - 6,494,985 - $28,370,568,000 1998 - 6,566,069 - $29,408,208,000 1999 - 6,556,634 - $30,106,132,000 2000 - 6,601,686 - $30,671,699,000 2001 - 6,688,489 - $32,165,856,000 2002 - 6,787,857 - $33,718,999,000 2003 - 6,902,364 - $34,693,278,000 2004 - 6,987,845 - $36,065,358,000 2005 - 7,113,879 - $37,235,000,000 2006 - 7,235,583 - $38,889,000,000 2007 - 7,359,525 - $41,205,000,000 2008 - 7,520,501 - $43,040,000,000 2009 - 7,676,686 - $44,906,000,000
818
Potential Residual Benefits to Other Programs

Once an individual qualifies for Supplemental Security Income they automatically become eligible for several other assistance programs as allowed by Federal and State law. An SSI recipient can receive benefits from all programs listed and they serve as a safety net for those on the program. Medicaid In order to help with the purchase of medicine and hospital care for the aged, blind, and disabled. Qualified Medicare Beneficiaries (QMB) Food stamps (SNAP) for the purchase of food. Depends on the individuals state of residence on how much they may receive in food stamps. Housing choice voucher program, more commonly known as HUD Section 8. SSI recipients automatically are entitled to Section 8 Housing as they meet the low income criteria yet they have to be approved by the Department of Housing and Urban Development.
Notes
[1] (SSA "Supplemental Security Income (SSI)" p. 2) [2] (SSA "Teleservice Representative Basic Training Curriculum: Supplemental Security Income" p. 5) [3] (SSA "Teleservice Representative Basic Training Curriculum: Supplemental Security Income" p. 7) [4] (SSA "Teleservice Representative Basic Training Curriculum: Supplemental Security Income" p. 27) [5] (SSA POMS SI 00501.001) [6] (SSA POMS SI 00520.001) [7] (SSA "Teleservice Representative Basic Training Curriculum: Supplemental Security Income" p. 9) [8] (SSA POMS RS 00615.015) [9] (SSA POMS DI 10105.065) [10] (SSA POMS DI 10501.015.B/C) [11] (SSA POMS DI 11055.005) [12] (SSA POMS SI 00810.001) [13] (SSA POMS SI 01110.003) [14] (SSA POMS SI 01110.300) [15] (SSA POMS 01150.200) [16] (SSA POMS SI 01110.210) [17] (24 CFR 416.1205) [18] http:/ / www. socialsecurity. gov/ OP_Home/ handbook/ handbook. 21/ handbook-2166. html [19] (SSA POMS SI 00501.410) [20] (SSA POMS SI 00501.415) [21] (SSA POMS SI 00501.411) [22] (SSA POMS SI 00502.100) [23] (SSA POMS SI 00502.100A.2) [24] (SSA POMS SI 00502.100A.3) [25] (SSA POMS SI 02001.005) [26] http:/ / ssa. gov/ pubs/ 11125. html [27] http:/ / www. ssa. gov/ oact/ cola/ SSI. html
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References
'Social Security Administration (SSA)'. "SSA's Program Operations Manual System (POMS)". https://s044a90. ssa.gov/apps10/poms.nsf/partlist!OpenView (https://s044a90.ssa.gov/apps10/poms.nsf/ partlist!OpenView). Accessed March 27, 2007. Note: this is the public version of POMS, the internal version is not available to the public 'Social Security Administration (SSA)'. "Supplemental Security Income (SSI)". Publication No. 05-11000. August 2005. 'Social Security Administration (SSA)'. 'Teleservice Representative Basic Training Curriculum: Supplemental Security Income'. Publication No. 25-1560. April 2006. Social Security Administration http://www.ssa.gov/history/briefhistory3.html (Beneficiaries and Costs Information) http://www.ssa.gov/history/1970.html (Chronology) http://www.ssa.gov/ssi/text-other-ussi.htm http://www.hud.gov/offices/pih/programs/hcv/homeownership/ http://www.statehealthfacts.org/comparemaptable.jsp?cat=4&ind=253#notes-1 http://www.socialsecurity.gov/policy/docs/statcomps/ssi_sc/2009/table01.html http://www.gpoaccess.gov/usbudget/fy11/pdf/budget/social.pdf http://www.ssa.gov/policy/docs/statcomps/ssi_monthly/2010-06/table02.pdf http://www.ssa.gov/policy/docs/statcomps/ssi_monthly/2010-09/table02.pdf http://www.ssa.gov/policy/docs/statcomps/ssi_monthly/2010-10/table02.pdf http://www.ssa.gov/policy/docs/statcomps/ssi_monthly/2010-11/table02.pdf http://www.ssa.gov/policy/docs/statcomps/ssi_monthly/2011-02/table01.pdf
External links
Social Security Administration webpage with information on SSI (http://www.socialsecurity.gov/ssi/index. htm/) The Social Security Act (http://www.ssa.gov/OP_Home/ssact/comp-toc.htm) Title XVI in particular (http://www.ssa.gov/OP_Home/ssact/title16b/1600.htm)
820
Miscellaneous income and funding sources

Annuities
In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time. Annuity contracts traditionally provide a guaranteed distribution of income over time, until the death of the person or persons named in the contract or until a final date, whichever comes first. However, the majority of modern annuity customers use annuities only to accumulate funds free of income and capital gains taxes and to later take lump-sum withdrawals without using the guaranteed-income-for-life feature.
General
Annuity contracts in the United States are defined by the Internal Revenue Code and regulated by the individual states. Variable annuities have features of both life insurance and investment products.[1] In the U.S., annuity insurance may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others. Their federal tax treatment, however, is governed by the Internal Revenue Code. Variable annuities are regulated by the Securities and Exchange Commission and the sale of variable annuities is overseen by the Financial Industry Regulatory Authority (FINRA) (the largest non-governmental regulator for all securities firms doing business in the United States). There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and another phase in which customers receive payments for some period of time (the annuity or income phase). During this latter phase, the insurance company makes income payments that may be set for a stated period of time, such as five years, or continue until the death of the customer(s) (the "annuitant(s)") named in the contract. Annuitization over a lifetime can have a death benefit guarantee over a certain period of time, such as ten years. Annuity contracts with a deferral phase always have an annuity phase and are called deferred annuities. An annuity contract may also be structured so that it has only the annuity phase; such a contract is called an immediate annuity. Note this is not always the case.
Immediate annuity
The term "annuity," as used in financial theory, is most closely related to what is today called an immediate annuity. This is an insurance policy which, in exchange for a sum of money, guarantees that the issuer will make a series of payments. These payments may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longer. It is also possible to structure the payments under an immediate annuity so that they vary with the performance of a specified set of investments, usually bond and equity mutual funds. Such a contract is called a variable immediate annuity. See also life annuity, below. The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings with a tax-deferred growth factor. A common use for an immediate annuity might be to provide a pension income. In the U.S., the tax treatment of a non-qualified immediate annuity is that every payment is a combination of a return of principal (which part is not taxed) and income (which is taxed at ordinary income rates, not capital gain rates). Immediate annuities funded as an IRA do not have any tax advantages, but typically the distribution satisfies the IRS RMD requirement and may satisfy the RMD requirement for other IRA accounts of the owner (see IRS Sec 1.401(a)(9)-6.)
Annuities When a deferred annuity is annuitized, it works like an immediate annuity from that point on, but with a lower cost basis and thus more of the payment is taxed.
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Annuity with period certain

This type of immediate annuity pays the annuitant for a designated number of years (i.e., a period certain) and is used to fund a need that will end when the period is up (for example, it might be used to fund the premiums for a term life insurance policy). Thus this option is not necessarily suitable for an individual's retirement income, as the person may outlive the number of years the annuity will pay.
Life annuity
A life or lifetime immediate annuity is used to provide an income for the life of the annuitant similar to a defined benefit or pension plan. A life annuity works somewhat like a loan that is made by the purchaser (contract owner) to the issuing (insurance) company, which pays back the original capital or principal (which isn't taxed) with interest and/or gains (which is taxed as ordinary income) to the annuitant on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant. In order to guarantee that the income continues for life, the insurance company relies on a concept called cross-subsidy or the "law of large numbers". Because an annuity population can be expected to have a distribution of lifespans around the population's mean (average) age, those dying earlier will give up income to support those living longer whose money would otherwise run out. Thus it is a form of longevity insurance (see also below). A life annuity, ideally, can reduce the "problem" faced by a person that he/she doesn't know how long he/she will live, and so he/she doesn't know the optimal speed at which to spend his/her savings. Life annuities with payments indexed to the Consumer Price Index might be an acceptable solution to this problem, but there is only a thin market for them in North America. Life annuity variants For an additional expense (either by way of an increase in payments (premium) or a decrease in benefits), an annuity or benefit rider can be purchased on another life such as a spouse, family member or friend for the duration of whose life the annuity is wholly or partly guaranteed. For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after death, for so long as the spouse survives. The annuity paid to the spouse is called a reversionary annuity or survivorship annuity. However, if the annuitant is in good health, it may be more advantageous to select the higher payout option on his or her life only and purchase a life insurance policy that would pay income to the survivor. The pure life annuity can have harsh consequences for the annuitant who dies before recovering his or her investment in the contract. Such a situation, called a forfeiture, can be mitigated by the addition of a period-certain feature under which the annuity issuer is required to make annuity payments for at least a certain number of years; if the annuitant outlives the specified period certain, annuity payments continue until the annuitant's death, and if the annuitant dies before the expiration of the period certain, the annuitant's estate or beneficiary is entitled to the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is that the annuity payment for the latter is smaller. A viable alternative to the life-with-period-certain annuity is to purchase a single-premium life policy that would cover the lost premium in the annuity. Impaired-life annuities for smokers or those with a particular illness are also available from some insurance companies. Since the life expectancy is reduced, the annual payment to the purchaser is raised. Life annuities are priced based on the probability of the annuitant surviving to receive the payments. Longevity insurance is a form of annuity that defers commencement of the payments until very late in life. A common longevity contract would be purchased at or before retirement but would not commence payments until 20 years after
Annuities retirement. If the nominee dies before payments commence there is no payable benefit. This drastically reduces the cost of the annuity while still providing protection against outliving one's resources.
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Deferred annuity
The second usage for the term annuity came into being during the 1970s. Such a contract is more properly referred to as a deferred annuity and is chiefly a vehicle for accumulating savings with a view to eventually distributing them either in the manner of an immediate annuity or as a lump-sum payment. All varieties of deferred annuities owned by individuals have one thing in common: any increase in account values is not taxed until those gains are withdrawn. This is also known as tax-deferred growth. A deferred annuity which grows by interest rate earnings alone is called a fixed deferred annuity (FA). A deferred annuity that permits allocations to stock or bond funds and for which the account value is not guaranteed to stay above the initial amount invested is called a variable annuity (VA). A new category of deferred annuity, called the fixed indexed annuity (FIA) emerged in 1995 (originally called an Equity-Indexed Annuity).[2] fixed indexed annuities may have features of both fixed and variable deferred annuities. The insurance company typically guarantees a minimum return for EIA. An investor can still lose money if he or she cancels (or surrenders) the policy early, before a "break even" period. An oversimplified expression of a typical EIA's rate of return might be that it is equal to a stated "participation rate" multiplied by a target stock market index's performance excluding dividends. Interest rate caps or an administrative fee may be applicable. Deferred annuities in the United States have the advantage that taxation of all capital gains and ordinary income is deferred until withdrawn. In theory, such tax-deferred compounding allows more money to be put to work while the savings are accumulating, leading to higher returns. A disadvantage, however, is that when amounts held under a deferred annuity are withdrawn or inherited, the interest/gains are immediately taxed as ordinary income.
Features
A variety of features and guarantees have been developed by insurance companies in order to make annuity products more attractive. These include death and living benefit options, extra credit options, account guarantees, spousal continuation benefits, reduced contingent deferred sales charges (or surrender charges), and various combinations thereof. Each feature or benefit added to a contract will typically be accompanied by an additional expense either directly (billed to client) or indirectly (inside product). Deferred annuities are usually divided into two different kinds: Fixed annuities offer some sort of guaranteed rate of return over the life of the contract. In general such contracts are often positioned to be somewhat like bank CDs and offer a rate of return competitive with those of CDs of similar time frames. Many fixed annuities, however, do not have a fixed rate of return over the life of the contract, offering instead a guaranteed minimum rate and a first year introductory rate. The rate after the first year is often an amount that may be set at the insurance company's discretion subject, however, to the minimum amount (typically 3%). There are usually some provisions in the contract to allow a percentage of the interest and/or principal to be withdrawn early and without penalty (usually the interest earned in a 12-month period or 10%), unlike most CDs. Fixed annuities normally become fully liquid depending on the surrender schedule or upon the owner's death. Most equity index annuities are properly categorized as fixed annuities and their performance is typically tied to a stock market index (usually the S&P 500 or the Dow Jones Industrial Average). These products are guaranteed but are not as easy to understand as standard fixed annuities as there are usually caps, spreads, margins, and crediting methods that can reduce returns. These products also don't pay any of the participating market indices' dividends; the trade-off is that contract holder can never earn less than 0% in a negative year. Variable annuities allow money to be invested in insurance company "separate accounts" (which are sometimes referred to as "subaccounts" and in any case are functionally similar to mutual funds) in a tax-deferred manner.[3]
Annuities Their primary use is to allow an investor to engage in tax-deferred investing for retirement in amounts greater than permitted by individual retirement or 401(k) plans. In addition, many variable annuity contracts offer a guaranteed minimum rate of return (either for a future withdrawal and/or in the case of the owner's death), even if the underlying separate account investments perform poorly. This can be attractive to people uncomfortable investing in the equity markets without the guarantees. Of course, an investor will pay for each benefit provided by a variable annuity, since insurance companies must charge a premium to cover the insurance guarantees of such benefits. Variable annuities are regulated both by the individual states (as insurance products) and by the Securities and Exchange Commission (as securities under the federal securities laws). The SEC requires that all of the charges under variable annuities be described in great detail in the prospectus that is offered to each variable annuity customer. Of course, potential customers should review these charges carefully, just as one would in purchasing mutual fund shares. People who sell variable annuities are usually regulated by FINRA, whose rules of conduct require a careful analysis of the suitability of variable annuities (and other securities products) to those to whom they recommend such products. These products are often criticized as being sold to the wrong persons, who could have done better investing in a more suitable alternative, since the commissions paid under this product are often high relative to other investment products. There are several types of performance guarantees, and one may often choose them la carte, with higher risk charges for guarantees that are riskier for the insurance companies. The first type is a guaranteed minimum death benefit (GMDB), which can be received only if the owner of the annuity contract, or the covered annuitant, dies. GMDBs come in various flavors, in order of increasing risk to the insurance company: Return of premium (a guarantee that you will not have a negative return) Roll-up of premium at a particular rate (a guarantee that you will achieve a minimum rate of return, greater than 0) Maximum anniversary value (looks back at account value on the anniversaries, and guarantees you will get at least as much as the highest values upon death) Greater of maximum anniversary value or particular roll-up Insurance companies provide even greater insurance coverage on guaranteed living benefits, which tend to be elective. Unlike death benefits, which the contractholder generally can't time, living benefits pose significant risk for insurance companies as contractholders will likely exercise these benefits when they are worth the most. Annuities with guaranteed living benefits (GLBs) tend to have high fees commensurate with the additional risks underwritten by the issuing insurer. Some GLB examples, in no particular order: Guaranteed minimum income benefit (GMIB, a guarantee that one will get a minimum income stream upon annuitization at a particular point in the future) Guaranteed minimum accumulation benefit (GMAB, a guarantee that the account value will be at a certain amount at a certain point in the future) Guaranteed minimum withdrawal benefit (GMWB, a guarantee similar to the income benefit, but one that doesn't require annuitizing) Guaranteed-for-life income benefit (a guarantee similar to a withdrawal benefit, where withdrawals begin and continue until cash value becomes zero, withdrawals stop when cash value is zero and then annuitization occurs on the guaranteed benefit amount for a payment amount that is not determined until annuitization date.) Recently, insurance companies developed asset-transfer programs that operate at the contract level or the fund level. In the former, a percentage of client's account value will be transferred to a designated low-risk fund when the contract has poor investment performance. On the fund level, certain investment options have a target volatility built within the fund (usually about 10%) and will re-balance to maintain that target. In both cases, they are stated to help buffer poor investment performance until markets perform better (where they will transition back to normal allocations to catch an upswing). However, there are criticisms of these programs including, but not limited to, often
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Annuities mandating these programs on clients, restricting flexibility of investing, and not catching the upswing of markets fast enough due to the underlying design of such programs. Be careful in regard to using GLB riders in non-qualified contracts as most of the products in the annuity marketplace today create a 100% taxable income benefit whereas income generated from an immediate annuity in a non-qualified contract would partially be a return of principal and therefore non-taxable.
824
Criticisms of deferred annuities

Deferred annuities are generally sold by financial professionals, some of whom may work directly for an insurance company. Most financial professionals, however, are independent agents of the insurance company, not employees. The financial professional who sells an annuity collects a commission from the insurance company. This commission will be a percentage of the total premium paid by the investor. This percentage can be as little as 1% and as high as 12%; the average is 6%. Since these commissions appear high and there are deferred sales charges on annuities, many financial gurus have criticized annuity products. The investor will, generally, not pay any of this commission directly to the financial professional; the commission is paid by the insurance company to the financial professional up front. The insurance company will recapture the commission paid to the financial professional through the fees charged to the customer (in a variable or fixed indexed annuity) or the spread in the interest rate market (for a fixed annuity). There are also deferred back-end charges that will be applied if the investor closes out his or her contract before the agreed-upon time frame, usually 8 years. These charges can last for as little as 1 year or as many as 20 years, depending on the type of annuity and issuing company. These back-end charges concern many financial professionals and financial gurus. Some annuities do not have any deferred surrender charges and do not pay the financial professional a commission, although the financial professional may charge a fee for his or her advice. These contracts are called "no-load" variable annuity products and are usually available from a fee-based financial planner or directly from a no-load mutual fund company. Of course various charges are still imposed on these contracts, but they are less than those sold by commissioned brokers. It is important that potential purchasersof annuities, mutual funds, tax-exempt municipal bonds, commodities futures, interest-rate swaps, in short, any financial instrumentunderstand the fees on the product and the fees a financial planner may charge. Variable annuities are controversial because many believe the extra fees (i.e., the fees above and beyond those charged for similar retail mutual funds that offer no principal protection or guarantees of any kind) may reduce the rate of return compared to what the investor could make by investing directly in similar investments outside of the variable annuity. A big selling point for variable annuities is the guarantees many have, such as the guarantee that the customer will not lose his or her principal. Critics say that these guarantees are not necessary because over the long term the market has always been positive, while others say that with the uncertainty of the financial markets many investors simply will not invest without guarantees. Past returns are no guarantee of future performance, of course, and different investors have different risk tolerances, different investment horizons, different family situations, and so on. The sale of any security product should involve a careful analysis of the suitability of the product for a given individual. A controversial practice of insurance sales is the selling of insurance contracts within an IRA or 401(k) plan. Since these investment vehicles are already tax deferred, investors do not receive additional tax shelters from the annuities. The benefit of the annuity contract is the guaranteed lifetime income that all annuity contracts must have by state law. Approximately 90% of annuitants, however, have not taken the life annuity upon retirement. If an investor does not intend to take the life income option from an annuity contract at retirement he or she may want to consider a low-cost deferred annuity. If an investor needs to take lifetime income at retirement, on the other hand, he or she may want to try to buy an annuity upon retirement or might consider selecting a 401(k) plan account with an option to buy the annuity just before retirement.
Annuities
825
Taxation
In the U.S. Internal Revenue Code, the growth of the annuity value during the accumulation phase is tax-deferred, that is, not subject to current income tax, for annuities owned by individuals. The tax deferred status of deferred annuities has led to their common usage in the United States. Under the U.S. tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of annuity contracts are bought primarily for the tax benefits rather than to receive a fixed stream of income. If an annuity is used in a qualified pension plan or an IRA funding vehicle, then 100% of the annuity payment is taxable as current income upon distribution (because the taxpayer has no tax basis in any of the money in the annuity). If the annuity contract is purchased with after-tax dollars, then the contract holder upon annuitization recovers his basis pro-rata in the ratio of basis divided by the expected value, according to the tax regulation Section 1.72-5. (This is commonly referred to as the exclusion ratio.) After the taxpayer has recovered all of his basis, then 100% of the payments thereafter are subject to ordinary income tax. Since the Jobs and Growth Tax Relief Reconciliation Act of 2003, the use of variable annuities as a tax shelter has greatly diminished, because the growth of mutual funds and now most of the dividends of the fund are taxed at long term capital gains rates. This taxation, contrasted with the taxation of all the growth of variable annuities at income rates, means that in most cases, variable annuities shouldn't be used for tax shelters unless very long holding periods apply (for example, more than 20 years). Also, any withdrawals before an investor reaches the age of 59 are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income. [4] In the October 2003 edition of Wealth Manager, an article titled "Photo Finish" by W. McAfee, Jr.[5] examined the effects of taxation on annuities relative to other investment vehicles. The author found that annuities are generally not effective as a tax-deferral vehicle and that there are significant flaws in the use of annuities for financial planning during the accumulation phase.
Insurance company default risk and state guaranty associations

An investor should consider the financial strength of the insurance company that writes annuity contracts. Major insolvencies have occurred at least 62 times since the conspicuous collapse of the Executive Life Insurance Company in 1991.[6] Insurance company defaults are governed by state law. The laws are, however, broadly similar in most states. Annuity contracts are protected against insurance company insolvency up to a specific dollar limit, often $100,000, but as high as $500,000 in New York [7], New Jersey [8], and the state of Washington [9]. This protection is not insurance and is not provided by a government agency. It is provided by an entity called the state Guaranty Association. When an insolvency occurs, the Guaranty Association steps in to protect annuity holders, and decides what to do on a case-by-case basis. Sometimes the contracts will be taken over and fulfilled by a solvent insurance company. The state Guaranty Association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The Guaranty Associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website [10] provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws. A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance(e.g. [11]). Presumably this is a response to concerns by stronger insurance
Annuities companies about moral hazard.
826
Compensation for advisors or salespeople

Deferred annuities, including fixed, fixed indexed and variable, typically pay the advisor or salesperson 1 percent to 10 percent of the amount invested as a commission, with possible trail options of 25 basis points to 1 percent. Sometimes the advisor can select his payout option, which might be either 7 or 10 percent up front, or 5 percent up front with a 25 basis point trail, or 1 percent to 3 percent up front with a 1 percent trail. Trail commissions are most common in variable annuities while fixed annuities typically only pay an up front commission. Fixed indexed annuities with long surrender periods (10 years or more) typically pay the highest commissions. Some firms allow an investor to pick an annuity share class, which determines the salesperson's commission schedule. The main variables are the up-front commission and the trailing commission. Fixed and Indexed Annuity commissions are paid to the agent by the insurance companies the agent represents. Commissions are not paid by the client (annuitant). "No-load" variable annuities are available on a direct-to-consumer basis from several no-load mutual fund companies. "No-load" means the products have no sales commissions or surrender charges.
References
[1] [2] [3] [4] US SEC Answers on Annuities (http:/ / www. sec. gov/ answers/ annuity. htm) US SEC Answers on Equity-Indexed Annuities (http:/ / www. sec. gov/ investor/ pubs/ equityidxannuity. htm) Variable Annuities: What You Should Know (http:/ / www. sec. gov/ investor/ pubs/ varannty. htm) FINRA - Investor Information - Investor Alert - Variable Annuities: Beyond the Hard Sell (http:/ / www. finra. org/ InvestorInformation/ InvestorAlerts/ AnnuitiesandInsurance/ VariableAnnuitiesBeyondtheHardSell/ p005976) [5] "Photo Finish" article by W. McAfee, Jr. in Wealth Manager (http:/ / www. whmca. com/ pdf/ PhotoFinishBloomberg2003. pdf) [6] http:/ / www. nolhga. org/ factsandfigures/ main. cfm/ location/ insolvencies [7] http:/ / www. nylifega. org/ faq. cfm?id=455 [8] http:/ / www. njlifega. org/ faq. cfm?id=427 [9] http:/ / www. walifega. org/ faq. cfm?id=679 [10] http:/ / www. nolhga. com/ [11] http:/ / www. njlifega. org/ faq. cfm?id=434
External links
National Association of Insurance Commissioners (http://www.naic.org) "Photo Finish", by W. H. McAfee, Jr., Bloomberg Wealth Manager, October 2003. An examination of variable annuity investment versus investing outside of annuities (http://www.whmca.com/pdf/ PhotoFinishBloomberg2003.pdf) The National Association for Fixed Annuities (http://www.nafa.com/)
Life annuity
827
Life annuity
A life annuity is a financial contract in the form of an insurance product according to which a seller (issuer) typically a financial institution such as a life insurance company makes a series of future payments to a buyer (annuitant) in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (regular-payment annuity), prior to the onset of the annuity. The payment stream from the issuer to the annuitant has an unknown duration based principally upon the date of death of the annuitant. At this point the contract will terminate and the remainder of the fund accumulated is forfeited unless there are other annuitants or beneficiaries in the contract. Thus a life annuity is a form of longevity insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients. Annuities can be purchased to provide an income during retirement, or originate from a structured settlement of a personal injury lawsuit.
History
The instrument's evolution has been long and continues as part of actuarial science.[1] Medieval German and Dutch cities and monasteries raised money by the sale of life annuities, and it was recognized that pricing them was difficult.[2] The early practice for selling this instrument did not consider the age of the nominee, thereby raising interesting concerns.[3] These concerns got the attention of several prominent mathematicians[4] over the years, such as Bernoulli, de Moivre, Huygens, Halley and others[3] . Even Gauss and Laplace had an interest in matters pertaining to this instrument.[5] Continuing practice is an everyday occurrence with well-known theory founded on robust mathematics, as witnessed by the hundreds of millions worldwide who receive regular remuneration via pension or the like. The modern approach to resolving the difficult problems related to a larger scope for this instrument applies many advanced mathematical approaches, such as stochastic methods, game theory, and other tools of financial mathematics.
Phases of an annuity
There are two possible phases for an annuity: The accumulation phase in which the customer deposits and accumulates money into an account, and ; The distribution phase in which the insurance company makes income payments until the death of the annuitants named in the contract. It is possible to structure an annuity contract so that it has only the distribution phase; such a contract is called an immediate annuity. Annuity contracts with a deferral phasedeferred annuitiesare essentially two phase annuities, but only having growth of capital by investment in the accumulation phase (now the deferral phase), with no customer deposits. The phases of an annuity can be combined in the fusion of a retirement savings and retirement payment plan: the annuitant makes regular contributions to the annuity until a certain date and then receives regular payments from it until death. Sometimes there is a life insurance component added so that if the annuitant dies before annuity payments begin, a beneficiary gets either a lump sum or annuity payments.
Life annuity
828
Decision to defer or not

The option to defer purchase of an annuity (income drawdown) has the benefit of investment flexibility, offset by the risk of falling annuity rates as the life expectancy of the surviving individual rises (mortality drag). Interest rates and inflation can affect the decision to purchase, as they are reflected in the annuity rates, and also affect secure investment potential by varying bond yields. Inflation deteriorates the buying power of an annuity and can therefore be a concern.
Types of life annuity

With the complex selection of options available, consumers can find it difficult to decide rationally on the right type of annuity product for their circumstances.[6]
Fixed and variable annuities

Annuities that make payments in fixed amounts or in amounts that increase by a fixed percentage are called fixed annuities. Variable annuities, by contrast, pay amounts that vary according to the investment performance of a specified set of investments, typically bond and equity mutual funds. Variable annuities are used for many different objectives. One common objective is deferral of the recognition of taxable gains. Money deposited in a variable annuity grows on a tax-deferred basis, so that taxes on investment gains are not due until a withdrawal is made. Variable annuities offer a variety of funds ("subaccounts") from various money managers. This gives investors the ability to move between subaccounts without incurring additional fees or sales charges.
Guaranteed annuities
With a "pure" life annuity, annuitants may die before recovering the value of their original investment in it. If the possibility of this situation, called a "forfeiture," is not desired, it can be ameliorated by the addition of an added clause, forming a type of guaranteed annuity, under which the annuity issuer is required to make annuity payments for at least a certain number of years (the "period certain"); if the annuitant outlives the specified period certain, annuity payments then continue until the annuitant's death, and if the annuitant dies before the expiration of the period certain, the annuitant's estate or beneficiary is entitled to collect the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is that in exchange for the reduced risk of loss, the annuity payments for the latter will be smaller.
Joint annuities
Multiple annuitant products include joint-life and joint-survivor annuities, where payments stop upon the death of one or both of the annuitants respectively. For example, an annuity may be structured to make payments to a married couple, such payments ceasing on the death of the second spouse. In joint-survivor annuities, sometimes the instrument reduces the payments to the second annuitant after death of the first.
Impaired life annuities

There has also been a significant growth in the development of Impaired Life annuities. These involve improving the terms offered due to a medical diagnosis which is severe enough to reduce life expectancy. A process of medical underwriting is involved and the range of qualifying conditions has increased substantially in recent years. Both conventional annuities and Purchase Life Annuities can qualify for impaired terms.
Life annuity
829
Annuities by region
United States
Further information: Annuity (US financial products) With a "single premium" or "immediate" annuity, the "annuitant" pays for the annuity with a single lump sum. The annuity starts making regular payments to the annuitant within a year. A common use of a single premium annuity is as a destination for roll-over retirement savings upon retirement. In such a case, a retiree withdraws all of the money he/she has saved during working life in, for example, a 401(k) (tax-advantaged) savings vehicle, and uses the money to buy an annuity whose payments will replace the retiree's wage payments for the rest of his/her life. The advantage of such an annuity is that the annuitant has a guaranteed income for life, whereas if the retiree were instead to withdraw money regularly from the retirement account (income drawdown), he/she might run out of money before death, or alternatively not have as much to spend while alive as could have been possible with an annuity purchase. The disadvantage of such an annuity is that the election is irrevocable and, because of inflation, a guaranteed income for life is not the same thing as guaranteeing a comfortable income for life.
United Kingdom
In the UK the conversion of pension income into an annuity is compulsory by the age of 75, and has led to a large market for annuities of various types. The most common are those where the source of the funds required to buy the annuity is from a pension scheme. Examples of these types of annuity, often referred to as a Compulsory Purchase Annuity, are conventional annuities, with profit annuities and unit linked, or "third way" annuities. Annuities purchased from savings (i.e. not from a pension scheme) are referred to as Purchase Life Annuities and Immediate Vesting Annuities. In October 2009, the International Longevity Centre-UK [7] published a report on Purchased Life Annuities (Time to Annuitise [8]) which argued that the PLA market might benefit up to 1.3 million individuals in the UK. Yet, less than 160,000 life annuities are in force with the number of policies having fallen by 65% in 10 years and new business in 2008 amounted to fewer than 1000 sales of life annuities In the UK it has become common for life companies to base their annuity rates on an individual's location. Legal & General may have been the first company to do this.
Internationally
Some countries developed more options of value for this type of instrument than others. However, a recent study reported that some of the risks related to longevity are poorly managed "practically everywhere".[6] Longevity insurance is now becoming more common in the UK and the U.S. (see Futures) while Chile, in comparison to the U.S., has had a very large life annuity market for 20 years.[9]
Future of annuities
It is expected that the aging of the Baby boomer generation [10] in the US will increase the demand for this type of instrument and how it might be optimized for the annuitant; this growing market will drive improvements necessitating more research and development of instruments plus increase insight into the mechanics (including dynamics in more than the sense of the dynamical system) involved on the part of the buying public. An example of increased scrutiny and discussion is that related to privatization of part of the U.S. Social Security Trust Fund. In late 2010, discussions, related to cutting Federal taxes, raised anew the following concern: how much would an annuity cost a retiree if he or she had to replace their Social Security income? [11] Assuming that the average benefit from Social Security is $14,000 per year, the replacement cost would be about $250,000 for the individual. The figures are based upon the individual receiving an inflation-adjusted stream that would pay for life and be insured.
Life annuity
830
European Court of Justice ruling

In March 2011 a European Court of Justice ruling was made that prevents annuity providers from using gender to set different premiums for men and women. Annuity rates for men are generally higher than those for women because they have shorter life expectancies. The change means that either annuity rates for men will fall or annuity rates for women will rise. In the UK any annuities that are taken out after 21st December 2012 will have to comply with the ruling.
References
[1] Laboratory of Actuarial Mathematics (http:/ / www. act. ku. dk/ ) [2] J. Franklin, The Science of Conjecture: Evidence and Probability Before Pascal (Baltimore: Johns Hopkins University Press, 2001), 269-272. [3] " From Commercial Arithmetic to Life Annuities: The Early History of Financial Economics, 1478-1776 (http:/ / www. bus. sfu. ca/ homes/ poitras/ FIN_HIS3. pdf)" Goeffrey Poitras, Simon Fraser University [4] Seminar Series on Quantitative Finance (http:/ / www. fields. utoronto. ca/ programs/ cim/ financial_math/ finance_seminar/ 06-07/ ) The Fields Institute [5] Stephen Hawking God Created the Integers: The Mathematical Breakthroughs That Changed History, Running Press, 2005 ISBN 0-7624-1922-9 [6] Longevity Insurance: A Missing Market (http:/ / wwwdocs. fce. unsw. edu. au/ actuarial/ research/ papers/ 2006/ Longevity Insurance - A Missing Market_28Aug_JP_Final. pdf) Adam Creighton, et al. University of New South Wales AU [7] http:/ / www. ilcuk. org. uk [8] http:/ / www. ilcuk. org. uk/ record. jsp?type=publication& ID=48 [9] " NCPA: Baby Boom Retirement Could Cause Annuity Market Explosion (http:/ / www. insurancenewsnet. com/ article. asp?a=top_news& id=30974)" Insurance Newsnet, 12/9/2004 [10] " An Income Stream to Last a Lifetime (http:/ / finance. yahoo. com/ focus-retirement/ article/ 105678/ An-Income-Stream-to-Last-a-Lifetime?mod=retirement-post-spending)" Anne Kates Smith, Kiplinger [11] " Could you retire without Social Security? (http:/ / finance. yahoo. com/ focus-retirement/ article/ 111640/ could-you-retire-without-social-security;_ylt=AhYu. 6rAp1KSabILrbNr. sy7YWsA;_ylu=X3oDMTE1azk4N240BHBvcwMzBHNlYwNmaWRlbGl0eUZQBHNsawNjb3VsZHlvdWFmZm8-?mod=fidelity-readytoretire& cat=fidelity_2010_getting_ready_to_retire) Bret Arends, WSJ
External links
Math and spreadsheet for purchase and deferral decision (http://www.retailinvestor.org/annuity.html)
Insurance
831
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.[1]
Insurability
Risk which can be insured by private companies typically share seven common characteristics:[2] 1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, which is famous for insuring the life or health of actors, sports figures and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates. 2. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements. 3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable. 4. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer. 5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that the insurance will be purchased, even if on offer. Further, as the accounting profession formally recognizes in financial accounting
Insurance standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the US Financial Accounting Standards Board standard number 113) 6. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim. 7. Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the US, flood risk is insured by the federal government. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
832
Legal
When a company insures an individual entity, there are basic legal requirements. Several commonly cited legal principles of insurance include:[3] 1. Indemnity the insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest. 2. Insurable interest the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons. 3. Utmost good faith the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed. 4. Contribution insurers which have similar obligations to the insured contribute in the indemnification, according to some method. 5. Subrogation the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for insured's loss. 6. Causa proxima, or proximate cause the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded 7. Principle of loss minimization - In case of any loss or casualty, the asset owner must attempt to keep the loss to a minimum, as if the asset was not insured.
Insurance
833
Indemnification
To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There are generally two types of insurance contracts that seek to indemnify an insured: 1. an "indemnity" policy, and 2. a "pay on behalf" or "on behalf of"[4] policy. The difference is significant on paper, but rarely material in practice. An "indemnity" policy will never pay claims until the insured has paid out of pocket to some third party; for example, a visitor to your home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000).[4] [5] Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (the homeowner in the above example) would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language.[4] An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy. When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a claim against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims in theory for a relatively few claimants and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin is an insurer's profit.
Effects
Insurance can have various effects on society through the way that it changes who bears the cost of losses and damage. On one hand it can increase fraud, on the other it can help societies and individuals prepare for catastrophes and mitigate the effects of catastrophes on both households and societies. Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by the insurance company. Insurance scholars have typically used morale hazard to refer to the increased loss due to unintentional carelessness and moral hazard to refer to increased risk due to intentional carelessness or indifference.[6] Insurers attempt to address carelessness through inspections, policy provisions requiring certain types of maintenance, and possible discounts for loss mitigation efforts. While in theory insurers could encourage investment in loss reduction, some commentators have argued that in practice insurers had historically not aggressively pursued loss control measures - particularly to prevent disaster losses such as hurricanes - because of concerns over rate reductions and legal battles. However, since about 1996 insurers began to take a more active role in loss mitigation, such as through building codes.[7]
Insurance
834
Insurers' business model

Underwriting and investing
The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation: Profit = earned premium + investment income - incurred loss - underwriting expenses. Insurers make money in two ways: 1. Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks; 2. By investing the premiums they collect from insured parties. The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process. At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.[8] Loss ratios and expense loads are also used. Rating for different risk characteristics involves at the most basic level comparing the losses with "loss relativities" - a policy with twice as many losses would therefore be charged twice as much. More complex multivariate analyses are sometimes used when multiple characteristics are involved and a univariate analysis could produce confounded results. Other statistical methods may be used in assessing the probability of future losses. Upon termination of a given policy, the amount of premium collected and the investment gains thereon, minus the amount paid out in claims, is the insurer's underwriting profit on that policy. Underwriting performance is measured by something called the "combined ratio"[9] which is the ratio of expenses/losses to premiums. A combined ratio of less than 100 percent indicates an underwriting profit, while anything over 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings. Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[10] In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, the float method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[11]
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Claims
Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as those produced by ACORD. Insurance company claims departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes an investigation of each claim, usually in close cooperation with the insured, determines if coverage is available under the terms of the insurance contract, and if so, the reasonable monetary value of the claim, and authorizes payment. The policyholder may hire their own public adjuster to negotiate the settlement with the insurance company on their behalf. For policies that are complicated, where claims may be complex, the insured may take out a separate insurance policy add on, called loss recovery insurance, which covers the cost of a public adjuster in the case of a claim. Adjusting liability insurance claims is particularly difficult because there is a third party involved, the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge. If a claims adjuster suspects under-insurance, the condition of average may come into play to limit the insurance company's exposure. In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation (see insurance bad faith).
Marketing
Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be captive, meaning they write only for one company, or independent, meaning that they can issue policies from several companies. Commissions to agents represent a significant portion of an insurance cost and insurers that sell policies directly via mass marketing campaigns can offer lower prices. The existence and success of companies using insurance policy (with higher prices) is likely due to improved and personalized service.[12]
History of insurance
In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: natural or non-monetary economies (using barter and trade with no centralized nor standardized set of financial instruments) and more modern monetary economies (with markets, currency, financial instruments and so on). The former is more primitive and the insurance in such economies entails agreements of mutual aid. If one family's house is destroyed the neighbours are committed to help rebuild. Granaries housed another primitive form of insurance to indemnify against famines. Often informal or formally intrinsic to local religious customs, this type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread. Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practised by Chinese and Babylonian
Insurance traders as long ago as the 3rd and 2nd millennia BC, respectively.[13] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practised by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea. Achaemenian monarchs of Ancient Persia were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices. The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."[14] A thousand years later, the inhabitants of Rhodes invented the concept of the general average. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were deliberately jettisoned in order to lighten the ship and save it from total loss. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies. Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
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Some forms of insurance had developed in London by the early decades of the 17th century. For example, the will of the English colonist Robert Hayman mentions two "policies of insurance" taken out with the diocesan Chancellor of London, Arthur Duck. Of the value of 100 each, one relates to the safe arrival of Hayman's ship in Guyana and the other is in regard to "one hundred pounds assured by the said Doctor Arthur Ducke on my life". Hayman's will was signed and sealed on 17 November 1628 but not proved until 1633.[15] Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships' captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is an insurance market rather than a company) for marine and other specialist types of insurance, but it operates rather differently than the more familiar kinds of insurance. Insurance as we know it today can be traced to the Great Fire of Lloyd's of London, pictured in 1991, is one of the London, which in 1666 devoured more than 13,000 houses. The world's leading and most famous insurance devastating effects of the fire converted the development of insurance markets "from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for 'the Insurance Office' in his new plan for London in 1667."[16] A number of attempted fire insurance schemes came to nothing, but in 1681 Nicholas Barbon, and eleven associates, established England's first fire insurance company, the 'Insurance Office for Houses', at the back of the Royal Exchange. Initially, 5,000 homes were insured by Barbon's Insurance Office.[17] The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banks and national banks.
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Types of insurance
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as perils. An insurance policy will set out in detail which perils are covered by the policy and which are not. Below are non-exhaustive lists of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set out below. For example, vehicle insurance would typically cover both the property risk (theft or damage to the vehicle) and the liability risk (legal claims arising from an accident). A home insurance policy in the US typically includes coverage for damage to the home and the owner's belongings, certain legal claims against the owner, and even a small amount of coverage for medical expenses of guests who are injured on the owner's property. Business insurance can take a number of different forms, such as the various kinds of professional liability insurance, also called professional indemnity (PI), which are discussed below under that name; and the business owner's policy (BOP), which packages into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners' insurance packages the coverages that a homeowner needs.[18]
Auto insurance
Auto insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision. Coverage typically includes: 1. Property coverage, for damage to or theft of the car; 2. Liability coverage, for the legal responsibility to others for bodily injury or property damage; 3. Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.
A wrecked vehicle in Copenhagen
Most countries, such as the United Kingdom, require drivers to buy some, but not all, of these coverages. When a car is used as collateral for a loan the lender usually requires specific coverage.
Home insurance
Home insurance provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[19]
Health insurance
Health insurance policies cover the cost of medical treatments. Dental insurance, like medical insurance, protects policyholders for dental costs. In the US and Canada, dental insurance is often part of an employer's benefits package, along with health insurance.
Great Western Hospital, Swindon
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Accident, sickness and unemployment insurance

Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.
Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. Insurance companies will often try to encourage the person back into employment in preference to and before declaring them unable to work at all and therefore totally disabled. Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work. Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance. Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.
Workers' compensation, or employers' liability insurance, is compulsory in some countries
Casualty
Casualty insurance insures against accidents, not necessarily tied to any specific property. It is a broad spectrum of insurance that a number of other types of insurance could be classified, such as auto, workers compensation, and some liability insurances. Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement. Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions could result in a loss.
Life
Life insurance provides a monetary benefit to a descendant's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance. Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
Insurance In many countries, such as the US and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death. In the US, the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation. Burial insurance Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance circa 600 AD when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.
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Property
Property insurance provides protection against risks to property, such as fire, theft or weather damage. This may include specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance. The term property insurance may, like casualty insurance, be used as a broad category of various subtypes of insurance, some of which are listed below:
This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes
Aviation insurance protects aircraft hulls and spares, and associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures. Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.
US Airways Flight 1549 was written off after ditching into the Hudson River
Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from an insured peril.[20] Crop insurance may be purchased by farmers to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease.[21] Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary home insurance policies do not cover earthquake damage.
Insurance Earthquake insurance policies generally feature a high deductible. Rates depend on location and hence the likelihood of an earthquake, as well as the construction of the home. Fidelity bond is a form of casualty insurance that covers policyholders for losses incurred as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees. Flood insurance protects against property loss due to flooding. Many insurers in the US do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort. Home insurance, also commonly called hazard insurance, or homeowners insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes, as outlined above.
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Hurricane Katrina caused over $80 billion of storm and flood damage
Landlord insurance covers residential and commercial properties which are rented to others. Most homeowners' insurance covers only owner-occupied homes. Marine insurance and marine cargo insurance cover the loss or damage of vessels at sea or on inland waterways, and of cargo in transit, regardless of the method of transit. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss.
Fire aboard MV Hyundai Fortune
Supplemental natural disaster insurance covers specified expenses after a natural disaster renders the policyholder's home uninhabitable. Periodic payments are made directly to the insured until the home is rebuilt or a specified time period has elapsed. Surety bond insurance is a three-party insurance guaranteeing the performance of the principal. Terrorism insurance provides protection against any loss or damage caused by terrorist activities. In the US in the wake of 9/11, the Terrorism Risk Insurance Act 2002 (TRIA) set up a federal Program providing a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The program was extended until the end of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007 (TRIPRA). Volcano insurance is a specialized insurance protecting against damage arising specifically from volcanic eruptions. Windstorm insurance is an insurance covering the damage that can be caused by wind events such as hurricanes.
The demand for terrorism insurance surged after 9/11
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Liability
Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner's insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property. The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will not apply to results of wilful or intentional acts by the insured. Public liability insurance covers a business or organization against claims should its operations injure a member of the public or damage their property in some way. Directors and officers liability insurance (D&O) protects an organization (usually a corporation) from costs associated with litigation resulting from errors made by directors and officers for which they are liable. Environmental liability insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the The subprime mortgage crisis was the source of dispersal, release or escape of pollutants. many liability insurance losses Errors and omissions insurance is business liability insurance for professionals such as insurance agents, real estate agents and brokers, architects, third-party administrators (TPAs) and other business professionals. Prize indemnity insurance protects the insured from giving away a large prize at a specific event. Examples would include offering prizes to contestants who can make a half-court shot at a basketball game, or a hole-in-one at a golf tournament. Professional liability insurance, also called professional indemnity insurance (PI), protects insured professionals such as architectural corporations and medical practitioners against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called medical malpractice insurance.
Credit
Credit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death. Mortgage insurance insures the lender against default by the borrower. Mortgage insurance is a form of credit insurance, although the name "credit insurance" more often is used to refer to policies that cover other kinds of debt. Many credit cards offer payment protection plans which are a form of credit insurance. Accounts Receivable insurance also known as Credit or Trade Credit insurance is business insurance over the accounts receivables of the insured. The policy pays the policy holder for covered accounts receivable if the debtor defaults on payment.
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Other types
All-risk insurance is an insurance that covers a wide-range of incidents and perils, except those noted in the policy. All-risk insurance is different from peril-specific insurance that cover losses from only those perils listed in the policy.[22] In car insurance, all-risk policy includes also the damages caused by the own driver. Bloodstock insurance covers individual horses or a number of horses under common ownership. Coverage is typically for mortality as a result of accident, illness or disease but may extend to include infertility, in-transit loss, veterinary fees, and prospective foal. Business interruption insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations. Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.
High-value horses may be insured under a bloodstock policy
Defense Base Act (DBA) insurance provides coverage for civilian workers hired by the government to perform contracts outside the US and Canada. DBA is required for all US citizens, US residents, US Green Card holders, and all employees or subcontractors hired on overseas government contracts. Depending on the country, foreign nationals must also be covered under DBA. This coverage typically includes expenses related to medical treatment and loss of wages, as well as disability and death benefits. Expatriate insurance provides individuals and organizations operating outside of their home country with protection for automobiles, property, health, liability and business pursuits. Kidnap and ransom insurance is designed to protect individuals and corporations operating in high-risk areas around the world against the perils of kidnap, extortion, wrongful detention and hijacking. Legal expenses insurance covers policyholders for the potential costs of legal action against an institution or an individual. When something happens which triggers the need for legal action, it is known as "the event". There are two main types of legal expenses insurance: before the event insurance and after the event insurance. Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases, a government may authorize its use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required. Livestock insurance is a specialist policy provided to, for example, commercial or hobby farms, aquariums, fish farms or any other animal holding. Cover is available for mortality or economic slaughter as a result of accident, illness or disease but can extend to include destruction by government order. Media liability insurance is designed to cover professionals that engage in film and television production and print, against risks such as defamation. Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. (See the nuclear exclusion clause and for the US the Price-Anderson Nuclear Industries Indemnity Act.) Pet insurance insures pets against accidents and illnesses; some companies cover routine/wellness care and burial, as well. Pollution insurance usually takes the form of first-party coverage for contamination of insured property either by external or on-site sources. Coverage is also afforded for liability to third parties arising from contamination of air, water, or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specifically excluded.
Insurance Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties, guarantees, care plans and even mobile phone insurance. Such insurance is normally very limited in the scope of problems that are covered by the policy. Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a real estate transaction. Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, loss of personal belongings, travel delay, and personal liabilities.
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Insurance financing vehicles

Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social organizations.[23] No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident. Protected self-insurance is an alternative risk financing mechanism in which an organization retains the mathematically calculated cost of risk within the organization and transfers the catastrophic risk with specific and aggregate limits to an insurer so the maximum total cost of the program is known. A properly designed and underwritten Protected Self-Insurance Program reduces and stabilizes the cost of insurance and provides valuable risk management information. Retrospectively rated insurance is a method of establishing a premium on large commercial accounts. The final premium is based on the insured's actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year's premium is based partially (or wholly) on the current year's losses, although the premium adjustments may take months or years beyond the current year's expiration date. The rating formula is guaranteed in the insurance contract. Formula: retrospective premium = converted loss + basic premium tax multiplier. Numerous variations of this formula have been developed and are in use. Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usually used to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequent losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords. Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital management rather than to transfer insurance risk. Social insurance can be many things to many people in many countries. But a summary of its essence is that it is a collection of insurance coverages (including components of life insurance, disability income insurance, unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others): National Insurance Social safety net Social security Social Security debate (United States)
Insurance Social Security (United States) Social welfare provision Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is purchased by organizations who do not want to assume 100% of the liability for losses arising from the plans. Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain limits called deductibles.
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Closed community self-insurance

Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts. In the United Kingdom, The Crown (which, for practical purposes, meant the civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies, and rented back, this arrangement is now less common and may have disappeared altogether.
Insurance companies
Insurance companies may be classified into two groups: Life insurance companies, which sell life insurance, annuities and pensions products. Non-life, general, or property/casualty insurance companies, which sell other types of insurance. General insurance companies can be further divided into these sub categories. Standard lines Excess lines In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year. In the United States, standard line insurance companies are "mainstream" insurers. These are the companies that typically insure autos, homes or businesses. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies. Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers not to be available through standard licensed insurers. Insurance companies are generally classified as either mutual or stock companies. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies.
Insurance Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late 20th century. Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations. Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products. Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well. Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices. The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance. Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background: heavy and increasing premium costs in almost every line of coverage; difficulties in insuring certain types of fortuitous risk; differential coverage standards in various parts of the world; rating structures which reflect market trends rather than individual loss experience; insufficient credit for deductibles and/or loss control efforts.
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There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client. Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have. The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.
Insurance
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Across the world

Global insurance premiums grew by 3.4% in 2008 to reach $4.3 trillion. For the first time in the past three decades, premium income declined in inflation-adjusted terms, with non-life premiums falling by 0.8% and life premiums falling by 3.5%. The insurance industry is exposed to the global economic downturn on the assets side by the decline in returns on investments and on the liabilities side by a rise in claims. So far the extent of losses on both sides has been limited although investment returns fell sharply following the bankruptcy of Lehman Brothers and bailout of AIG in September 2008. The financial crisis has shown that the insurance sector is sufficiently capitalised. The vast majority of insurance companies had enough capital to absorb losses and only a small number turned to government for support.
Life insurance premiums written in 2005
Advanced economies account for the bulk of global insurance. With Non-life insurance premiums written in 2005 premium income of $1,753bn, Europe was the most important region in 2008, followed by North America $1,346bn and Asia $933bn. The top four countries generated more than a half of premiums. The US and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the worlds population but generated only around 10% of premiums. Their markets are however growing at a quicker pace.[24]
Regulatory differences
In the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[25] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[26] In the European Union, the Third Non-Life Directive and the Third Life Directive, both passed in 1992 and effective 1994, created a single insurance market in Europe and allowed insurance companies to offer insurance anywhere in the EU (subject to permission from authority in the head office) and allowed insurance consumers to purchase insurance from any insurer in the EU.[27] The insurance industry in China was nationalized in 1949 and thereafter offered by only a single state-owned company, the People's Insurance Company of China, which was eventually suspended as demand declined in a communist environment. In 1978, market reforms led to an increase in the market and by 1995 a comprehensive Insurance Law of the People's Republic of China[28] was passed, followed in 1998 by the formation of China Insurance Regulatory Commission (CIRC), which has broad regulatory authority over the insurance market of China.[29] In India, IRDA is insurance regulatory authority. As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA), which was constituted by an act of parliament. National Insurance Academy, Pune is apex insurance capacity builder institute promoted with support from Ministry of Finance and by LIC, Life & General Insurance compnies.
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Controversies
Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer), a concept known as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability. For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider were so irrational as to want to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.
Complexity of insurance policy contracts

Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertised and sold. For example, most insurance policies in the English language today have been carefully drafted in plain English; the industry learned the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying. Typically, courts construe ambiguities in insurance policies against the insurance company and in favor of coverage under the policy.
9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policy
Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface it appears the broker represents the buyer (not the insurance company), and typically counsels the buyer on appropriate coverage and policy limitations, it should be noted that in the vast majority of cases a broker's compensation comes in the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the broker's financial interest is tilted towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible. Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. Just as there is a potential conflict of interest with a broker, an agent has a different type of conflict. Because agents work directly for the insurance company, if there is a claim the agent may advise the client to the benefit of the insurance company. It should also be noted that agents generally can not offer as broad a range of selection compared to an insurance broker. An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thus offers completely independent advice, free of the financial conflict of interest of brokers and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.
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Limited consumer benefits

Economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk.[30] This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[30]
Redlining
Redlining is the practice of denying insurance coverage in specific geographic areas, supposedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination. Racial profiling or redlining has a long history in the property insurance industry in the United States. From a review of industry underwriting and marketing materials, court documents, and research by government agencies, industry and community groups, and academics, it is clear that race has long affected and continues to affect the policies and practices of the insurance industry.[31] In July, 2007, The Federal Trade Commission (FTC) released a report presenting the results of a study concerning credit-based insurance scores in automobile insurance. The study found that these scores are effective predictors of risk. It also showed that African-Americans and Hispanics are substantially overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to predict risk within each of the ethnic groups, leading the FTC to conclude that the scoring models are not solely proxies for redlining. The FTC indicated little data was available to evaluate benefit of insurance scores to consumers.[32] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry. [33] All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[34] In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used. An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent. Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination. What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system. The failure to address the deficit may mean insolvency and hardship for all of a company's insureds. The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e.,
Insurance externalize outside of the company to society at large).
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Insurance patents
Further information: Insurance patent New assurance products can now be protected from copying with a business method patent in the United States. A recent example of a new insurance product that is patented is Usage Based auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5797134 [35]) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009 [36]). Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70% of the new US patent applications in this area. Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. The Hartford insurance company, for example, recently had to pay $80 million to an independent inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a type of corporate owned life insurance product invented and patented by Bancorp. There are currently about 150 new patent applications on insurance inventions filed per year in the United States. The rate at which patents have issued has steadily risen from 15 in 2002 to 44 in 2006.[37] Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[38] The first insurance patent application to be posted was US2009005522 Risk assessment company [39]. It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[40]
The insurance industry and rent-seeking

Certain insurance products and practices have been described as rent-seeking by critics. That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products. Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.
Religious concerns
Muslim scholars have varying opinions about insurance. Insurance policies that earn interest are generally considered to be a form of riba[41] (usury) and some consider even policies that do not earn interest to be a form of gharar (speculation). Some argue that gharar is not present due to the actuarial science behind the underwriting.[42] Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[43] Some Christians believe insurance represents a lack of faith[44] and there is a long history of resistance to commercial insurance in Anabaptist communities (Mennonites, Amish, Hutterites, Brethren in Christ) but many participate in community-based self-insurance programs that spread risk within their communities.[45] [46] [47]
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Notes
[1] Gollier C. (2003). To Insure or Not to Insure?: An Insurance Puzzle (http:/ / dhenriet. perso. egim-mrs. fr/ gollier. pdf). The Geneva Papers on Risk and Insurance Theory. [2] This discussion is adapted from Mehr and Camack Principles of Insurance, 6th edition, 1976, pp 34 37. [3] Irish Brokers Association. Insurance Principles (https:/ / www. iba. ie/ development2009/ index. php?option=com_content& view=article& id=76& Itemid=167). [4] C. Kulp & J. Hall, Casualty Insurance, Fourth Edition, 1968, page 35 [5] However, bankruptcy of the insured does not relieve the insurer. Certain types of insurance, e.g., workers' compensation and personal automobile liability, are subject to statutory requirements that injured parties have direct access to coverage. [6] Dembe AE, Boden LI. (2000). Moral hazard: A question of morality? (http:/ / baywood. metapress. com/ index/ 1GU8EQN802J62RXK. pdf). New Solutions. [7] Kunreuther H. (1996). Mitigating Disaster Losses Through Insurance (http:/ / opim. wharton. upenn. edu/ risk/ downloads/ archive/ arch167. pdf). Journal of Risk and Uncertainty. [8] Brown RL. (1993). Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance (http:/ / books. google. com/ books?id=1j4O50JENE4C). ACTEX Publications. [9] Feldstein, Sylvan G.; Fabozzi, Frank J. (2008). The Handbook of Municipal Bonds (http:/ / books. google. com/ ?id=Juc4fb1Fx1cC& lpg=PA614& pg=PA614#v=onepage& f=false). Wiley. p.614. ISBN978-0470108758. . Retrieved February 8, 2010. [10] http:/ / www. abi. org. uk/ About_The_ABI/ role. aspx [11] Fitzpatrick, Sean, Fear is the Key: A Behavioral Guide to Underwriting Cycles, (http:/ / ssrn. com/ abstract=690316) 10 Conn. Ins. L.J. 255 (2004). [12] Berger, Allen N.; Cummins, J. David; Weiss, Mary A. (October 1997). "The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance.". Journal of Business 70 (4): 51546. doi:10.1086/209730. ( online draft (http:/ / fic. wharton. upenn. edu/ fic/ papers/ 95/ 9513. pdf)) [13] See, e.g., Vaughan, E. J., 1997, Risk Management, New York: Wiley. [14] http:/ / www. iran-law. com/ article. php3?id_article=61 [15] "And whereas I have left in the hands of Doctor Ducke Channcellor of London two pollicies of insurance the one of one hundred pounds for the safe arivall of our Shipp in Guiana which is in mine owne name, if we miscarry by the waie (which God forbid) I bequeath the advantage thereof to my said Cosin Thomas Muchell...whereas there is an other insurance of one hundred pounds assured by the said Doctor Arthur Ducke on my life for one yeare if I chance to die within that tyme I entreat the said doctor Ducke to make it over to the said Thomas Muchell his kinsman..." Will of Robert Hayman, 1628:Records of the Prerogative Court of Canterbury, Catalogue Reference PROB 11/163 [16] Dickson (1960): 4 [17] Dickson (1960): 7 [18] Insurance Information Institute. "Business insurance information. What does a businessowners policy cover?" (http:/ / www. iii. org/ individuals/ business/ basics/ bop/ ). . Retrieved 2007-05-09. [19] Insurance Information Institute. "What is homeowners insurance?" (http:/ / www. iii. org/ individuals/ homei/ hbasics/ whatis/ ). . Retrieved 2008-11-11. [20] "Builder's Risk Insurance" (http:/ / www. adjustersinternational. com/ AdjustingToday/ ATfullinfo. cfm?start=1& page_no=1& pdfID=4). Adjusters International. . Retrieved 2009-10-16. [21] US application 20060287896 (http:/ / v3. espacenet. com/ textdoc?DB=EPODOC& IDX=US20060287896) Method for providing crop insurance for a crop associated with a defined attribute [22] http:/ / www. business. gov/ manage/ business-insurance/ insurance-types. html [23] Margaret E. Lynch, Editor, "Health Insurance Terminology," Health Insurance Association of America, 1992, ISBN 1-879143-13-5 [24] http:/ / www. thecityuk. com/ assets/ Uploads/ Insurance-2010. pdfPDF(365KB) page 2 [25] Randall S. (1998). Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners (http:/ / www. law. fsu. edu/ Journals/ lawreview/ downloads/ 263/ rand. pdf). FLORIDA STATE UNIVERSITY LAW REVIEW. [26] J Schacht, B Foudree. (2007). A Study on State Authority: Making a Case for Proper Insurance Oversight (http:/ / www. ncoil. org/ policy/ Docs/ 2007/ ILFStudy. pdf). NCOIL [27] CJ Campbell, L Goldberg, A Rai. (2003). The Impact of the European Union Insurance Directives on Insurance Company Stocks (http:/ / people. hofstra. edu/ Anoop_Rai/ research/ JORI70-1Campbell. pdf). The Journal of Risk and Insurance. [28] Insurance Law of the People's Republic of China - 1995 (http:/ / www. lehmanlaw. com/ resource-centre/ laws-and-regulations/ insurance/ insurance-law-of-the-peoples-republic-of-china-1995. html). Lehman, Lee & Xu. [29] Thomas JE. (2002). The role and powers of the Chinese insurance regulatory commission in the administration of insurance law in China (http:/ / www. genevaassociation. org/ PDF/ Geneva_papers_on_Risk_and_Insurance/ GA2002_GP27(3)_Thomas. pdf). Geneva Papers on Risk and Insurance. [30] Schindler RM. (1994). Consumer Motivation for Purchasing Low-Deductible Insurance (http:/ / www. business. camden. rutgers. edu/ FacultyStaff/ research/ schindler/ Schindler (1994). pdf). In Marketing and Public Policy Conference Proceedings, Vol. 4, D.J. Ringold (ed.), Chicago, IL: American Marketing Association, 147-155.
Insurance
[31] Gregory D. Squires (2003) Racial Profiling, Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas Journal of Urban Affairs Volume 25 Issue 4 Page 391-410, November 2003 [32] Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance (http:/ / ftc. gov/ opa/ 2007/ 07/ facta. shtm), Federal Trade Commission (July 2007) [33] Consumers Dispute FTC Report on Insurance Credit Scoring (http:/ / www. consumeraffairs. com/ news04/ 2007/ 07/ insurance_credit. html) www.consumeraffairs.com (July 2007) [34] Insurance Information Institute. "Issues Update: Regulation Modernization" (http:/ / www. iii. org/ media/ hottopics/ insurance/ ratereg/ ). . Retrieved 2008-11-11. [35] http:/ / www. google. com/ patents?vid=5797134 [36] http:/ / v3. espacenet. com/ textdoc?DB=EPODOC& IDX=EP0700009 [37] (Source: Insurance IP Bulletin, December 15, 2006) (http:/ / marketsandpatents. com/ IPB-12152006. mht) [38] Mark Nowotarski "Patent Q/A: Peer to Patent", Insurance IP Bulletin, August 15, 2008 (http:/ / www. marketsandpatents. com/ bulletin/ IPB-08152008. html) [39] http:/ / www. peertopatent. org/ patent/ 20090055227/ activity [40] Bakos, Nowotarski, An Experiment in Better Patent Examination, Insurance IP Bulletin, December 15, 2008 (http:/ / www. marketsandpatents. com/ bulletin/ IPB-12152008. html) [41] "Islam Question and Answer - The true nature of insurance and the rulings concerning it" (http:/ / islamqa. com/ en/ ref/ 8889/ insurance). . Retrieved 2010-01-18. [42] "Life Insurance from an Islamic Perspective" (http:/ / www. islamonline. net/ servlet/ Satellite?pagename=IslamOnline-English-Ask_Scholar/ FatwaE/ FatwaE& cid=1119503543412). . Retrieved 2010-01-18. [43] "Jewish Association for Business Ethics - Insurance" (http:/ / www. jabe. org/ insurance. html). . Retrieved 2008-03-25. [44] "CIC Insurance - Insurance and the Church" (http:/ / www. cic. co. ke/ template/ t02. php?menuId=72). . Retrieved 2010-01-18. [45] Rubinkam, Michael (October 5, 2006). "Amish Reluctantly Accept Donations" (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2006/ 10/ 05/ AR2006100501360. html). The Washington Post. . Retrieved 2008-03-25. [46] Donald B. Kraybill. The riddle of Amish culture. p.277. ISBN0801836824. [47] "Global Anabaptist Mennonite Encyclopedia Online, Insurance" (http:/ / www. gameo. org/ encyclopedia/ contents/ I583ME. html). . Retrieved 2010-01-18.
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Bibliography
Dickson, P.G.M. (1960). The Sun Insurance Office 1710-1960: The History of Two and a half Centuries of British Insurance. London: Oxford University Press. pp.324.
External links
Congressional Research Service (CRS) Reports regarding the US Insurance industry (http://digital.library.unt. edu/govdocs/crs/search.tkl?type=subject&q=Insurance companies &q2=LIV) Federation of European Risk Management Associations (http://www.ferma.eu/) Insurance (http://www.dmoz.org/Home/Personal_Finance/Insurance/) at the Open Directory Project Insurance Bureau of Canada (http://www.ibc.ca/) Insurance Information Institute (http://www.iii.org/) Museum of Insurance (http://www.immediateannuities.com/museumofinsurance/) - displays thousands of antique insurance policies and ephemera National Association of Insurance Commissioners (http://www.naic.org/) The British Library (http://www.bl.uk/collections/business/insurind.html) - finding information on the insurance industry (UK bias)
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Tax
Capital gains tax
A capital gains tax (CGT) is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations. For equities, an example of a popular and liquid asset, national and state legislation often has a large array of fiscal obligations that must be respected regarding capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes companies pay to the state, or that tax-free stock market operations are useful to boost economic growth.
Tax systems
Argentina
There is no specific capital gains tax in Argentina; however, there is a 9 % to 35 % tax for fiscal residents on their world revenues, including capital gains.
Australia
Capital gains tax in Australia is only payable upon realized capital gains, except for certain provisions relating to deferred-interest debt such as zero-coupon bonds. The tax is not separate in its own right, but forms part of the income tax system. The proceeds of an asset sold less its 'cost base' (the original cost plus addition for cost price increases over time) are the capital gain. Discounts and other concessions apply to certain taxpayers in varying circumstances. From the 21st of September 1999, after a report by Alan Reynolds the 50% capital gains tax discount has been in place for individuals and some trusts that acquired the asset after that time and have held the asset for more than 12 months, however the tax is levied without any adjustment to the cost base for inflation. The amount left after applying the discount is added to the assessable income of the taxpayer for that financial year. For individuals, the most significant exemption is the family home. The sale of personal residential property is normally exempt from Capital Gains Tax, except for gains realized during any period in which the property was not being used as a persons personal residence (for example, being leased to other tenants) or portions attributable to business use. Capital gains or losses as a general rule can be disregarded for CGT purposes when assets were acquired before 20 September 1985 (pre CGT).
Capital gains tax
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Barbados
There is no capital gains tax charged in Barbados.
Belgium
Under the participation exemption, capital gains realised by a Belgian resident company on shares in a Belgian or foreign company are fully exempt from corporate income tax, provided that the dividends on the shares qualify for the participation exemption. For purposes of the participation exemption for capital gains the minimum participation test is not required. Unrealised capital gains on shares that are recognised in the financial statements (which recognition is not mandatory) are taxable. But a roll-over relief is granted if, and as long as, the gain is booked in a separate reserve account on the balance sheet and is not used for distribution or allocation of any kind. As a counterpart to the new exemption of realised capital gains, capital losses on shares, both realised and unrealised, are no longer tax deductible. However, the loss incurred in connection with the liquidation of a subsidiary company remains deductible up to the amount of the paid-up share capital. Other capital gains are taxed at the ordinary rate. If the total amount of sales is used for the purchase of depreciable fixed assets within 3 years, the taxation of the capital gains will be spread over the depreciable period of these assets.[1]
Belize
There are no capital gains taxes for residents or non-residents in Belize.
Brazil
Capital gains tax is set at 15%, payable the following month after the sale in the case of shares.
Bulgaria
Capital gains tax is 10 % since 1 January 2007. The info below is way out of date! A newer more proper example is: If one were to invest 1 million dollars into a stock at a price of one dollar per share, then next pull it out at a price of ten dollars per share. They would have Ten Million dollars . The taxes would look like this: First seperate the original Million dollars which is the cost of the investment, then take the remaining nine million and divide it by fifty percent. Take the first fifty percent we just divided and stick it in with original one million because it is tax free. Next the remaining Four Million Five Hundred Thousand is taxable at 32 percent. This is the current capital gains tax in canada! Not whats listed underneath!!!
Canada
Currently 50.00% of realized capital gains are taxed in Canada at an individual's tax rate. Some exceptions apply, such as selling one's primary residence which may be exempt from taxation.[2] Capital gains made by investments in a Tax-Free Savings Account (TFSA) are not taxed. For example, if your capital gains (profit) is $100, you are only taxed on $50 at your marginal tax rate. That is, if you were in the top tax bracket, you'd be taxed at approx 43%. A formula for this example using the top tax bracket would be as follows: Capital gain x 50.00% x marginal tax rate = capital gain tax = $100 x 50.00% x 43% = $50 x 43% = $21.50 In this example your capital gains tax on $100 is $21.50, leaving you with $78.50.
Capital gains tax The formula is the same for capital losses and these can be carried forward indefinitely to offset future years' capital gains; capital losses not used in the current year can also be carried back to the previous three tax years to offset capital gains tax paid in those years. For corporations as for individuals, only 50% of realized capital gains are taxable. The net taxable capital gains (which can be calculated as 50% of total capital gains minus 50% of total capital losses) are subject to income tax at normal corporate tax rates. If more than 50% of a small business's income is derived from specified investment business activities (which include income from capital gains) they are not even allowed to claim the small business deduction. Capital gains earned on income in an RRSP are not taxed at the time the gain is realized (i.e. when the holder sells a stock that has appreciated inside of their RRSP) but they are taxed when the funds are withdrawn from the registered plan (usually after converting to a registered income fund.) These gains are then taxed at the individual's full marginal rate. Capital gains earned on income in a TFSA are not taxed at the time the gain is realized. Any money withdrawn from a TFSA, including capital gains, are also NOT taxed. Unrealized capital gains are not taxed.
855
Cayman Islands
There are no capital gains taxes charged on any transaction in the Cayman Islands. However, a Cayman Islands entity may be subject to taxation on capital gains made in other jurisdictions.
China
The applicable tax rate for capital gains in China depends upon the nature of the taxpayer (i.e. whether the taxpayer is a person or company) and whether the taxpayer is resident or non-resident for tax purposes. Tax-resident enterprises will be taxed at 25% in accordance with the Enterprise Income Tax Law. Non-resident enterprises will be taxed at 10% on capital gains in accordance with the Implementing Regulations to the Enterprise Income Tax Law. The only tax circular specifically addressing the PRC income tax treatment of income derived by QFIIs from the holding and trading of Chinese securities is Guo Shui Han (2009) No.47 ("Circular 47") issued by the State Administration of Taxation ("SAT") on 23 January 2009. The circular addresses the withholding tax treatment of dividends and interest received by QFIIs from PRC resident companies, however, circular 47 is silent on the treatment of capital gains derived by QFIIs on the trading of A-shares. It is generally accepted that Circular 47 is intentionally silent on capital gains and possible indication that SAT is considering but still undecided on whether to grant tax exemption or other concessionary treatment to capital gains derived by QFIIs. This uncertainty has caused significant problems for those investment managers investing in A-Shares. Guo Shui Han (2009) No. 698 was issued on 10 December 2009 addressing the PRC corporate income tax treatment on the transfer of PRC equity interest by non-PRC tax resident enterprises directly or indirectly, however has not resolved the uncertain tax position with regards A-Shares.
Czech Republic
In general, capital gains in the Czech Republic are taxed as income for companies and individuals. The Czech income tax rate for an individual's income in 2010 is flat, a 15% rate. Corporate tax in 2010 is 19%. Capital gains from the sale of shares by a company owning 10% or more is entitled to participation exemption under certain terms. For an individual, gain from sale of a main private dwelling, held for at least 2 years, is tax exempt. Or, when not used as a main residence, if held for more than 5 years.
Capital gains tax
856
Denmark
Share dividends and realized capital gains on shares are charged 28% to individuals of gains up to DKK 48,300 (2011-level, adjusted annually), and at 42% of gains above that.[3] Carryforward of realized losses on shares is allowed. Individuals' interest income from bank deposits and bonds, realized gains on property and other capital gains are taxed up to 59%, however, several exemptions occur, such as on selling one's principal private residence or on gains on selling bonds. Interest paid on loans is deductible, although in case the net capital income is negative, only approx. 33% tax credit applies. Companies are taxed at 25%. Share dividends are taxed at 28%.
Ecuador
Ecuador does not have capital gains tax for income gained abroad.
Egypt
There is no capital gains tax. After the Egyptian Revolution there is a proposal for a 10% capital gains tax.
Estonia
There is no separate capital gains tax in Estonia. All earned income from capital gains is taxed the same as regular income, the rate of which currently stands at 21% and is expected to drop to 20% by 2009 (on Nov 18 2008 The Parliament of Estonia passed the amendment to postpone the tax reduction for one year).
Finland
The capital gains tax in Finland is 28% on realized capital income.[4] Carryforward of realized losses is allowed for three years. However, capital gains from the sale of residential homes is tax-free after two years of residence, with certain limitations.[5]
France
For residents, capital gains tax on the sale of financial instruments (shares, bonds, etc..) is a flat 32.3%, which includes 12.3% of social security taxes. If shares are held in a special account (called a PEA), the gain is subject only to social security taxes provided that the PEA is held for at least five years. The maximum amount that can be deposited in the PEA is 132,000. The gain realized on the sale of a principal residence is not taxable. Also, a gain realized on the sale of other real estate held at least 15 years is not taxable, although from 2011 this will become subject to 12.1% social security taxes. (There is a sliding scale for non principal residence property owned for between 6 and 15 years. The taxable gain is reduced by 10% for each full year that the property was held, starting at the fifth year. For example, on a property owned for between 6 and 7 years, 90% of the gain is taxable; on a property owned for between 11 and 12 years, 40% of the gain is taxable.) Non-residents are generally taxable on capital gains realized on French real estate and on some French financial instruments, subject to any applicable double tax treaty. Social security taxes, however, are not usually payable by non-residents. A French tax representative will be mandatory if you are non-resident and you sell a property for an amount over 150.000 euros or you own the real estate for more than 15 years.
Capital gains tax
857
Germany
In January 2009, Germany introduced a very strict capital gains tax (called Abgeltungsteuer in German) for shares, funds, certificates etc. Capital gains tax only applies to financial instruments (shares, bonds etc.) that have been bought after 31 December 2008. Instruments bought before this date are exempt from capital gains tax (assuming that they have been held for at least 12 months), even if they are sold in 2009 or later, barring a change of law. Certificates are treated specially, and only qualify for tax exemption if they have been bought before 15 March 2007. Real estate continues to be exempt from capital gains tax if it has been held for more than ten years. The German capital gains tax is 25% plus Solidarittszuschlag (add-on tax initially introduced to finance the 5 eastern states of Germany - Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt, Thuringia and Brandenburg - and the cost of the reunification, but later kept in order to finance all kind of public funded projects in whole Germany), plus Kirchensteuer (church tax), resulting in an effective tax rate of about 28%. Deductions of expenses such as custodian fees, travel to annual shareholder meetings, legal and tax advice, interest paid on loans to buy shares, etc., are no longer permitted starting in 2009.
Hong Kong
In general Hong Kong has no capital gains tax. However, employees who receive shares or options as part of their remuneration are taxed at the normal Hong Kong income tax rate on the value of the shares or options at the end of any vesting period less any amount that the individual paid for the grant. If part of the vesting period is spent outside Hong Kong then the tax payable in Hong Kong is pro-rated based on the proportion of time spent working in Hong Kong.[6] Hong Kong has very few double tax agreements and hence there is little relief available for double taxation. Therefore, it is possible (depending on the country of origin) for employees moving to Hong Kong to pay full income tax on vested shares in both their country of origin and in Hong Kong. Similarly, an employee leaving Hong Kong can incur double taxation on the unrealized capital gains of their vested shares. The Hong Kong taxation of capital gains on employee shares or options that are subject to a vesting period, is at odds with the treatment of unrestricted shares or options which are free of capital gains tax.
Hungary
Since 1 September 2006 there is one flat tax rate (20%) on capital income. This includes: selling stocks, bonds, mutual funds shares and also interests from bank deposits. Since January 2010, Hungarian citizens can open special "long-term" accounts. The tax rate on capital gains from securities held in such an account is 10% after a 3 year holding period, and 0% after the account's maximum 5 years period is expired.
Iceland
From 1. of January 2011 the capital gains tax in Iceland is 20%. Before it was 18% for one year as it was raised from 15% in January 2010. 2008 - 10% 2009 until 30 June - 10% 2009 from 1 July - 15% 2010 - 18% 2011 - 20%
Capital gains tax
858
India
As of 2008, equities are considered long term capital if the holding period is one year or more. Long term capital gains from equities are not taxed if shares are sold through recognised stock exchange and STT is paid on the sale . However short term capital gain from equities held for less than one year, is taxed at 15% [7] (w.e.f. 1 April 2009.[8] ) (plus surcharge and education cess). This is applicable only for transactions that attract Securities Transaction Tax (STT). Many other capital investments (house, buildings, real estate, bank deposits) are considered long term if the holding period is 3 or more years.[9] Short term capital gains are taxed just as any other income and they can be negated against short term capital loss from the same business.
Iran, Islamic Republic of

There is no capital gains tax. but in tax system reform, it is implemented in land and housing sector.
Ireland, Republic of
Since 7 April 2009, there is a 25% tax on capital gains, with several exclusions and deductions (e.g. agricultural land, primary residence, transfers between spouses). Gains made where the asset was originally purchased before 2003 attract indexation relief (the cost of the asset can be multiplied by a published factor to reflect inflation). Costs of purchase and sale are deductible, and every person has an exempt band of 1,270 per year. The tax rate is 23% on certain investment policies, and rises to 40% on certain offshore gains when they are not declared in time. Tax on capital gains arising in the first eleven months of the year must be paid by 15 December, and tax on capital gains arising in the last month of the year must be paid by the following 31 January.
Isle of Man
There is no capital gains tax.
Israel
Capital gains tax in Israel is a flat rate of 20%. The taxed gains are inflation adjusted.
Italy
Capital gains tax of corporate income tax 27.5 % (IRES) on gains derived from disposals of participations and extraordinary capital gains. For individuals (IRPEF), capital gains shall incur a 22 % tax.
Jamaica
There are no capital gains taxes in Jamaica.
Japan
In Japan, there were two options for paying tax on capital gains from the sale of listed stocks. The first, Withholding Tax (), taxed all proceeds (regardless of profit or loss) at 1.05%. The second method, declaring proceeds as "taxable income" (), required individuals to declare 26% of proceeds on their income tax statement. Many traders in Japan used both systems, declaring profits on the Withholding Tax system and losses as taxable income, minimizing the amount of income tax paid. In 2003, Japan scrapped the system above in favor of a flat 20% tax on gains, though the rate was temporarily halved at 10% and after being postponed a few times the return to the normal rate of 20% is now set for 2014. Losses can be
Capital gains tax carried forward for 3 years. Starting in 2009, losses can alternatively be deducted from dividend income declared as "Separate Income" since the tax rate on both categories is equal (i.e., 20% temporarily halved to 10%). Aggregating profits and dividends to reach a single figure taxed at the same rate is fairly innovative.
859
Latvia
Capital gains are taxed at a 15% rate since 2010. Dividends are taxed at a 10% rate.
Lithuania
Capital gains tax from the disposal of securities and from sale of real estate is 15%. Gains from the disposal of securities are exempt if they are acquired more than 366 days before their sale and the individual owns not more than 10% of securities for three years preceding the tax year during which the securities are sold. Gains from sale of real estate are exempt if the property is owned for more than 3 years before sale.
Malaysia
There is no capital gains tax for equities in Malaysia. Malaysia used to have a capital gains tax on real estate but the tax was repealed in April 2007; however, a 5% real property gains tax (RPGT) announced during the 2010 Budget now applies to property sold less than five years from its purchase.[10] Malaysia has imposed capital gain tax on share options and share purchase plan received by employee starting year 2007.
Mexico
There is a capital gains tax in Mexico.
Moldova
Under the Moldovan Tax Code a capital gain is defined as the difference between the acquisition and the disposition price of the capital asset. Only this difference (i.e. the gain) is taxable. The applicable rate is half (1/2) of the income tax rate, which for individuals is 18% and for companies was 15% (but in 2008 is 0%). Therefore, in 2008 the capital gain tax rate is 9% for individuals and 0% for companies. Not all types of assets are "capital assets". Capital assets include: real estate; shares; stakes in limited liability companies etc.
Netherlands
There is no capital gains tax in the Netherlands. However a "theoretical capital yield" of 4% is taxed at a rate of 30%
New Zealand
New Zealand has a capital gains tax on property that is easily avoided and in most cases not policed. However, there have been a few cases of the IRD enforcing the law; in 2004 the government gathered $106.6M checking on property sales from Queenstown, Wanaka and some areas of Auckland. [11] In a speech delivered on 3 June 2009, New Zealand Treasury Secretary John Whitehead called for a capital gains tax to be included in reforms to New Zealand's taxation system,.[12] The introduction of a capital gains tax has been proposed by the New Zealand Labour Party as an election campaign strategy for the 2011 general election.[13] [14]
Capital gains tax
860
Norway
The individual capital gains tax in Norway is 28%. In most cases, there is no capital gains tax on profits from sale of your principal home. There is no capital gains tax for share-based profits for companies in Norway (capital gains excluding gains from property, bonds, and interest). Personal investment companies are popular for this reason, as well as single purpose companies for property investments.
The Philippines
There is a 6% Capital Gains Tax and a 1.5% Documentary Stamps on the disposal of real estate in the Philippines. While the Capital Gain Tax is imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including other forms of conditional sale, the Documentary Stamp Tax is imposed on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property incident thereto. These two taxes are imposed on the actual price the property has been sold, or on its current Market Value, or on its Zonal Value whichever is higher. Zonal valuation in the Philippines is set by its tax collecting agency, the Bureau of Internal Revenue. Most often, real estate transactions in the Philippines are being sealed higher than their corresponding Market and Zonal values. As a standard process, the Capital Gain Tax is paid for by the seller, while the Documentary Stamp is paid for by the buyer. However, either of the two parties may pay both taxes depending on the agreement they entered into.
Poland
Since 2004 there is one flat tax rate (19%) on capital income. It includes: selling stocks, bonds, mutual funds shares and also interests from bank deposits.
Portugal
There is a capital gains tax on sale of home and property. Any capital gain (mais-valia) arising is taxable as income. For residents this is on a sliding scale from 12-40%. However, for residents the taxable gain is reduced by 50%. Proven costs that have increased the value during the last five years can be deducted. For non-residents, the capital gain is taxed at a uniform rate of 25%. The capital gain which arises on the sale of own homes or residences, which are the elected main residence of the taxpayer or his family, is tax free if the total profit on sale is reinvested in the acquisition of another home, own residence or building plot in Portugal. In 1986 and 1987 Portuguese corporations changed their capital structure by increasing the weight of equity capital. This was particularly notorious on quoted companies. In these two years, the government set up a large number of tax incentives to promote equity capital and to encourage the quotation on the Lisbon Stock Exchange. Until 2010, for stock held for more than twelve months the capital gain was exempt. The capital gain of stock held for shorter periods of time was taxable on 10%. From 2010 onwards, for residents, all capital gain of stock above 500 is taxable on 20%. Investment funds, banks and corporations are exempted of capital gain tax over stock.
Capital gains tax
861
Russia
There is no separate tax on capital gains; rather, gains or gross receipt from sale of assets are absorbed into income tax base. Taxation of individual and corporate taxpayers is distinctly different: Capital gains of individual taxpayers are tax free if the taxpayer owned the asset for at least three years. If not, gains on sales of real estate and securities are absorbed into their personal income tax base and taxed at 13% (residents) and 30% (non-residents). A tax resident is any individual residing in the Russian Federation for more than 183 days in the past year. Capital gains of resident corporate taxpayers operating under general tax framework are taxed as ordinary business profits at the common rate of 20%, regardless of the ownership period. Small businesses operating under simplified tax framework pay tax not on capital gains, but on gross receipts at 6% or 15%. Dividends that may be included into gains on disposal of securities are taxed at source at 9% (residents) and 15% (non-residents) for either corporate or individual taxpayers.
Singapore
There is no capital gains tax in Singapore.
South Africa
For legal persons in South Africa, 50% of their net profit will attract CGT and for natural persons 25%. This portion of the net gain will be taxed at their marginal tax rate. As an effective tax rate this means a maximum effective rate of 10% is payable and for corporate taxpayers a maximum of 15%. For example, for natural persons the maximum marginal tax rate is 40%. Assuming the aggregate capital gain for the year of assessment is R50 000, 25% of R50 000 is R12 500, which is taxed at 40%, therefore R5 000 is payable. The R5 000 as a percentage of the original profit made is 10%.
South Korea
For individuals holding less than 3% of listed company, there is only 0.3% trade tax for sales of shares. Exchange traded funds are exempt from any trade tax. For larger than 3% shareholders of listed companies or for sales of shares in any unlisted company, capital gains tax in South Korea is 11% for tax residents for sales of shares in smalland medium-sized companies. Rates of 22% and 33% apply in certain other situations.[15] Those who have been resident in Korea for less than five years are exempt from capital gains tax on foreign assets.[16]
Spain
For individuals from January 1, 2010 capital tax change in Spain. First EUR 6.000 will be taxed at 19%, on the other hand, gains from EUR 6.000 will be taxed at 21% For companies CGT is taxed like any other income gain, that means between 25% to 30% depending if a company is small or big.
Sri Lanka
Currently there is no capital gains tax in Sri Lanka.
Capital gains tax
862
Sweden
The capital gains tax in Sweden is 30% on realized capital income.
Switzerland
There is no capital gains tax in Switzerland for residents. Corporate capital gains are taxed as ordinary income. Capital gains tax is charged to individuals on the sale property if sold within 10 years of purchase. The 10 year rule is not valid in all Cantons. There are places, where still capital gains tax on property is payable up to 30 years, but the tax is degressive.
Thailand
There is no separate capital gains tax in Thailand. All earned income from capital gains is taxed the same as regular income. However, if individual earns capital gain from security in the Stock Exchange of Thailand, it is exempted from personal income tax.
Turkey
Capital gains tax rate for residents and non-residents is 0% as of 2009 regardless of the holding period. http:/ / rega. basbakanlik.gov.tr/#
United Kingdom
Basics (Tax year April 2009-10) Individuals who are resident or ordinarily resident in the United Kingdom (and trustees of various trusts) are subject to a capital gains tax, charged at 18%. For people paying more than the basic rate of income tax, this increased to 28% from midnight on June 23, 2010. There are exceptions such as for principal private residences, holdings in ISAs or gilts. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT. Entrepreneurs' Relief allows a lower rate of CGT (10%) to be paid by people who have been involved for a year with a company and have a 5% or more shareholding. Every individual has an annual capital gains tax allowance: gains below the allowance are exempt from tax, and capital losses can be set against capital gains in other holdings before taxation. All individuals are exempt from tax up to a specified amount of capital gains per year. For the 2009/10 tax year this "annual exemption" is 10,100. Corporate notes Companies are subject to corporation tax on their "chargeable gains" (the amounts of which are calculated along the lines of capital gains tax). Companies cannot claim taper relief, but can claim an indexation allowance to offset the effect of inflation. A corporate substantial shareholdings exemption was introduced on 1 April 2002 for holdings of 10% or more of the shares in another company (30% or more for shares held by a life assurance company's long-term insurance fund). This is effectively a form of UK participation exemption. Almost all of the corporation tax raised on chargeable gains is paid by life assurance companies taxed on the I minus E basis. The rules governing the taxation of capital gains in the United Kingdom for individuals and companies are contained in the Taxation of Chargeable Gains Act 1992.
Capital gains tax Background to changes to 18% rate In the Chancellor's October 2007 Autumn Statement, draft proposals were announced that would change the applicable rates of CGT as of 6 April 2008. Under these proposals, an individual's annual exemption will continue but taper relief will cease and a single rate of capital gains tax at 18% will be applied to chargeable gains. This new single rate would replace the individual's marginal (Income Tax) rate of tax for CGT purposes. The changes were introduced, at least in part, because the UK government felt that private equity firms were making excessive profits by benefiting from overly generous taper relief on business assets. The changes were criticised by a number of groups including the Federation of Small Businesses, who claimed that the new rules would increase the CGT liability of small businesses and discourage entrepreneurship in the UK.[17] At the time of the proposals there was concern that the changes would lead to a bulk selling of assets just before the start of the 2008-09 tax year to benefit from existing taper relief. Capital Gains Tax will rise to 28% with effect from 00:00 on 23 June 2010. Historical (useful if looking at years prior to April 2008) Individuals paid capital gains tax at their highest marginal rate of income tax (0%, 10%, 20% or 40% in the tax year 2007/8) but from 6 April 1998 were able to claim a taper relief which reduces the amount of a gain that is subject to capital gains tax (reducing the effective rate of tax), depending on whether the asset is a "business asset" or a "non-business asset" and the length of the period of ownership. Taper relief provided up to a 75% reduction (leaving 25% taxable) in taxable gains for business assets, and 40% (leaving 60% taxable), for non-business assets, for an individual.[18] Taper relief replaces indexation allowance for individuals, which can still be claimed for assets held prior to 6 April 1998 from the date of purchase until that date, but was itself abolished on 5 April 2008.
863
United States
In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on "long-term capital gains," which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15% (for individuals, whose highest tax bracket is 15% or more), or to 5% for individuals in the lowest two income tax brackets (whose highest tax bracket is less than 15%) (See progressive tax). Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Increase Prevention and Reconciliation Act signed into law by President Bush on May 17, 2006, which also reduced the 5% rate to 0%.[19] Toward the end of 2010, President Obama signed a law extending the reduced rate on eligible dividends until the end of 2012. The law allows for individuals to defer capital gains taxes with tax planning strategies such as the structured sale (ensured installment sale), charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange. The United States is unlike other countries in that, with some exceptions,[20] its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise as tax havens, U.S. law requires reporting of income from those accounts, and willful failure to do so constitutes tax evasion.
Capital gains tax
864
Deferring or reducing capital gains tax

Capital gains tax can be deferred or reduced if a seller utilizes the proper sales method and/or deferral technique. There are many such sales techniques and methods, each of which has its benefits and drawbacks. See some ways to defer and/or reduce capital gains tax below. (US Only) - Tax Loss Harvesting - Realized tax losses can carry forward forever and can be applied to offset capital gains months or years in the future. Discretionary Overlay managers have developed new trading methodologies that have evolved tax loss harvesting into a year-round strategy, as opposed to year-end, which is standard to most financial advisors, and is paramount in reducing the capital gains tax burden on affluent investors.[21] Charitable trust - Defer and reduce capital gains by giving equity to a charity. Installment Sale - Defer capital gains by taking payments from a buyer over a period of years. No protection from buyer default. (US only) Deferred Sales Trust- Allows the seller of property to defer capital gains tax due at the time of sale over a period of time. (US only) 1031 exchange - Defer tax by exchanging for "like kind" propertyhowever, generally available only for real estate and tangible property, both of which must be business-related. Pay capital gains when they are realized (i.e. when subsequently sold). (US only) Roth IRA - Transactions inside an account (including capital gains, dividends, and interest) do not incur a current tax liability. (US only) Structured sale annuity (aka Ensured Installment Sale) - Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income. (US only) Self Directed Installment Sale (SDIS) Allows for the deferral of capital gains taxes while removing the risks from buyer default under a traditional installment sale. (US only) (historical) Private annuity trust - No longer a valid tax deferral tool. (Canada only) - Utilize a Tax-Free Savings Account
References
[1] [2] [3] [4] Invest in Belgium (http:/ / economie. fgov. be/ investors/ why_invest_in_belgium/ tax. htm#5) CRA. IT-120R6 Principal Residence (http:/ / www. cra-arc. gc. ca/ E/ pub/ tp/ it120r6/ it120r6-e. html#P92_14422) http:/ / www. skat. dk/ SKAT. aspx?oId=1549830 VERO Taxation of Stock Options (http:/ / www. vero. fi/ default. asp?article=3619& domain=VERO_ENGLISH& path=488,489& language=ENG) [5] VERO (http:/ / vero. fi/ ?article=2610& domain=VERO_MAIN& path=5,40& language=FIN) [6] http:/ / www. gov. hk/ en/ residents/ taxes/ salaries/ salariestax/ chargeable/ options. htm [7] http:/ / law. incometaxindia. gov. in/ TaxmannDit/ DispCitation/ ShowCit. aspx?fn=http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2009ITAct/ section111A. htm [8] http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2009ITAct/ ftn97section105. htm [9] Indian Gov Capital Gains Tax Calculator (http:/ / www. incometaxindia. gov. in/ publications/ 4_Compute_Your_Capital_Gains/ Chapter2. asp) [10] Real Property Gains Tax is making a comeback in 2010 (http:/ / www. malaysianbar. org. my/ publications/ real_property_gains_tax_is_making_a_comeback_in_2010. html) (The Malaysian Bar) [11] "Capital Gains Tax - Is this needed in New Zealand", National.org.nz, 22nd March 2007, at http:/ / www. national. org. nz/ Article. aspx?articleId=9733 [12] Fallow, Brian (4 June 2009). "Treasury pushes for capital gains tax" (http:/ / www. nzherald. co. nz/ nz/ news/ article. cfm?c_id=1& objectid=10576312). The New Zealand Herald. . Retrieved 23 September 2011. [13] Peter Wilson and Matthew Backhouse of NZPA (5 July 2011). "Capital gains tax on Labour's agenda" (http:/ / www. nzherald. co. nz/ nz/ news/ article. cfm?c_id=1& objectid=10736526). The New Zealand Herald. . Retrieved 23 September 2011. [14] "Own Our Future", New Zealand Labour Party, 14 July 2011, at: http:/ / www. ownourfuture. co. nz/ [15] http:/ / www1. samil. com/ publication/ filemng. nsf/ 0/ 9DBA0F85774C3BF34925737C001CF249/ $File/ 2007KoreanTaxSummaries. pdf [16] http:/ / www. pwc. com/ kr/ en/ publications/ korean-tax-2009. jhtml
Capital gains tax

[17] Jean Eaglesham and John Willman (2008-01-23). "Final showdown on CGT reforms" (http:/ / www. ft. com/ cms/ s/ 0/ bea3509e-c920-11dc-9807-000077b07658. html). Financial Times. . Retrieved 2008-01-23. [18] "An Introduction to Capital Gains Tax" (http:/ / www. hmrc. gov. uk/ guidance/ cgt-introduction. pdf) (PDF). HM Revenue and Customs. pp. 94. . Retrieved 2008-04-22. [19] Public Law No. 109-222. [20] An example of an exception is the exemption from U.S. federal income tax for a limited amount of foreign earned income of a citizen or resident of the United States who is living abroad, under 26 U.S.C. 911 (http:/ / www. law. cornell. edu/ uscode/ 26/ 911. html). [21] John Phoenix. Seeking Tax Alpha 'Financial Planning' Retrieved on September 1, 2008.' (http:/ / www. financial-planning. com/ asset/ article/ 651221/ seeking-tax-alpha. html)
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External links
The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (http://brookings.nap.edu/books/ 0815712707/html/) (1999), Brookings Institution Press. Deloitte Tax Country Guides (http://www.deloittetaxguides.com/) IRS "Like Kind Exchanges Tax Tips" (http://www.irs.gov/businesses/small/industries/article/ 0,,id=98491,00.html)
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax. However, a consumption tax can also be structured as a form of direct, personal taxation, such as an expenditure tax.
Types
Value-added tax
A value added tax (VAT) applies to the market value added to a product or material at each stage of its manufacture or distribution. If a retailer buys a shirt for $20 and sells it for $30, this tax would apply to the $10 difference between the two amounts. A simple VAT would be proportional on consumption but also be regressive on income at higher income levels (as consumption falls as a percentage of income). Savings and investment are tax-deferred until they become consumption. A VAT may exclude certain goods, intent being creating progressive effects. The tax is used in countries within the European Union.
Sales tax
A sales tax typically applies to the sale of goods, less often to the sales of services. The tax is applied at the point of sale. Like a VAT, simple sales taxes hit lower-income consumers harder than others, leading to exemptions for basic items such as food.
Excise tax
An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, gasoline (petrol), or tourism. The tax rate varies according to the type of good and quantity purchased and is typically unaffected by the person who purchases it.
Consumption tax
866
Expenditure tax
A direct, personal consumption tax may take the form of an expenditure tax or an income tax that deducts savings and investments.[1] A direct consumption tax may be called an expenditure tax, a cash-flow tax, or a consumed-income tax and can be flat or progressive. Expenditure taxes have been briefly implemented in the past in India and Sri Lanka.[2] This form of tax applies to the difference between an individual's income and increase/decrease savings. Like the other consumption taxes, simple personal consumption taxes are regressive with respect to income. However, because this tax applies on an individual basis, it can be made as progressive as a progressive personal income tax. Just as income tax rates increase with personal income, consumption tax rates increase with personal consumption.[3]
[4]
History
Consumption taxes, specifically excise taxes, have featured in several notable historic events. In the U.S., the Stamp tax, the tax on tea, and whisky taxes produced revolts, the first two against the British government and the latter against the nascent American Republic. In India, an excise tax on salt led to Gandhi's famous Salt Satyagraha, a seminal moment in his struggle to win independence from the U.K.
United States
In the early U.S., taxes were levied principally on consumption. Alexander Hamilton, one of the two chief authors of the anonymous Federalist Papers, favored consumption taxes in part because they are harder to raise to "confiscatory" levels than incomes taxes.[5] In the Federalist Papers (No. 21), Hamilton wrote: It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposedthat is, an extension of the revenue. When applied to this object, the saying is as just as it is witty that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.[6] Although personal and corporate income taxes provide the bulk of revenue to the federal government, consumption taxes continue to be a primary source of income for state and local governments. One of the first detailed proposals of a personal consumption tax was developed in 1974 by William Andrews.[7]
Savings effect
Consumption taxes do not tax savings, which allows invested assets to grow more quickly. If, in the absence of taxes, $1 of savings is put aside for retirement at 9% compound interest, savings will grow to $7.86 after 24 years. Alternatively, by assuming a 33% tax rate, the same $1 is reduced to about $0.67 after taxes when earned. The effective interest rate, thereafter, is reduced to 6%, since the rest of the yield is paid in taxes. After 24 years, the balance increases only to $2.64. The cumulative taxes in the latter case are $0.96. The missing $4.26 is not lost by the economy in any sense, as the $4.26 is what the government would make in interest, if they invested their tax revenue. If the initial investment amount is not taxed when earned, but the earnings are taxed thereafter, the cumulative taxes paid are about the same, but are spread more evenly across the period and the asset grows to more than $4. These results are primarily sensitive to the rate of return. With a 3% return, most of the tax receipts come from the tax on the initial $1.00. To the extent that taxing something results in less of it (whether income or consumption), taxing consumption instead of income should encourage both work and capital formation, which will increase economic growth, while
Consumption tax discouraging consumption.[3] [4] Secondly, the tax base will be larger because all consumption will be taxed. Some critics argue that sales and consumption taxes can shift the tax burden to the less well-off. The ratio of tax obligation shrinks as wealth grows because the wealthy spend proportionally less of their income on consumables.[8] An individual unable to save will pay taxes on 100%, but individuals who save or invest a portion of their income will be taxed only on the remaining income.
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Practical considerations
Many proposed consumption taxes share some features with the current income tax systems. Under these proposals, taxpayers would be given exemptions and a standard deduction in order to ensure that the poor do not pay any tax. In a pure consumption tax, other deductions would not be permitted, because all savings would be deductible.[3] A withholding system might also be put into place in order to estimate the total tax liability. It would be difficult for many taxpayers to pay no tax all year, only to be faced with a large tax bill at the end of the year. A consumption tax could also eliminate the concept of basis when computing the value of investments. All income that is put in investments (such as property, stocks, savings accounts) is tax-free. As the asset grows in value, it is not taxed. Only when the proceeds from the asset are spent is any tax imposed. This is in contrast with the current system where if one buys land for $10,000 and sells it for $15,000, one has a taxable gain of $5,000. A consumption tax taxes only consumption, so if one sells an investment to buy another investment, no tax is imposed. Andrews notes the inherent problem with housing. Renters necessarily "consume" housing, so they will be taxed on the expenditure of rent. However, homeowners also consume housing in the same way, but as they pay down a mortgage, the payments are classified as savings, not consumption (because equity is being built in an asset). The disparity is explained by what is known as the imputed rental value of a home. A homeowner could choose to rent the home to others in exchange for money but instead chooses to live in the home to the exclusion of all possible renters. Therefore, the homeowner is also consuming housing by not permitting renters to pay for and occupy the home. The amount of money that the homeowner could receive in rent is the imputed rental value of the home. A true consumption tax would tax the imputed rental value of the home (which could be determined in the same way that valuation occurs for property tax purposes) and would not tax the increase in the value of the asset (the home). Andrews proposes to ignore this method of taxing imputed rental values because of its complexity. In the United States, home ownership is subsidized by the federal government by permitting a deduction for mortgage interest expense and exempting a significant increase in value from the capital gains tax. Therefore, treating renters and homeowners identically under a consumption tax may not be feasible in there. Also, a consumption tax could utilize progressive rates in order to maintain "fairness." The more that someone spends on consumption, the more that the person will be taxed. The rate structure could look like the current bracket system, or a new bracket system could be implemented.
Economic impact
Former senior editor of Fortune Magazine Al Ehrbar notes that proponents of a consumption tax argue its superiority to the income tax based on an economic principle called "temporal neutrality".[9] He observes that a tax is "neutral" if it does not "alter spending habits or behavior patterns and thus does not distort the allocation of resources." In other words, taxing apples but not oranges will cause apple consumption to decrease and orange consumption to increase. The temporal neutrality of a consumption tax, however, is that consumption itself is taxed, so it is irrelevant what good or service is being consumed in terms of allocation of resources. The only possible effect on neutrality is between consumption and savings. Taxing only consumption should, in theory, cause an increase in savings.[3] William Gale, Co-director of the Urban-Brookings Tax Policy Center, offers a simplified way to understand a consumption tax: Assume that our current tax system remains the same but remove limitations to contributing to and
Consumption tax removing funds from a traditional Individual Retirement Account (IRA). Thus, a person would essentially have a bank account where they could place tax-free earnings at any time, but unsaved (or consumed) withdrawals would be subject to taxation. Having an unrestricted IRA under the current system would approximate a consumption tax at the federal level. Many economists and tax experts favor consumption taxes over income taxes for economic growth.[10] Consumption taxes are neutral with respect to investment.[3] [11]
[11] [12]
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Depending on implementation (such as treatment of depreciation) and circumstances, income taxes either favor or disfavor investment.(On the whole, the US system is thought to disfavor investment.[3] ) By not disfavoring investment, a consumption tax might increase the capital stock, productivity, and therefore increase the size of the economy.[3] [4] Consumption more closely tracks long run average income.[4] An individual or a family's income often varies dramatically from year to year. The sale of a home, a one-time job bonus, and various other events can lead to temporary high income that will push a low or middle income person into a high tax bracket. On the other hand, a wealthy individual may be temporarily unemployed and will pay no taxes.
Notes
[1] The Flat Tax (http:/ / www. hoover. org/ publications/ books/ 3602666. html), By Robert E. Hall and Alvin Rabushka, Hoover Institution [2] Encyclopedia Britannica: Taxation (http:/ / www. britannica. com/ EBchecked/ topic/ 584578/ taxation) [3] Andrews, Edmund L. (2005-03-04). "Fed's Chief Gives Consumption Tax Cautious Backing" (http:/ / www. nytimes. com/ 2005/ 03/ 04/ politics/ 04tax. html). The New York Times. . Retrieved 2008-02-05. [4] Auerbach, Alan J (2005-08-25). "A Consumption Tax" (http:/ / online. wsj. com/ article/ SB112492381500022421. html). The Wall Street Journal. . Retrieved 2008-02-05. [5] Bartlett, Bruce (2002-04-05). "The Founders and the consumption tax" (http:/ / www. townhall. com/ columnists/ BruceBartlett/ 2002/ 04/ 05/ the_founders_and_the_consumption_tax). Townhall.com. . Retrieved 2007-08-09. [6] Federalist Paper No. 21 (http:/ / www. conservativetruth. org/ library/ fed21. html) [7] Andrews, William D. A Consumption-Type or Cash Flow Personal Income Tax, 87 Harv. L. Rev. 1113 (1974) [8] Gilbert E. Metcalf. " The National Sales Tax: Who Bears the Burden? (http:/ / www. cato. org/ pubs/ pas/ pa-289. html)" [9] Ehrbar, Al. Consumption Tax, The Concise Encyclopedia of Economics (http:/ / www. econlib. org/ library/ Enc/ ConsumptionTax. html) [10] Regnier, Pat (2005-09-07). "Just how fair is the FairTax?" (http:/ / money. cnn. com/ 2005/ 09/ 06/ pf/ taxes/ consumptiontax_0510/ ). Money Magazine. . Retrieved 2006-07-20. [11] "Greenspan: Consumption Tax Could Help Economy" (http:/ / www. foxnews. com/ story/ 0,2933,149298,00. html). Fox News. 2005-03-03. . Retrieved 2008-08-09. [12] "America the Uncompetitive" (http:/ / online. wsj. com/ article/ SB121875570585042551. html). Wall Street Journal. 2008-08-15. . Retrieved 2008-09-03.
External links
OECD Center for Tax Policy and Administration (http://www.oecd.org/department/ 0,3355,en_2649_33739_1_1_1_1_1,00.html) Why do consumption taxes encourage saving? (http://econblog.aplia.com/2007/10/ should-government-tax-consumption-or.html?showComments=false) The Consumption Tax: Macroeconomic Effects (http://www.consumption-tax.org/Archives/ TheConsumptionTax.html)- Edward Cremata
Dividend tax
869
Dividend tax
A dividend tax is an income tax on dividend payments to the stockholders (shareholders) of a company.
History
Collection
In many jurisdictions, the government requires the company to withhold at least the standard tax, paying this to the national revenue authorities and paying out only the balance to the shareholders.
Characterization of dividend income

In most jurisdictions worldwide, dividend payments are considered ordinary income and are taxed as such, the same as if the taxpayer had earned the income working at a job. Other jurisdictions separate dividend income and characterize it as something other than ordinary income subject to different tax rates if taxed at all.
Controversy
Depending on the jurisdiction dividend income along with interest income, collected rents, or other "unearned income" may also be taxed and is the subject of recurring debate as to whether or not these taxes should be eliminated. Arguments against Abolitionists argue that a dividend tax amounts to unfair "double taxation". Since a company has already paid a corporate tax on these profits, this means that the shareholders, as part owners, have been taxed already.[1] The term "double taxation" is sometimes used (unconventionally[2] ) by opponents of the dividend income tax for investors. Others argue that the dividend taxes adds to and serves as a justification for management's built in bias for growth, even when such growth does not add to shareholder returns.[3] It is true that a corporation is an independent entity that has a "life of its own". However, the logical consequence of that view is that dividends do not represent income to the corporation, but are rather an expense to the corporation (like employee salaries), and thus should be deductible on corporate income tax returns like any other business expense. Arguments in favor A corporation is a legal entity that can own property, sue or be sued, and enter into contracts. The corporation is, therefore, separate from its shareholders with a "life" of its own. As a separate entity, a corporation has the right to use public goods as an individual does, and is therefore obligated to help pay for the public goods through taxes.[4] Additionally, as described by Professor Confidence W. Amadi: The greatest advantage of the corporate form of business organization is the limited liability protection accorded its owners. Taxation of corporate income is the price of that protection. This price must be worth the benefits since, according to the Internal Revenue Service (1996), corporations account for less than 20 percent of all U.S. business firms, but about 90 percent of U.S. business revenues and approximately 70 percent of U.S. business profits. The benefits of limited liability independent of those enjoyed by shareholders, the flexibility of change in ownership, and the immense ability to raise capital are all derived from the legal entity status accorded corporations by the law. This equal status requires that corporations pay income taxes.[5] Although the above is an argument for corporate taxation as opposed to the taxation of dividends, arguments for the taxation of income from capital would apply to both and on that count it can be argued that from a social policy
Dividend tax standpoint it is unfair to tax income generated through active work at a higher rate than income generated through less active means (although it might be said in defense that the ability to generate a material amount of dividend income can depend on years spent in active work pursuits). Proponents make the related point that reducing or eliminating dividend taxes helps the wealthiest individuals who can afford to buy large quantities of stock, as they could feasibly live off the dividend payments without any income tax on their earnings. There are also worries that companies may not have paid their full share of income tax due to legislated tax preferences.
870
Dividend Tax Policy

United States
In 2003, President George W. Bush proposed to eliminate the U.S. dividend tax saying that "double taxation is bad for our economy and falls especially hard on retired people". He also argued that while "it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits."[6]
Dividend Taxation in the United States: 2003 - [7]

20032012 20032007 Ordinary Income Tax Rate Ordinary Dividend Tax Rate 10% 15% 25% 28% 33% 35% Qualified Dividend Tax Rate 5% 5% 15% 15% 15% 15% Ordinary Dividend Tax Rate 10% 15% 25% 28% 33% 35% 20082012 Qualified Dividend Tax Rate 0% 0% 15% 15% 15% 15% Ordinary Income Tax Rate Ordinary Dividend Tax Rate 15% 28% 31% 36% 39.6% 2013 2013 Qualified Dividend Tax Rate 15% 28% 31% 36% 39.6%
10% 15% 25% 28% 33% 35%
15% 28% 31% 36% 39.6%
Soon after, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA"), which included some of the cuts Bush requested and which he signed into law on May 28, 2003. Under the new law, qualified dividends are taxed at the same rate as long-term capital gains, which is 15 percent for most individual taxpayers. Qualified dividends received by individuals in the 10% and 15% income tax brackets were taxed at 5% from 2003 to 2007. The qualified dividend tax rate was set to expire December 31, 2008; however, the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA") extended the lower tax rate through 2010 and further cut the tax rate on qualified dividends to 0% for individuals in the 10% and 15% income tax brackets. On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The legislation extends for two additional years the changes enacted to the taxation of dividends in the JGTRRA and TIPRA.[8]
Canada
In Canada, there is taxation of dividends, but tax policy attempts to compensate for this through the Dividend Tax Credit or DTC for personal income in dividends from Canadian corporations. An increase to the DTC was announced in the fall of 2005 by Liberal finance minister Ralph Goodale just prior to the fall of the Liberal minority government, in conjunction with the announcement that Canadian income trusts would not become subject to dividend taxation as had been feared. Effective tax rates on dividends will now range from negative to over 30% depending on income level and different provincial tax rates and credits.
Dividend tax
871
India
In India, earlier dividends were taxed in the hands of the recipient as any other income. However since 1 June 1997, all domestic companies were liable to pay a dividend distribution tax on the profits distributed as dividends resulting in a smaller net dividend to the recipients. The rate of taxation alternated between 10% and 20%[9] until the tax was abolished with effect from 31 March 2002.[10] The dividend distribution tax was also extended to dividends distributed since 1 June 1999 by domestic mutual funds, with the rate alternating between 10% and 20%[9] in line with the rate for companies, up to 31 March 2002. However, dividends from open-ended equity oriented funds distributed between 1 April 1999 to 31 March 2002 were not taxed.[11] Hence the dividends received from domestic companies since 1 June 1997, and domestic mutual funds since 1 June 1999, were made non-taxable in the hands of the recipients to avoid double-taxation, until 31 March 2002.[12] The budget for the financial year 20022003 proposed the removal of dividend distribution tax bringing back the regime of dividends being taxed in the hands of the recipients and the Finance Act 2002 implemented the proposal for dividends distributed since 1 April 2002. This fueled negative sentiments in the Indian share markets causing stock prices to go down.[13] However the next year there were wide expectations for the budget to be friendlier to the markets[14] and the dividend distribution tax was reintroduced. Hence the dividends received from domestic companies and mutual funds since 1 April 2003 were again made non-taxable at the hands of the recipients.[15] However the new dividend distribution tax rate for companies was higher at 12.5%,[9] and was increased with effect from 1 April 2007 to 15%.[9] [16] Also, the funds of the Unit Trust of India and open-ended equity oriented funds were kept out of the tax net . The taxation rate for mutual funds was originally 12.5%[9] but was increased to 20%[9] for dividends distributed to entities other than individuals with effect from 9 July 2004.[17] With effect from 1 June 2006 all equity oriented funds were kept out of the tax net but the tax rate was increased to 25%[9] for money market and liquid funds with effect from 1 April 2007.[18] Dividend income received by domestic companies until 31 March 1997 carried a deduction in computing the taxable income but the provision was removed with the advent of the dividend distribution tax.[19] A deduction to the extent of received dividends redistributed in turn to their shareholders resurfaced briefly from 1 April 2002 to 31 March 2003 during the time the dividend distribution tax was removed to avoid double taxation of the dividends both in the hands of the company and its shareholders[20] but there has been no similar provision for dividend distribution tax. However the budget for 20082009 proposes to remove the double taxation for the specific case of dividends received by a domestic holding company (with no parent company) from a subsidiary that is in turn distributed to its shareholders.[21]
Other countries
In Australia dividends are taxed at the recipient's marginal tax rate (up to 45% from 1 July 2006). Australia (like New Zealand) has a Dividend Imputation system which allows franking credits to be attached to dividends. This allows recipients of franked dividends to impute (or credit) the corporate tax paid by the paying company. A recipient of a fully franked dividend on the top marginal tax rate will effectively pay only about 15% tax on the cash amount of the dividend. In Austria the KeSt (Kapitalertragssteuer) is used as dividend tax rate, which is 25% on dividends. In Belgium there is a tax of 25% (or 15% under certain conditions) on dividends, known as "roerende voorheffing" (in Dutch) or "prcompte mobilier" (in French). In Bulgaria there is a tax of 5% on dividends. In China, the dividend tax rate is 20%, but since June 13, 2005, 50% of the dividend is taxed. In Hong Kong, there is no dividend tax. In the Czech Republic there is a tax of 15% on dividends. This was meant to be reduced to 12.5% for 2009. According to Leos Jirasek, Senior Trade & Investment Adviser, British Embassy, Prague - Trade & Investment
Dividend tax Section, the Parliament of the Czech Republic will be discussing an amendment to the Tax Act No. 586/1992 as amended on 25 November 2008. If the amendment gets approved, the withholding tax on dividends (part of personal income tax) of physical persons in 2009 will NOT be 12.5%, as specified by the Act No. 261/2007, but will remain 15%. In Finland, there is a tax of 19.6% on dividends (70% of dividend is taxable capital income and capital gain tax rate is 28%). However, effective tax rate is 40.5% for private person. That's because corporate earnings have already been taxed, so dividends are double taxed. Corporate income tax is 26.0%. In Japan, there is a tax of 10% on dividends from listed stocks (7% for Nation, 3% for Region) while Jan 1st 2009 Dec 31 2012, by tax reduction rule. After Jan 1st 2013, the tax of 20% on dividends from listed stocks (15% for Nation, 5% for Region). In case of an indivisual person who has over 5% of total issued stocks (value or number), he/she can not apply the tax reduction rule, so after Jan 1st 2009, should pay 20%(15%+5%). There is a tax of 20% on dividends from Non-listed stocks (20% for Nation, 0% for Region).[22] In Iran there are no taxes on dividends, according to article (105). In Ireland, companies paying dividends must generally withhold tax at the standard rate (as of 2007, 20%) from the dividend and issue a tax voucher to include details of the tax paid. A person not liable to tax can reclaim it at the end of year, while a person liable to a higher rate of tax must declare it and pay the difference. In Israel there is a tax of 20% on dividends. In Italy there is a tax of 12.5% on dividends, known as "capital gain tax". In the Netherlands there is a tax of 15% on dividends. There's also a tax of 1.2% per year on the value of the share, regardless of the dividend, as part of the flat tax on savings and investments. In Pakistan income tax of 10% as required by the Income Tax Ordinace, 2001 on the amount of dividend is deducted at source. A surcharge of 15% on income tax is withheld and will be duly paid by the company to Government of Pakistan as per Income Tax (Amendment) Ordinance, 2011. In Poland there is a tax of 19% on dividends. This rate is equal to the rates of capital gains and other taxes. In Romania there is a tax of 16% on dividends. In Slovakia, tax residents' income from dividends is not subject to income taxation in the Slovak Republic pursuant to Article 12 Section 7 Letter c) for legal entities and to Article 3 Section 2 Letter c) for individual entities of Income Tax Act No. 595/2003 Coll. as amended. This applies to dividends from profits relating to the calendar year 2004 onwards (regardless of when the dividends were actually paid out). Before that, dividends were taxed as normal income. The stated justification is that tax at 19 percent has already been paid by the company as part of its corporation tax (in Slovak "Income Tax for a Legal Entity"). However, there is no provision for residents to reclaim tax on dividends withheld in other jurisdictions with which Slovakia has a double-taxation treaty. Foreign resident owners of shares in Slovak companies may have to declare and pay tax in their local jurisdiction. Shares of profits made by investment funds are taxable as income at 19 percent. In Turkey there is an income tax withholding of 15% on dividends. In the United Kingdom, companies pay UK corporation tax on their profits and the remainder can be paid to shareholders as dividends. Basic rate tax payers have no further tax to pay as the dividend is deemed to have been received net of 10% tax. For higher-rate taxpayers, additional tax must be paid at 22.5% of the net dividend received (32.5% less the 10% deemed tax deduction, calculated on the deemed gross payment of the dividend).
872
Dividend tax
873
References
[1] http:/ / www. cato. org/ research/ articles/ edwards-030108. html The Cato Institute [2] Taxation authorities world-wide use the term double taxation to mean that taxation is levied by two or more different jurisdictions on the same gain. This is often mitigated by tax treaty [3] http:/ / www. marshalla. com/ articles/ doubletax. htm Bob Marshalla [4] http:/ / www. newaccountantusa. com/ newsFeat/ wealthManagement/ TaxPaperDividends. pdf Double Taxation of Dividends: Is the Question Resolved? By Novella Clevenger and Ken Pfannenstiel [5] http:/ / www. westga. edu/ ~bquest/ 2002/ double. htm Double Taxation of Dividends: A Clarification by Confidence W. Amadi [6] http:/ / georgewbush-whitehouse. archives. gov/ news/ releases/ 2003/ 01/ 20030107-5. html [7] "Tax Law Changes for 2008 - 2017." Kiplinger's. <www.kiplinger.com> Published March 2009. Accessed 28 August 2009. (http:/ / www. kiplinger. com/ features/ archives/ 2008/ 11/ tax-planning-tax-law-changes4. html?kipad_id=44) [8] "Two Year Extension of Bush-era Tax Cut Becomes Law Published December 21, 2010. Accessed December 31, 2010. (http:/ / economy. cbh. com/ 2010/ 12/ two-year-extension-of-bush-era-tax-cuts-becomes-law/ ) [9] Indian dividend distribution taxes are subject to a surcharge since 2000 and an education cess since 2004 as of 2007 the effect is to increase the tax to 1.133 times the rate, as per the sub-sections (4), (11) and (12) of the section 2 of the Finance Act 2007 (http:/ / www. taxmann. net/ Directtaxlaws/ FA2007. pdf)PDF(245KiB) [10] Section 115-O (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ section115O. htm) of the Income Tax Act in India as of 2002, added by the Finance Act 1997 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115oft91. htm), modified by the Finance Acts 2000, 2001 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115oft92. htm) and 2002 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115oft91a. htm) [11] Section 115R (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ section115R. htm) of the Income Tax Act in India as of 2002, added by the Finance Act 1999 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115rft95. htm), modified by the Finance Acts 2000, 2001 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115rft96. htm) and 2002 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115rft95a. htm) (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec115rft95b. htm) [12] Sub-section (34) of the section 10 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ section10. htm) of the Income Tax Act in India as of 2002, added by the Finance Act 1997 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec10ft396. htm), modified by the and removed by the Finance Act 2002 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2002ITAct/ ITACT2002/ ftnsec10ft395a. htm) The tax on dividends from companies was excluded since the tax assessment year 1 Apr 199831 Mar 1999, i.e. for income received since the financial year 1 Apr 199731 Mar 1998, however the section 115-O was introduced only with effect from 1 June 1997. Similarly for dividends from mutual funds the tax was excluded since the assessment year 2000-2001, i.e. for income received since 1 June 1999. The tax was brought back for the assessment year 2003-2004, i.e. for income received since 1 April 2002. [13] rediff.com: How the Budget affects the Sensex, slide 3 (http:/ / specials. rediff. com/ money/ 2008/ feb/ 06slide3. htm) [14] rediff.com: How the Budget affects the Sensex, slide 2 (http:/ / specials. rediff. com/ money/ 2008/ feb/ 06slide2. htm) [15] Sub-sections (34), (35) of the section 10 (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ section10. htm) of the Income Tax Act in India as of 2007, added by the Finance Act 2003 (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ ftn374section10. htm) The tax was excluded since the tax assessment year 20042005, i.e. for income received since 1 Apr 2003. [16] Section 115-O (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ section115O. htm) of the Income Tax Act in India as of 2007, modified after 2002 by the Finance Acts 2003 (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ ftn2section115o. htm) and 2007 (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ ftn2asection115o. htm) [17] Section 115R (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2004ITAct/ section115R. htm) of the Income Tax Act in India as of 2004, modified after 2002 by the Finance Act 2003 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2004ITAct/ ftn91_1_563. htm) and Finance (No. 2) Act 2004 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2004ITAct/ ftn91a_1_563. htm) [18] Section 115R (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ section115R. htm) of the Income Tax Act in India as of 2007, modified after 2004 by the Finance Acts 2006 (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ ftn6section115r. htm) and 2007 (http:/ / www. taxmann. net/ Directtaxlaws/ Act2007/ ftn5asection115r. htm) [19] Section 80M (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 1997ITAct/ itac3zzh. htm) of the Income Tax Act in India as of 1997, added by the Finance (No. 2) Act 1967 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 1997ITAct/ itac4q5w. htm), modified by various Finance Acts and removed by the Finance Act 1997 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 1997ITAct/ itac2iht. htm) The deduction was removed since the tax assessment year 19981999, i.e. for income received since 1 Apr 1997. [20] Section 80M (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2003ITAct/ Act2003/ Section80m. htm) of the Income Tax Act in India as of 2003, added by the Finance Act 2002 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/ 2003ITAct/ Act2003/ ftn55p469. htm) and removed by the Finance Act 2003 (http:/ / law. incometaxindia. gov. in/ DitTaxmann/ IncomeTaxActs/
Dividend tax
2003ITAct/ Act2003/ ftn54Ap469. htm) [21] Budget 20082009: Speech of Minister of Finance (http:/ / indiabudget. nic. in/ ub2008-09/ bs/ speecha. htm) [22] Japan National Tax Agency's web site (http:/ / www. nta. go. jp/ taxanswer/ shotoku/ 1330. htm)
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External links
United States Double Taxation Double Speak: Why Repealing Dividend Taxes Is Unfair (http://www.dollarsandsense.org/ archives/2003/0303miller.pdf) from Dollars & Sense magazine The new U.S. dividend tax cut traps (http://tscpa.com/Journal/articles/dividend_tax_cut_traps.pdf) from Tennessee CPA Journal IRS Publication 17 on taxation of dividends (http://www.irs.gov/publications/p17/ch08.html) India The Hindu Business Line : How FMs have been spraying Budgets with DDT (http://www.thehindubusinessline. com/2007/03/09/stories/2007030901060900.htm)
Estate tax in the United States

The estate tax in the United States is a tax imposed on the transfer of the "taxable estate" of a deceased person, whether such property is transferred via a will, according to the state laws of intestacy or otherwise made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate. In addition to the federal government, many states also impose an estate tax, with the state version called either an estate tax or an inheritance tax. Since the 1990s, opponents of the tax have used the pejorative term, "death tax."[1] The equivalent tax in the United Kingdom has always been referred to as "inheritance tax". If an asset is left to a (Federally recognized) spouse or a charitable organization, the tax usually does not apply. For deaths occurring in 2010, up to $5,000,000 can be passed from an individual upon his or her death without incurring estate tax.[2]
Federal estate tax

The Federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States."[3] The starting point in the calculation is the "gross estate."[4] Certain deductions (subtractions) from the "gross estate" amount are allowed in arriving at a smaller amount called the "taxable estate."
The "gross estate"

The "gross estate" for Federal estate tax purposes often includes more property than that included in the "probate estate" under the property laws of the state in which the decedent lived at the time of death. The gross estate (before the modifications) may be considered to be the value of all the property interests of the decedent at the time of death. To these interests are added the following property interests generally not owned by the decedent at the time of death: the value of property to the extent of an interest held by the surviving spouse as a "dower or curtesy";[5]
Estate tax in the United States the value of certain items of property in which the decedent had, at any time, made a transfer during the three years immediately preceding the date of death (i.e., even if the property was no longer owned by the decedent on the date of death), other than certain gifts, and other than property sold for full value;[6] the value of certain property transferred by the decedent before death for which the decedent retained a "life estate", or retained certain "powers";[7] the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent;[8] the value of certain property in which the decedent retained a "reversionary interest", the value of which exceeded five percent of the value of the property;[9] the value of certain property transferred by the decedent before death where the transfer was revocable;[10] the value of certain annuities;[11] the value of certain jointly owned property, such as assets passing by operation of law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with special rules for assets owned jointly by spouses.;[12] the value of certain "powers of appointment";[13] the amount of proceeds of certain life insurance policies.[14] The above list of modifications is not comprehensive. As noted above, life insurance benefits may be included in the gross estate (even though the proceeds arguably were not "owned" by the decedent and were never received by the decedent). Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation). Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" are usually included in the taxable estate, even though such assets are not subject to the probate process under state law.
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Deductions and the taxable estate

Once the value of the "gross estate" is determined, the law provides for various "deductions" (in Part IV of Subchapter A of Chapter 11 of Subtitle B of the Internal Revenue Code) in arriving at the value of the "taxable estate." Deductions include but are not limited to: Funeral expenses, administration expenses, and claims against the estate;[15] Certain charitable contributions;[16] Certain items of property left to the surviving spouse.[17] Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia.[18]
Of these deductions, the most important is the deduction for property passing to (or in certain kinds of trust, for) the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse (not the decedent) is not a U.S. citizen.[19] A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses.[20]
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Tentative tax
The tentative tax is based on the tentative tax base, which is the sum of the taxable estate and the "adjusted taxable gifts" (i.e., taxable gifts made after 1976). For decedents dying after December 31, 2009, the tentative tax will, with exceptions, be calculated by applying the following tax rates:
Lower Limit 0 $10,000 $20,000 $40,000 $60,000 $80,000 $100,000 $150,000 $250,000 $500,000 Upper Limit $10,000 $20,000 $40,000 $60,000 $80,000 $100,000 $150,000 $250,000 $500,000 and over Initial Taxation $0 $1,800 $3,800 $8,200 $13,000 $18,200 $23,800 $38,800 $70,800 $155,800 Further Taxation 18% of the amount 20% of the excess 22% of the excess 24% of the excess 26% of the excess 28% of the excess 30% of the excess 32% of the excess 34% of the excess 35% of the excess
--Internal Revenue Code section 2001(c), as amended by section 302(a)(2) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. 111-312, ___ Stat. ___ (Dec. 17, 2010). The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death (which means that the reduction is not necessarily equal to the gift tax actually paid on those gifts).
Credits against tax

There are several credits against the tentative tax, the most important of which is a "unified credit" which can be thought of as providing for an "exemption equivalent" or exempted value with respect to the sum of the taxable estate and the taxable gifts during lifetime. For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is $2,000,000, so if the sum of the taxable estate plus the "adjusted taxable gifts" made during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable exclusion increased to $3,500,000 in 2009, the estate tax was repealed for estates of decedents dying in 2010, but then the Act "sunsets" in 2011 and the estate tax was to reappear with an applicable exclusion amount of only $1,000,000. However, On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law by President Barack Obama on December 17, 2010. The 2010 Act changed, among other things, the rate structure for estates of decedents dying after December 31, 2009, subject to certain exceptions. It also served to reunify the estate tax credit (aka exemption equivalent) with the federal gift tax credit (aka exemption equivalent). The gift tax exemption is now equal to $5,000,000. The 2010 Act also provided portability to the credit, allowing a surviving spouse to use that portion of the pre-deceased spouses credit that was not previously used (i.e. Husband dies and used $3 million of his credit. At his wife's death, she can use her $5 million credit plus the remaining $2 million of her husband's). If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previously taxed.
Estate tax in the United States Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001.
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Requirements for filing return and paying tax

For estates larger than the current federally exempted amount, any estate tax due is paid by the executor, other person responsible for administering the estate, or the person in possession of the decedent's property. That person is also responsible for filing a Form 706 return with the Internal Revenue Service (IRS). The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid. The deadline for filing the Form 706 is 9 months from the date of the decedent's death. The payment may be extended, but not to exceed 12 months, but the return must be filed by the 9 month deadline.
Exemptions and tax rates

Year Exclusion Max/Top Amount tax rate $675,000 $1 million $1 million 55% 50% 49%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 * 2011 * See paragraph in this section with respect to reinstatement of this exemption
$1.5 million 48% $1.5 million 47% $2 million $2 million $2 million 46% 45% 45%
$3.5 million 45% Repealed * $5 million 35% 35%
As noted above, a certain amount of each estate is exempted from taxation by the federal government. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption. For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means that they would have paid (or, more precisely, the estate would have paid) a taxable rate of 19.7%. As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. However, on December 17, 2010, President Barack Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstates the federal estate tax. The new law sets the exemption at $5 million per person.[21] A top tax rate of 35 percent is provided for the years 2011 and 2012.[22]
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Inheritance tax at the state level

Many U.S. states also impose their own estate or inheritance taxes[23] (see Ohio estate tax for an example), and some, such as Kentucky, impose both.[24] Some states "piggyback" on the federal estate tax law in regard to estates subject to tax (i.e., if the estate is exempt from federal taxation it is also exempt from state taxation, e.g. Pennsylvania, 72 P.S. Section 9111(r). Some states' estate taxes, however, operate independently of federal law, so it is possible for an estate to be subject to state tax while exempt from federal tax. In Kentucky, the inheritance tax operates separately from either the state or federal estate tax; the inheritance tax is imposed on beneficiaries and based on the amount received from the estate, with some close relatives exempt from this tax by statute.[24]
Tax avoidance
Estate tax rates and complexity have driven a vast array of support services to assist clients with a perceived eligibility for the estate tax to develop tax avoidance techniques. Many insurance companies maintain a network of life insurance agents, all providing financial planning services, guided to avoid paying estate taxes. Many suggested techniques involve products that can be costly, though the outlay is often only a small fraction of the estate tax liability. Brokerage and financial planning firms also use estate planning, including estate tax avoidance, as a marketing technique. Many law firms also specialize in estate planning, tax avoidance, and minimization of estate taxes. The first technique many use is to combine the tax exemption limits for a husband and wife by their testamentary documents, using what is known as a credit shelter trust. Many, but not all, other techniques recommended by those selling products with high fees, do not really avoid the estate tax, rather they claim to provide a leveraged way to have liquidity to pay for the tax at the time of death. It is very important for those whose primary wealth is in a business they own, or real estate, or stocks, to seek professional legal advice. In one technique marketed by commissioned agents, an irrevocable life insurance trust is recommended, where the parents give their children funds to pay the premiums on life insurance on the parents. Structured in this way, life insurance proceeds can be free of estate tax. However, if the parents have a very high net worth and the life insurance policy would be inadequate in size due to the limits in premiums, a charitable remainder trust may be recommended, but should be critically reviewed. The client, however, may lose access to the asset placed in the CRUT. Proponents of the estate tax, and lobbyists for high commission financial products, argue the tax should be maintained to encourage this form of charity.
Debate
Arguments in favor
Proponents of the estate tax argue that it serves to prevent the perpetuation of wealth, free of tax, in wealthy families and that it is necessary to a system of progressive taxation.[25] Proponents point out that the estate tax affects only estates of considerable size (in 2011, over $5 million USD, and $10 million USD for couples) and provides numerous credits (including the unified credit) that allow a significant portion of even large estates to escape taxation. Regarding the tax's effect on farmers, proponents counter that this criticism is misguided as there is an exemption built into the law that is specifically designed for family-owned farms.[26] Proponents note that abolishing the estate tax will result in tens of billions of dollars being lost annually from the federal budget.[27] Another argument is that estate tax is essential for true capitalism. The argument is that capitalism is a survival of the fittest contest breeding a strong society, and that without estate tax the wealth of the nation becomes concentrated into fewer and fewer families, which in turn prevents the brightest and most fit from being able to compete. Estate tax means that there is more need for people to continue earning, rather than resting upon the wealth they inherit without contributing to the competition that is capitalism.
Estate tax in the United States Furthermore, supporters argue that many large fortunes do not represent taxed income or savings, that wealth is not being taxed but merely the transfer of that wealth, and that many large fortunes represent unrealized capital gains which (because of a step up in basis at the time of death) will never be taxed as capital gains under the federal income tax.<ref name="NYT" / Proponents further argue that the estate tax serves to encourage charitable giving, one way in which individuals can avoid paying the tax. A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by 6-12 percent.[28] Another argument in favor of the estate tax relates to comparative incentives. Proponents argue that the estate tax is a better source of revenue than the income tax, which is said to directly disincentivize work. While all taxes have this effect to a degree, some argue that the estate tax is less of a disincentive since it does not tax money that the earner spends, but merely that which he or she wishes to give away for non-charitable purposes. Moreover, some argue that allowing the rich to bequeath unlimited wealth on future generations will disincentivize hard work in those future generations.[27] Winston Churchill argued that estate taxes are a certain corrective against the development of a race of idle rich. Research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market.[29] Proponents of the estate tax tend to object to characterizations that it operates as a double or triple taxation. Proponents point out that many of the earnings that are subject to the estate tax were never taxed because they were "unrealized" gains.[26] Others note that double and triple taxation is common (through income, property, and sales taxes, for instance) or argue that the estate tax should be seen as a single tax on the inheritors of large estates. Supporters of the estate tax also point to longstanding historical precedent for limiting inheritance, and note that current generational transfers of wealth are greater than they have been historically. In ancient times, funeral rites for lords and chieftains involved significant wealth expenditure on sacrifices to religious deities, feasting, and ceremonies. The well-to-do were literally buried or burned along with most of their wealth. These traditions may have been imposed by religious edict but they served a real purpose, which was to prevent accumulation of great disparities of wealth, which tended to destabilize societies and lead to social imbalance, eventual revolution, or disruption of functioning economic systems. Proponents also note that the arguments of estate tax opponents are occasionally disingenuous. For example, while opponents point to family farmers and small business owners in an effort to demonstrate the unfairness or overreach of the tax, proponents note that nearly all family farmers and small business owners are exempt from or are not subject to the estate tax.[26]
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Arguments against
One argument against the estate tax is that the tax obligation in itself can assume a disproportionate role in planning, possibly overshadowing more fundamental decisions about the underlying assets. In certain cases, this is claimed to create an undue burden. For example, pending estate taxes could become an artificial disincentive to further investment in an otherwise viable business increasing the appeal of tax- or investment-reducing alternatives such as liquidation, downsizing, divestiture, or retirement. This could be especially true when an estate's value is about to surpass the exemption equivalent amount. Older individuals owning farms or small businesses, when weighing ongoing investment risks and marginal rates of return in light of tax factors, may see less value in maintaining these taxable enterprises. They may instead decide to reduce risk and preserve capital, by shifting resources, liquidating assets, and using tax avoidance techniques such as insurance policies, gift transfers, trusts, and tax free investments[30] The estate tax burdens farmers because agriculture involves the use of many capital assets, such as land and equipment, to generate the same amount of income that other types of businesses generate with fewer assets. Individuals, partnerships, and family corporations own 98 percent of the nations 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to keep their operation going.[31]
Estate tax in the United States Another argument against the estate tax is a moral one. Proponents continually offer that the inheritor of wealth doesn't deserve the wealth because, simply, he or she did not earn it directly. While it may be true that the receiver of wealth may not have a direct moral claim to that wealth, those opposed to the estate tax would argue that, neither does anyone else. This argument would further assert that the rights to that wealth lie with the deceased persons, the person who earned it originally and who paid taxes on it continually while living. The rights lie with the deceased to dispose of his or her wealth as he or she sees fit, whether that disposition be in the form of a charitable gift, a check to the government, or a gift to a chosen heir. (Rand, 1967) This argument would assert that anyone claiming that an heir does not deserve inherited wealth could certainly not claim a right to use the power of government to confiscate that wealth on behalf of unknown others who most certainly would not deserve the wealth by that same line of thinking. To quote an Investor's Business Daily editorial, "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.".[32] Free market critics of the estate tax also point out that many attempts at validating the estate tax assume the superiority of socialist/collectivist economic models. For example, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts. Such statements exhibit a predilection for collectivist principles that opponents of the estate tax have long opposed on moral grounds.[33] [34] An often overlooked element of taxation is that Americans live in a bubble ending at the border of the US. Many countries have inheritance tax rates at or near zero . The huge disparity between rates only encourage individuals to seek relocation to avoid or minimize taxation. This moves the wealth -and all associated future tax revenue- outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States. Previous Tax Foundation research has concluded that the estate tax acts as a strong disincentive toward entrepreneurship. A 1994 study found that the estate taxs 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneurs top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy. Other past economic studies have estimated the compliance costs of the federal estate tax to be roughly equal to the amount of revenue raisednearly five times more costly per dollar of revenue than the federal income taxmaking it one of the nations most inefficient revenue sources.[35]
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The term "death tax"

The term "death tax" is a neologism used by policy makers and critics to describe the tax in a way that conveys additional meaning. The terms "death duties" and "inheritance taxes" are also sometimes used. On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons.[36] The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the Revenue Act of 1916. Section 201 used the term "estate tax."[37] [38] According to Professor Michael Graetz of Columbia Law School and professor emeritus at Yale Law School, opponents of the estate tax began calling it the "death tax" in the 1940s.[39] The term "death tax" more directly refers back to the original use of "death duties" to address the fact that death itself triggers the tax or the transfer of assets on which the tax is assessed. Many opponents of the estate tax refer to it as the "death tax" in their public discourse partly because a death must occur before any tax on the deceased's assets can be realized and also because the tax rate is determined by the value of the deceased's assets rather than the amount each inheritor receives. Neither the number of inheritors nor the size of each inheritor's portion factors into the calculations for rate of the Estate Tax.
Estate tax in the United States Proponents of the tax say the term "death tax" is imprecise, and that the term has been used since the nineteenth century to refer to all the death duties applied to transfers at death: estate, inheritance, succession and otherwise.[40] This also is how the phrase "death taxes" is used in the United States' Internal Revenue Code.[41] Political use of "death tax" as a synonym for "estate tax" was encouraged by Jack Faris of the National Federation of Independent Business[42] during the Speakership of Newt Gingrich. Well-known Republican pollster Frank Luntz wrote that the term "death tax" "kindled voter resentment in a way that 'inheritance tax' and 'estate tax' do not".[43] Linguist George Lakoff asserts that the term "death tax" is a deliberate and carefully calculated neologism used as a propaganda tactic to aid in efforts to repeal estate taxes. The use of "death tax" rather than "estate tax" in the wording of questions in the 2002 National Election Survey increased support for estate tax repeal by only a few percentage points.[44]
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Future of tax on inheritances

Congress has passed tax laws that have made numerous, temporary changes to both the estate tax rate and the exemption amount. Since 2002, the top rate has decreased incrementally from 50%, and the exemption amount has increased incrementally from $1 million. In 2009 the rate was 45% and the exemption amount was $3.5 million. On January 1, 2010 a "one year repeal" of the tax was effectuated by a temporary, one-year-only rate of 0%. On January 1, 2011 the estate tax is scheduled to a top rate of 35% and the exemption amount is scheduled to be $5.0 million, or $10 million for married couples. (law passed in December 2010) For 2010 property transferred from decedents will be treated as if it is transferred by gift. This means the basis of the property for calculating capital gains when the recipient eventually sells the property will be the same basis as in the hands of the decedent. This is generally called carryover basis. However most recipients will effectively get the same result they would receive under present law, because section 1022 allows the executor of an estate to allocate up to 1.3 million in basis for singles and 3 million for surviving spouses to the property of the estate. This will effectively give most recipients a tax basis in the property equal to the full market value (i.e., "step up basis").[45] Legislation to extend raising the unified credit (beyond year 2010) of the estate tax has passed the House of Representatives. It also passed in the Senate in June, 2006. Later when the conference committee added it to a bill to increase the minimum wage, the combined bill failed to garner 60 votes to invoke cloture in the United States Senate, and it failed to pass. Congress may attempt to enact an estate tax during 2010, making it retroactive to January 1, 2010.[46] Such retroactivity is likely constitutional, as the Supreme Court has approved retroactive taxation directed against estates in the past.[47] Among the creative ideas being floated in Congress is a change in the way the estate tax is collected using Cap Gains with a transition charge based on AGI. [48][49]
Death elasticity
A few commentators have been concerned that changes in estate tax provides incentives to change the timing of death, a phenomenon termed "death elasticity." Dr. George E. Mendenhall has warned that large discontinuities in the estate tax rates, as planned in 2010 and 2011, may provide incentives to hasten death (late 2010) or prolong life (late 2009) with large financial implications for the inheritors.[50]
IRS audits
In July 2006, the IRS confirmed that it planned to cut the jobs of 157 of the agencys 345 estate tax lawyers, plus 17 support personnel, by October 1, 2006. Kevin Brown, an IRS deputy commissioner, said that he had ordered the staff cuts because far fewer people were obliged to pay estate taxes than in the past. Estate tax lawyers are the most productive tax law enforcement personnel at the IRS, according to Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.[51]
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Related taxes
The federal government also imposes a gift tax, assessed in a manner similar to the estate tax. One purpose is to prevent a person from avoiding paying estate tax by giving away all his or her assets before death. There are two levels of exemption from the gift tax. First, transfers of up to (as of 2010) $13,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $26,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $1,000,000 (not covered by annual exclusions) has been given. If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate. Generally, clients choose not to pay a gift tax until the lifetime exemption is exceeded. Paying a gift tax for gifts in excess of the lifetime exemption can be advantageous, if the client lives at least three years, as the gift tax is tax exclusive, and the estate tax is tax inclusive. Funds used to pay the estate tax are taxed in a decedent's gross estate, but gift taxes paid more than three years prior to death are not included. But in many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the transferor and the number of donees. Clients often choose to use a trust, sometimes referred to as a Cristofani Trust, to hold such gifts. Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.
Notes
[1] [2] [3] [4] Meet Mr. Death (http:/ / www. prospect. org/ cs/ articles?article=meet_mr_death). Joshua Green, May 20, 2001 "Estate Tax" irs.gov, Retrieved 2011-09-29 See 26 U.S.C. 2001(a) (http:/ / www. law. cornell. edu/ uscode/ 26/ 2001. html#a). Defined at 26 U.S.C. 2031 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2031. html) and 26 U.S.C. 2033 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2033. html). [5] See 26 U.S.C. 2034 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2034. html). [6] See 26 U.S.C. 2035 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2035. html). [7] See 26 U.S.C. 2036 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2036. html). [8] See 26 U.S.C. 2037(a)(1) (http:/ / www. law. cornell. edu/ uscode/ 26/ 2037. html#a_1). [9] See 26 U.S.C. 2037(a)(2) (http:/ / www. law. cornell. edu/ uscode/ 26/ 2037. html#a_2). [10] See 26 U.S.C. 2038 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2038. html). [11] See 26 U.S.C. 2039 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2039. html). [12] See 26 U.S.C. 2040 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2040. html). [13] See 26 U.S.C. 2041 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2041. html). [14] See 26 U.S.C. 2042 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2042. html). [15] See 26 U.S.C. 2053 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2053. html). [16] See 26 U.S.C. 2055 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2055. html). [17] See 26 U.S.C. 2056 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2056. html). [18] See 26 U.S.C. 2058 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2058. html). [19] See 26 U.S.C. 2056(d) (http:/ / www. law. cornell. edu/ uscode/ 26/ 2056. html#d). [20] See 26 U.S.C. 2056A (http:/ / www. law. cornell. edu/ uscode/ 26/ 2056A. html). [21] Internal Revenue Code section 2010(c), as amended by section 302(a)(1) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. ___-___, ___ Stat. ___ (Dec. 17, 2010). [22] See Title III of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. ___-___, ___ Stat. ___ (Dec. 17, 2010). [23] Bankrate.com :Death and taxes: Inheritance taxes (http:/ / www. bankrate. com/ brm/ itax/ Edit/ basics/ Final_filing/ basic_3a. asp) [24] "A Guide to Kentucky Inheritance and Estate Taxes: General Information" (http:/ / revenue. ky. gov/ NR/ rdonlyres/ 6D844DC9-B300-4EE7-963E-DB141FC0AED6/ 0/ guide_2003. pdf). Kentucky Revenue Cabinet. March 2003. . Retrieved 2009-05-29.

[25] Death and Taxes (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2006/ 06/ 05/ AR2006060501360. html), Washington Post, Editorial, June 6, 2006. [26] Edmund Andrews, Death Tax? Double Tax? For Most, It's No Tax (http:/ / www. nytimes. com/ 2005/ 08/ 14/ business/ yourmoney/ 14view. html?_r=1& pagewanted=print& oref=slogin), New York Times, August 14, 2005. [27] Stuart Taylor, Gay Marriage and the Estate Tax (http:/ / www. theatlantic. com/ doc/ 200606u/ nj_taylor_2006-06-13), The Atlantic Monthly, June 13, 2006. [28] The Estate Tax and Charitable Giving (http:/ / www. cbo. gov/ doc. cfm?index=5650& type=0), Congressional Budget Office, July 2004. [29] "The case for death duties" (http:/ / www. economist. com/ finance/ displaystory. cfm?story_id=10024733). The Economist. October 25, 2007. . [30] (http:/ / www. heritage. org/ Research/ Taxes/ BG1428. cfm), (http:/ / www. investors. com/ NewsAndAnalysis/ Article. aspx?id=517003) [31] http:/ / www. ers. usda. gov/ amberwaves/ june09/ features/ federalestatetax. htm [32] A Good Year To Die (http:/ / www. investors. com/ NewsAndAnalysis/ Article. aspx?id=517003) by Investor's Business Daily, (http:/ / www. capmag. com/ article. asp?id=594), (http:/ / www. capmag. com/ article. asp?id=3218) [33] A Good Year To Die (http:/ / www. investors. com/ NewsAndAnalysis/ Article. aspx?id=517003) by Investor's Business Daily [34] http:/ / bisonsurvivalblog. blogspot. com/ 2006_12_01_archive. html http:/ / www. acton. org/ publications/ mandm/ mandm_101article05. php Getting more links to those taking each position should be fine. [35] "Noting that this compliance burden is largely the result of widespread tax avoidance, Aaron and Munnell conclude that estate taxes are effectively 'penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners' rather than actual taxes." The Economics of Federal Estate Taxes (http:/ / www. taxfoundation. org/ files/ sr142. pdf) [36] Section 111 of the Revenue Act of 1862, Ch. 119, 12 Stat. 432, 485 (July 1, 1862). [37] Revenue Act of 1916, Ch. 463, sec. 201, 39 Stat. 756, 777 (Sept. 8, 1916). [38] Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, "The Estate Tax: Ninety Years and Counting," Internal Revenue Service, U.S. Dep't of the Treasury, at (http:/ / www. irs. gov/ pub/ irs-soi/ ninetyestate. pdf). [39] "How We Got from Estate Tax to 'Death Tax'", National Public Radio, attrib. to Professor Michael Graetz, Dec. 15, 2010, at (http:/ / www. npr. org/ blogs/ thetwo-way/ 2010/ 12/ 16/ 132031116/ a-history-of-how-we-got-from-estate-tax-to-death-tax). [40] The Tax That Suits the Farmer (http:/ / query. nytimes. com/ gst/ abstract. html?res=9903EEDB1230E333A25757C2A9639C94669ED7CF), New York Times, May 24, 1897. ("It will escape these death taxes, even, by removal from the State or by to heirs during life instead of by testament.") [41] Politicizing the Internal Revenue Code (http:/ / www. blogdenovo. org/ archives/ 001695. html), De Novo, May 6, 2007. [42] Capitol Hill Memo; In 2 Parties' War of Words, Shibboleths Emerge as Clear Winner (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9E06EFD61239F934A15757C0A9679C8B63), New York Times, April 27, 2001. [43] "Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes" (http:/ / www. 60plus. org/ deathtax. asp?docID=347) [44] Homer Gets a Tax Cut: Inequality and Public Policy in the American Mind (http:/ / www. princeton. edu/ ~csdp/ research/ pdfs/ homer. pdf) [45] See 26 U.S.C. 1022. [46] Estate Tax Reform Bill Passes House, Moves to Senate (http:/ / www. ombwatch. org/ node/ 10619) [47] Estate Tax Fix Not Likely By Year End (http:/ / www. floridaprobatetrustlaw. com/ 2009/ 12/ articles/ estate-taxation/ estate-tax-fix-not-likely-by-year-end) [48] http:/ / www. estatetaxsimplification. org [49] (http:/ / estatetaxsimplification. org) [50] (http:/ / www. annals. org/ content/ 149/ 11/ 822. full. pdf+ html) [51] "I.R.S. to Cut Tax Auditors" (http:/ / www. nytimes. com/ 2006/ 07/ 23/ business/ 23tax. html). The New York Times. July 23, 2006. .
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Further reading
Cost and Consequences of the Federal Estate Tax, A Joint Economic Committee Study, http://www.house.gov/ jec/publications/109/05-01-06estatetax.pdf New International Survey Shows U.S. Death Tax Rates Among Highest, American Council for Capital Formation, August 2007, http://www.accf.org/media/dynamic/1/media_133.pdf Ian Shapiro and Michael J. Graetz, Death By A Thousand Cuts: The Fight Over Taxing Inherited Wealth, Princeton University Press (February, 2005), hardcover, 372 pages, ISBN 0-691-12293-8 William H. Gates, Sr. and Chuck Collins, with foreword by former Federal Reserve Chairman Paul Volcker, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, Beacon Press (2003) The Roosevelts Would Be Appalled, A history of the estate tax shows just how far both political parties are from the beliefs of Teddy and FDR, http://american.com/archive/2010/december/the-roosevelts-would-be-appalled Brett T. Bradford. 2010. "The Estate Planning Perils of 2010 and Beyond" The Selected Works of Brett T. Bradford, http://works.bepress.com/brett_bradford/1
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External links
The origin of the Federal estate tax (http://www.ustreas.gov/education/faq/taxes/history.shtml#q2) nodeathtax.org (http://www.nodeathtax.org/), American Family Business Institute, a trade association of family business owners and farmers working for repeal of the Estate Tax. (http://www.SimplifyEstateTax.org), ASSSET, a trade association of private business owners, farmers and ranchers working for relief of the Estate Tax. IRS publication 950 (http://www.irs.gov/pub/irs-pdf/p950.pdf), Introduction to Estate and Gift Taxes, revised December 2009. "Estate Tax Pyramid Scheme" (http://www.tompaine.com/articles/2006/06/06/estate_tax_pyramid_scheme. php), a June 2006 article by former US Secretary of Labor Robert Bernard Reich arguing for the estate tax. "Death and taxes 2010" (http://www.zoomorama.com/d162765a7233e71d38a68f269d078bdc) A visual guide to where your federal tax dollars (Full resolution poster) Deathtax.com (http://www.deathtax.com/) an anti-inheritance tax campaign by a Seattle family-owned newspaper. Gross Estate and Net Estate Tax on Farms and Businesses in 2004 (http://www.taxpolicycenter.org/TaxModel/ tmdb/TMTemplate.cfm?DocID=734&topic2ID=40&topic3ID=41&DocTypeID=), from the Tax Policy Center website. ...Ads exaggerate what the tax costs farmers, small businesses... (http://www.factcheck.org/article328m.html), a June 2005 article from FactCheck Death tax deception (http://www.dollarsandsense.org/archives/2003/0103hunter.html) Article from Dollars & Sense magazine. Sterling Harwood, "Is Inheritance Immoral?" in Louis P. Pojman, Political Philosophy (McGraw Hill, 2002). www.sterlingharwood.com. David Runciman, London Review of Books, 2 June 2005, "Tax Breaks for Rich Murderers" (http://www.lrb.co. uk/v27/n11/runc01_.html) Wiki Legal Comment, Night of the Living Dead: Why Death Tax Wont Stay Dead (http://wikilegaljournal. wiki.com/Night_of_the_Living_Dead), Wiki Legal Journal (http://wikilegaljournal.wiki.com) This article is part of a study to determine if a wiki community can produce high quality legal research, November 18, 2006 (this comment explores the various proposals Congress has considered with a special emphasis on the interaction of estate tax on state revenue and philanthropy.). A program at mystatewill.com (http://www.mystatewill.com) gives a quick calculation of the federal estate tax. (http://estatetaxsimplification.org), Estate Tax Simplification Idea for 2011-2012
Gift tax in the United States
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Gift tax in the United States

A gift tax is a tax imposed on the gratuitous transfer of ownership of property. When a taxable gift in the form of cash, stocks, real estate, or other tangible or intangible property is made the tax is usually imposed on the donor (the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is completely gratuitous where the donor receives nothing of value in exchange for the gifted property. A transfer is gratuitous in part where the donor receives some value but the value of the property received by the donor is substantially less than the value of the property given by the donor. In this case, the amount of the gift is the difference. In the United States, the gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The tax is imposed by section 2501 of the Code.[1] Generally, if an interest in property is transferred during the giver's lifetime (often called an inter vivos gift) then the gift or transfer would not be subject to the estate tax. In 1976, Congress unified the gift and estate taxes limiting the givers ability to circumvent the estate tax by gifting during his or her lifetime. Notwithstanding, there remain differences between estate and gift taxes such as the effective tax rate, the amount of the credit available against tax, and the basis of the received property. There are also types of gifts which will be included in a person's estate such as certain gifts made within the three year window before death and gifts in which the donor retains an interest, such as gifts of remainder interests that are not either qualified remainder trusts or charitable remainder trusts. The remainder interest gift tax rules apply the gift tax on the entire value of the trust by assigning a zero value to the interest retained by the donor.
Non-taxable gifts
Generally, the following gifts are not taxable gifts:[2] Gifts that are not more than the annual exclusion for the calendar year Gifts to a political organization for its use Gifts to charities Gifts to one's (US taxpayer) spouse Tuition or medical expenses one pays directly to a medical or educational institution for someone
Gift tax exemptions

There are two levels of exemption from the gift tax. First, transfers of a present interest up to $13,000 per person per year (as of 2011) are not subject to the tax ("present interest" is defined as: when the recipient of the gift can "immediately and without restriction use, possess, or enjoy the gifted property", if it's not this "present interest" then it's a "future interest" and therefore the annual exclusion amount of $13,000 (2011) is NOT available to use as a deduction from the gift). An individual can make gifts up to this amount to as many people as he/she wishes each year. A married couple can pool their individual gift exemptions to make gifts worth up to $26,000 per recipient per year without incurring any gift tax. For 2011 and 2012, the lifetime gift tax exemption is $5,000,000, which is the same as the federal estate tax exemption. The lifetime gift tax exemption is tied directly to the federal estate tax exemption such that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption after you die. If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate.
Gift tax in the United States In many instances, however, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate. Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met. Further information: Estate tax in the United States
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Tax deductibility for gifts

Pursuant to 26 U.S.C.102(a) [3], property acquired by gift, bequest, devise, or inheritance is not included in gross income and thus a taxpayer does not have to include the value of the property when filing an income tax return. Although many items might appear to be gift, courts have held that the most critical factor is the transferor's intent. Bogardus v. Commissioner, 302 U.S. 34, 43, 58 S.Ct. 61, 65, 82 L.Ed. 32. (1937). The transferor must demonstrate a "detached and disinterested generosity" when giving the gift to actually exclude the value of the gift from the taxpayer's gross income. Commissioner of Internal Revenue v. LoBue, 352 U.S. 243, 246, 76 S.Ct. 800, 803, 100 L.Ed. 1142 (1956). Unfortunately, the court's articulation of what exactly satisfies a "detached and disinterested generosity" leaves much to be desired. Some situations are clearer, however. 1. "Gifts" received at promotional events are not excluded from taxation: For example, Oprah's seemingly good deed of giving new cars to her audience does not satisfy this definition because of Oprah's interest in the promotional value that this event causes for her television show. 1. "Gifts" received from employers that benefit employees are not excluded from taxation: 26 U.S.C.102(c) [4] clearly states that employers cannot exclude as a gift anything transferred to an employee that benefits the employee. Consequently, an employer cannot gift an employee's salary to avoid taxation. In addition, policy reasons for the gift exclusion from gross income are unclear. It is said that no justification exists. It is also said that the exclusion is for administrative reasons, both for taxpayers and for the IRS. Without the exclusion taxpayers would have to keep track of all their gifts, including nominal ones, during the year, and this would create additional oversight problems for the IRS.
U.S. Federal gift tax contrasted with U.S. Federal income tax treatment of gifts
The treatment of a gift for U.S. gift tax purposes (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102[5] ) from the gross income of the recipient, and thus are not taxed as income. For the purposes of taxable income, courts have defined "gift" as proceeds from a "detached and disinterested generosity." See Commissioner v. Duberstein (quoting Commissioner v. LoBue, 351 U.S. 243 (1956)). Gifts from certain parties will always be taxed for U.S. Federal income tax purposes. Under Internal Revenue Code section 102(c)[6] , gifts transferred by or for an employer to, or for the benefit of, an employee cannot be excluded from the gross income of the employee for Federal income tax purposes. While there are some statutory exemptions under this rule for de minimis fringe amounts, and for achievement awards, the general rule is the employee must report a gift from the employer as income for Federal income tax purposes. The foundation for the preceding rule is the presumption that employers do not give employees items of value out of "detached and disinterested generosity" due to the existing employment relationship. Under Internal Revenue Code section 102(b)(1), income subsequently derived from any property received as a gift is not excludable from the income taxed to the recipient.[7] In addition, under Internal Revenue Code section 102(b)(2), a donor may not circumvent this requirement by gifting only the income and not the property itself to the recipient. [8] Thus, a gift of income is always income to the recipient. Permitting such an exclusion would allow the donor and
Gift tax in the United States the recipient to avoid paying taxes on the income received, a loophole Congress has chosen to eliminate.
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References
[1] [2] [3] [4] [5] [6] [7] [8] 26 U.S.C. 2501 (http:/ / www. law. cornell. edu/ uscode/ 26/ 2501. html). "IRS Publication 950 - Introduction to Estate and Gift Taxes (PDF)" (http:/ / www. irs. gov/ pub/ irs-pdf/ p950. pdf). . (Rev December 2009) http:/ / www. law. cornell. edu/ uscode/ 26/ 102. html#a http:/ / www. law. cornell. edu/ uscode/ 26/ 102. html#c 26 U.S.C. 102 (http:/ / www. law. cornell. edu/ uscode/ 26/ 102. html). 26 U.S.C. 102 (http:/ / www. law. cornell. edu/ uscode/ 26/ 102. html). 26 U.S.C. 102 (http:/ / www. law. cornell. edu/ uscode/ 26/ 102. html). 26 U.S.C. 102 (http:/ / www. law. cornell. edu/ uscode/ 26/ 102. html).
External links
IRS article (http://www.irs.gov/businesses/small/article/0,,id=98968,00.html), Estate and Gift Taxes IRS publication 950 (http://www.irs.gov/pub/irs-pdf/p950.pdf), Introduction to Estate and Gift Taxes IRS publication 950 (http://www.irs.gov/publications/p950/index.html), Introduction to Estate and Gift Taxes IRS Form 709 (http://www.irs.gov/pub/irs-pdf/f709.pdf), United States Gift (and Generation-Skipping Transfer) Tax Return Instructions for Form 709 (http://www.irs.gov/pub/irs-pdf/i709.pdf), Instructions for Form 709 Instructions for Form 709 (http://www.irs.gov/instructions/i709/index.html), Instructions for Form 709
Income tax
An income tax is a tax levied on the income of individuals or businesses (corporations or other legal entities). Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). Various systems define income differently, and often allow notional reductions of income (such as a reduction based on number of children supported).
Principles
The "tax net" refers to the types of payment that are taxed, which included personal earnings (wages), capital gains, and business income. The rates for different types of income may vary and some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is significant or based on the manner in which it is paid. Some types of income, such as interest on bank savings, may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). In some tax systems, personal earnings may be strictly defined where labor, skill, or investment is required (e.g. wages); in others, they may be defined broadly to include windfalls (e.g. gambling wins). Tax rates may be progressive, regressive, or proportional. A progressive tax applies progressively higher tax rates as earnings reach higher levels. For example, the first $10,000 in earnings may be taxed at 7%, the next $10,000 at 10%, and any more income at 30%. Alternatively, a flat tax taxes all earnings at the same rate. A regressive income tax may apply to income up to a certain amount, such as taxing only the first $90,000 earned. A tax system may use different taxation methods for different types of income.
Income tax Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government by taxpayers who did not pay enough during the tax year; and tax refunds from the government to those who overpaid. Income tax systems often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years. The idea of a progressive tax has garnered support from macro economists and political scientists of many different ideologies - ranging from Adam Smith to Karl Marx, although there are differences of opinion about the optimal level of progressivity. Some economists[1] trace the origin of modern progressive taxation to Adam Smith, who wrote in The Wealth of Nations: The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.[2] Income taxes are used in most countries around the world, but are not without criticism. Frank Chodorov wrote "... you come up with the fact that it gives the government a prior lien on all the property produced by its subjects." The government "unashamedly proclaims the doctrine of collectivized wealth.... That which it does not take is a concession."[3] Some have argued that the economic effects of an income tax system penalize work, discourage saving and investing, and hinder the competitiveness of business and economic growth.[4] [5] Income taxes are also not border-adjustable; meaning the tax component embedded into products via taxes imposed on companies cannot be removed when exported to a foreign country (see Effect of taxes and subsidies on price). Alternate tax systems such as a national sales tax or value added tax remove the tax component when goods are exported and apply the tax component on imports.[6]
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History
The concept of taxing income is a modern innovation and presupposes several things: a money economy, reasonably accurate accounts, a common understanding of receipts, expenses and profits, and an orderly society with reliable records. For most of the history of civilization, these preconditions did not exist, and taxes were based on other factors. Taxes on wealth, social position, and ownership of the means of production (typically land and slaves) were all common. Practices such as tithing, or an offering of firstfruits, existed from ancient times, and can be regarded as a precursor of the income tax, but they lacked precision and certainly were not based on a concept of net increase.
Income tax
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Han Dynasty (ancient China)

In the year 10 CE, Emperor Wang Mang of the Xin Dynasty instituted an unprecedented taxthe income taxat the rate of 10 percent of profits, for professionals and skilled labor. (Previously, all taxes were either head tax or property tax.) He was overthrown 13 years later in 23 CE and earlier laissez-faire policies were restored during the Later Han.
United Kingdom
An income tax was levied in Britain by William Pitt the Younger in his budget of December 1798, to pay for weapons and equipment in preparation for the Napoleonic wars. Pitt's new graduated income tax began at a levy of 2d in the pound (0.8333%) on annual incomes over 60 and increased up to a maximum of 2s in the pound (10%) on incomes of over 200 (170,542 in 2007). Pitt hoped that the new income tax would raise 10 million (8,527,100,000 in 2007), but actual receipts for 1799 totaled just over 6 million.[7] The tax was repealed in 1816 and opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal. Records were publicly burned by the Chancellor of the Exchequer but copies were retained in the basement of the tax court.[8]
United States
In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800) ($19490 in 2010 dollars).[9] This tax was repealed and replaced by another income tax in 1862.[10]
Punch cartoon (1907); illustrates the unpopularity amongst Punch readers of a proposed 1907 income tax by the Labour Party in the United Kingdom.
In 1894, Democrats in Congress passed the Wilson-Gorman tariff, which imposed the first peacetime income tax. The rate was 2% on income over $4000 ($101200 in 2010 dollars), which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions.[11] Also, the Panic of 1893 is said to have something to do with the passage of Wilson-Gorman. In 1895 the United States Supreme Court, in its ruling in Pollock v. Farmers' Loan & Trust Co., held a tax based on receipts from the use of property to be unconstitutional. The Court held that taxes on rents from real estate, on interest income from personal property and other income from personal property (which includes dividend income) were treated as direct taxes on property, and therefore had to be apportioned. Since apportionment of income taxes is impractical, this had the effect of prohibiting a federal tax on income from property. However, the Court affirmed that the Constitution did not deny Congress the power to impose a tax on real and personal property, and it affirmed that such would be a direct tax.[12] Due to the political difficulties of taxing individual wages without taxing income from property, a federal income tax was impractical from the time of the Pollock decision until the time of ratification of the 16th Amendment in 1913. In 1913, the Sixteenth Amendment to the United States Constitution made the income tax a permanent fixture in the U.S. tax system. The United States Supreme Court in its ruling Stanton v. Baltic Mining Co. stated that the amendment conferred no new power of taxation but simply prevented the courts from taking the power of income taxation possessed by Congress from the beginning out of the category of indirect taxation to which it inherently belongs. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark,
Income tax rising to $5.4 billion by 1920. With the advent of World War II, employment increased, as did tax collectionsto $7.3 billion. The withholding tax on wages was introduced in 1943 and was instrumental in increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945.[3]
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Types
Personal
A personal or individual income tax is levied on the total income of the individual (with some deductions permitted). It is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages.
Corporate
Corporate tax refers to a direct tax levied on the profits made by companies or associations and often includes capital gains of a company. Earnings are generally considered gross revenue minus expenses. Corporate expenses related to capital expenditures are usually deducted in full (for example, trucks are fully deductible in the Canadian tax system, while a corporate sports car is only partly deductible) over their useful lives by using percentage rates based on the class of asset they belong to. Accounting principles and tax rules about recognition of expenses and revenue will vary at times, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a deferred tax. Future assets and liabilities created by a deferred tax are reported on the balance sheet. See also: Excess profits tax, Windfall profits tax
Payroll
A payroll tax generally refers to two kinds of taxes: employee and employer payroll taxes. Employee payroll taxes are taxes which employers are required to withhold from employees' pay, also known as withholding, pay-as-you-earn (PAYE) or pay-as-you-go (PAYG) tax. These withholdings contribute to the payment of an employee's personal income tax obligation; if the payments exceed this obligation, the employee may be eligible for a tax refund or carryforward to future periods. Employer payroll taxes are paid from the employer's own funds, either as a fixed charge per employee or as a percentage of each employee's pay. Payroll taxes often cover government social insurance programs, such as social security, health care, unemployment, and disability. These payments do not count toward the income taxes of employees and employers, but are normally deductible by the employer as a business expense.
Inheritance
The inheritance tax, estate tax and death duty are the names given to various taxes which arise on the death of an individual. In international tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction is not universally recognized. For example, the "inheritance tax" in the UK is a tax on personal representatives, and is therefore, strictly speaking, an estate tax.
Income tax
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Capital gains tax

A capital gains tax is the tax levied on profits from the sale of capital assets. In many cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax. In an inflationary environment, capital gains may be, to some extent, illusory. If prices in general have doubled over five years, then selling an asset for twice the price it was purchased at five years earlier represents no gain at all. Partly to compensate for such changes in the value of money over time, some jurisdictions, such as the United States, give a favorable capital gains tax rate based on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. In Canada, 2050% of the gain is taxable income. In India, Short Term Capital Gains Tax (arising before one year) is 10% [15 % from F.Y 2008-09 as per Finance Act 2008] flat rate of the gains and Long Term Capital Gains Tax is nil for stocks and mutual fund units held one year or more, provided the sale of shares involved payment of the Securities Transaction Tax, and 20% for any other assets held three years or more.
Around the world

Income taxes are used in most countries around the world. The tax systems vary greatly and can be progressive, proportional, or regressive, depending on the type of tax. Comparison of tax rates around the world is a difficult and somewhat subjective enterprise. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. Of course, services provided by governments in return for taxation also vary, making comparisons all the more difficult.
Transparency / Public Disclosure

Public disclosure of personal income tax filings occurs in Finland and Norway.[13]
Notes
[1] Stein, Herbert (1994, April 6). "Board of Contributors: Remembering Adam Smith." Wall Street Journal (Eastern Edition), p. PAGE A14. Retrieved January 8, 2008, from Wall Street Journal database. (Document ID: 28143064). [2] Adam Smith, An Inquiry into the Nature And Causes of the Wealth of Nations (http:/ / www. adamsmith. org/ smith/ won-b5-c2-article-1-ss3. htm) (1776). Book Five: Of the Revenue of the Sovereign or Commonwealth. CHAPTER II: Of the Sources of the General or Public Revenue of the Society. ARTICLE I: Taxes upon the Rent of House. [3] Young, Adam (2004-09-07). "The Origin of the Income Tax" (http:/ / mises. org/ story/ 1597). Ludwig von Mises Institute. . Retrieved 2007-01-24. [4] "America Needs a Better Tax System" (http:/ / www. taxreformpanel. gov/ 04132005. pdf). The Presidents Advisory Panel on Federal Tax Reform. 2005-04-13. . Retrieved 2007-01-28. [5] "The state's take" (http:/ / www. economist. com/ opinion/ displaystory. cfm?story_id=14924473). The Economist. 19 November 2009. . Retrieved 20 November 2009. [6] Linbeck, Leo (2006-06-22). "Testimony Before the Subcommittee on Select Revenue Measures" (http:/ / waysandmeans. house. gov/ hearings. asp?formmode=view& id=5196). House Committee on Ways and Means. . Retrieved 2006-08-11. [7] "A tax to beat Napoleon" (http:/ / www. hmrc. gov. uk/ history/ taxhis1. htm). HM Revenue & Customs. . Retrieved 2007-01-24. [8] Adams, Charles 1998. Those Dirty Rotten TAXES, The Free Press, New York, NY [9] Revenue Act of 1861, sec. 49, ch. 45, 12 Stat. 292, 309 (Aug. 5, 1861). [10] Sections 49, 51, and part of 50 repealed by Revenue Act of 1862, sec. 89, ch. 119, 12 Stat. 432, 473 (July 1, 1862); income taxes imposed under Revenue Act of 1862, section 86 (pertaining to salaries of officers, or payments to "persons in the civil, military, naval, or other employment or service of the United States ...") and section 90 (pertaining to "the annual gains, profits, or income of every person residing in the United States, whether derived from any kind of property, rents, interest, dividends, salaries, or from any profession, trade, employment or vocation carried on in the United States or elsewhere, or from any other source whatever...."). [11] Charles F. Dunbar, "The New Income Tax," Quarterly Journal of Economics, Vol. 9, No. 1 (Oct., 1894), pp. 2646 in JSTOR (http:/ / www. jstor. org/ stable/ 1883633). [12] Chief Justice Fuller's opinion, 158 U.S. 601, 634 (http:/ / www. let. rug. nl/ usa/ D/ 1876-1900/ reform/ pollock. htm). [13] Bernasek, Anna (February 13, 2010). "Should Tax Bills Be Public Information?" (http:/ / www. nytimes. com/ 2010/ 02/ 14/ business/ yourtaxes/ 14disclose. html). The New York Times. . Retrieved 2010-03-07.
Income tax
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External links
Tax Policy Analysis, OECD Tax Database (http://www.oecd.org/document/60/ 0,2340,en_2649_34533_1942460_1_1_1_1,00.html) History of the Income Tax in the United States Infoplease.com (http://www.infoplease.com/ipa/A0005921. html#ixzz0x3i3fPTZ)
Inheritance tax
An inheritance tax (also known as an estate tax) is a tax levied on a person who inherits money or property, or a tax on the estate (total value of the money and property), of a person who has died.[1] In international tax law, there is a distinction between an estate tax and an inheritance tax: an estate tax is assessed on the assets of the deceased, while an inheritance tax is assessed on the legacies received by the beneficiaries of the estate. However, this distinction is not always respected in the language of tax laws. For example, the "inheritance tax" in the United Kingdom is a tax on the assets of the deceased, and is therefore, strictly speaking, an estate tax. In some jurisdictions the term used is death duty. For historical reasons that term is used colloquially (though not legally) in the United Kingdom and some Commonwealth nations.
Varieties of inheritance and estate taxes

Belgium, droits de succession or successierechten (Inheritance tax). Collected at the federal level but distributed to the regional level. Bermuda: stamp duty Czech Republic: da ddick (Inheritance tax) Finland: perintvero (Finnish) or arvskatt (Swedish) (Inheritance tax) France: droits de succession (Inheritance tax) Germany: Erbschaftssteuer (Inheritance tax) Ireland: Inheritance tax Italy: tassa di successione (Inheritance tax). Abolished in 2001.,[2] and reestablished in 2006. 1,000,000 exemption on a bequest to a spouse or child, and a maximum rate of 8%.[3] [4] The Netherlands: Successierecht (Inheritance tax) Norway: arveavgift (inheritance and gift tax). Smaller bequests are exempt. Bequests larger than a certain value are taxed from 6% to 15%, depending on the status of the beneficiary and the size of the taxable amount. See Taxation in Norway. Switzerland has no national inheritance tax. Some cantons impose estate taxes or inheritance taxes. United Kingdom: see Inheritance Tax (United Kingdom) (actually an estate tax) United States: see Estate tax in the United States Some jurisdictions formerly had estate or inheritance taxes, but have abolished them: Australia abolished the federal estate tax in 1979.[5] Austria abolished the Erbschaftssteuer in 2008. This tax had some of the features of the gift tax, which was abolished at the same time.[6] Canada: abolished inheritance tax in 1972. Hong Kong: abolished estate duty in 2006 for all deaths occurring on or after 11 February 2006. (See Estate Duty Ordinance Cap.111) India: had an estate tax from 1953 to 1985.[7] Israel: abolished inheritance tax in 1981. Louisiana: abolished inheritance tax in 2008, for deaths occurring on or after Ju1y 1, 2004.[8]
Inheritance tax New Hampshire: abolished state inheritance tax in 2003; abolisherd surcharge on Federal estate tax in 2005.[9] New Zealand abolished estate duty in 1992. Russia abolished inheritance tax in 2006. Singapore: abolished estate tax in 2008, for deaths occurring on or after 15 Feb 2008.[10] [11] Sweden: abolished inheritance tax in 2005.[12] Utah: abolished inheritance tax in 2005.[13]
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Some states of the United States impose inheritance or estate taxes (see Inheritance tax at the state level): Indiana Iowa: Inheritance is exempt if passed to a surviving spouse, parents, or grandparents, or to children, grandchildren,or other "lineal" descendants. Other recipients are subject to inheritance tax, with rates varying depending on the relationship of the recipient to the deceased.[14] Kentucky: The inheritance tax is a tax on a beneficiary's right to receive property from a decedent's estate. It is imposed as a percentage of the amount transferred to the beneficiary. Transfers to "Class A" relatives (spouses, parents, children, grandchildren, and siblings) are exempt. Transfers to "Class B" relatives (nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles, and great-grandchildren) are taxable. Transfers to "Class C" recipients (all other persons) are taxable at a higher rate.[15] Kentucky imposes an estate tax in addition to its inheritance tax.[15] Maryland Nebraska New Jersey Oklahoma Pennsylvania: Inheritance tax is a flat tax on the value of the decedent's taxable estate as of the date of death, less allowable funeral and administrative expenses and debts of the decedent. Pennsylvania does not allow the six month after date of death alternate valuation method that is available at the federal level. Transfers to spouses exempt. Transfers to grandparents, parents, or lineal descendants are taxed at 4.5%. Transfers to siblings are taxed at 12%. Transfers to any other persons are taxed at 15%. Some assets are exempted, including life insurance proceeds. The inheritance tax is imposed on both residents and nonresidents who owned real estate and tangible personal property in Pennsylvania at the time of their death. The Pennsylvania Inheritance Tax Return (Form Rev-1500) must be filed within nine (9) months of the date of death.[16] Tennessee:[17]
Other taxation applied to inheritance

In some jurisdictions, when assets are transferred by inheritance, any unrealized increase in the value of those assets is subject to capital gains tax, payable immediately. This applies in Canada, which has no inheritance tax. (see Taxation in Canada) Where a jurisdiction has both capital gains tax and inheritance tax, it is usual to exempt inheritances from capital gains tax. In some jurisdictions death gives rise to the local equivalent of gift tax (see Austria, for example). This was the model in the United Kingdom during the period before the introduction of Inheritance Tax in 1986, where estates were charged to a form of gift tax called Capital Transfer Tax. Where a jurisdiction has both gift tax and inheritance tax, it is usual to exempt inheritances from gift tax. Also, it is common for inheritance taxes to share some features of gift taxes, by taxing some transfers which happen during the lifetime of the giver rather than on death. The United Kingdom, for example, subjects "lifetime chargeable transfers" (usually gifts to trusts) to inheritance tax.
Inheritance tax
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References
[1] O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.358. ISBN0-13-063085-3. [2] camera.it (http:/ / www. camera. it/ parlam/ leggi/ 01383l. htm) [3] delgiudice.clara.net (http:/ / www. delgiudice. clara. net/ UK/ FIN. 2007. IT. htm) [4] parlamento.it (http:/ / www. parlamento. it/ leggi/ decreti/ 06262d. htm) [5] http:/ / www. taxfoundation. org/ blog/ show/ 1678. html [6] http:/ / vorarlberg. orf. at/ stories/ 176790/ [7] The Estate Duty Act came into effect 15 October 1953. The E.D.(Amendment) Act of 1985 discontinued the estate duty on deaths occurring on or after 16 March 1985. [8] http:/ / rev. louisiana. gov/ sections/ individual/ estate. aspx Inheritance and Estate Transfer Taxes [9] Estate Taxes by State - Does New Hampshire Have an Estate Tax? (http:/ / wills. about. com/ b/ 2009/ 12/ 12/ estate-taxes-by-state-does-new-hampshire-have-an-estate-tax. htm) [10] iras.gov.sg (http:/ / www. iras. gov. sg/ irasHome/ page01. aspx?id=778) [11] singaporebudget.gov.sg (http:/ / www. singaporebudget. gov. sg/ speech_p4/ p4. html#s4. 1) [12] Inheritance tax does not reduce inequality (http:/ / www. guardian. co. uk/ commentisfree/ story/ 0,,1862555,00. html), The Guardian, August 31, 2006 [13] www.tax.utah.gov/miscellaneous [14] "Iowa Department of Revenue: Iowa Taxes" (http:/ / www. iowa. gov/ tax/ educate/ 78517. html). 2010-07-08. . [15] "A Guide to Kentucky Inheritance and Estate Taxes: General Information" (http:/ / revenue. ky. gov/ NR/ rdonlyres/ 6D844DC9-B300-4EE7-963E-DB141FC0AED6/ 0/ guide_2003. pdf). Kentucky Revenue Cabinet. March 2003. . Retrieved 2009-05-29. [16] http:/ / www. state. pa. us/ portal/ server. pt/ community/ inheritance_tax/ 11414 [17] Tenn. Code Ann. 67-8-303
Inheritance Tax (United Kingdom)

In the United Kingdom, Inheritance Tax is a transfer tax. It was introduced with effect from 18 March 1986 replacing Capital Transfer Tax.
History
From 1796, inheritance taxes, then called legacy, succession and estate duties were collected, in England and Wales on estates over a certain value. The value changed over time and the scope of estate duty was extended. By 1857 estates worth over 20 were taxable but duty was rarely collected on estates valued under 1,500. Death duties were introduced in 1894, and for the next century were effective in breaking up large estates. In 2007, 94% of all estates escaped Inheritance Tax, mainly because they fell in the nil rate band.[1] Estate duty was replaced in 1975 by Capital Transfer Tax, which was renamed Inheritance Tax (IHT) in 1986. Partly due to the simple and widely-used methods which are available to avoid it, Inheritance Tax accounts for about 0.8% of government income, raising around 2 billion in 2001[2] and 3.6 billion in 2006. For the 2010/2011 tax year, the IHT rate is 0% on the first 325,000 (the "nil-rate band), and 40% on the rest of the value, at death, of an individual's tax estate. The nil rate band rises annually; tax is only payable on the value of an estate above the nil rate band. In the 2007 budget report the Chancellor of the Exchequer announced that the nil rate band was to rise to 350,000 by 2010. This was said to take into account the sharp rise in house prices in the United Kingdom over the previous few years,[3] although in fact it represents an increase below the rate of house price inflation. This increase was cancelled by the Chancellor in December 2009.
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Tax estate
The tax estate includes: 1. all of the deceased's assets, whether real estate or personal estate, and includes even small-value items such as the contents of his or her home; 2. any gifts made by the deceased in the seven years before death; 3. some assets which were not owned by the deceased but which are affected by the death (the most common example is a life interest in a trust, technically known as an interest-in-possession); 4. gifts with reservation of benefit. These are gifts where the legal ownership passes to the recipient. However, the donor continues to enjoy the benefit of the asset either rent free or at reduced cost. The seven year period outlined above does not begin counting down whilst a gift is considered to be under a reservation of benefit. There is also a charge on "lifetime chargeable transfers" into certain trusts (and a recalculation of those charges if the giver dies within seven years), and trusts themselves have an inheritance tax regime. See Taxation of trusts (United Kingdom).
Deductions
There are deductions for: 1. 2. 3. 4. 5. 6. 7. 8. all assets left to a UK-registered charity. some political donations to major political parties. gifts of up to 3,000 in total in a given year.[4] "small gifts" of up to 250 made to separate individuals. some business assets (under Business Property Relief or "BPR"). some farmland (under Agricultural Property Relief or "APR"). gifts made out of income that do not affect the standard of living of the donor. gifts made in contemplation of a marriage or civil partnership. The allowance ranges from 5,000 to 1,000 according to the closeness of the relationship of the donor to the person marrying or entering into a civil partnership. 5,000 for close family, e.g. wife and children, 2,500 for grand children, 1,000 for anybody else.
Minimising IHT
In order to avoid IHT, many people in the IHT bracket practise some or all of the following avoidance measures: Outright gifts to another individual made during a person's lifetime are known as "potentially exempt transfers" or PETs. They are taxable if the person dies within seven years but have the potential to become exempt from tax once the donor survives seven years. There is no reduction in inheritance tax if the donor dies within three years of the transfer. However, if the donor survives three years, the rate of tax on the PET reduces by one fifth (to 32%) and then by a further fifth on each of the subsequent anniversaries (to 24%, 16% and then 8%) until the PET is fully exempt from inheritance tax after seven years. This is known as inheritance tax taper relief (not to be confused with the better-known capital gains tax taper relief). Giving assets to a trust fund before death. (Some gifts of this kind, however, are disadvantageous as they amount to lifetime chargeable transfers on which half the IHT is due immediately if the cumulative total of chargeable gains gifted exceeds the nil-rate band (325,000 in 2009/10). This applies to many more trusts, including discretionary/flexible trusts, than previously under legislation introduced by the 2006 budget. See Taxation of trusts (United Kingdom).) Certain special types of trust, such as a Discounted Gift Trust, which allow for capital to be given whilst retaining a life long access to an income stream from said capital (and which, where the settlor is in reasonably good health, are one of very few planning arrangements with an immediate reduction in inheritance tax liability), and gift and loan Trusts.
Inheritance Tax (United Kingdom) Inheritance tax solutions based around Business Property Relief qualifying investments, including Enterprise Investment Schemes. Charitable giving, which is IHT exempt. Lifetime gifts within certain limits are completely exempt. These include any number of "small gifts" (up to 250 per recipient per year), an annual amount of 3,000, all regular gifts from surplus income, and some wedding gifts. Upon death, passing non-taxable assets to the next generation (or to a discretionary trust for the benefit of the whole family) and therefore not to the spouse. This may seem counterintuitive because gifts to a spouse are IHT exempt and should therefore be maximised. However, if something is non-taxable on the first death it should not go to the spouse as it will merely increase their tax estate upon their later death. (The nil-band discretionary trust, discussed below, is an example of this principle in action.) Following changes in the 2008 budget (see below), this strategy may no longer be necessary. Selling one's property to a home reversion plan, which is a type of Equity release scheme, and using the resulting income stream to fund a life insurance policy, written in trust for the beneficiaries, so as to replace the lost value of the property.
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Nil-rate band
The Chancellor of the Exchequer's Autumn Statement on 9 October 2007 [5] announced that with immediate effect inheritance tax allowances (often referred to as the nil-rate band) were to be transferrable between married couples and between civil partners. Thus, for the 2007/8 tax year, a married couple will in effect have an allowance of 600,000 against inheritance tax, whilst a single person's allowance remains at 300,000. The mechanism for this enhanced allowance is that on the death of the second spouse to die, the nil rate band for the second spouse is increased by the percentage of the nil-rate band which was not used on the death of the first spouse to die. For example, if in 2007/08 the first married spouse (or civil partner) to die were to leave 120,000 to their children and the rest of their estate to their spouse, there would be no inheritance tax due at that time and 180,000 or 60% of the nil-rate band would be unused. Later, upon the second death the nil-rate band would be 160% of the allowance for a single person, so that if the surviving spouse also died in 2007/08 the first 480,000 (160% of 300,000) of the surviving spouse's estate would be exempt from inheritance tax. If the surviving spouse died in a later year when the nil-rate band had reached 350,000, the first 560,000 (160% of 350,000) of the estate would be tax exempt. This measure was also extended to existing widows, widowers and bereaved civil partners on 9 October 2007. If their late spouse or partner had not used all of their inheritance tax allowance at the time of the spouse's death, then the unused percentage of that allowance can now be added to the single person's allowance when the surviving spouse or partner dies. This applies irrespective of the date on which the first spouse died, but special rules apply if the surviving spouse remarries. In a judgement following an unsuccessful appeal to a 2006 decision by the European Court of Human Rights, it was held that the above does not apply to siblings living together. The crucial factor in such cases was determined to be the existence of a public undertaking, carrying with it a body of rights and obligations of a contractual nature, rather than the length or supportive nature of the relationship.[6] Prior to this legislative change, the most common means of ensuring that both nil-rate bands were used was called a nil band discretionary trust (now more properly known as NRB Relevant Property Trust*). This is an arrangement in both wills which says that whoever is the first to die leaves their nil band to a discretionary trust for the family, and not to the survivor. The survivor can still benefit from those assets if needed, but they are not part of that survivor's estate. Finance Act 2006
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Pre-owned assets
The Finance Act 2004 introduced a retrospective income tax regime known as pre-owned asset tax (POAT) which aims to reduce the use of common methods of IHT avoidance.[7]
References
[1] [2] [3] [4] [5] http:/ / news. bbc. co. uk/ 1/ hi/ uk_politics/ 6949753. stm. accessed 01 October 2007 http:/ / www. unbiased. co. uk/ media/ media-resources/ press-releases/ 7-11-2001%5B60%5D accessed 22 may 2007 http:/ / money. uk. msn. com/ budget/ article. aspx?cp-documentid=4345307 accessed 21 March 2007 HMRC - Annual Exemptions (http:/ / www. hmrc. gov. uk/ cto/ glossary. htm#annualexemption) 2007 Pre-Budget Report and Comprehensive Spending Review: 01 (http:/ / www. hm-treasury. gov. uk/ pbr_csr/ press/ pbr_csr07_press01. cfm) [6] Sisters lose fight for tax rights of wedded couples | Money | guardian.co.uk (http:/ / www. guardian. co. uk/ money/ 2008/ apr/ 29/ inheritancetax. humanrights) [7] REV BN 40: Tax Treatment Of Pre-Owned Assets (http:/ / www. hmrc. gov. uk/ budget2004/ revbn40. htm)
External links
Instantly calculate your inheritance tax liability free with the Which? group (http://www.whichoffshore.com/ content/inheritance-tax-calculator/) Revenue and Customs Inheritance Tax (http://www.hmrc.gov.uk/cto/iht.htm) List of UK Regional Probate Registries - Regional Offices for probate information and to register the location of a Will and/or Executor (http://www.hmcourts-service.gov.uk/HMCSCourtFinder/CourtFinder. do?court_work_type_desc=probate) The National Will Database - a UK register of Wills and Executors, trying to reduce the number of lost Wills in the UK (http://www.tnwdb.com) Top ten inheritance tax questions from Hargreaves Lansdown (http://www.h-l.co.uk/news/Feature-articles/ id/927) Inheritance tax rates and thresholds (http://www.emraccountants.co.uk/inheritance-tax-thresholds)
Optimal tax
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Optimal tax
Optimal tax theory is the study of how best to design a tax to minimize distortion and inefficiency subject to increasing set revenues through distortionary taxation.[1] A neutral tax is a theoretical tax which avoids distortion and inefficiency completely.[2] [3] . Other things being equal, if a tax-payer must choose between two mutually exclusive economic projects (say investments) that have the same pre-tax risk and returns, the one with the lower tax or with a tax exemption would be chosen by a rational actor. Thus economists argue that taxes generally distort behavior. For example, since only economic actors who engage in market activity of "entering the labor market" have an income tax liability on their wages, people who are able to consume leisure or engage in household production outside the market by say providing housewife services in lieu of hiring a maid are taxed more lightly. With the "married filing jointly" tax unit in U.S. income tax law, the second earner's income is added to the first wage earner's taxable income and thus gets the highest marginal rate. This type of tax creates a large distortion disfavoring women from the labor force during years when the couple have great child care needs. The incidence of sales taxes on commodities also results in distortion if say food prepared in restaurants is taxed but supermarket-bought food prepared at home is not taxed at purchase. If a taxpayer needs to buy food at fast food restaurants because he/she is not wealthy enough to purchase extra leisure time (by working less) he/she pays the tax although a more prosperous person who enjoys playing at being a home chef is taxed more lightly. This differential taxation of commodities may cause inefficiency (by discouraging work in the market in favor of work in the household). Ramsey (1927) developed a theory for optimal commodity sales taxes. The intersection on downward sloping demand curve and upward sloping supply curves implies that there is producer surplus and consumer surplus. Any sales tax reduces output and imposes a deadweight loss (DWL). If we assume nonvarying demand and supply elasticities, then a single uniform rate of tax on all commodities would seem to minimize the sum area of all such DWL triangles. Ramsey proposed that we assume suppliers were all perfectly elastic in their responses to price changes from tax and then concluded that taxes on goods with more inelastic consumer demand response would have smaller DWL distortions. Thus, we would tax MILK more than PAPAYA JUICE if consumers were more inelastic in their demand for cows milk. The DWL triangles are now termed Harberger triangles (for Arnold Harberger). Modern theory of optimal taxation can be used to evaluate the efficiency of tax reforms in regard to marginal deadweight losses (Mayshar 1990, Slemrod & Yitzhaki 1996).
References
J. Mayshar (1990), "Measures of Excess Burden," Journal of Public Economics, 43, 263-289. F.P. Ramsey (1927) "A Contribution to the Theory of Taxation," The Economic Journal, 37, no. 145, (March 1927), 47-61. J. Slemrod and S. Yitzhaki (1996) "The costs of taxation and the marginal efficiency cost of funds," International Monetary Fund Staff Papers, March 1996, 43, 1 N.H. Stern (1987). "Optimal taxation," The New Palgrave: A Dictionary of Economics, v. 1, pp. 865-67.
[1] Lars Ljungqvist and Thomas J. Sargent (2000), Recursive Macroeconomic Theory, 2nd ed, MIT Press, ISBN 0-262-19451-1, p.444. [2] Rothbard, Murray. (1970) Power and Market: Government and the Economy, p65 [3] Business Dictionary.com (http:/ / www. businessdictionary. com/ definition/ neutral-tax. html)
Property tax
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Property tax
A property tax (or millage tax) is an ad valorem tax levy on the value of property that the owner of the property is required to pay to a government in which the property is situated. Multiple jurisdictions may tax the same property. There are three species or types of property: land, improvements to land (immovable man-made objects, such as buildings), and personal property (movable man-made objects). Real property (also called real estate or realty) means the combination of land and improvements. Under a property tax system, the state requires and/or performs an appraisal of the monetary value of each property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions. A special assessment tax is sometimes confused with property tax. These are two distinct forms of taxation: one (ad valorem tax) relies upon the fair market value of the property being taxed for justification, and the other (special assessment) relies upon a special enhancement called a "benefit" for its justification. The property tax rate is often given as a percentage. It may also be expressed as a permille (amount of tax per thousand currency units of property value), which is also known as a millage rate or mill levy. (A mill is also one-thousandth of a currency unit.) To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of US $50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of US $1,000 per year.[1] In more familiar terms, dividing the mills by 10 (moving the decimal point to the left by one) yields the percentage rate; for example, 20 mills = 2.0%.
Countries
Australia
Australia has property taxes known as property or land rates. Land rates and frequency of payment are determined by local councils. Each council has land valuers who value the land's worth. The land's worth is the value of the land only; it does not include existing dwellings on the property. The assessed value of the land determines the total charges of rates. Rates can range from $100 per quarter to $1,000 per quarter depending on the location and value of the land. Quarterly payments are common, but frequency varies by locality. Australian property owners also pay water rates. Some councils include this in the total of the rates notice and provide a breakdown of water and land charges. Other councils may charge this separately. Depending on the municipality, water rates can be either a flat fee, user pay or a combination of both. Prospective buyers can get details about land and water rates from the local council before purchase. Australia also has stamp duty, applied at the time a property is sold, by the purchaser to the Office of State Revenue. In addition to stamp duty there is also a Land Transfer Charge under the NSW State Revenue Legislation Amendment Bill 2010 (1 July 2010). The Charge will be levied as an ad valorem tax to be paid by the purchaser, for property above $500,000 in value, and is payable at the time a transfer document is lodged for registration with Land & Property Information (LPI). Stamp duty rates are applied on a sliding scale of 1% to 6.75% based on the value of property and the state of Australia.
Property tax
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Canada
Many provinces in Canada levy property tax on real estate based upon the current use and value of the land. This is the major source of revenue for most municipal governments in Canada. While property tax levels vary among municipalities in a province there is usually common property assessment or valuation criteria laid out in provincial legislation. There is a trend to use a market value standard for valuation purposes in most provinces with varying revaluation cycles. A number of provinces have established an annual reassessment cycle where market activity warrants while others have longer periods between valuation periods. Calculating Individual Property Taxes In Ontario, for most properties (e.g., residential, farms), the property taxes can be calculated by multiplying the phased-in assessment indicated on the Property Assessment Notice by the tax rate. Municipal tax rate x phased-in assessment for the particular taxation year = municipal portion of tax county/regional tax rate x phased-in assessment for the particular taxation year = county/regional portion of tax education tax rate x phased-in assessment for the particular taxation year = education portion of tax municipal portion of tax + county/regional portion of tax + education portion of tax = Total Property Tax In some cases (e.g., commercial, industrial, multi-residential properties), the Province or municipality may implement measures that affect the actual taxes paid on a property.
Chile
Land property taxes, called "territorial tax" or "contributions", are paid annually in four payments during the year. The rate varies between 1 to 2% of the fiscal value, depending on the use of the property (agricultural, habitation, commercial). The fiscal value is determined for each property by the Internal Tax Service, based on the land area and built area, the value of the construction materials, age, use and distance to commercial areas. The fiscal value is usually much lower than the market value. Non-business properties valued below a certain fiscal value are exempt (currently about USD$33K). Properties used for business face no exemption.[2] The collected taxes go to the municipality where the property is located.[3] All municipalities contribute a share of the received income to a "common municipal fund", which is then redistributed back to all municipalities according to its needs (poverty rate, etc.).[4] [5]
Greece
The Greek property tax of 2011 is based upon floor-area and is to be collected with electricity bills.[6]
Hong Kong
In Hong Kong , there is a kind of tax named a property tax, but it is not an ad valorem tax; it is actually classified as an income tax. According to HK Inland Revenue Ordinance IRO s5B, all property owners shall not be subject to this tax; unless the HK property owner has received a consideration, the example is rental income for the year of assessment. The property tax shall be computed on the net assessable value at the standard rate.
Property tax Year of Assessment The period of assessment is from April 1 to March 31 of the following year. Net assessable value The formula is: Net assessable value = 80% of Assessable value. HK property tax payable = Net assessment value X Property tax standard rate Assessable value = Rental income + Premium + (Rental bad debt recovered Irrecoverable rent) - Rates paid by owner.
901
Jamaica
This tax is paid in the same way as a mortgage, an annual payment depending on the value of one's assets, such as property.
India
Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed on owners. It resembles the US-type wealth tax and differs from the excise-type UK rate. The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or area-based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempt. Central government properties are exempt. Instead a 'service charge' is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity. The tax is usually accompanied by a number of service taxes, e.g., water tax, drainage tax, conservancy (sanitation) tax, lighting tax, all using the same tax base. The rate structure is flat on rural (panchayat) properties, but in the urban (municipal) areas it is mildly progressive with about 80% of assessments falling in the first two slabs. By all accounts, the property tax is under-utilised in the municipalities and not effectively used in the panchayats, mainly due to tax payer resistance.[7]
Netherlands
Property tax (Dutch: Onroerendezaakbelasting (OZB)) is levied on homes on a municipal basis in two parts: for the one who lives in the house, and for the owner of the house. When one has a rental home, they are only liable for the living part of the tax.
United Kingdom
There is currently no ad valorem tax on residential property. Two former systems were dropped because of their extreme unpopularity. They were Schedule A income tax, a central government tax that was levied on the imputed rent, that is the rent that owner-occupiers of land would have been receiving from a tenant had they not been living in the houses they owned. However, actual (as opposed to imputed) rent is still subject to income tax under Schedule A. Rates, a local government tax that was levied in proportion to the assessed value of property; this proportion was not fixed or set by a schedule or formula, but rather floated according to the budget decided on by councillors (originally only elected by ratepayers), giving rise to a charge distributed proportionally over all the relevant properties. This was replaced under the Thatcher government by the Community Charge (popularly known as "poll tax"), which proved even more unpopular than the rates, and was replaced by a mixed Council Tax which combines elements of property tax and a poll tax. Rates are still (2010) levied on business property, though some
Property tax classes of business are exempt.
902
United States
In the United States, property tax on real estate is usually levied by local government, at the municipal or county level. Rates vary across the states, between about 0.2% and 4% of the home value.[8] The assessment is made up of two componentsthe improvement or building value, and the land or site value. In some states, personal property is also taxed. The property tax is the main tax supporting local education, police/fire protection, local governments, some free medical services, and most of other local infrastructure. Also, many U.S. state and local jurisdictions impose personal property taxes.
References
[1] "Connecticut Office of Policy Management: Mill Rates" (http:/ / www. ct. gov/ opm/ cwp/ view. asp?A=2987& Q=385976). . Retrieved 2010-10-04. [2] Fija texto refundido, coordinado, sistematizado y actualizado de la ley numero 17.235 sobre impuesto territorial (http:/ / www. leychile. cl/ Navegar?idNorma=128563) [3] Preguntas frecuentes de bienes raices (http:/ / www. sii. cl/ preguntas_frecuentes/ bienes_raices/ preg_contribuciones. htm) [4] http:/ / www. subdere. cl/ 1510/ articles-77206_recurso_1. pdf [5] (http:/ / www. sinim. gov. cl/ download/ diarioficial20090102. pdf?netui_treeselected=0. 2) [6] http:/ / www. progress. org/ 2011/ fold735. htm [7] Datta, Abhijit. Local Government Finances: Trends, Issues and Reforms, in Bagchi, Amaresh. et al. (Eds.), State Finances in India, New Delhi: Vikas Publishing House for the NIPFP, 1992) [8] "The Tax Foundation Property Taxes on Owner-Occupied Housing by State, 2004 - 2009" (http:/ / www. taxfoundation. org/ publications/ show/ 1913. html). 2009. . Retrieved 2010-10-04.
Special assessment tax

Special assessment is the term used in the United States to designate a unique charge that government units can assess against real estate parcels for certain public projects. This charge is levied in a specific geographic area known as a Special Assessment District (S.A.D.). A special assessment may only be levied against parcels of real estate which have been identified as having received a direct and unique "benefit" from the public project.[1]
Examples
The most universally known special assessments, are charges levied against lands when drinking water lines are installed; when sewer lines are installed; or when streets are paved with concrete or some other impervious surface. However, special assessment tax levies can be made for other purposes including police or fire protection, parking structures, street lighting and many of the other purposes permitted by state and local government statutes. While variations of the concept of special assessments may exist in a number of the worlds nations, in the United States of America, a special assessment is more formally defined through court action as remuneration that a governmental unit may demand from property owners to fund a public project which creates a "benefit" in properties lying within a special geographic area known as a special assessment district.[2]
903
Special assessment district

A Special Assessment District (S.A.D.) is a geographic area in which the market value of real estate is enhanced due to the influence of a public improvement and in which a tax is apportioned to recover the costs of the public improvement.[3] Individual special assessment levies may be made only in a Special Assessment District (S.A.D.), which is one of two kinds of geographic areas commonly associated with a special assessment levy. The other kind of geographic area is the "service district". Circumstances vary according to laws of various states, but the essential distinguishing feature between these two types of districts is this: a service district is composed of all individual parcels of land that are somehow connected to the public improvement for which the special assessment is to be levied. The special assessment district consists of only those properties which are designated by the applicable law as having received a specific and unique "benefit" from the public improvement. Examples of properties which may be connected in some way to a public improvement and are therefore included within a service district, but may be excluded from the special assessment district are properties associated with a dam and properties associated with a business parking structure. In the case of a dam ... all properties located within a scientifically defined "watershed" and all properties lying within the floodplain of the dam are connected by how water drains from an entire watershed into a lake and how water within the lake may flood specific areas downstream. Since the area of a watershed and the area of a floodplain are often very, very large when compared to the area of a lake, it is possible for some portions of the watershed and floodplain to be physically located in some government unit other than the lake. It is also possible that the government unit authorizing a special assessment levy does not have jurisdiction to include all land within the watershed and floodplain. In this example, the service district would be large enough to include all properties connected to the lake by how water flows. The Special Assessment District would be a smaller area within which the government unit proposing the special assessment has the power to levy a special assessment tax. In the case of an economic development project (e.g. a parking structure for a business district) circumstances which would cause the service district and Special Assessment District to have differing geographic boundaries relates to the existing and permitted use of property rather than political subdivisions. That is, economic forces within the market would be the key to including or excluding a specific property. The service district for a parking facility is generally limited to the geographic area from which pedestrians would walk between businesses and the parking structure. An example might be that users of a parking structure will traverse an area defined as being within six blocks or less of a parking structure. In this example, the service district would consist of all properties lying within six blocks of the parking structure. However, there may be more than just retail business structures within the six block area. All classes of properties lying within the distance shoppers can reasonably be expected to walk to and from retail outlets could include a block of homes or an industrial facility. The commercial properties would be assessed because surveys would illustrate that retail sales depend upon adequate parking for customers. It could also be demonstrated that residential properties (homes), would be excluded because users of those properties might not reasonably be expected to "benefit" from the parking structure. Depending upon various scenarios, industrial properties might similarly, not "benefit", from a parking structure.
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Benefit
There are variations between state governments as to what constitutes a benefit under special assessment laws. In general, the "benefit" must result directly, uniquely and specifically from the public project. For example, when water and sewer lines are installed by government units, nearby land often increases in value. Both the presence of safe drinking water and of sewer lines means that expensive wells and septic systems do not have to be installed by affected property owners. It also means the potential for contamination of ground water and surface areas from improperly treated sewage will be eliminated. Land that might have been unbuildable before may become "buildable" once government provided water and sewer services become available. Providing water and sewer service are situations which may adapt formerly unusable land for residential or commercial use. A storm sewer or a dam or dike may mitigate flooding and therefore the sewer, dike or dam relieves a burden, flooding.[4] The term benefit most frequently means an increase in the market value of the benefited property. However, some states historically have defined the term benefit to mean more than an increase in market value. For example, benefit may mean a special adaptability of the land or a relief from some burden.[5]
Tax limited to real property

Only certain property can be specially assessed. The "property" to be assessed must be real estate as opposed to "personalty". Personalty is a taxation term which means personal property.
Summary of special assessment components

In summary, when a government unit funds a public project that directly, uniquely and specifically "benefits" (increases) the value of certain parcels of real estate it may levy a charge against each specifically benefitted property as compensation for the benefit. Properties designated to be specially assessed are assembled into a geographic area with clearly defined boundaries. This geographic area is termed a Special Assessment District.
Unique Aspect
In some states, sometimes one government unit can levy a special assessment against another. This is true in cases where the public's health, safety and welfare are being promoted by the project (e.g. repairs to a dam). Refer to specific state statutes for details.[6]
A special assessment is not an ad valorem property tax

The property tax most citizens are aware of is known as an ad valorem tax. This tax is used to fund general or day-to-day government operations. An ad valorem tax is commonly levied on both real and personal property. A property tax is based upon a property's market value. The ad valorem tax levy is based upon a "millage rate" which never varies from parcel to parcel. The foundation principles for ad valorem taxes are that each property is valued according to its market value (equity) and that each property is taxed based upon a single millage rate that applies to everyone (uniformity). Special assessment levies are not ad valorem property taxes even though they may be collected on a property tax bill. A special assessment is based strictly upon the concepts of "need" and "benefit." Special assessments require a finding that the public improvement is "needed" for a reason consistent with the law which permits the special assessment and that each property specially assessed receives a unique, measurable and direct benefit from the public improvement that was needed. The basic idea is, if government funds make a property more valuable, the government has the right to get money back from a property owner. This contrasts significantly with the ad valorem tax which is extracted to fund government operations that are designed to benefit all citizens.
Special assessment tax An ad valorem tax is based upon the legal principles of equity and uniformity. That is, everyone must be treated fairly and equally. In special assessments, proportionality is a key element. A special assessment is premised upon the necessity for the public improvement and the fiscal burden imposed must be reasonably proportional to the benefit created. Unlike ad valorem taxes,special assessments are not expected to be uniformly levied (the same millage rate for each parcel). The fiscal burden is spread among only those properties within the special assessment district and it is apportioned to each property based upon the unique, specific and direct benefit the property received from the public improvement. Thus, a vacant lot might be assessed the same fee as an adjacent lot which has a million dollar home on it.
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Difficulty
Among the unique characteristics of the special assessment is one that makes a special assessment particularly onerous for ordinary citizens. A special assessment levy enjoys a legal benefit known as a "presumption of validity." This means that it is much harder and usually, much more difficult to appeal than the ad valorem property tax most citizens are familiar with. This happens because it is difficult for the ordinary citizen to recognize that an error in the special assessment procedure or methodology has occurred and the resources a taxpayer must use to fight a special assessment levy are more expansive and costly than resources to fight an improper ad valorem tax on their real estate. For example, most property taxpayers intuitively understand market forces associated with the value of their homes or other property. Consequently, if the tax assessment seems out of line, they usually can recognize it quickly. In the case of special assessments, it is difficult for even professionals to grasp the complex nuances associated with the concepts of necessity and benefit which are the foundations of a special assessment levy. Once a taxpayer has recognized a problem exists, the difference in procedures to appeal a property tax and a special assessment levy makes a special assessment appeal much more difficult. Whereas, ad valorem tax appeals can often be made at a local level without any professional help, special assessment appeals often require the assistance of attorneys, engineers and other consultants. Furthermore, a taxpayer often has the opportunity to protest a property tax assessment annually. In the case of most special assessments, there is usually a very short window of opportunity to appeal and if the window is missed, there can be little recourse available. Of most importance to any property owner who feels aggrieved by a special assessment levy is a legal concept known as a "presumption of validity". This means courts regard the actions of local government units with deference and the courts presume the government unit did everything correctly. At a minimum, any challenge to the special assessment must show the government did not act lawfully. That challenge is significant. For all these reasons, it is critical for any person facing a special assessment levy to participate in public hearings and monitor the special assessment process from its earliest stages.
References
[1] Kadzban v City of Grandville, 502 N.W.2d 299, 501; Davies v City of Lawrence, 218 Kan. 551, 545 P 2d 1115, 1120; State v City of Newark, 27 N.J. Law, 190. [2] Dosedel v City of Ham Lake, Minn.App., 44 N.W.2d 751, 755 [3] Blacks Law Dictionary, Sixth Edition, page 117, (1990) [4] 2 Cooley, Taxation (3rd Edition), ch xx, p 1254, Kadzban v City of Grandville, 502 N.W.2d 299, 503 [5] Dixon Road Group v City of Novi, 395 N.W. 2d 211, 401 [6] Michigan Compiled Laws, Section 324.30701 et seq.
Stamp duty
906
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp (a revenue stamp) had to be attached to or impressed upon the document to denote that stamp duty had been paid before the document was legally effective. More modern versions of the tax no longer require an actual stamp.
Australia
The federal government of Australia does not levy stamp duty. However, stamp duties are levied by the Australian states on various instruments (written documents) and transactions. The rates of stamp duty vary from state to state, as do the nature of the instruments or transactions subject to duty. Some jurisdictions no longer require a physical document to attract what is now often referred to as "transaction duty". Major forms of duty include the transfer duty on the sale of land, businesses, shares and other forms of dutiable property; mortgage duty; lease duty and duty on the hire of goods. Rebates or exemptions are available from transfer duty and mortgage duty for those purchasing their first home. On 20 April 2005, the treasurers of various states and territories announced that they would phase out a number of duties over the following five years. However, duty on land ownership transfers would remain.
Hong Kong
According to Schedule 1 of Hong Kong Stamp Duty Ordinance Cap.117 (SDO), Stamp duty applies to some legal binding documents as classified into 4 heads: Head 1: All sale or lease transactions in Hong Kong immovable property. Head 2: The transfer of Hong Kong Stock. Head 3: All Hong Kong bearer instruments. Head 4: Any duplicates and counterparts of the above documents.
An impressed duty stamp of Western Australia for eleven shillings and three pence, circa 1907. Such stamps are not commonly used to pay stamp duty today.
One of examples is shares of companies which are either incorporated in Hong Kong or listed on the Hong Kong Stock Exchange. Other than the said shares, HK Stock is defined as shares and marketable securities, units in unit trusts, and rights to subscribe for or to be allotted stock. Stamp duty on a conveyance on sale of land is charged at progressive rates ranging from 0.75% to 3.75% of the amount of consideration. The maximum rate of 3.75% applies where the consideration exceeds HK$6 million. References Hong Kong Stamp Duty Ordinance Cap.117, Schedule 1 Heading [1]
Stamp duty
907
Singapore
From 1998, stamp duty in Singapore only applies to documents relating to immovable property, stocks and shares. Purchases of Singapore property or shares traded on the Singapore Exchange, are subject to stamp duty. Applicable rates and more information can be obtained from Inland Revenue Authority of Singapore. Legislation covering Singapore Stamp Duties are found in the Stamp Duties Act.[2]
Republic of Ireland
In the Republic of Ireland stamp duties are levied on various items including (but not limited to) credit cards, debit cards, ATM cards, cheques, property transfers, and certain court documents.
United Kingdom
"Stamp Duty Reserve Tax" (SDRT) was introduced on agreements to transfer certain shares and other securities in 1986, albeit with a relief for intermediaries (such as market makers and large banks that are members of a qualifying exchange).[3] "Stamp Duty Land Tax" (SDLT), a new transfer tax derived from stamp duty, was introduced for land and property transactions from 1 December 2003. SDLT is not a stamp duty, but a form of self-assessed transfer tax charged on "land transactions". On March 24, 2010, Chancellor Alistair Darling introduced two significant changes to UK stamp duty. For first-time buyers purchasing a property under 250,000, stamp duty was abolished for the next two years. This measure was offset by a rise from 4% to 5% in stamp duty on properties costing more than 1 million.[4]
United States
Although the federal government formerly imposed various documentary stamp taxes on deeds, notes and other transactional documents, in modern times such taxes are only imposed by states. Typically when real estate is transferred or sold, a real estate transfer tax will be collected at the time of registration of the deed in the public records. In addition, many states impose a tax on mortgages or other instruments securing loans against real property. This tax, known variously as a mortgage tax, intangibles tax, or documentary stamp tax, is also usually collected at the time of registration of the mortgage or deed of trust with the recording authority.
Sweden
Swedish law applies a stamp duty on property deeds, at 1.5% of the purchase value. In addition, a stamp duty of 2.0% is levied on new mortgage securities ("pantbrev") for properties.
References
[1] [2] [3] [4] http:/ / www. legislation. gov. hk/ blis_export. nsf/ CurAllEngDocAgent?OpenAgent& Chapter=117 Stamp Duties Act ( Cap.312 (http:/ / statutes. agc. gov. sg/ non_version/ cgi-bin/ cgi_retrieve. pl?actno=REVED-312)) "HMRC Stamp Taxes Manual" (http:/ / www. hmrc. gov. uk/ so/ manual. pdf). p. 8,11. . Jones, Rupert (24 March 2010). "Budget 2010: stamp duty boost for first-time buyers" (http:/ / www. guardian. co. uk/ money/ 2010/ mar/ 24/ stampduty-firsttimebuyers). The Guardian. . Retrieved 25 August 2011.
Tax advantage
908
Tax advantage
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Governments establish the tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest. An example is retirement plans, which often offer tax advantages to incentivize savings for retirement. In the United States, many government bonds (such as state bonds or municipal bonds) may also be exempt from certain taxes. In countries in which average age of the population is increasing, tax advantages may put pressure on pension schemes. For example, where benefits are funded on a pay-as-you-go basis, the benefits paid to those receiving a pension come directly from the contributions of those of working age. If the proportion of pensioners to working-age people rises, the contributions needed from working people will also rise proportionately. In the United States, the rapid onset of Baby Boomer retirement is currently causing such a problem. In order to reduce the burden on such schemes, many governments give privately funded retirement plans a tax advantaged status in order to encourage more people to contribute to such arrangements. Governments often exclude such contributions from an employee's taxable income, while allowing employers to receive tax deductions for contributions to plan funds. Investment earnings in pension funds are almost universally excluded from income tax while accumulating, prior to payment. Payments to retirees and their beneficiaries also sometimes receive favorable tax treatment. In return for a pension scheme's tax advantaged status, governments typically enact restrictions to discourage access to a pension fund's assets before retirement.
Tax assessment
An assessor is a specialist who calculates the value of property. The value calculated by the assessor is then used as the basis for determining the amounts to be paid or assessed for tax or insurance purposes. In Local government in the United States, an assessor is an appointed or elected official charged with determining the value of each taxable property in a county, municipality, or township; this information is then used by the locality to determine the necessary rate of taxation to support the community's annual budget. In Vermont, this office is known as a "Lister". (This is a specialization of the previous sense; a person who performs similar work for a private employer is more often called an appraiser or, specifically in the insurance industry, an adjuster.) A professional organization for assessors and source for innovation, education, and research in property appraisal, assessment administration, and property tax policy is the International Association of Assessing Officers.
External links
IAAO [1], International Association of Assessing Officers
References
[1] http:/ / www. iaao. org
Tax avoidance and tax evasion
909

Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. By contrast, tax evasion is the general term for efforts not to pay taxes by illegal means. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax avoidance. The term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law. Some of those attempting not to pay tax believe that they have discovered interpretations of the law that show that they are not subject to being taxed: these individuals and groups are sometimes called tax protesters. An unsuccessful tax protestor has been attempting openly to evade tax, while a successful one avoids tax. Tax resistance is the declared refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). Tax resisters typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are more concerned with not paying for particular government policies that they oppose.
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The United States Supreme Court has stated that "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." See Gregory v. Helvering. Examples of tax avoidance include:
Examples of Tax Avoidance in the US

An IRS report[1] indicates that, in 2009, 1,470 individuals earning more than $1,000,000 annually faced a net tax liability of zero or less. Also, in 1998 alone, a total of 94 corporations faced a net liability of less than half the full 35% corporate tax rate and the corporations Lyondell Chemical, Texaco, Chevron, CSX, Tosco, PepsiCo, Owens & Minor, Pfizer, JP Morgan, Saks, Goodyear, Ryder, Enron, Colgate-Palmolive, Worldcom, Eaton, Weyerhaeuser, General Motors, El Paso Energy, Westpoint Stevens, MedPartners, Phillips Petroleum, McKesson and Northrup Grumman all had net negative tax liabilities.[2] Additionally, this phenomenon was widely documented regarding General Electric in early 2011.[3] Furthermore, a Government Accountability Office study found that, from 1998 to 2005, 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.[4] [5]
Country of residence
One way a person or company may lower taxes is by changing one's tax residence to a tax haven, such as Monaco, or by becoming a perpetual traveler. Some countries, such as the U.S., tax their citizens, permanent residents, and companies on all their worldwide income. In these cases, taxation cannot be avoided by simply transferring assets or moving abroad. The United States is unlike many other countries in that its citizens and permanent residents are subject to U.S. federal income tax on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating from the U.S. According to Forbes magazine some nationals choose to give up their United States citizenship rather than be subject to the U.S. tax system;[6] however, U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from income in computing the U.S. federal income tax. The 2010 limit on the amount that can be excluded was
Tax avoidance and tax evasion US$91,500. [7]
910
Double taxation
Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation treaties with many other countries to avoid taxing nonresidents twiceonce where the income is earned and again in the country of residence (and perhaps, for US citizens, taxed yet again in the country of citizenship)however, there are relatively few double-taxation treaties with countries regarded as tax havens.[8] To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. nationals, renounce one's citizenship) to avoid tax.
Legal entities
Without changing country of residence (or, if a U.S. citizen, giving up one's citizenship), personal taxation may be legally avoided by creation of a separate legal entity to which one's property is donated. The separate legal entity is often a company, trust, or foundation. Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner. If assets are later transferred back to an individual, then capital gains taxes would apply on all profits. The company/trust/foundation may also be able to avoid corporate taxation if incorporated in an offshore jurisdiction (see offshore company, offshore trust or private foundation). Although income tax would still be due on any salary or dividend drawn from the legal entity. For a settlor (creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be a trustee or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them.
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Legal vagueness
Tax results depend on definitions of legal terms which are usually vague. For example, vagueness of the distinction between "business expenses" and "personal expenses" is of much concern for taxpayers and tax authorities. More generally, any term of tax law, has a vague penumbra, and is a potential source of tax avoidance.[9]
Tax evasion
By contrast, tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions). Tax evasion is an activity commonly associated with the underground economy and one measure of the extent of tax evasion the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported. In the 1970's and 80's, The IRS undertook the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the tax gap. The tax gap is the difference between the A "Lion's Mouth" postbox for anonymous denunciations at the Doge's Palace in Venice, amount of tax legally owed and the amount actually collected by the Italy. Text translation: "Secret denunciations government. The TCMP program was believed to produce the most against anyone who will conceal favors and [10] reliable information about noncompliance, but these "audits from services or will collude to hide the true revenue hell" were deemed to be overly intrusive and were discontinued in from them." 1988. The National Research Program was undertaken in the 1990's as a less intrusive means of measuring noncompliance and was described as "the most careful and comprehensive estimates of the extent and nature of tax noncompliance anywhere in the world"[11] However, critics [12] point out numerous problems with the tax gap measure. The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models[13]
US Statistics
In the United States, the most recent IRS estimate of the tax gap was for 2001 at which time, the tax gap amounted to $345 billion. [14] A more recent study [15] estimates the 2008 tax gap in the range of $450-$500 billion, and unreported income to be approximately $2 trillion. Thus, 18-19 percent of total reportable income is not properly reported to the IRS. The typical tax evader in the United States is a male under the age of 50 in the highest tax bracket and with a complicated return, and the most common means of tax evasion is overstatement of charitable contributions, particularly church donations. [16]
Illegal income and tax evasion

In the United States, persons subject to the Internal Revenue Code who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States[17] ), but they often do not do so. Suspected lawbreakers, most famously Al Capone, have therefore been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax related crimes. The United States Supreme Court has ruled that a simple declaration of income does not violate an individual's right to remain silent,[18] although the privilege may apply to the source of the income if
Tax avoidance and tax evasion claimed.[19] Those who attempt to report illegal income as coming from a legitimate source could be charged with money laundering. By contrast, in the UK law enforcement agencies do not generally have access to tax returns and so illegal earnings can supposedly be safely declared but in practice those carrying on criminal activities generally prefer not to do so, and so can sometimes be prosecuted for tax evasion rather than for other crimes. Soviet spy Aldrich Ames, who had earned more than $2 million cash for his espionage, was also charged with tax evasion as none of the Soviet money was reported on his tax returns. Ames attempted to have the tax evasion charge dismissed on the grounds his espionage profits were illegal, but the charges stood.
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Economics of tax evasion

In 1968, Nobel laureate economist Gary Becker first theorized the economics of crime,[20] on the basis of which Allingham and Sandmo produced in 1972 an economic model of tax evasion. It deals with the evasion of income tax, the main source of tax revenue in the developed countries. According to them, the level of evasion of income tax depends on the level of punishment provided by law.[21] The literature's theoretical models are elegant in their effort to identify the variables likely to affect non-compliant behaviors, however, alternative specifications yield conflicting results concerning both the signs and magnitudes of variables believed to affect tax evasion. As such, empirical work is required to resolve the theoretical ambiguities. Income tax evasion appears to be positively influenced by the tax rate, the unemployment rate, the level of income and dissatisfaction with government. [22] The U.S. Tax Reform Act of 1986 appears to have reduced tax evasion in the U.S.
Evasion of customs duty

Customs duties are an important source of revenue in the developing countries. The importers purport to evade customs duty by (a) under-invoicing and (b) misdeclaration of quantity and product-description. When there is ad valorem import duty, the tax base is reduced through underinvoicing. Misdeclaration of quantity is more relevant for products with specific duty. Production description is changed match an H. S. Code commensurate with a lower rate of duty.[23] Smuggling Smuggling is importation or exportation of foreign products through unauthorized route. Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of contraband items. A smuggler does not have to pay any customs duty since the products are not routed through an authorized or notified Customs port and therefore, not subjected to declaration and payment of duties and taxes.[23]
Evasion of value added tax (VAT) and sales taxes

During the later half of the twentieth century, value added tax (VAT) has emerged as a modern form of consumption tax through the world, with the notable exception of the United States. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales.[24] The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states instead collect sales taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms. In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that those consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are in fact breaking the law in most cases. Such evasion is, especially, prevalent in federal states like the Nigeria, US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. In Nigeria for example, some local states enforce VAT on each goods sold by trader. The price must be clearly stated and the VAT distinct from the price of the good purchased. Any act by the trader contrary to this (like including
Tax avoidance and tax evasion VAT in the price of the goods) is punishable as attempting to syphoning the VAT. Borders between tax districts in the same nation usually lack the resources to enforce tax collection on goods carried in private vehicles from one district to another, so states only pursue sales and use tax collection on high-value items such as cars.[25]
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Control of evasion
Level of evasion depends on a number of factors one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the tax officials often render control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include, among others, privatization of tax enforcement,[26] tax farming,[27] and institution of Pre-Shipment Inspection (PSI) agencies.[28]
Corruption by tax officials

Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe. Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped and southern European countries.
Level of evasion and punishment

Tax evasion is a crime in almost all developed countries and subjects the guilty party to fines and/or imprisonment. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment.
Privatization of tax enforcement

Professor Christopher Hood first suggested privatization of tax enforcement for overcoming limitations of government tax administration in controlling tax evasion.[29] Some governments have resorted to privatization of tax enforcement to enhance efficiency of the tax system. The assumption is that leakage of revenue will lower under a privatized regime. In Bangladesh, part of customs administration was privatized in as early as 1991.[30] Abuse by private tax collectors (see tax farming below) has led to revolutionary overthrow of governments which have outsourced tax administration.
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Tax farming
Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Governments lease out the collection system to a private entity for a fixed amount who then collects the revenue and shoulders the risk of attempts at evasion by the taxpayers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries.[31] Governments have historically turned to tax farming for quick cash. A "tax farmer" buys a "franchise" by making pre-payment to the government. The "tax-farmer," then invested with the authority of the government, goes into the "farm" and begins extracting "taxes" from citizens. This is a system destined to be abusive as the "tax-farmers" seek back their investment, plus profit, and are themselves unrestrained by "politics." Abuses by "tax farmers" (together with a tax system that exempted the aristocracy) were a primary reason for the French Revolution that toppled Louis XVI.
PSI Agencies
Pre-shipment Agencies like SGS, Cotecna etc. are employed to prevent evasion of customs duty through under-invoicing and misdeclaration. However, in the recent times, allegations have been lodged that PSI agencies have actively cooperated with the importers in evading customs duties. Authority in Bangladesh has found Cotecna, a PSI agency of Swiss origin, guilty of complicity with the importers for evasion of customs duties on a huge scale.[32] The same company Cotecna was implicated for bribing Pakistan's prime minister Benazir Bhutto for securing contract for importation by Pakistani importers. She and her husband were sentenced both in Pakistan and Switzerland.[33]
The distinction in various jurisdictions

The use of the terms tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose.
The distinction in the United States

In the United States "tax evasion" is evading the assessment or payment of a tax that is already legally owed at the time of the criminal conduct.[34] Tax evasion is criminal, and has no effect on the amount of tax actually owed, although it may give rise to substantial monetary penalties. By contrast, the term "tax avoidance" describes lawful conduct, the purpose of which is to avoid the creation of a tax liability in the first place. Whereas an evaded tax remains a tax legally owed, an avoided tax is a tax liability that has never existed. For example, consider two businesses, each of which have a particular asset (in this case, a piece of real estate) that is worth far more than its purchase price. Business One sells the property and underreports its gain. In this instance, tax is legally due. Business One has engaged in tax evasion, which is criminal. Business Two consults with a tax advisor and discovers that it can structure the sale as a "like kind exchange" (formally known as a 1031 exchange, named after the Code section) for other real estate that it can use. In this instance, no tax is due because (legally, under Section 1031) no sale took place. Business Two has engaged in tax avoidance (or tax mitigation), which is completely within the law. In the above example, tax may eventually be due when the second property is sold. Whether and how much tax will be due will depend on circumstances and the state of the law at the time. This is true of many tax avoidance strategies.
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The distinction in the United Kingdom

The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed. There is, however, a further distinction drawn between tax avoidance and tax mitigation. Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament: IRC v Willoughby.[35] Tax mitigation is conduct which reduces tax liabilities without tax avoidance (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of avoidance: they are held not to apply in cases of mitigation. The clear articulation of the concept of an avoidance/mitigation distinction goes back only to the 1970s. The concept originated from economists, not lawyers.[36] The use of the terminology avoidance/mitigation to express this distinction was an innovation in 1986: IRC v Challenge.[37] In practice the distinction is sometimes clear, but often difficult to draw. Relevant factors to decide whether conduct is avoidance or mitigation include: whether there is a specific tax regime applicable; whether transactions have economic consequences; confidentiality; tax linked fees. Important indicia are familiarity and use. Once a tax avoidance arrangement becomes common, it is almost always stopped by legislation within a few years. If something commonly done is contrary to the intention of Parliament, it is only to be expected that Parliament will stop it. So that which is commonly done and not stopped is not likely to be contrary to the intention of Parliament. It follows that tax reduction arrangements which have been carried on for a long time are unlikely to constitute tax avoidance. Judges have a strong intuitive sense that that which everyone does, and has long done, should not be stigmatised with the pejorative term of avoidance. Thus UK courts refused to regard sales and repurchases (known as bed-and-breakfast transactions) or back-to-back loans as tax avoidance. Other approaches in distinguishing tax avoidance and tax mitigation are to seek to identify the spirit of the statute or misusing a provision. But this is the same as the evident intention of Parliament properly understood. Another approach is to seek to identify artificial transactions. However, a transaction is not well described as artificial if it has valid legal consequences, unless some standard can be set up to establish what is natural for the same purpose. Such standards are not readily discernible. The same objection applies to the term device. It may be that a concept of tax avoidance based on what is contrary to the intention of Parliament is not coherent. The object of construction of any statute is expressed as finding the intention of Parliament. In any successful tax avoidance scheme a Court must have concluded that the intention of Parliament was not to impose a tax charge in the circumstances which the tax avoiders had placed themselves. The answer is that the expression intention of Parliament is being used in two senses. It is perfectly consistent to say that a tax avoidance scheme escapes tax (there being no provision to impose a tax charge) and yet constitutes the avoidance of tax. One is seeking the intention of Parliament at a higher, more generalised level. A statute may fail to impose a tax charge, leaving a gap that a court cannot fill even by purposive construction, but nevertheless one can conclude that there would have been a tax charge had the point been considered. An example is the notorious UK case Ayrshire Employers Mutual Insurance Association v IRC,[38] where the House of Lords held that Parliament had missed fire. History of the distinction An avoidance/evasion distinction along the lines of the present distinction has long been recognised but at first there was no terminology to express it. In 1860 Turner LJ suggested evasion/contravention (where evasion stood for the lawful side of the divide): Fisher v Brierly.[39] In 1900 the distinction was noted as two meanings of the word evade: Bullivant v AG.[40] The technical use of the words avoidance/evasion in the modern sense originated in the USA where it was well established by the 1920s.[41] It can be traced to Oliver Wendell Holmes in Bullen v Wisconsin.[42] It was slow to be accepted in the United Kingdom. By the 1950s, knowledgeable and careful writers in the UK had come to distinguish the term tax evasion from avoidance. However in the UK at least, evasion
Tax avoidance and tax evasion was regularly used (by modern standards, misused) in the sense of avoidance, in law reports and elsewhere, at least up to the 1970s. Now that the terminology has received official approval in the UK (Craven v White[43] ) this usage should be regarded as erroneous. But even now it is often helpful to use the expressions legal avoidance and illegal evasion, to make the meaning clearer.
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Public opinion on tax avoidance

Tax avoidance may be considered to be the dodging of one's duties to society, or alternatively the right of every citizen to structure one's affairs in a manner allowed by law, to pay no more tax than what is required. Attitudes vary from approval through neutrality to outright hostility. Attitudes may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the tax being avoided. In the judiciary, different judges have taken different attitudes. As a generalisation, for example, judges in the United Kingdom before the 1970s regarded tax avoidance with neutrality; but nowadays they may regard aggressive tax avoidance with increasing hostility. See the quotes below for examples.
Responses to tax avoidance

Avoidance also reduces government revenue and brings the tax system into disrepute, so governments need to prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is no scope for avoidance. In practice this has not proved achievable and has led to an ongoing battle between governments amending legislation and tax advisors' finding new scope for tax avoidance in the amended rules. To allow prompter response to tax avoidance schemes, the US Tax Disclosure Regulations (2003) require prompter and fuller disclosure than previously required, a tactic which was applied in the UK in 2004. Some countries such as Canada, Australia and New Zealand have introduced a statutory General Anti-Avoidance Rule (GAAR). Canada also uses Foreign Accrual Property Income rules to obviate certain types of tax avoidance. In the United Kingdom, there is no GAAR, but many provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance where the main object (or purpose), or one of the main objects (or purposes), of a transaction is to enable tax advantages to be obtained. In the United States, the Internal Revenue Service distinguishes some schemes as "abusive" and therefore illegal. In the UK, judicial doctrines to prevent tax avoidance began in IRC v Ramsay (1981) followed by Furniss v. Dawson (1984). This approach has been rejected in most commonwealth jurisdictions even in those where UK cases are generally regarded as persuasive. After two decades, there have been numerous decisions, with inconsistent approaches, and both the Revenue authorities and professional advisors remain quite unable to predict outcomes. For this reason this approach can be seen as a failure or at best only partly successful. In the UK in 2004, the Labour government announced that it would use retrospective legislation to counteract some tax avoidance schemes, and it has subsequently done so on a few occasions, notably BN66. Initiatives announced in 2010 suggest an increasing willingness on the part of HMRC to use retrospective action to counter avoidance schemes, even when no warning has been given.[44] In 2008, the charity Christian Aid published a report, Death and taxes: the true toll of tax dodging, which criticised tax exiles and tax avoidance by some of the world's largest companies, linking tax evasion to the deaths of millions of children in developing countries.[45] However the research behind these calculations has been questioned in a 2009 paper prepared for the UK Department for International Development.[46] According to the Financial Times there is a growing trend for charities to prioritise tax avoidance as a key campaigning issue, with policy makers across the world considering changes to make tax evasion more difficult.[47] In 2010, tax avoidance became a hot-button issue in the UK. An organisation,UK Uncut, began to encourage people to protest at local high-street shops that were thought to be avoiding tax, such as Vodafone, Topshop and the Arcadia Group.[48]
Tax avoidance and tax evasion In 2011, HMRC stated that it would continue to crackdown on tax evasion, with a goal of collecting 18 billion in revenue before 2015.[49] A voluntary amnesty program HMRC began in 2010 that targeted middle-class professionals raised 500 million.[50]
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Tax protesters and tax resistance

Some tax evaders believe that they have uncovered new interpretations of the law that show that they are not subject to being taxed (not liable): these individuals and groups are sometimes called tax protesters. Many protesters continue posing the same arguments that the federal courts have rejected time and time again, ruling the arguments to be legally frivolous. Tax resistance is the refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). They typically do not take the position that the tax laws are themselves illegal or do not apply to them, and they are more concerned with not paying for what they oppose than they are motivated by the desire to keep more of their money. In the UK case of Cheney v. Conn,[51] an individual objected to paying tax that, in part, would be used to procure nuclear arms in unlawful contravention, he contended, of the Geneva Convention. His claim was dismissed, the judge ruling that "What the [taxation] statute itself enacts cannot be unlawful, because what the statute says and provides is itself the law, and the highest form of law that is known to this country."
Definition of tax evasion in the United States

The application of the U.S. tax evasion statute may be illustrated in brief as follows, as applied to tax protesters. The statute is Internal Revenue Code section 7201: Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.[52] Under this statute and related case law, the prosecution must prove, beyond a reasonable doubt, each of the following three elements: 1. the "attendant circumstance" of the existence of a tax deficiency an unpaid tax liability; and 2. the "actus reus" (i.e., guilty conduct) an affirmative act (and not merely an omission or failure to act) in any manner constituting evasion or an attempt to evade either: 1. the assessment of a tax, or 2. the payment of a tax. 3. the "mens rea" or "mental" element of willfulness the specific intent to violate an actually known legal duty; An affirmative act "in any manner" is sufficient to satisfy the third element of the offense. That is, an act which would otherwise be perfectly legal (such as moving funds from one bank account to another) could be grounds for a tax evasion conviction (possibly an attempt to evade "payment"), provided the other two elements are also met. Intentionally filing a false tax return (a separate crime in itself[53] ) could constitute an attempt to evade the "assessment" of the tax, as the Internal Revenue Service bases initial assessments (i.e., the formal recordation of the tax on the books of the U.S. Treasury) on the tax amount shown on the return.
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Application to tax protesters

This statute is an example of an exception to the general rule under U.S. law that "ignorance of the law or a mistake of law is no defense to criminal prosecution."[54] Under the Cheek Doctrine (Cheek v. United States[55] ), the United States Supreme Court ruled that a genuine, good faith belief that one is not violating the federal tax law (such as a mistake based on a misunderstanding caused by the complexity of the tax law itself) would be a valid defense to a charge of "willfulness" ("willfulness" in this case being knowledge or awareness that one is violating the tax law itself), even though that belief is irrational or unreasonable. On the surface, this rule might appear to be of some comfort to tax protesters who assert, for example, that "wages are not income."[56] However, merely asserting that one has such a good faith belief is not determinative in court; under the American legal system the trier of fact (the jury, or the trial judge in a non-jury trial) decides whether the defendant really has the good faith belief he or she claims. With respect to willfulness, the placing of the burden of proof on the prosecution is of limited utility to a defendant that the jury simply does not believe. A further stumbling block for tax protesters is found in the Cheek Doctrine with respect to arguments about "constitutionality." Under the Doctrine, the belief that the Sixteenth Amendment was not properly ratified and the belief that the federal income tax is otherwise unconstitutional are not treated as beliefs that one is not violating the "tax law" i.e., these errors are not treated as being caused by the "complexity of the tax law." In the Cheek case the Court stated: Claims that some of the provisions of the tax code are unconstitutional are submissions of a different order. They do not arise from innocent mistakes caused by the complexity of the Internal Revenue Code. Rather, they reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable. Thus, in this case, Cheek paid his taxes for years, but after attending various seminars and based on his own study, he concluded that the income tax laws could not constitutionally require him to pay a tax. The Court continued: We do not believe that Congress contemplated that such a taxpayer, without risking criminal prosecution, could ignore the duties imposed upon him by the Internal Revenue Code and refuse to utilize the mechanisms provided by Congress to present his claims of invalidity to the courts and to abide by their decisions. There is no doubt that Cheek, from year to year, was free to pay the tax that the law purported to require, file for a refund and, if denied, present his claims of invalidity, constitutional or otherwise, to the courts. See 26 U.S.C. 7422. Also, without paying the tax, he could have challenged claims of tax deficiencies in the Tax Court, 6213, with the right to appeal to a higher court if unsuccessful. 7482(a)(1). Cheek took neither course in some years, and, when he did, was unwilling to accept the outcome. As we see it, he is in no position to claim that his good-faith belief about the validity of the Internal Revenue Code negates willfulness or provides a defense to criminal prosecution under 7201 and 7203. Of course, Cheek was free in this very case to present his claims of invalidity and have them adjudicated, but, like defendants in criminal cases in other contexts who "willfully" refuse to comply with the duties placed upon them by the law, he must take the risk of being wrong.[57] The Court ruled that such beliefs even if held in good faith are not a defense to a charge of willfulness. By pointing out that arguments about constitutionality of federal income tax laws "reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable," the Supreme Court may have been impliedly warning that asserting such "constitutional" arguments (in open court or otherwise) might actually help the prosecutor prove willfulness.[58] Daniel B. Evans, a tax lawyer who has written about tax protester arguments, has stated that: [ . . . ] if you plan ahead to use it [the Cheek defense], then it is almost certain to fail, because your efforts to establish your good faith belief are going to be used by the government as evidence that you knew that what you were doing was wrong when you did it, which is why you worked to set up a
Tax avoidance and tax evasion defense in advance. Planning not to file tax returns and avoid prosecution using a good faith belief is kind of like planning to kill someone using a claim of self-defense. If youve planned in advance, then it shouldnt work.[59]
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Failing to file returns in the United States

According to some estimates, about three percent of taxpayers do not file tax returns at all. In the case of U.S. federal income taxes, civil penalties for willful failure to timely file returns and willful failure to timely pay taxes are based on the amount of tax due; thus, if no tax is owed, no penalties are due.[60] The civil penalty for willful failure to timely file a return is generally equal to 5.0% of the amount of tax "required to be shown on the return per month, up to a maximum of 25%.[61] By contrast, the civil penalty for willful failure to timely pay the tax actually "shown on the return" is generally equal to 0.5% of such tax due per month, up to a maximum of 25%.[62] The two penalties are computed together in a relatively complex algorithm, and computing the actual penalties due is somewhat challenging. In cases where a taxpayer does not have enough money to pay the entire tax bill, the IRS can work out a payment plan with taxpayers. For years for which no return has been filed, there is no statute of limitations on civil actionsthat is, on how long the IRS can seek taxpayers and demand payment of taxes owed.[63] For each year a taxpayer willfully fails to timely file an income tax return, the taxpayer can be sentenced to one year in prison.[64] In general, there is a six-year statute of limitations on federal tax crimes.[65]
Tax shelters
Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the IRA for the required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive. The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. TAX SHELTER INDUSTRY: THE ROLE OF ACCOUNTANTS, LAWYERS, AND FINANCIAL PROFESSIONALS. Many of these tax shelters were designed and provided by accountants at the large American accounting firms. Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions." Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses. In the Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under 26 U.S.C.469 [66]) on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the "at risk" loss rules of 26 U.S.C.465 [67]. Coupled with the hobby loss rules (26 U.S.C.183 [68]), the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses.
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References
[1] IRS report containing complete income tax data for FY2009 (http:/ / www. irs. gov/ pub/ irs-soi/ 09inalcr. pdf) [2] Corporate Income Taxes in the 1990's (http:/ / www. uic. edu/ classes/ actg/ actg516rtr/ Readings/ Taxes/ Corporate-Income-Taxes-In-The-90's---ITEP. pdf) [3] NYTimes article "G.E.s Strategies Let It Avoid Taxes Altogether" (http:/ / www. nytimes. com/ 2011/ 03/ 25/ business/ economy/ 25tax. html) [4] NYTimes article "U.S. Business Has High Tax Rates but Pays Less" (http:/ / www. nytimes. com/ 2011/ 05/ 03/ business/ economy/ 03rates. html) [5] GAO report "Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005" (http:/ / www. gao. gov/ new. items/ d08957. pdf) [6] "The new refugees. (Americans who give up citizenship to save on taxes)" (http:/ / web. archive. org/ web/ 20060227051231/ http:/ / www. frissell. com/ taxpat/ FORBES1. HTM). Forbes. 1994-11-21. Archived from the original (http:/ / www. frissell. com/ taxpat/ FORBES1. HTM) on 2006-02-27. . Retrieved 2006-12-23. [7] "Foreign earned income exclusion" (https:/ / secure. wikimedia. org/ wikipedia/ en/ wiki/ Foreign_earned_income_exclusion). . [8] There are certain well-known exceptions to this: Cyprus has a heavily exploited double taxation relief treaty with Russia; another frequently used treaty is the double taxation relief treaty between Mauritius and India. There are also a number of other less well known and less frequently utilized treaties, such as the one between the British Virgin Islands and Switzerland. [9] "Pasternak M., and Rico C., Tax Interpretation, Planning, and Avoidance: Some Linguistic Analysis, 23 Akron Tax Journal, 33 (2008)." (http:/ / www. uakron. edu/ law/ lawreview/ taxjournal/ atj23/ docs/ Pasternak08. pdf). . [10] James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June [11] Slemrod, Joel. 2007. "Cheating Ourselves: The Economics of Tax Evasion." Journal of Economic Perspectives, 21(1): 2548. [12] Toder, E "What is the Tax Gap?" http:/ / www. urban. org/ publications/ 1001112. html [13] Feige,Edgar L. (ed.), 1989. "The Underground Economies,:Tax Evasion and Information Distortion" Cambridge Books, Cambridge University Press, number 9780521262309. [14] http:/ / www. irs. gov/ newsroom/ article/ 0,,id=154496,00. html [15] Richard Cebula and Edgar Feige "Americas Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S" http:/ / ideas. repec. org/ p/ pra/ mprapa/ 29672. html [16] Patricia Sabatini, Pittsburgh Post-Gazette, "Tax Cheats Cost U.S. hundreds of billions," http:/ / www. post-gazette. com/ pg/ 07084/ 772106-28. stm [17] 366 U.S. 213 (1961), overruling Commissioner v. Wilcox, 327 U.S. 404 (1946). [18] 274 U.S. 259 (http:/ / supreme. justia. com/ us/ 274/ 259/ case. html) (1927) [19] Garner v. United States, 424 U.S. 648 (http:/ / caselaw. lp. findlaw. com/ scripts/ getcase. pl?navby=CASE& court=US& vol=424& page=648) (1976) [20] Gary Becker (1968). "Crime and Punishment: An Economic Approach". The Journal of Political Economy 76: pp. 169217 (http:/ / www. nber. org/ chapters/ c3625. pdf). [21] Allingham, M. G. and A. Sandmo [1972] Income Tax evasion: A Theoretical Analysis, Journal of Public Economics, Vol.1, 1972, p.323-38. [22] Richard Cebula and Edgar L. Feige,"Americas Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S" http:/ / ideas. repec. org/ p/ pra/ mprapa/ 29672. html [23] Chowdhury, F. L. Evasion of Customs Duty in Bangladesh, 2006: Desh Prokashon Dhaka. [24] Spiro, Peter S. (2005), "Tax Policy and the Underground Economy," in Christopher Bajada and Friedrich Schneider, eds., Size, Causes and Consequences of the Underground Economy (Ashgate Publishing). [25] Tomkov, Eva (2008): "Tax Evasion in the Czech Republic" (http:/ / www. aicels. org/ aicels/ Interduction_to_czech_law_-_AICELS Abstract1. pdf) In: A Brief Introduction to Czech Law. Rincon: The American Institute for Central European Legal Studies (AICELS), 2008. p. 111 - 121, ISBN 978-0-692-00045-8 [26] Chowdhury, F. L. (1992) Evasion of Customs Duty in Bangladesh, unpublished MBA dissertation, Graduate School of Management, Monash University, Australia. [27] Stella, P. [1992] Tax Farming - A radical Solution for Developing Country Tax Problem, IMF Working Paper No. 92/70 [28] Alam. D (1999) Introduction of PSI system in Bangladesh: Facts and Documents, Desh Prokashon, Dhaka. [29] Hood, C. (1986) Privatizing UK tax Law Enforcement?, Public Administration, Vol. 64, Autumn, 1986, p. 319-33. [30] Chowdhury, F. L. [1992] Evasion of Customs Duty in Bangladesh, unpublished MBA dissertation, Graduate School of Management, Monash University, Australia. [31] Stella, P. (1992) Tax Farming - A radical Solution for Developing Country Tax Problem, IMF Working Paper No. 92/70. [32] "[http://www.newagebd.com/2007/sep/14/front.html#21 NBR show Age [33] New York Times, 06 August 2003 [34] The term "assessment" is here used in the technical sense of a statutory assessment: the formal administrative act of a duly appointed employee of the Internal Revenue Service who records the tax on the books of the United States Treasury after certain administrative

prerequisites have been met. The term "assessment" has a separate, non-statutory meaning in the United States, viz. the act of the taxpayer computing the amount of the tax when preparing and filing a federal income tax return. [35] 70 TC 57. [36] See for instance CT Sandford, Hidden Costs of Taxation, IFS, 1973. [37] (1986) STC 548. [38] 27 TC 331. [39] (1860) 1 de G F&J 643 (England). [40] (1901) AC 196 (England). [41] Minimising Taxes, Sears, 1922, Vernon Law Book Co. [42] 240 U.S. 625, 630 (1916). [43] (1988) 62 TC 1 at 197. [44] HMRC goes on 1bn retro warpath (http:/ / www. accountancyage. com/ accountancyage/ news/ 2258065/ hmrc-goes-1bn-retro-warpath), Accountancy Age, 18 Feb 2010 [45] O'grady, Sean (2008-05-12). "Tax evasion 'costs lives of 5.6m children'" (http:/ / www. independent. co. uk/ news/ uk/ home-news/ tax-evasion-costs-lives-of-56m-children-826252. html). The Independent (London). . [46] Fuest, Clemens; Riedel, Nadine (19 June 2009). Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the literature (http:/ / www. sbs. ox. ac. uk/ centres/ tax/ Documents/ reports/ TaxEvasionReportDFIDFINAL1906. pdf). Oxford: Oxford University Centre for Business Taxation. . [47] Vanessa Houlder (2010-11-08). "Tax claims hit reputation as well as coffers" (http:/ / www. ft. com/ cms/ s/ 0/ c153e27c-eb7d-11df-b482-00144feab49a. html#axzz14mgsdfEK). The Financial Times. . Retrieved 2010-11-09. [48] "UK Uncut protesters spied upon by undercover police" (http:/ / www. guardian. co. uk/ uk/ 2010/ dec/ 03/ uk-uncut-protests-undercover-police). The Guardian. 2010-12-03. . Retrieved 2010-12-30. [49] "Watch out, the taxman's about: HMRC ordered to bring in 18bn in government crackdown" (http:/ / www. dailymail. co. uk/ news/ article-1367058/ Watch-taxmans-HMRC-ordered-bring-18bn-government-crackdown. html). Mail Online. dailymail.co.uk. March 17, 2011. . Retrieved August 12, 2011. [50] Russell, Jonathan (June 10, 2011). "HMRC opens 16 criminal cases over tax evasion" (http:/ / www. telegraph. co. uk/ finance/ financial-crime/ 8566897/ HMRC-opens-16-criminal-cases-over-tax-evasion. html). The Telegraph. telegraph.co.uk. . Retrieved August 12, 2011. [51] (1968) All ER 779. [52] 26 U.S.C. 7201 (http:/ / www. law. cornell. edu/ uscode/ 26/ 7201. html). [53] 26 U.S.C. 7206 (http:/ / www. law. cornell. edu/ uscode/ 26/ 7206. html). [54] Ignorantia legis neminem excusat, or "ignorance of law excuses no one." Black's Law Dictionary, p. 673 (5th ed. 1979). [55] 498 U.S. 192 (1991). [56] The U.S. courts have consistently rejected arguments that "wages" or "labor" are not taxable as income under the Internal Revenue Code. For example, see United States v. Connor, 898 F.2d 942, 90-1 U.S. Tax Cas. (CCH) paragr. 50,166 (3d Cir. 1990) (tax evasion conviction under 26 U.S.C. 7201 (http:/ / www. law. cornell. edu/ uscode/ 26/ 7201. html) affirmed by the United States Court of Appeals for the Third Circuit; taxpayers argument that because of the Sixteenth Amendment, wages were not taxable was rejected by the Court; taxpayers argument that an income tax on wages is required to be apportioned by population also rejected); Perkins v. Commissioner, 746 F.2d 1187, 84-2 U.S. Tax Cas. (CCH) paragr. 9898 (6th Cir. 1984) (26 U.S.C. 61 (http:/ / www. law. cornell. edu/ uscode/ 26/ 61. html) ruled by the United States Court of Appeals for the Sixth Circuit to be in full accordance with Congressional authority under the Sixteenth Amendment to the Constitution to impose taxes on income without apportionment among the states; taxpayers argument that wages paid for labor are non-taxable was rejected by the Court, and ruled frivolous); White v. United States, 2005-1 U.S. Tax Cas. (CCH) paragr. 50,289 (6th Cir. 2004), cert. denied, ____ U.S. ____ (2005) (taxpayers argument that wages are not taxable was ruled frivolous by the United States Court of Appeals for the Sixth Circuit; penalty imposed under 26 U.S.C. 6702 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6702. html) for filing tax return with frivolous position was therefore proper); Granzow v. Commissioner, 739 F.2d 265, 84-2 U.S. Tax Cas. (CCH) paragr. 9660 (7th Cir. 1984) (taxpayers argument that wages are not taxable was rejected by the United States Court of Appeals for the Seventh Circuit, and ruled frivolous); Waters v. Commissioner, 764 F.2d 1389, 85-2 U.S. Tax Cas. (CCH) paragr. 9512 (11th Cir. 1985) (taxpayers argument that income taxation of wages is unconstitutional was rejected by the United States Court of Appeals for the Eleventh Circuit; taxpayer required to pay damages for filing frivolous suit). [57] Cheek, 498 U.S. at 205-206 (footnote omitted; emphasis added). [58] See also Spies v. United States, 317 U.S. 492 (1943); Sansone v. United States, 380 U.S. 343 (1965); Cheek v. United States, 498 U.S. 192 (1991). [59] Daniel B. Evans, The Tax Protester FAQ; downloaded 24 April 2007 (http:/ / evans-legal. com/ dan/ tpfaq. html) [60] See 26 U.S.C. 6651 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6651. html). [61] See 26 U.S.C. 6651(a)(1) (http:/ / www. law. cornell. edu/ uscode/ 26/ 6651(a)(1). html). [62] See 26 U.S.C. 6651(a)(2) (http:/ / www. law. cornell. edu/ uscode/ 26/ 6651(a)(2). html). [63] See 26 U.S.C. 6501 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6501. html). [64] See 26 U.S.C. 7203 (http:/ / www. law. cornell. edu/ uscode/ 26/ 7203. html). [65] See 26 U.S.C. 6531 (http:/ / www. law. cornell. edu/ uscode/ 26/ 6531. html).
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[66] http:/ / www. law. cornell. edu/ uscode/ 26/ 469. html [67] http:/ / www. law. cornell. edu/ uscode/ 26/ 465. html [68] http:/ / www. law. cornell. edu/ uscode/ 26/ 183. html
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Further reading
Taxation of Non-Residents and Foreign Domiciliaries (James Kessler QC, 10th edition, 2011, Key Haven Publications) chapter 29 discusses tax avoidance in context of UK anti-avoidance provisions.
External links
International Financial Centres Forum (IFC Forum) (http://www.ifcforum.org) - research into the positive impacts of tax competition and tax planning Tax Justice Network (http://www.taxjustice.net) - research into "the negative impacts of tax avoidance, tax competition and tax havens" Tax Me if You Can (http://www.pbs.org/wgbh/pages/frontline/shows/tax/) - PBS Frontline documentary into tax avoidance The Tax Gap (http://www.guardian.co.uk/business/series/tax-gap) Special report from The Guardian about tax avoidance by big business US Justice Dept Press Release (http://www.usdoj.gov/tax/txdv09729.htm) on Jeffrey Chernick, UBS tax evader US Justice Dept Press Release (http://www.usdoj.gov/tax/txdv09729.htm) on Robert Moran and Steven Michael Rubenstein, two UBS tax evaders US States Atty for Central Dist of California Press Release (http://www.usdoj.gov/tax/usaopress/2009/ txdv09_101.pdf) on John McCarthy of Malibu, Calif, UBS tax evader
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions. Tax deductions generally are allowed only for expenses incurred that produce current benefits, and capitalization of items producing future benefit is required, sometimes with exceptions. Most systems allow recovery in some manner over a period of time of capitalized business and investment items, such as through allowances for depreciation, obsolescence, or decline in value. Many systems reduce taxable income for personal allowances or provide a range of income subject to zero tax. In addition, some systems allow deductions from the tax base for items the tax levying government desires to encourage. Some systems distinguish among types of deductions (business versus non-business).
Business expenses
Nearly all jurisdictions that tax business income allow tax deductions for expenses incurred in trading or carrying on the trade or business. Technical details of the allowance vary, and may be very general for all expenses, or very specific in respect of certain expenses. The amount of particular deductions may be limited based on character or amount, or deductions in aggregate may be limited or reduced. To be deducted, the expenses must be incurred in furthering a business. Generally, a business includes only those activities undertaken for profit.
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Cost of goods sold

Nearly all income tax systems allow a deduction for cost of goods sold. This may be considered an expense, a reduction of gross income,[1] or merely a component utilized in computing net profits.[2] The manner in which cost of goods sold is determined has several inherent complexities, including various accounting methods. These include: Conventions for assigning costs to particular goods sold where specific identification is infeasible.[3] Methods for attributing common costs, such as factory burden, to particular goods.[4] Methods for determining when costs are recognized in computing cost of goods sold or to be sold.[5] Methods for recognizing costs of goods that will not be sold or have declined in value.[6]
Trading or ordinary and necessary business expenses

Many systems, including the UK, levy tax on all chargeable profits of a trade computed under local generally accepted accounting principles (GAAP).[7] Under this approach, determination of whether an item is deductible depends upon accounting rules and judgments. By contrast, the U.S. allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business...[8] subject to qualifications, enhancements, and limitations. A similar approach is followed by Canada, but generally with fewer special rules. Such an approach poses significant definitional issues. Among the definitional issues often addressed are: What constitutes a trade or business? Generally, the business must be regular, continuous, substantial, and entered into with an expectation of profit.[9] [10] What expenses are ordinary and necessary? The phrase deals with what expenses are appropriate to the nature of the business, whether the expenses are of the sort expected to help produce income and promote the business, and whether the expenses are not lavish and extravagant. Note that under this concept, the same sorts of expenses are generally deductible by business entities and individuals carrying on a trade or business. To the extent such expenses relate to the employment of an individual and are not reimbursed by the employer, the amount may be deductible by the individual.[11] Business deductions of flow-through entities may flow through as a component of the entity's net income in some jurisdictions. Deductions of flow-through entities may pass through to members of such entities separately from the net income of the entity in some jurisdictions or some cases. For example, charitable contributions by trusts, and all deductions of partnerships (and S corporations in the U.S.) are deductible by member beneficiaries or partners (or S corporation shareholders) in a manner appropriate to the deduction and the member, such as itemized deductions for charitable contributions or a component of net business profits for business expenses.[12]
Accounting methods
One important aspect of determining tax deductions for business expenses is the timing of such deduction. The method used for this is commonly referred to as an accounting method. Accounting methods for tax purposes may differ from applicable GAAP. Examples include timing of recognition of cost recovery deductions (e.g., depreciation), current expensing of otherwise capitalizable costs of intangibles,[13] and rules related to costs that should be treated as part of cost of goods not yet sold.[14] Further, taxpayers often have choices among multiple accounting methods permissible under GAAP and/or tax rules. Examples include conventions for determining which goods have been sold (such as first-in-first-out, average cost, etc.), whether or not to defer minor expenses producing benefit in the immediately succeeding period, etc. Accounting methods may be defined with some precision by tax law, as in the U.S. system, or may be based on GAAP, as in the UK system.
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Limits on deductions
Many systems limit particular deductions, even where the expenses directly relate to the business. Such limitations may, by way of example, include: Maximum deductions for use of automobiles[15] Limits on deducting compensation of certain key employees[16] Limits on lobbying or similar expenditures[17] Nondeductibility of payments considered in violation of public policy, such as criminal fines[18] Limits on deductions for business related entertainment.[19]
In addition, deductions in excess of income in one endeavor may not be allowed to offset income from other endeavors. For example, the United States limits deductions related to passive activities to income from passive activities.[20]
Capitalized items and cost recovery (depreciation)

Many systems require that the cost of items likely to produce future benefits be capitalized.[21] Examples include plant and equipment, fees related to acquisition of property, and costs of developing intangible assets (e.g., patentable inventions). Such systems often allow a tax deduction for cost recovery in a future period. A common approach to such cost recovery is to allow a deduction for a portion of the cost ratably over some period of years. The U.S. system refers to such a cost recovery deduction as depreciation for costs of tangible assets[22] and as amortization for costs of intangible assets. Depreciation in these systems is allowed over an estimated useful life, which may be assigned by the government for numerous classes of assets, based on the nature and use of the asset and the nature of the business.[23] The annual depreciation deduction may be computed on a straight line, declining balance, or other basis, as permitted in each country's rules.[24] Many systems allow amortization of the cost of intangible assets only on a straight line basis, generally computed monthly over the actual expected life or a government specified life. Alternative approaches are used by some systems. Some systems allow a fixed percentage or dollar amount of cost recovery in particular years, often called capital allowances.[25] This may be determined by reference to the type of asset or business.[26] Some systems allow specific charges for cost recovery for some assets upon certain identifiable events.[27] Capitalization may be required for some items without the potential for cost recovery until disposition or abandonment of the asset to which the capitalized costs relate. This is often the case for costs related to the formation or reorganization of a corporation, or certain expenses in corporate acquisitions.[28] However, some systems provide for amortization of certain such costs, at the election of the taxpayer.[29]
Non-business expenses
Some systems distinguish between an active trade or business and the holding of assets to produce income.[30] In such systems, there may be additional limitations on the timing and nature of amounts that may be claimed as tax deductions. Many of the rules, including accounting methods and limits on deductions, that apply to business expenses also apply to income producing expenses.
Losses
Many systems allow a deduction for loss on sale, exchange, or abandonment of both business and non-business income producing assets. This deduction may be limited to gains from the same class of assets. In the U.S., a loss on non-business assets is considered a capital loss, and deduction of the loss is limited to capital gains. Also, in the U.S. a loss on the sale of the taxpayer's principal residence or other personal assets is not allowed as a deduction except to the extent due to casualty or theft.
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Personal deductions
Many jurisdictions allow certain classes of taxpayers to reduce taxable income for certain inherently personal items. A common such deduction is a fixed allowance for the taxpayer and certain family members or other persons supported by the taxpayer. The U.S. allows such a deduction for personal exemptions for the taxpayer and certain members of the taxpayer's household.[31] The UK grants a personal allowance.[32] Both U.S. and UK allowances are phased out for individuals or married couples with income in excess of specified levels. In addition, many jurisdictions allow reduction of taxable income for certain categories of expenses not incurred in connection with a business or investments. In the U.S. system, these (as well as certain business or investment expenses) are referred to as itemized deductions for individuals. The UK allows a few of these as personal reliefs. These include, for example, the following for U.S. residents (and UK residents as noted): Medical expenses (in excess of 7.5% of adjusted gross income)[33] State and local income and property taxes[34] Interest expense on certain home loans[35] Gifts of money or property to qualifying charitable organizations, subject to certain maximum limitations,[36] Losses on non-income-producing property due to casualty or theft,[37] Contribution to certain retirement or health savings plans (U.S. and UK),[38] Certain educational expenses.[39]
Many systems provide that an individual may claim a tax deduction for personal payments that, upon payment, become taxable to another person, such as alimony.[40] Such systems generally require, at a minimum, reporting of such amounts,[41] and may require that withholding tax be applied to the payment.
Groups of taxpayers
Some systems allow a deduction to a company or other entity for expenses or losses of another company or entity if the two companies or entities are commonly controlled. Such deduction may be referred to as group relief.[42] Generally, such deductions function in lieu of consolidated or combined computation of tax (tax consolidation) for such groups. Group relief may be available for companies in EU member countries with respect to losses of group companies in other countries.[43]
International aspects
Many systems impose limitations on tax deductions paid to foreign parties, especially related parties. See International tax and Transfer pricing.
Further reading
Crowningshield, Gerald, and Gorman, Kenneth: Cost Accounting, ISBN 9780395267974 Horngren, Charles T., et al.: Cost Accounting, ISBN 9780136126638 Hoffman, William, et al.: Individual Income Taxes (annual editions; 2011 edition ISBN 9780538468602 ) Pratt, James, and Kulsrud, William: 2010 Federal Taxation, ISBN 9781424069866 Whittenberg, Gerald, and Altus-Buller, Martha: Income Tax Fundamentals, ISBN 9780324663686 Schneider, Leslie: Federal Income Taxation of Inventories Weltman, Barbara: J.K.Lasser's 1001 Deductions , ISBN 978-0470445488
Tax deduction
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External links
Australia: Australian Taxation Office: Main site Canada: Laws [44] Canada Revenue Agency: Main site [45] Deductions index [46] United Kingdom: HM Revenue and Customs: Main site [47] HMRC manuals [48] Business Income Manual (BIM) [49] United States: Internal Revenue Service: Main site [2] Some relevant publications [50]: 334 [51] Business expenses: Tax Guide for Small Business 463 [52] Travel and entertainment deductions 501 [53] Exemptions and standard deduction 529 [54] Miscellaneous deductions 565 [55] Business Expenses 936 [56] Home mortgage interest 946 [57] Depreciation A few relevant forms (also see related instructions) Form 1040 [58] (individual tax return), Schedules C (business) and E (rental) Form 1065 [59] (partnership return of income), page 1, and Schedule K Form 1120 [60] (corporation tax return), page 1 Form 2106 [61] (employee business expenses) Form 4562 [62] (depreciation and amortization) Form 4797 [63] (gain or loss on business assets) Form 8825 [64] (rental realty income)
References
[1] The U.S. system computes taxable income by subtracting deductions from gross income. Gross income, under 26 USC 61 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000061----000-. html) is defined as gains from the sale of property plus other income. Gains, in turn, are defined in 26 USC 1001 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00001001----000-. html) as the amount realized less the adjusted basis of property sold. [2] The UK system computes income chargeable to tax as net business profits, plus other income, with adjustments. In such systems, the locally recognized generally accepted accounting principles apply. See, e.g., IAS 2, Inventories. [3] Examples of alternatives to specific identification include first-in-first-out (FIFO), average cost, and last-in-first-out (LIFO). Many EU countries do not permit LIFO. [4] Among the methods commonly used are: i) factory burden rate, in which overhead costs are assigned to goods produced based on labor hours or labor dollars; ii) standard costs, in which a cost including overheads is periodically determined for each type of goods and inventory and cost of goods sold are adjusted periodically for variances of actual costs from such standards; and iii) activity based costing, in which costs are assigned based on factors which drive the incurrence of such costs. Numerous variations on these are available in many systems. [5] Generally, determinations depend upon the overall method of accounting or overarching principles of local GAAP. These include the cash receipts and disbursements method, accrual methods, and deferred cost methods. Under these principles there may be a need to determine when amounts are properly treated as incurred.
Tax deduction
[6] GAAP often requires that the decline in value of unsold goods be charged to income when the decline occurs. This is often accomplished through a lower of cost or market value inventory accounting method, or inventory reserves. Some systems provide for differences in these determinations for financial reporting and tax purposes. [7] [ UK Income and Corporation Taxes Act of 1988 (ICTA) section ]. The HMRC Business Income Manual at BIM 31001 (http:/ / www. hmrc. gov. uk/ manuals/ bimmanual/ bim31001. htm) states that the starting point is accounts prepared in accordance with ordinary principles of commercial accountancy, and the commercial profits are then adjusted in accordance with the provisions of the Taxes Acts. [8] 26 USC 162(a) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000162----000-. html). [9] In this regard, the United States Tax Court has issued well in excess of one thousand rulings. Among the factors considered are: a) whether the transactions are regular and continuous (discussed, e.g., prior to the income tax in Lewellyn v. Pittsburgh, B. & L. E. R. Co., 222 Fed. 177 (CA3, 1915), a case cited by the Tax Court), (b) whether the purported business is substantial (see, e.g., ), (c) whether the transactions were profit motivated (see, e.g., Doggett v. Burnet, (1933) , 65 F2d 191; also see hobby loss rules at 26 USC 183 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000183----000-. html)). [10] UK Business Income Manual 20200 (http:/ / www. hmrc. gov. uk/ manuals/ bimmanual/ bim20200. htm) describes various badges of trade. [11] See IRS Form 2106 (http:/ / www. irs. gov/ pub/ irs-pdf/ f2106. pdf). [12] 26 USC 704(b) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000704----000-. html) and 26 USC 170 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000170----000-. html). [13] 26 USC 174 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000174----000-. html). [14] 26 USC 263A (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000263---A000-. html). [15] UK: [ ICTA __], [ ]. U.S.: 26 USC 280F (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000280---F000-. html). [16] U.S.: 26 USC 162(m) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000162----000-. html). [17] U.S.: 26 USC 162(e) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000162----000-. html). [18] U.S.: 26 USC 162(f) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000162----000-. html). [19] U.S.: 26 USC 274(n) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000274----000-. html). [20] 26 USC 469 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000469----000-. html). Income from passive activities includes not only operating income but also gains from disposition of the activity or assets used in the activity. See IRS Publication 925 (http:/ / www. irs. gov/ pub/ irs-pdf/ p925. pdf). [21] See, e.g., 26 USC 263 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000263----000-. html); International Financial Reporting Standards ([IFRS]), particularly IAS 16, applicable in most EU jurisdictions for determining business profits as the starting point for taxable income. [22] U.S.: 26 USC 168 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000168----000-. html), which prescribes depreciable lives by broad class; [23] For lives by class of assets, see: U.S. see Rev. Proc. 87-56, as updated, reproduced in IRS Publication 946 (http:/ / www. irs. gov/ pub/ irs-pdf/ p946. pdf); Canada Income Tax Regulations section 1100 et seq. [24] The U.S. permits declining balance switching to straight line in a particular year, by life of asset class. See Rev. Proc. 87-57, reproduced in IRS Publication 946 (http:/ / www. irs. gov/ pub/ irs-pdf/ p946. pdf) for percentages that may be used at the option of the taxpayer. [25] UK: ICTA , ___; Canada: [ Income Tax Act section 20.(1(a))], which provides for deduction as provided in regulations; see [ Income Tax Regulations Part XI, sections 1100 et seq], Capital Allowances. [26] Canadian rules cited above specify more than 30 classes for which specific percentages are allowed. [27] For example, Germany allows a deduction for depreciation for assets that have come to be worth significantly less than their unrecovered cost due to identifiable events. English language . [28] See INDOPCO v. Commissioner. [29] 26 USC 248 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000248----000-. html) for corporations, 26 USC 709 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000709----000-. html) for partnerships. [30] 26 USC 212 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000212----000-. html); UK [ ICTA ]. [31] 26 USC 151, 152. The amount is adjusted annually for inflation, and was $3,650 (http:/ / www. irs. gov/ formspubs/ article/ 0,,id=177992,00. html) for 2009. [32] For 2009, the amount was 6,475 (http:/ / www. hmrc. gov. uk/ rates/ it. htm), with additional allowances for married couples over age 75. [33] 26 USC 213 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000213----000-. html). [34] 26 USC 164(a)(2) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000164----000-. html). Individuals may elect for a tax year after 2003 to claim a deduction for state and local sales taxes in lieu of the deduction for state and local income taxes. [35] 26 USC 163 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000163----000-. html) subsection (h) of which limits the deduction of personal interest. [36] 26 USC 170 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000170----000-. html) Qualifying organizations generally include organizations that are tax exempt under 26 USC 503(c) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000503----000-. html)(charitable organizations) or (d) (religious orders), as well as certain other organizations. Generally, the deducton is limited to 50% of gross income. This limitation is reduced in certain circumstances. Amounts in excess of the limitation may be deducted in future years, also subject to limitations. [37] 26 USC 165 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000165----000-. html).
927
Tax deduction
[38] 26 USC 219 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000219----000-. html), which provides deductions for contributions to 401(k) and IRA plans, among others, and 26 USC 223 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000223----000-. html), which provides deductions for contributions to health savings accounts that are used to pay for medical expenses. [39] 26 USC 221 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000221----000-. html) and 222 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000222----000-. html). [40] See, e.g., 26 USC 215 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000215----000-. html). [41] See, e.g., Form IRS Form 1040 (http:/ / www. irs. gov/ pub/ irs-pdf/ f1040. pdf), line 31b. [42] UK [S380 ICTA et seq ] [43] See, e.g., UK draft guidance (http:/ / www. hmrc. gov. uk/ ctsa/ ext_group_relief. pdf) following the Marks & Spencer case. [44] http:/ / laws. justice. gc. ca [45] http:/ / www. cra-arc. gc. ca/ menu-eng. html [46] http:/ / www. cra-arc. gc. ca/ tx/ ndvdls/ tpcs/ ncm-tx/ rtrn/ cmpltng/ ddctns/ menu-eng. html?=slnk [47] http:/ / www. hmrc. gov. uk/ index. htm [48] http:/ / www. hmrc. gov. uk/ thelibrary/ manuals-subjectarea. htm [49] http:/ / www. hmrc. gov. uk/ manuals/ bimmanual/ index. htm [50] http:/ / www. irs. gov/ formspubs/ article/ 0,,id=98171,00. html [51] http:/ / www. irs. gov/ pub/ irs-pdf/ p334. pdf [52] http:/ / www. irs. gov/ pub/ irs-pdf/ p463. pdf [53] http:/ / www. irs. gov/ pub/ irs-pdf/ p501. pdf [54] http:/ / www. irs. gov/ pub/ irs-pdf/ p529. pdf [55] http:/ / www. irs. gov/ pub/ irs-pdf/ p565. pdf [56] [57] [58] [59] [60] [61] [62] [63] [64] http:/ / www. irs. gov/ pub/ irs-pdf/ p936. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ p946. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f1040. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f1065. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f1120. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f2106. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f4562. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f4797. pdf http:/ / www. irs. gov/ pub/ irs-pdf/ f8825. pdf
928
Tax exemption
929
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some systems. Tax exempt status may provide a potential taxpayer complete relief from tax, tax at a reduced rate, or tax on only a portion of the items subject to tax. Examples include exemption of charitable organizations from property taxes and income taxes, exemptions provided to veterans, and exemptions under cross-border or multi-jurisdictional principles. Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances (i.e., an exclusion). Tax exemption also generally refers to removal from taxation of a particular item or class rather than a reduction of taxable items by way of deduction of other items (i.e., a deduction). Tax exemptions may theoretically be granted at any governmental level that imposes taxation, though in some broader systems restraints are imposed on such exemptions by lower tier governmental units.
Specific monetary exemptions

Some jurisdictions allow for a specific monetary reduction of the tax base, which may be referred to as an exemption. For example, the U.S. Federal and many state tax systems allow a deduction of a specified dollar amount for each of several categories of "personal exemptions." Similar amounts may be called "personal allowances." Some systems may provide thresholds at which such exemptions or allowances are phased out or removed.[1]
Exempt organizations
Some governments grant broad exclusions from all taxation for certain types of organization. The exclusions may be restricted to entities having various characteristics. The exclusions may be inherent in definitions or restrictions outside the tax law itself.[2]
Approaches for Exemption

There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions. Some jurisdictions grant an overall exemption from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), and income taxes for entities governed by the Charities Law. This overall exemption may be somewhat limited by limited scope for taxation by the jurisdiction. Some jurisdictions may levy only a single type of tax, so a broad grant of exemption may have the effect of an exemption from only a particular tax. Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes,[3] but not from various excise or most employment taxes.[4]
Tax exemption
930
Charitable and Religious Organizations

Many tax systems provide complete exemption from tax for recognized charitable organizations. Such organizations may include religious organizations (churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes. The U.S. system exempts from Federal and many state income taxes[5] the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax exempt purposes,[6] which includes more than 28 types of organizations and also requires, for most types of organizations, that the organization apply for tax exempt status with the Internal Revenue Service,[7] or be a religious or apostolic organization.[8] [9] Note that the U.S. system does not distinguish between various kinds of tax exempt entities (such as educational versus charitable) for purposes of granting exemption, but does make such distinctions with respect to allowing a [tax deduction] for contributions.[10] The UK generally exempts public charities from business rates, corporation tax, income tax, and certain other taxes.[11]
Governmental entities
Most systems exempt internal governmental units from all tax. For multi-tier jurisdictions, this exemption generally extends to lower tier units and across units. For example, state and local governments are not subject to Federal, state, or local income taxes in the U.S.[12]
Pension Schemes
Most systems do not tax entities organized to conduct retirement investment and pension activities for employees of one or more employers or for the benefit of employees.[13] In addition, many systems also provide tax exemption for personal pension schemes.[14]
Educational institutions
Some jurisdictions provide separate total or partial tax exemptions for educational institutions.[15] These exemptions may be limited to certain functions or income.
Other not for profit entities

Some jurisdictions provide tax exemption for other particular types of organizations not meeting any of the above categories.
Reciprocal exemptions
Some jurisdictions allow tax exemption for organizations exempt from tax in certain other jurisdictions. For example, most U.S. states allow tax exemption for organizations recognized for Federal tax purposes as tax exempt.
Tax exemption
931
Sales tax
Most states and localities imposing sales and use taxes in the United States exempt resellers from sales taxes on goods held for sale and ultimately sold. In addition, most such states and localities exempt from sales taxes goods used directly in the production of other goods (i.e., raw materials). See also Sales taxes in the United States, tax-free shopping, tax holiday.
Exempt individuals
Certain classes of persons may be granted a full or partial tax exemption within a system. Common exemptions are for veterans[16] or clergymen.[17] The exemption granted may depend on multiple criteria, including criteria otherwise unrelated to the particular tax. For example, a property tax exemption may be provided to certain classes of veterans earning less than a particular income level.[18] Definitions of exempt individuals tend to be complex.
Exempt income
Most income tax systems exclude certain classes of income from the taxable income base. Such exclusions may be referred to as exclusions or exemptions. Systems vary highly.[19] Among the more commonly excluded items are: Income earned outside the taxing jurisdiction.[20] Such exclusions may be limited in amount.[21] Interest income earned from subsidiary jurisdictions.[22] Income consisting of compensation for loss.[23] The value of property inherited or acquired by gift.[24] Some tax systems specifically exclude from income items that the system is trying to encourage. Such exclusions or exemptions can be quite specific[25] or very general. Among the types of income that may be include are classes of income earned in specific areas, such as special economic zones, enterprise zones, etc. These exemptions may be limited to specific industries. As an example, India provides SEZs where exporters of goods or providers of services to foreign customers may be exempt from income taxes and customs duties.
Exempt property
Certain types of property are commonly granted exemption from property or transaction (such as sales or value added) taxes. These exemptions vary highly from jurisdiction to jurisdiction, and definitions of what property qualifies for exemption can be voluminous.[26] Among the more commonly granted exemptions are: Property used in manufacture of other goods (which goods may ultimately be taxable) Property used by a tax exempt or other parties for a charitable or other not for profit purpose Property considered a necessity of life, often exempted from sales taxes in the United States Personal residence of the taxpayer,[27] often subject to specific monetary limitations
Tax exemption
932
Conditions imposed on exemptions

Exemption from tax often requires that certain conditions to be met.
Multi-tier jurisdictions
Many countries that impose tax have subdivisions or subsidiary jurisdictions that also impose tax. This feature is not unique to federal systems, like the U.S., Switzerland and Australia, but rather is a common feature of national systems.[28] The top tier system may impose restrictions on both the ability of the lower tier system to levy tax as well as how certain aspects of such lower tier system work, including the granting of tax exemptions. The restrictions may be imposed directly on the lower jurisdiction's power to levy tax or indirectly by regulating tax effects of the exemption at the upper tier.
Cross-border agreements
Jurisdictions may enter into agreements with other jurisdictions that provide for reciprocal tax exemption. Such provisions are common in an income [tax treaty]. These reciprocal tax exemptions typically call for each contracting jurisdiction to exempt certain income of a resident of the other contracting jurisdiction. Multi-jurisdictional agreements for tax exemption also exist. 20 of the U.S. states have entered into the Multistate Tax Compact [29] that provides, among other things, that each member must grant a full credit for sales and use taxes paid to other states or subdivisions. The European Union members are all parties to the EU multi-country VAT harmonisation rules [30].
External links
United States: IRS Publication 557 [31], Tax-Exempt Status for Your Organization IRS FAQs about Tax-Exempt Organizations [32] UK: HMRC web site [47] HMRC manuals by subject [48]
References
[1] 26 USC 151 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000151----000-. html), Allowance of deductions for personal exemptions. The amount per exemption is $3,650 (http:/ / www. irs. gov/ formspubs/ article/ 0,,id=177992,00. html), subject to phase-out. UK tax free personal allowances (http:/ / www. hmrc. gov. uk/ incometax/ personal-allow. htm) vary. [2] As an example, UK charities law (http:/ / www. opsi. gov. uk/ acts/ acts2006/ ukpga_20060050_en_1) defines the types of organizations which may qualify as registered charities, and places limits on their actions. [3] 26 USC 501(a) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000501----000-. html). The exemption from Federal income tax is longstanding. This exemption formed part of the Revenue Act of 1894. The 1894 Act was the first broadly applicable U.S. tax on corporate income, but was soon declared unconstitutional. Since ratification of the Sixteenth Amendment to the United States Constitution in 1913, the exemption for charitable, religious, and educational organizations has been included in all subsequent Federal income tax law. See Belknap, Chauncey, "The Federal Income Tax Exemption of Charitable Organizations: Its History and Underlying Policy," 1954, reprinted (very large file) (http:/ / www. eric. ed. gov/ PDFS/ ED143606. pdf) as pages 2025-2043 of the Research Papers of the Commission on Private Philanthropy and Public Needs, Volume IV, 1977. [4] 26 USC Subtitle D (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sup_01_26_10_D. html) excise taxes are imposed on particular goods or services, generally without exemptions. Certain of these taxes apply primarily to tax exempt organizations. See, e.g., 26 USC 4911 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00004911----000-. html), tax on excess expenditures to influence legislation. 26 USC 3101 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00003101----000-. html) and 3301 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00003301----000-. html) generally impose social security and unemployment taxes on all organizations. Note that income from certain types of services, such as services as a minister, may be exempt from the definition of income for these taxes. Note, also, that employees of certain nonprofit and governmental organizations are eligible to
Tax exemption
participate in different sorts of deferred compensation plans than employees of other organizations. Compare 26 USC 401 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000401----000-. html), IRS Publication 560 (http:/ / www. irs. gov/ pub/ irs-pdf/ p560. pdf) and others vs. , IRS Publication 571 (http:/ / www. irs. gov/ publications/ p571/ index. html). [5] Note that under the U.S. system each state is entitled to raise its own taxes. 43 of the states impose a [state income tax]. Some states incorporate or make reference to Federal definitions for parts of their tax laws. See, e.g.,. [6] 26 USC 501(c) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000501----000-. html) [7] 26 CFR 1.501(a)-1(a)(2) (http:/ / ecfr. gpoaccess. gov/ cgi/ t/ text/ text-idx?c=ecfr& rgn=div8& view=text& node=26:7. 0. 1. 1. 1. 0. 1. 1& idno=26). [8] 26 USC 501(d) (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000501----000-. html). [9] See IRS Publication 557 (http:/ / www. irs. gov/ pub/ irs-pdf/ p557. pdf). [10] Tax exempt entities with gross receipts over USD 25,000 are required to file annual tax returns on Form 990. Those with less than USD 25,000 must file a simplified return. The IRS granted an extension of time (http:/ / www. irs. gov/ charities/ article/ 0,,id=225705,00. html) for such organizations to file for 2009 until October 15, 2010. Charities falling under that revenue threshold have had no regular filing mandate in the past. One list of small organizations is at http:/ / www. 501exempt. com. [11] For a discussion of UK taxation of charities, see the 1999 Review of Charity Taxation Consultation Document (http:/ / www. hmrc. gov. uk/ consult/ rct. pdf). [12] 26 USC 115 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000115----000-. html) specifically excludes from taxable income all income of states or municipalities, as well as income of public utilities. This operates as an exemption from tax for state and municipal governments. [13] Examples include: a) The United States taxes beneficiaries of trusts, not trusts (with exceptions), but exempts under 26 USC 402 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000402----000-. html) beneficiaries of a pension trust meeting certain qualification; b) Canada ; c) The United Kingdom exempts income and gains of a registered pension scheme from taxation under Income Tax Act section 186 (http:/ / www. opsi. gov. uk/ acts/ acts1988/ ukpga_19880001_en_16), as discussed in the Registered Pension Scheme Manual (http:/ / www. hmrc. gov. uk/ manuals/ rpsmmanual/ RPSM04103010. htm). [14] See, e.g., 26 USC 409 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000409----000-. html) providing exemption to owners of Individual Retirement Accounts until funds are distributed. [15] See, e.g., Malaysian Ministry of Higher Education chart (http:/ / jpt. mohe. gov. my/ RUJUKAN/ Maklumat Insentif Untuk IPTS & Borang Yang Digunakan_120309. pdf) of exemptions and benefits for private higher education institutions. [16] See, e.g., New York City's veterans property tax exemption (http:/ / www. nyc. gov/ html/ dof/ html/ property/ property_tax_reduc_individual. shtml#veterans). [17] See, e.g., [26 USC 107] which excludes from income the rental value of a parsonage provided by a church to a clergyman. [18] See the New York City rule cited above. [19] Contrast 26 USC 101-140 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sup_01_26_10_A_20_1_30_B_40_III. html) exclusions from gross income to UK non-taxable income (http:/ / www. hmrc. gov. uk/ incometax/ taxable-income. htm#2). [20] See International tax for a discussion of territorial tax systems. Most systems exclude from the tax base income of nonresidents from sources outside the taxing jurisdiction. U.S. states and Canadian provinces provide for formulary apportionment of certain business income to achieve a similar result. See, e.g., the Multi State Tax Compact, discussed in a note below. [21] See, e.g., 26 USC 911, 912 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sup_01_26_10_A_20_1_30_N_40_III_50_B. html). [22] See, e.g., 26 USC 103 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000103----000-. html), excluding from U.S. Federal taxable income certain types of interest income received on bonds issued by states or political subdivisions thereof. [23] See, e.g., 26 USC 104 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000104----000-. html), excluding compensation for sickness or injury. [24] The transfer of such property is often taxed separately to the transferor or the transferee. See Estate tax and Gift tax. [25] See, e.g., 26 USC 131 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00000131----000-. html) relating to certain foster care payments. [26] See, e.g., the Texas Sales Tax rules, providing very specific lists of items that are exempt from sales tax. For shortened list of examples of such, see the Grocery and Convenience Stores flyer (http:/ / www. window. state. tx. us/ taxinfo/ taxpubs/ tx96_280. pdf) from the state. [27] See, e.g., the Homestead Exemption (http:/ / www. myflorida. com/ dor/ property/ exemptions. html) granted in Florida. [28] See, e.g., Japan's prefecture taxes, UK local rates, etc.. [29] http:/ / www. mtc. gov/ About. aspx?id=76 [30] http:/ / www. europarl. europa. eu/ ftu/ pdf/ en/ FTU_4. 18. 2. pdf [31] http:/ / www. irs. gov/ pub/ irs-pdf/ p557. pdf [32] http:/ / www. irs. gov/ charities/ content/ 0,,id=96986,00. html
933
Tax haven
934
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.[1] Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. States that are sovereign or self-governing under international law have theoretically unlimited powers to enact tax laws affecting their territories, unless limited by previous international treaties. There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former economic adviser to Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens.[2] Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.[3] According to other definitions,[4] the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions. In its December 2008 report on the use of tax havens by American corporations,[5] the U.S. Government Accountability Office was unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of a tax haven: 1. 2. 3. 4. 5. nil or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center.
History
The use of differing tax laws between two or more countries to try to mitigate tax liability is probably as old as taxation itself. In Ancient Greece, some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the city-state of Athens on imported goods. It is sometimes suggested that the practice first reached prominence through the avoidance of the Cinque ports and later the staple ports in the twelfth and fourteenth centuries respectively. In 1721, American colonies traded from Latin America to avoid British taxes. Various countries claim to be the oldest tax haven in the world. For example, the Channel Islands claim their tax independence dating as far back as Norman Conquest, while the Isle of Man claims to trace its fiscal independence to even earlier times. Nonetheless, the modern concept of a tax haven is generally accepted to have emerged at an uncertain point in the immediate aftermath of World War I.[6] Bermuda sometimes optimistically claims to have been the first tax haven based upon the creation of the first offshore companies legislation in 1935 by the newly created law firm of Conyers Dill & Pearman.[7] However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital.[8] Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein.[9] Swiss banks had long been a capital haven for people fleeing social upheaval in Russia, Germany, South America and elsewhere. However, in the early part of the twentieth century, in the years immediately following World War I, many European governments raised taxes sharply to help pay for reconstruction efforts following the devastation of World War I. By and large, Switzerland, having remained neutral during the Great War,
Tax haven avoided these additional infrastructure costs and was consequently able to maintain a low level of taxes. As a result, there was a considerable influx of capital into the country for tax related reasons. It is difficult, nonetheless, to pinpoint a single event or precise date which clearly identifies the emergence of the modern tax haven. Until the 1950s, tax havens were used to avoid personal taxation but since then jurisdictions have come to focus on attracting companies with low or no corporate tax. Centres which focus on providing financial services to corporations rather than private wealth management are more often known as offshore financial centres. This strategy generally relied on double taxation treaties between large jurisdictions and the tax haven, allowing corporations to structure group ownership through the smaller jurisdiction to reduce tax liability. Although some of these double tax treaties survive,[10] in the 1970s, most major countries began repealing their double taxation treaties with micro-states to prevent corporate tax leakage in this manner. In the early to mid-1980s, most tax havens changed the focus of their legislation to create corporate vehicles which were "ring-fenced" and exempt from local taxation (although they usually could not trade locally either). These vehicles were usually called "exempt companies" or "International Business Corporations". However, in the late 1990s and early 2000s, the OECD began a series of initiatives aimed at tax havens to curb the abuse of what the OECD referred to as "unfair tax competition". Under pressure from the OECD, most major tax havens repealed their laws permitting these ring-fenced vehicles to be incorporated, but concurrently they amended their tax laws so that a company which did not actually trade within the jurisdiction would not accrue any local tax liability.[11]
935
Money and exchange control

Most tax havens have a double monetary control system which distinguish residents from non-resident as well as foreign currency from the domestic one. In general, residents are subject to monetary controls but not non-residents. A company, belonging to a non-resident, when trading overseas is seen as non-resident in terms of exchange control. It is possible for a foreigner to create a company in a tax haven to trade internationally; the companys operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven. Tax havens usually have currency easily convertible or linked to an easily convertible currency. Most are convertible to US dollars, euro or to pounds sterling.
Methodology
At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:[12] Personal residency. Since the early 20th century, wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation see Tax residence. In some cases the low-tax jurisdictions levy no, or only very low, income tax. But almost no tax haven assesses any kind of capital gains tax, or inheritance tax. Individuals who are unable to return to a high-tax country in which they used to reside for more than a few days a year are sometimes referred to as tax exiles. Asset holding. Asset holding involves utilizing a trust or a company, or a trust owning a company. The company or trust will be formed in one tax haven, and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as real estate or valuable chattels. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not resident in the high-tax jurisdiction, they cease to be taxable in that jurisdiction. Often the mechanism is employed to avoid a specific tax. For example, a wealthy testator could transfer his house into an offshore company; he can then settle the shares of the company on trust (with himself being a trustee with another trustee, whilst holding the beneficial life estate) for himself for life, and then to his daughter. On his death, the shares will automatically vest in the daughter, who thereby acquires the house,
Tax haven without the house having to go through probate and being assessed with inheritance tax.[13] (Most countries assess inheritance tax (and all other taxes) on real estate within their jurisdiction, regardless of the nationality of the owner, so this would not work with a house in most countries. It is more likely to be done with intangible assets.) Trading and other business activity. Many businesses which do not require a specific geographical location or extensive labor are set up in tax havens, to minimize tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years. Other examples include internet based services and group finance companies. In the 1970s and 1980s corporate groups were known to form offshore entities for the purposes of "reinvoicing". These reinvoicing companies simply made a margin without performing any economic function, but as the margin arose in a tax free jurisdiction, it allowed the group to "skim" profits from the high-tax jurisdiction. Most sophisticated tax codes now prevent transfer pricing scams of this nature. Financial intermediaries. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. Generally the funds are deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer's jurisdiction, it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation. This has proved particularly successful in the area of offshore funds.[14] In 2010 it was reported that Google uses techniques called the "Double Irish" and "Dutch Sandwich" to reduce its corporate income tax to 2.4%, by funnelling its corporate income through Ireland and from there to a shell in the Netherlands where it can be transferred to Bermuda, which has no corporate income tax.[15]
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The OECD and tax havens

The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:[16] 1. Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence. 2. Protection of personal financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction. 3. Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayers situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. Secret rulings, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a governments lack of legal access to financial records are contributing factors. However the OECD found that its definition caught certain aspects of its members' tax systems (some countries have low or zero taxes for certain favored groups). Its later work has therefore focused on the single aspect of information exchange. This is generally thought to be an inadequate definition of a tax haven, but is politically expedient because it includes the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the USA and UK.[17] In deciding whether or not a jurisdiction is a tax haven, the first factor to look at is whether there are no or nominal taxes. If this is the case, the other two factors whether or not there is an exchange of information and transparency must be analyzed. Having no or nominal taxes is not sufficient, by itself, to characterize a jurisdiction as a tax
Tax haven haven. The OECD recognizes that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.
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Anti-avoidance
To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens. Generally, such legislation tends to operate in one of five ways: 1. attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled Foreign Corporation legislation is an example of this. 2. transfer pricing rules, standardization of which has been greatly helped by the promulgation of OECD guidelines. 3. restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients. 4. taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this. 5. exit charges, or taxing of unrealized capital gains when an individual, trust or company emigrates. However, many jurisdictions employ blunter rules. For example, in France securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven.[18] Also becoming increasingly popular is "forced disclosure" of tax mitigation schemes. Broadly, these involve the revenue authorities compelling tax advisors to reveal details of the scheme, so that the loopholes can be closed during the following tax year, usually by one of the five methods indicated above.[19] Although not specifically aimed at tax havens, given that so many tax mitigation schemes involve the use of offshore structures, the effect is much the same. Anti-avoidance came to prominence in 2010/2011 as NGOs and politicians in the leading economies looked for convenient scapegoats for their governments' spending cuts.[20] The International Financial Centres Forum (IFC Forum) has asked for a balanced debate on the issue of tax avoidance and an understanding of the role that the tax neutrality of small international financial centres plays in the global economy.[21]
Incentives
There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies. Many industrialized countries claim that tax havens act unfairly by reducing tax revenue which would otherwise be theirs. Various pressure groups also claim that money launderers also use tax havens extensively,[22] although extensive financial and KYC regulations in tax havens can actually make money laundering more difficult than in large onshore financial centers with significantly higher volumes of transactions, such as New York City or London.[23] In 2000 the Financial Action Task Force published what came to be known as the "FATF Blacklist" of countries which were perceived to be uncooperative in relation to money laundering; although several tax havens have appeared on the list from time to time (including key jurisdictions such as the Cayman Islands, Bahamas and Liechtenstein), no offshore jurisdictions appear on the list at this time. A very interesting incentive was Inland Revenue and HM Customs and Excise agreeing to sell more than 600 of their building stock to a firm in a tax haven. The sell-off, was made to Bermuda based Mapeley Steps Ltd in 2001.[24]
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Examples
The U.S. National Bureau of Economic Research has suggested that roughly 15% of countries in the world are tax havens, that these countries tend to be small and affluent, and that better governed and regulated countries are more likely to become tax havens, and are more likely to be successful if they become tax havens.[25] No two commentators can generally agree on a "list of tax havens", but the following countries are commonly cited as falling within the "classic" perception of a sovereign tax haven. Andorra The Bahamas Bermuda (United Kingdom) British Virgin Islands (United Kingdom) Cayman Islands (United Kingdom) The Channel Islands of Jersey and Guernsey (United Kingdom) Cyprus The Isle of Man (United Kingdom) Liechtenstein Mauritius Monaco Panama San Marino Seychelles Switzerland Turks and Caicos Islands (United Kingdom)
Non-sovereign jurisdictions sometimes labelled as tax havens potentially include: Campione d'Italia an Italian enclave within Switzerland Delaware Jebel Ali Free Zone in the United Arab Emirates Labuan, a Malaysian island off Borneo
Some tax havens including some of the ones listed above do charge income tax as well as other taxes such as capital gains, inheritance tax, and so forth. Criteria distinguishing a taxpayer from a non-taxpayer can include citizenship and residency and source of income.
Former tax havens

Beirut formerly had a reputation as the only tax haven in the Middle East. However, this changed after the Intra Bank crash of 1966,[26] and the subsequent political and military deterioration of Lebanon dissuaded foreign use as a tax haven. Liberia had a prosperous ship registration industry. The series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the jurisdiction. The fact that the ship registration business still continues is partly a testament to its early success, and partly a testament to moving the national Shipping Registry to New York City. Tangier had a brief but colorful existence as a tax haven in the period between the end of effective control by the Spanish in 1945 until it was formally reunited with Morocco in 1956. A number of Pacific based tax havens have ceased to operate as tax havens in response to OECD demands for better regulation and transparency in the late 1990s. Vanuatu's Financial Services commissioner announced in May 2008 that his country would reform its laws so as to cease being a tax haven. "We've been associated with this stigma for a long time and we now aim to get away from being a tax haven."[27]
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Extent
While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizeable activity. IMF calculations based on BIS data suggest that for selected OFCs (Offshore Financial Centres), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the IFCs (International Financial Centers), namely London, the U.S. IBFs, and the JOM (Japanese Offshore Market).[28] A 2006 academic paper indicated that: "in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries",[29] although they did not define "significant" for this purpose. A January 2009 Government Accountability Office (GAO) report said that the GAO had determined that 83 of the 100 largest U.S. publicly traded corporations and 63 of the 100 largest contractors for the U.S. federal government were maintaining subsidiaries in countries generally considered havens for avoiding taxes. The GAO did not review the companies' transactions to independently verify that the subsidiaries helped the companies reduce their tax burden, but said only that historically the purpose of such subsidiaries is to cut tax costs.[30] Currently the "Caribbean Banking Centers" which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, and Panama hold almost two trillion dollars in United States debt.[31]
Lost tax revenue

In October 2009 research commissioned from Deloitte for the Foot Review of British Offshore Financial Centres indicated that much less tax had been lost to tax havens than previously had been thought. The report indicated "We estimate the total UK corporation tax potentially lost to avoidance activities to be up to 2 billion per annum, although it could be much lower." The report also dissected an earlier report by the TUC, which had concluded that tax avoidance by the 50 largest companies in the FTSE 100 was depriving the UK Treasury of approximately 11.8 billion. The TUC's analysis had looked at the reported profits of the companies and the amount of tax paid, which created a gap in tax revenues which was mostly due to differences in the accounting treatment of profit for taxation purposes, which were intended under the UK's tax rules.[32] The report also stressed that British Crown Dependencies make a "significant contribution to the liquidity of the UK market". In the second quarter of 2009, they provided net funds to banks in the UK totalling $323 billion (195 billion), of which $218 billion came from Jersey, $74 billion from Guernsey and $40 billion from the Isle of Man. Tax Justice Network, an anti-tax haven pressure group, suggests that global tax revenue lost to tax havens exceeds US$255 billion per year, although those figures are not widely accepted. Estimates by the OECD suggest that by 2007 capital held offshore amounts to somewhere between US$5 trillion and US$7 trillion, making up approximately 68% of total global investments under management. Of this, approximately US$1.4 trillion is estimate to be held in the Cayman Islands alone.[33] The Center for Freedom and Prosperity disputes claims about forgone tax revenue. Academic researchers also have found that tax havens actually boost prosperity in neighboring jurisdictions by creating tax-efficient platforms for economic activity much of which would not occur if subject to onerous taxes if controlled by a domestic entity. Some support for this is found in academic studies which suggest that the tax elasticity of investment is approximately 0.6.[34]
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Modern developments
Proposed U.S. legislation
The Foreign Account Tax Compliance Act (FATCA) was initially introduced to target those who evade paying U.S. taxes by hiding assets in undisclosed foreign bank accounts. With the strong backing of the Obama Administration, Congress quickly drafted the FATCA legislation and slipped it into the vaguely related HIRE Hiring_Incentives_to_ Restore_Employment_Act signed into law by President Obama in March 2010. Key provisions of FATCA FATCA requires foreign financial institutions (FFI) of broad scope banks, stock brokers, hedge funds, pension funds, insurance companies, trusts to report directly to the IRS all clients who are U.S. Persons. Starting January 1, 2013 (later delayed to 2014), FATCA will require FFIs to provide annual reports to the Internal Revenue Service (IRS) on the name and address of each U.S. client, as well as the largest account balance in the year and total debits and credits of any account owned by a U.S. person. If an institution does not comply, the U.S. will impose a 30% withholding tax on all its transactions concerning U.S. securities, including the proceeds of sale of securities. In addition, FATCA requires any foreign company not listed on a stock exchange or any foreign partnership which has 10% U.S. ownership to report to the IRS the names and tax I.D. number (TIN) of any U.S. owner. FATCA also requires U.S. citizens and green card holders who have foreign financial assets in excess of $50,000 to complete a new Form 8938 to be filed with the 1040 tax return, starting with fiscal year 2011 (later delayed to 2012).
[35]
The delay is indicative of a controversy over the feasibility of implementing the legislation as evidenced in this paper from the renowned Peterson Institute for International Economics. [36]
Proposed German legislation

In January 2009, Peer Steinbrck, the German financial minister, announced a plan to amend fiscal laws. New regulations would disallow that payments to companies in certain countries that shield money from disclosure rules be declared as operative expenses. The effect of this would make banking in such states unattractive and expensive.[37]
Liechtenstein banking scandal

In February 2008 Germany announced that it had paid 4.2 million to Heinrich Kieber,[38] a former data archivist of LGT Treuhand, a Liechtenstein bank, for a list of 1,250 customers of the bank and their accounts' details. Investigations and arrests followed relating to charges of illegal tax evasion. The German authorities shared the data with U.S. tax authorities, but the British government paid a further 100,000 for the same data.[39] Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property.[40] The Liechtenstein authorities subsequently accused the German authorities of espionage.[41] However, regardless of whether unlawful tax evasion was being engaged in, the incident has fuelled the perception amongst European governments and press that tax havens provide facilities shrouded in secrecy designed to facilitate unlawful tax evasion, rather than legitimate tax planning and legal tax mitigation schemes. This in turn has led to a call for "crackdowns" on tax havens.[42] Whether the calls for such a crackdown are mere posturing or lead to more definitive activity by mainstream economies to restrict access to tax havens is yet to be seen. No definitive announcements or proposals have yet been made by the European Union or governments of the member states.
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G20 tax havens blacklist

At the London G20 summit on 2 April 2009, G20 countries agreed to define a blacklist for tax havens, to be segmented according to a four-tier system, based on compliance with an "internationally agreed tax standard."[43] The list as per April 2nd of 2009 can be viewed on the OECD Data [44] After a great progress the four tiers are now: 1. Those that have substantially implemented the standard (includes most countries but China still excludes Hongkong and Macao). 2. Tax havens that have committed to but not yet fully implemented the standard (includes Montserrat, Nauru, Niue, Panama, and Vanuatu) 3. Financial centres that have committed to but not yet fully implemented the standard (includes Guatemala, Costa Rica and Uruguay). 4. Those that have not committed to the standard (an empty category) Those countries in the bottom tier were initially classified as being 'non-cooperative tax havens'. Uruguay was initially classified as being uncooperative. However, upon appeal the OECD stated that it did meet tax transparency rules and thus moved it up. The Philippines took steps to remove itself from the blacklist and Malaysian Prime Minister Najib Razak had suggested earlier that Malaysia should not be in the bottom tier.[45] On April 7, 2009, the OECD, through its chief Angel Gurria, announced that Costa Rica, Malaysia, the Philippines and Uruguay have been removed from the blacklist after they had made "a full commitment to exchange information to the OECD standards."[46] Despite calls from French President Nicolas Sarkozy for Hong Kong and Macau to be included separately from China on the list, they are as of yet not included independently, although it is expected that they will be added at a later date.[43] Government response to the crackdown has been broadly supportive, although not universal.[47] Luxembourg Prime Minister Jean-Claude Juncker has criticised the list, stating that it has "no credibility", for failing to include various states of the U.S.A. which provide incorporation infrastructure which are indistinguishable from the aspects of pure tax havens to which the G20 object.[48]
Foot report
In November 2009 Sir Michael Foot delivered a report on the British Crown Dependencies and Overseas Territories for HM Treasury.[49] The report indicated that whilst many of the territories "had a good story to tell", others needed to improve in detection and prevention of financial crime. It also stressed the view that narrow tax bases presented long term strategic risks, and that the economies should seek to diversify and broaden their own tax bases. The report also indicated that tax revenue lost by the United Kingdom government appeared to be much smaller than had previously estimated (see above under Lost tax revenue), and also stressed the importance of the liquidity provided by the territories to the United Kingdom. The Crown Dependencies and Overseas Territories broadly welcomed the report,[50] but the pressure group Tax Justice Network, unhappy with the findings, commented "[a] weak man, born to be an apologist, has delivered a weak report."[51]
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Notes
[1] Dharmapala, Dhammika und Hines Jr., James R. (2006) Which Countries Become Tax Havens? (http:/ / ssrn. com/ abstract=952721) [2] Doggart, Caroline. 2002. Tax Havens and Their Uses (originally published 1970), Economist Intelligence Unit, ISBN 0-86218-163-1 [3] Davidson, Sinclair (2007-10-15). "The Truth About Tax Havens - retrieved 28 December 2007" (http:/ / www. theage. com. au/ news/ business/ here-is-the-truth-about-tax-havens/ 2007/ 10/ 15/ 1192300685572. html). Melbourne: Theage.com.au. . Retrieved 2011-03-22. [4] "The Truth About Tax Havens - retrieved 28 December 2007" (http:/ / www. taxjustice. net/ cms/ upload/ pdf/ Identifying_Tax_Havens_Jul_07. pdf) (PDF). . Retrieved 2011-03-22. [5] "International Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions GAO:GAO-09-157" (http:/ / www. gao. gov/ products/ GAO-09-157). Government Accountability Office. December 18, 2008. . Retrieved 2009-01-21. [6] "[T]he tax haven is a creature of the twentieth century, and began to be used extensively because of the high levels of tax which prevailed after the First World War" at para 26.1, Tolley's International Tax Planning (2002), ISBN 0-7545-1339-4 [7] See generally Introduction to Tolley's International Initiatives Affecting Financial Havens (2001), ISBN 0-406-94264-1 [8] The Personen- und Gesellschaftsrecht of 20 January 1926 [9] Tolley's Tax Havens (2000), ISBN 0-7545-0471-9 [10] For example a double taxation treaty still exists between Barbados and Japan, and another between Cyprus and Russia. Mauritius has a double taxation treaty with India that is used for tax mitigation, although India is seeking to renegotiate the treaty, India to push for change in tax treaty with Mauritius (http:/ / timesofindia. indiatimes. com/ NEWS/ India_Business/ India_to_push_for_change_in_tax_treaty_with_Mauritius/ articleshow/ 1068539. cms) [11] For example, the British Virgin Islands repealed the International Business Companies Act (Cap 291) (which had prohibited such companies from trading locally) and enacted the BVI Business Companies Act 2004 (which permitted this) in its place. Contemporaneously it varied its tax laws by amending the Income Tax Act (Cap 206) which amended the rate of income tax for individuals and corporations to zero, and the Payroll Taxes Act 2004 which imposed a (new) payroll tax on person employed by businesses within the British Virgin Islands. [12] Tolley's Offshore Service (2006), ISBN 1-4057-1568-5 [13] This is a simplistic example; in most sophisticated tax codes there are extensive provisions for catching "gifts" (such as a declaration of trust) made for a specified time preceding death. [14] It has been estimated over 75% of the world's hedge funds (probably the riskiest form of collective investment vehicle) are domiciled in the Cayman Islands, with nearly $1.1 trillion US AUM - Institutional Investor (http:/ / www. dailyii. com/ article. asp?ArticleID=1039798& LS=EMS73445), 15 May 2006, although statistics in the hedge fund industry are notoriously speculative. [15] Drucker J. (2010). The Tax Haven That's Saving Google Billions (http:/ / www. businessweek. com/ magazine/ content/ 10_44/ b4201043146825. htm). Business Week. [16] "Tax Haven Criteria - retrieved 26 February 2008 Tax Haven Criteria" (http:/ / www. oecd. org/ document/ 63/ 0,3343,en_2649_37427_30575447_1_1_1_37427,00. html). Oecd.org. . Retrieved 2011-03-22. [17] Hay, Towards a level playing field - regulating corporate vehicles in cross border transactions, (http:/ / www. itio. org/ documents/ TowardsaLevel. pdf) [18] Companies incorporated in tax havens are often used as bond issuing vehicles in securitisations for tax reasons. [19] The United Kingdom is one country that has strict forced disclosure rules. - http:/ / www. hmrc. gov. uk/ aiu/ index. htm [20] "Tax Dodgers - Big Society Revenue & Customs. UK Uncut" (http:/ / www. ukuncut. org. uk/ targets/ tax-dodgers). . Retrieved 18 March 2011. [21] "Statement on tax avoidance debate. IFC Forum" (http:/ / www. ifcforum. org/ files/ IFC_Forum_holding_statement_on_tax_avoidance. pdf). . Retrieved 18 March 2011. [22] Such as ATTAC and the Tax Justice Network. See for example: Offshore watch (http:/ / visar. csustan. edu/ aaba/ jerseypage. html) [23] See for example the views expressed in The Guardian (http:/ / www. guardian. co. uk/ waronterror/ story/ 0,,563715,00. html) in 2001. [24] "UK Treasury rebukes Inland Revenue for tax haven deal" (http:/ / www. internationaltaxreview. com/ default. asp?Page=9& PUBid=210& ISS=13230& SID=488943). International Tax Review. . Retrieved 2011-03-22. [25] Working paper 12802, (http:/ / www. nber. org/ papers/ w12802). The paper implicitly adopts the "smaller" tax haven approach, ie. disregarding larger countries which have either low taxes rates (for example, Russia), or systems of taxation which permit them to be used to structure tax avoidance schemes (for example, the United Kingdom). It also excludes non-sovereign tax havens (for example, Delaware or Labuan). [26] "Election Under Fire" (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,945606-1,00. html). Time Magazine. 1976-05-17. . Retrieved 2006-12-23. [27] "Vanuatu to ditch tax haven" (http:/ / www. theaustralian. news. com. au/ story/ 0,25197,23652068-2702,00. html), Anthony Klan, The Australian, May 6, 2008 [28] "Offshore Financial Centers" (http:/ / www. imf. org/ external/ np/ mae/ oshore/ 2000/ eng/ back. htm), International Monetary Fund background paper, June 23, 2000 [29] Desai, Foley and Hines, "The demand for tax haven operations", Journal of Public Economics 90 (2006), page 514. [30] Carol D. Leonnig (January 16, 2009). "Report Finds Major U.S. Companies Have Offshore Tax Havens" (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2009/ 01/ 16/ AR2009011602602. html?hpid=topnews). Washington Post. .
Tax haven
[31] "U.S. Banking Liabilities to Foreigners." (http:/ / www. treasury. gov/ resource-center/ data-chart-center/ tic/ Pages/ ticliab. aspx). Treasury.gov. . Retrieved 2011-03-22. [32] The Times (2009-10-30). "Tax haven report lays emphasis on vital role of Crown Dependencies" (http:/ / business. timesonline. co. uk/ tol/ business/ industry_sectors/ banking_and_finance/ article6896141. ece). London. . Retrieved 2009-11-02. [33] "Places in the sun" (http:/ / www. economist. com/ surveys/ displaystory. cfm?story_id=8695139), The Economist, February 22, 2007 [34] Hines, Lessons from behavioral responses to international taxation, (1999) 52 National Tax Journal, pp. 305322 [35] U.S. Internal Revenue Service (2011-07-14). "Treasury and IRS Issue Guidance Outlining Phased Implementation of FATCA Beginning in 2013" (http:/ / www. irs. gov/ newsroom/ article/ 0,,id=242164,00. html) (in English). . Retrieved 2011-08-25. [36] "Gary Clyde Hufbauer: The Foreign Account Tax Compliance Act: Imperial Overreach" (http:/ / www. piie. com/ realtime/ ?p=2276) (in English). 2011-07-22. . Retrieved 2011-08-25. [37] Der Spiegel (2009-01-17). "Steinbrck forciert Kampf gegen Steuerparadiese" (http:/ / www. spiegel. de/ wirtschaft/ 0,1518,601859,00. html) (in German). . Retrieved 2009-01-17. [38] Mr Kieber seems to be an unlikely hero for law enforcement authorities. A convicted fraudster, reports indicate that after initially stealing the information, he blackmailed the Liechtenstein authorities into reducing and dropping criminal charges against him relating to property fraud in Spain. However, before returning the disks he made copies which he later sold to foreign governments after he left the country. Further reports indicate that he now lives under a new name in Australia. (http:/ / www. spiegel. de/ international/ business/ 0,1518,537640,00. html) [39] The Guardian, 2 March 2008 (http:/ / www. guardian. co. uk/ business/ 2008/ mar/ 02/ tax. personalfinancenews); The Daily Telegraph, 27 February 2008 (http:/ / www. telegraph. co. uk/ opinion/ main. jhtml?xml=/ opinion/ 2008/ 02/ 27/ do2704. xml); Der Spiegel, 25 February 2008 (http:/ / www. spiegel. de/ international/ business/ 0,1518,537640,00. html) [40] Denmark's tax minister, Kristian Jensen, said: "I think it's a moral problem to reward a criminal for some information that he stole... I don't like this and I don't think this ethic is the best way to ensure that taxes are paid correctly." [41] By Harry de Quetteville 12:01AM GMT 20 Feb 2008 (2008-02-20). "''The Daily Telegraph'', 26 February 2008" (http:/ / www. telegraph. co. uk/ news/ main. jhtml?xml=/ news/ 2008/ 02/ 20/ wliech120. xml). London: Telegraph.co.uk. . Retrieved 2011-03-22. [42] Accountancy Age, 3 March 2008 (http:/ / www. accountancyage. com/ accountancyage/ news/ 2210944/ germany-call-tax-haven); The Times, 9 March 2008 (http:/ / business. timesonline. co. uk/ tol/ business/ money/ tax/ article3510661. ece); The Guardian, 5 March 2008 (http:/ / www. guardian. co. uk/ money/ 2008/ mar/ 05/ capitalgainstax. moneyinvestments?gusrc=rss& feed=worldnews) [43] G20 declares door shut on tax havens (http:/ / www. guardian. co. uk/ world/ 2009/ apr/ 02/ g20-summit-tax-havens), The Guardian, April 2, 2009 [44] "OECD List as per 2009-04-02" (http:/ / www. oecd. org/ dataoecd/ 38/ 14/ 42497950. pdf) (PDF). . Retrieved 2011-03-22. [45] "OECD names and shames tax havens" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 7980848. stm). BBC News. 2009-04-03. . Retrieved 2009-04-04. [46] BBC (2009-04-07). "OECD removes tax havens from list" (http:/ / news. bbc. co. uk/ 2/ hi/ business/ 7987417. stm). BBC News. . Retrieved 2009-04-07. [47] Butler, Eamonn (2009-04-12). "Save the tax havens we need them" (http:/ / www. timesonline. co. uk/ tol/ comment/ columnists/ guest_contributors/ article6078115. ece). London: The Times. . Retrieved 2009-04-14. [48] Clark, Andrew (2009-04-10). "Welcome to tax-dodge city, USA" (http:/ / www. guardian. co. uk/ business/ 2009/ apr/ 10/ tax-havens-blacklist-us-delaware). London: The Guardian. . Retrieved 2009-04-14. [49] "Michael Foot publishes final report" (http:/ / www. hm-treasury. gov. uk/ press_98_09. htm). HM Treasury. 2009-10-29. . Retrieved 2009-11-05. [50] "Governor and Premier Welcome Michael Foot Review Conclusions" (http:/ / www. bviplatinum. com/ news. php?section=article& source=1256939117). 2009-10-30. . Retrieved 2009-11-05. [51] "The Foot Report: a setback" (http:/ / taxjustice. blogspot. com/ 2009/ 10/ foot-report. html). Tax Justice Network. 2009-10-29. . Retrieved 2009-11-05.
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Further reading
Baker, Raymond W. (August 2005). Capitalism's Achilles' Heel: Dirty Money, and How to Renew the Free-Market System. Hoboken, New Jersey: John Wiley & Sons. ISBN 978-0-471-64488-0. Henry, James S. (October 2003). The Blood Bankers: Tales from the Global Underground Economy. New York, NY: Four Walls Eight Windows. ISBN978-1-568-58254-2. Morriss, Andrew P. (2010). Offshore Financial Centers and Regulatory Competition. Washington: The AEI Press. ISBN13: 978-0-844-74324-0. Scevola, Carlo; Sneiderova, Karina (January 2010). Offshore Jurisdictions Guide. Geneva, Switzerland: CS&P Fiduciaire. ISBN978-1-605-94433-3. Shaxson, Nicholas (April 2011). Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. New York, NY: Palgrave Macmillan. ISBN978-0-230-10501-0.
Tax haven
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External links
International Financial Centres Forum (IFC Forum) (http://www.ifcforum.org) Offshore Banking (http://www.onlinetaxhavens.com) directory of providers Offshore Banking and Financial Centers (http://www.imf.org/external/ns/cs.aspx?id=55) Offshore Financial Centers -- IMF Background Paper (http://www.imf.org/external/np/mae/oshore/2000/ eng/back.htm) Congressional Research Service (CRS) Reports regarding tax havens (http://digital.library.unt.edu/govdocs/ crs/search.tkl?type=subject&q=Tax havens&q2=LIV) Tax Justice Network (http://www.taxjustice.net/cms/front_content.php?idcat=2) Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD (http://www.oecd.org/ tax/transparency) Global Financial Integrity (http://www.gfip.org/) Task Force on Financial Integrity & Economic Development (http://www.financialtaskforce.org/) An OECD Proposal To Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy (http://www. heritage.org/Research/Taxes/BG1395.cfm) Heritage Foundation: Washington D.C. The Moral Case for Tax Havens (http://admin.fnst.org/uploads/1044/24-OP-pdf.pdf)
The Economic Case for Tax Havens (http://freedomandprosperity.org/2008/videos/ the-economic-case-for-tax-havens/) The Economics of Tax Competition: Harmonization vs. Liberalization (http://www.heritage.org/research/ features/index/chapters/pdfs/Index2004_Chap2.pdf) "Why tax havens are a blessing" the Cato Institute (http://www.cato.org/pub_display.php?pub_id=9283) "Profiting from corruption: The role and responsibility of financial institutions" - U4 Anti-Corruption Resource Centre (http://www.cmi.no/publications/file/3537-profiting-from-corruption.pdf) Tax Havens: Myth v. Fact (http://freedomandprosperity.org/issues/tax-havens/)
Tax residence
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Tax residence
Outline of definitions of residence for tax purposes
Definitions of residence for tax purposes vary considerably from state to state. For individuals, physical presence in a state is an important factor. Some states also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some states determine the residence of a corporation based on its place of incorporation. Other states determine the residence of a corporation by reference to its place of management. Some states use both a place-of-incorporation test and a place-of-management test. Domicile is, in common law jurisdictions, a different legal concept to residence. Residence as defined in double taxation treaties is different from residence as defined for domestic tax purposes. Tax treaties generally follow the OECD Model Convention which provides: 1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests); b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national; d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.[1]
Tax residence
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Tax residence in the United Kingdom

Tax residence in the United Kingdom for companies
A company is generally treated as resident in the United Kingdom for tax purposes if it is incorporated in the United Kingdom or, if the company is not incorporated in the United Kingdom, if its central management and control are exercised in the United Kingdom. "Central management and control" refers to the highest level of oversight, usually as exercised by the board, rather than day-to-day management.[2]
Tax residence in the United Kingdom for individuals

An individual who spends more than 183 days in the UK in a tax year is UK resident.[3] Apart from that, there are no clear statutory guidelines. The question of whether someone is UK resident is a question of fact and degree, to be determined "on all the circumstances of the case."[4] The vagueness of this test has often been criticised. Viscount Sumner said in Levine v IRC: The words "resident in the United Kingdom", "... guide the subject remarkably little as to the limits within which he must pay and beyond which he is free. .. The Legislature has, however, left the language of the Acts substantially as it was in [1801], nor can I confidently say that the decided cases have always illuminated matters. In substance persons are chargeable or exempt, as the case may be, according as they are deemed by this body of Commissioners or that to be resident or the reverse, whatever resident may mean in the particular circumstances of each case. The tribunal thus provided is neither bound by the findings of other similar tribunals in other cases nor is it open to review, so long as it commits no palpable error of law, and the Legislature practically transfers to it the function of imposing taxes on individuals, since it empowers them in terms so general that no one can be certainly advised in advance whether he must pay or can escape payment.[5] Similarly, the Codification Committee concluded: an enquirer can only be told that the question whether he is resident or not is a question of fact for the Commissioners but that by the study of the effect of a large body of case law he may [emphasis added] be able to make an intelligent forecast of their decision.[6] More recently, the Chartered Institute of Taxation concluded: the law determining whether an individual is resident in the UK is a mess.[7] It is not possible in the scope of a wikipedia article to provide a useful and accurate statement of the substantial case law relating to residence of individuals for tax purposes in the UK and any short summary would be inaccurate and misleading. The number of days present in the UK is not a decisive factor (unless the number of days exceeds 183 in a tax year). In one case a foreigner who spent 5 months in the UK was held not UK resident.[8] In the view of HMRC someone who exceeds 90 days on a four year average is UK resident, but considerable emphasis is given to the fact that someone who averages less than 90 days may also be UK resident.[9] Before 2009/10, the vagueness of the law did not seem to matter because HMRC published relatively clear guidelines in document IR20. That document has been withdrawn from 2009/10 and replaced with the much vaguer guidance in HMRC 6.[10] HMRC currently argue that they are not bound by the terms of IR20 for years prior to 2009/10. Whether that is correct is currently the subject of litigation.[11] It is clear that HMRC are not in any way bound by the terms of HMRC 6, which contains a very full disclaimer.[12]
Tax residence
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Tax residence in Germany

All tax resident individuals are taxed on their worldwide income, regardless of the source. This would include salary, dividends, etc. earned from one's limited company. Generally, individuals are deemed to be tax resident if they are physically present in Germany for more than six months in any one calendar year or for a consecutive period of six months over a calendar year-end. This ruling is applied retrospectively so presence in Germany from 1 March to 30 November, for example, would make one a German tax resident and therefore subject to German tax on the worldwide income for the entire period rather than just from the beginning of the seventh month. An individual can also be deemed tax resident if they acquire an abode in Germany. This can include renting, as opposed to purchasing, a property but only if the duration of the lease is deemed to be more than temporary. For this reason, to avoid German tax residency, short-term (such as three months) should be taken out wherever possible. Non-resident individuals are taxed on German-source income only. In the case of salary and benefits from your limited company, the source is German since the duties of the employment are being performed in Germany. However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in Germany: see below) would be from a non-German source regardless of where the dividends are received. There is, therefore, scope for tax mitigation here if one does not become a German tax resident (although non-German taxes may also need to be considered).
References
[1] http:/ / www. oecd. org/ dataoecd/ 50/ 49/ 35363840. pdf [2] For HMRC views see SP 1/90 and the International Tax Handbook chapters 3 and 4. For a statement of judicial views, see Control of Special Purpose Vehicles (John Chadwick) [2007] Jersey & Guernsey Law Review 153. (http:/ / www. jerseylaw. je/ Publications/ jerseylawreview) For general studies, see Corporate Residence and International Taxation (Robert Couzin, IBFD 2002); Stephen Brandon QCs Taxation of Non-UK Companies and their Shareholders (Key Haven Publications, 2002). [3] Section 831(1) Income Tax Act 2007 [4] Gaines-Cooper v HMRC [2007] STC (SCD) 23 at [165]. [5] Levine v IRC 13 TC 486 at p.502. [6] Income Tax Codification Committee Report 1936 Cmd.5131 pp.3439. [7] Residence for tax purposes 14 November 2007 accessible www.kessler.co.uk. [8] IRC v Zorab 11 TC 289. [9] HMRC 6 para 1.2, 1.5.13, 1.5.22, 2.2 [10] http:/ / www. hmrc. gov. uk/ cnr/ hmrc6. pdf [11] Gaines-Cooper v HMRC [12] HMRC6 section 1
External links
Site explaining what makes a person as tax resident, for different jurisdictions. (http://www. capitaltaxconsulting.com/international-tax/) Grant Thornton tax ebook for expats (http://www.gti.org/Services/Tax-services/Expatriate-tax/ Expatriate-tax-ebook/) Deloitte Tax Guides (http://www.deloittetaxguides.com/) Taxation of Foreign Domiciliaries in UK law (http://www.foreigndomiciliaries.co.uk/index.php/Main_Page)
Tax shelter
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Tax shelter
Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws. In North America, a tax shelter is generally defined as any method that recovers more than $1 in tax for every $1 spent, within 4 years.
Types of tax shelters

Some tax shelters are questionable or even illegal: Offshore companies. Due to differing tax rates and legislations in each country, tax benefits can be exploited. Example: If Import Co. buys $1 of goods from India and sells for $3, Import Co. will pay tax on $2 of taxable income. However, tax benefits can be exploited if Import Co. is to setup an offshore subsidiary in the British Virgin Islands to buy the same goods for $1, sell the goods to Import Co. for $3 and sell it again in the domestic market for $3. This allows Import Co. to report taxable income of $0 (because it was purchased for $3 and sold for $3), thus paying no tax. While the subsidiary will have to pay tax on $2, the tax is payable to the tax authority of British Virgin Islands. Since the British Virgin Islands has a corporate tax rate of 0%, no taxes are payable. Financing arrangements. By paying unreasonably high interest rates to a related party, one may severely reduce the income of an investment (or even create a loss), but create a massive capital gain when one withdraws the investment. The tax benefit derives from the fact that capital gains are taxed at a lower rate than the normal investment income such as interest or dividend. The flaws of these questionable tax shelters are usually that transactions were not reported at fair market value or the interest rate was too high or too low. In general, if the purpose of a transaction is to lower tax liabilities but otherwise have no economic value, and especially when arranged between related parties, such transactions are often viewed as unethical. The agency may re-evaluate the price, and will quickly neutralize any over tax benefits. However, such cases are difficult to prove. A soft drink from a vending machine can cost $1.00, but may also be bought in bulk for $0.25. To prove that the price is in fact unreasonable may turn out to be reasonably difficult itself. Other tax shelters can be legal and legitimate: Flow-through shares/limited partnerships. Certain companies, such as mining or oil drilling often take several years before they can generate positive income, while many of them will go under. This normally deters common investors who demand quick, or at least safe, returns. To encourage the investment, the US government allows the exploration costs of the company to be distributed to shareholders as tax deductions (not to be confused with tax credits). Investors are rewarded by 1) the near instant tax savings 2) the potential massive gains if the company discovers gold or oil. In US terminology, these entities are given the generic title of "limited partnership" and in the past they may have simply been called a "tax shelter", being an archetypical tax shelter. However the IRS limited the popularity of these plans by allowing the losses to only offset passive (investment) income as opposed to earned income. Retirement plan. In order to reduce burden of the government-funded pension systems, governments may allow individuals to invest in their own pension. In the USA these sanctioned programs include Individual Retirement Accounts (IRAs) and 401(k)s. The contributed income will not be taxable today, but will be taxable when the individual retires. The advantage to these plans is that money that would have been taken out as taxes is now compounded in the account until the funds are withdrawn. With the Roth IRA and the newly introduced ([2006]) Roth 401(k), income is taxed before the contributions are made into the account but are not taxed when the funds are withdrawn. This option is preferred by those workers who expect to be in a higher tax bracket during retirement than they currently are. A similar system is available in the United Kingdom and is known as the
Tax shelter Individual Savings Account. These tax shelters are usually created by the government to promote a certain desirable behavior, usually a long term investment, to help the economy; in turn, this generates even more tax revenue. Alternatively, the shelters may be a means to promote social behaviors. In Canada, in order to protect the Canadian culture from American influence, tax incentives were given to companies that produced Canadian television programs. In general, a tax shelter is any organized program in which many individuals, rich or poor, participate to reduce their taxes due. However, a few individuals stretch the limits of legal interpretation of the income tax laws. While these actions may be within the boundary of legally accepted practice in physical form, these actions could be deemed to be conducted in bad faith. Tax shelters were intended to induce good behaviors from the masses, but at the same time caused a handful to act in the opposite manner. Tax shelters have therefore often shared an unsavory association with fraud. William J. Casey is credited with coining the term 'tax shelter'.
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Judicial doctrines to combat tax shelters

Aside from the attempts to stop tax shelters in the United States through provisions of the U.S. Internal Revenue Code, U.S. courts have several ways to prevent tax sheltering activities from happening. The judicial doctrines have a basic theme: to invalidate a transaction that would achieve a result contradictory to the intent or basic structure of the tax code provisions at issue. The following are the judicial doctrines: 1) The Substance over form doctrine This doctrine is based on the premise that if two transactions have the same economic result, they should have the same tax result. To achieve this a similar tax result, it can be necessary to look at the substance of the transaction rather than the formal steps taken to implement it. 2) The Step transaction doctrine Similar to the substance doctrine, the step transaction doctrine treats a series of formally separate steps as a single transaction to determine what really was going on with the transaction. 3) The Business Purpose Doctrine Courts will invalidate a transaction for tax purposes under this doctrine when it appears that the taxpayer was motivated by no business purpose other than to avoid tax or secure some tax benefit. This judicial inquiry largely is dependent on the taxpayers intent. 4) The Sham Transaction Doctrine This doctrine looks for transactions where the economic activities giving rise to the tax benefits do not occur. A clear example of this doctrine is seen in Knetsch v. United States, 364 U.S. 361. 5) The Economic Substance Doctrine Under this doctrine, courts will invalidate the tax transaction if the transaction lacks economic substance independent of the tax considerations. This doctrines questions whether the purported economic activity would have occurred absent the tax benefits claimed by the taxpayer. Donaldson, Samuel A. (2007), Federal Income Taxation of Individuals: Cases, Problems and Materials (2nd ed.), St. Paul: Thompson West.pg. 730-734
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External links
Tax Shelters: Exotic or Just Plain Illegal? [1] Knowledge@Wharton, (requires login) March 9, 2006 The Internal Revenue Service on tax shelter [2] Tax Me If You Can [3] PBS Frontline documentary on illegal tax shelters TaxShelters.org [4]
References
[1] [2] [3] [4] http:/ / knowledge. wharton. upenn. edu/ index. cfm?fa=viewArticle& id=1419 http:/ / www. irs. ustreas. gov/ businesses/ corporations/ article/ 0,,id=97384,00. html http:/ / www. pbs. org/ wgbh/ pages/ frontline/ shows/ tax/ view/ http:/ / www. taxshelters. org/
Tax shield
A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield. Since a tax shield is a way to save cash flows, it increases the value of the business, and it is an important aspect of business valuation.
Example
Case A
Consider one unit of investment that costs $1,000 and returns $1,100 at the end of year 1, i.e. a 10% return on investment before taxes. Now assume tax rate of 20%. If an investor pays $1,000 of capital, at the end of the year, he will have ($1,000 return of capital, $100 income and $20 tax) $1,080. He earned net income of $80, or 8% return on capital.
Case B
Consider the investor has an option to borrow $4000 at 8% interest (same rate as return of capital in Case A). By borrowing $4,000 in addition to the $1,000 of his initial equity capital, the investor can purchase 5 units of investment. At the end of the year, he will have: ($5,000 return of capital, 4,000 repayment of debt, $500 revenue, $320 interest payment, and $(500-320)*20%=$36 tax). Therefore, he is left with $1,144. He earned net income $144, or 14.4%. The reason that he was able to earn additional income is because the cost of equity capital (opportunity cost, 8%) is not deductible for tax purposes, but the cost of debt (interest) is.
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Value of the Tax Shield

In most business valuation scenarios, it is assumed that the business will continue forever. Under this assumption, the value of the tax shield is: (interest bearing debt) x (tax rate). Using the above examples: Assume Case A brings $80 after-tax income per year, forever. Assume Case B brings $144 after-tax income per year, forever. Value of firm in Case A: $80/0.08 = $1,000 Value of firm in Case B: $144/0.08 = $1,800 Increase in firm value due to tax shield: $1,800 $1,000 = $800 Alternatively, debt x tax rate: $4,000 x 20% = $800;
External links
The Value of Tax Shields IS Equal to the Present Value of Tax Shields [1] Tax Shield at Investopedia.com [2]
References
[1] http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=790844 [2] http:/ / www. investopedia. com/ terms/ t/ taxshield. asp
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable and some expenditures not deductible in computing tax. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships. Most systems require that all income realized be included in taxable income. Some systems provide tax exemption for some types of income. Many systems impose tax at different rates for differing types (e.g., capital gains or salaries) or levels of income (e.g., graduated rates). In the United States, gross income includes all income realized from whatever source, but excludes particular tax exempt items, such as municipal bond interest. In 2010, the United Kingdom and the United States both provided reduced rates of tax for capital gains and dividends. Most systems and jurisdictions allow business taxpayers to reduce taxable income by cost of goods or other property sold, as well as deductions for business expenses. Many systems limit some sorts of business deductions. For example, deductions for automobile expenses are limited in the United Kingdom and United States. Some systems allow tax deductions for certain nonbusiness expenses. Such deductions may include personal expense items, such as a home mortgage interest deduction, and vary widely by jurisdiction. In addition, many systems allow deductions for personal allowances or a minimum deemed amount of personal deductions. The United States Federal system allows a deduction for personal exemptions, as well as a minimum standard deduction in lieu of other personal deductions. Some states in the United States allow few personal deductions.
Taxation of trusts (United Kingdom)
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Taxation of trusts (United Kingdom)

The taxation of trusts in the United Kingdom is governed by a different set of principles to those tax laws which apply to individuals or companies.
Inheritance tax
See main article Inheritance tax (United Kingdom). The inheritance tax ("IHT") treatment of trusts was substantially revised by the Finance Act 2006, with effect from 22 March 2006. The possible types of trust which can now exist for inheritance tax purposes are set out in the table below:
Name Bare trust. Defining features Not a true trust: beneficiary is absolutely entitled to the income and capital. Trust for wholly charitable purposes. The current interest-in-possession existed at 22 March 2006. Tax treatment No tax on the trustees. Beneficiary taxed in all respects as if the assets are his or her own, personally. Inheritance tax free. Interest-in-possession treatment (see below).
Charity. Pre-existing interest-in-possession trust. Pre-existing accumulation and maintenance trust.
Trust was an accumulation and maintenance trust under the old rules (not explained on this page: broadly speaking, trusts for beneficiaries under 25) at 22 March 2006.
Creation no longer possible. No ten-year charges or exit charges until 6 April 2008. May already fulfil the definition of an 18-25 Trust, or may (if its terms allow) be amended to so as to fulfil that definition before 6 April 2008. If so, taxed as an 18-25 Trust from that date. If not, taxed as a relevant property trust from that date. Tax as normal on creation (can only be created by will, therefore taxed as part of the settlor's death estate). No ten-year charges or exit charges. Tax as normal on creation (new ones can only be created by will, therefore taxed as part of the settlor's death estate). Trust becomes a relevant property trust (see below) upon the beneficiary attaining 18 (therefore a maximum exit charge of 7/10ths of 6% = 4.2% where the beneficiary becomes entitled at 25). Interest-in-possession treatment (see below). Spouse exemption available if the interest-in-possession beneficiary is a spouse or civil partner of the deceased. Interest-in-possession treatment (see below). Spouse exemption available if the new interest-in-possession beneficiary is a spouse or civil partner of the previous interest-in-possession beneficiary. Interest-in-possession treatment (see below).
Trust for bereaved minor. Created in the will of the parent of the beneficiary concerned, who must be absolutely entitled on or before age 18. 18-25 trust. Created either by amendment to an existing accumulation and maintenance trust, or in the will of the parent of the beneficiary concerned, who must be absolutely entitled on or before age 25. An interest-in-possession trust, created by a will and taking effect immediately upon the death.
Immediate post-death interest.
Transitional serial interest.
Various situations where a pre-existing interest-in-possession trust has terminated in favour of a new interest-in-possession. Certain trusts for the benefit of a beneficiary with a disability. Any trust not falling into another category, above. Prior to March 2006 this treatment applied mainly to discretionary trusts.
Disabled trust.
Relevant property trust.
Relevant property trust treatment (see below).
NOTES: 1. An "interest-in-possession" means that a specific beneficiary has a right to the current income of the trust. 2. The spouse exemption exempts from tax any assets passing between spouses and civil partners. Relevant property trusts are taxed: On creation:
Taxation of trusts (United Kingdom) If the trust is created inter vivos (i.e. during the settlor's lifetime): It is taxed at half of the current death rate for IHT. The death rate is 40%, and the 2007/8 IHT "nil-band" is 300,000. Therefore if the settlor has made no gifts and settled no trusts in the seven years prior to settling a trust in 2007/8, it would be taxed at nil rate (0%) on the first 300,000 and 20% on the balance. If the settlor dies within seven years of the settlement, the initial 20% charge will be recalculated as if it were a PET, and if that is more than the tax already paid, the balance will be due (but there is no repayment if the recalculation produces a lower result). If the trust is created on death (i.e. a testamentary trust) it will usually suffer IHT at creation under the normal rules, because of the death. There is therefore no need for the trust to be taxed separately on creation. To "ten-year charges", on each tenth anniversary of the settlement (or of the date of death, in the case of a testamentary trust). The rate is 6% on the value of the trust's assets exceeding the nil-band at that time. To "exit charges" when money leaves the trust: most usually by appointment to a beneficiary. Simplifying a little, the rate of IHT is that proportion of what the next ten-year charge would have been, that the time which has elapsed since creation or the last ten year charge bears to ten years. The Interest-in-possession treatment, since 2006, applies only to some trusts with an interest-in-possession (as defined above). Where it applies, such trusts are taxed by attributing the trust's value to the beneficiary who is currently entitled to the income. Accordingly: On creation: In the rare cases where they can be created in lifetime they are taxed as PETs. They are taxed as part of the death estate, when created by will. A spouse exemption is available where the interest-in-possession beneficiary is a spouse or civil partner of the deceased. On termination (i.e. termination of the interest-in-possession, which may, or may not, be the termination of the trust): The value of the trust's assets is taxed at death rates upon the death of the interest-in-possession beneficiary. It aggregates with that beneficiary's estate, and the trust and the estate share the nil-band between them, in proportion to their values. The value of the trust's assets is taxed as if it were a "PET" where the beneficiary's right to receive income ceases in his or her lifetime. Source: Schedule 20 Finance Act 2006.
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Article Sources and Contributors
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edits English trusts law Source: http://en.wikipedia.org/w/index.php?oldid=454075104 Contributors: Ajbpearce, Ckatz, Gabbe, Ironholds, James500, Marbod Egerius, RTV User 545631548625, Topbanana, Wikidea, Woohookitty, 3 anonymous edits United States trust law Source: http://en.wikipedia.org/w/index.php?oldid=454244634 Contributors: Aboutmovies, Adoarns, Allenb11464, Christopher Kraus, Colonies Chris, Cory Donnelly, DH85868993, DickClarkMises, Drmies, EECavazos, Eastlaw, Edward, Iridescent, JohnPeterAltgeld, Legis, Macclancy, Mangostar, Mild Bill Hiccup, Ohnoitsjamie, Sardanaphalus, SuedInfo, TastyPoutine, Wikidea, Yellowdesk, 25 anonymous edits Domicile (law) Source: http://en.wikipedia.org/w/index.php?oldid=446691472 Contributors: Arthur chos, BD2412, Blue-Haired Lawyer, Bryanmackinnon, Cburnett, CheshireKatz, Coemgenus, Coolcaesar, Dale Arnett, Danger, David91, Deodar, Fama Clamosa, Gaius Cornelius, Guy Peters, 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anonymous edits Beneficiary (trust) Source: http://en.wikipedia.org/w/index.php?oldid=439408270 Contributors: A E Francis, Grafen, Legis, Pevernagie, Plrk, Savidan, Thaurisil, 13 anonymous edits Capacity Source: http://en.wikipedia.org/w/index.php?oldid=451542612 Contributors: Angel ivanov angelov, BD2412, Baby Jenga, Blue-Haired Lawyer, Bobby H. Heffley, Brianjd, CHJL, Cburnett, Charles Matthews, David91, Deodar, Dims, Djmckee1, Dr. Sunglasses, Eastlaw, Gcm, George Burgess, Gobiman, Gondiamond, GraemeL, H Padleckas, Ian Pitchford, Ibrain, J.martin.leonard, Jeff3000, Jlittlet, La Pianista, Legis, Mais oui!, Matthew Proctor, Mikeblas, Mild Bill Hiccup, MrBoo, NTK, Neutrality, Ohnoitsjamie, Phng Huy, PikachuSnowman, Piotrnikitin, QuantumEngineer, R'n'B, Reedy, Robert Bond, Robert Weemeyer, Roberto12, Robofish, Rsabbatini, Sardanaphalus, Sj, Sl, Texaselder, Tomas e, Vercillo, Wafry, Zannah, 12 , anonymous edits Cestui que Source: http://en.wikipedia.org/w/index.php?oldid=414269526 Contributors: A E Francis, AnnaFrance, Bunnyhop11, Cybercobra, Eastlaw, Gary King, Joseph Solis in Australia, Kwamikagami, Kwertii, Lightmouse, Noq, Pietrow, RJFJR, Rilkas, Rjwilmsi, Sardanaphalus, Siva1979, Tfeledy, The Master and Margarita, Tim!, , 10 anonymous edits Characterisation (conflict) Source: http://en.wikipedia.org/w/index.php?oldid=453047505 Contributors: David91, Deodar, Eastlaw, Flarity, Gabriel Duvall, Jafeluv, Jerzy, Jojalozzo, Joriki, Kungfuadam, Michael Hardy, O mores, PullUpYourSocks, R'n'B, Sardanaphalus, 2 anonymous edits Condition precedent Source: http://en.wikipedia.org/w/index.php?oldid=392287558 Contributors: Agent 86, Elliejohn, Idaltu, Misterx2000, Ontheinternets, Piratejosh85, Rich Farmbrough, Sam Hocevar, The Master and Margarita, Wikidea, 11 anonymous edits Condition subsequent Source: http://en.wikipedia.org/w/index.php?oldid=434729427 Contributors: Bluegreen1011, CrashingWave, Kerryf, Lamro, Misterx2000, Piratejosh85, PullUpYourSocks, Rich Farmbrough, The Master and Margarita, 10 anonymous edits Conveyancing Source: http://en.wikipedia.org/w/index.php?oldid=453572518 Contributors: Alfred thumb, Alpha Quadrant (alt), Alysiawilson, Areetkid, BD2412, Batmanand, Bearian, Berland, Cashmaster10001, Cashmaster1001, Chowbok, Cutler, Cynical, Darkskynet, Dave souza, DaveK@BTC, DavidFarmbrough, Deipnosophista, Delpino, DocWatson42, Docu, Dougshephard, Eekerz, Emailmattp, Epbr123, Everyking, Famspear, Flowanda, Fxdesignstudio, GBrazg, GMoxley, Gageridge, Garethharvey, Gb drbob, Giraffedata, Graham87, Gralo, Heron, Hezbolarki Fun Ship, Hmains, Hughcharlesparker, J.delanoy, JHunterJ, James Pinnell, Jni, Johnclay, Johnleemk, Johntex, Johnuniq, Khoj badami, La Pianista, Lo2u, Lobsterthermidor, Mandarax, Minesweeper, Mydogategodshat, Nedrump, Nellis, Nick Number, Nixeagle, Noq, NortyNort, Notinasnaid, Ohnoitsjamie, Omicronpersei8, Ozdaren, Parkplethora123, Peterjohnambrose, Peterraybone, Pnm, Postdlf, Quickbeam, Reaper Eternal, Redsy, RobBlakemore, Robocoder, Sardanaphalus, Shadowjams, Stifle, That Guy, From That Show!, Thomascombs, TomViza, Tplatt, Uncle Milty, VeryRusty, Vik-Thor, Wangi, Willking1979, Xshanez1, 132 anonymous edits Coroner's jury Source: http://en.wikipedia.org/w/index.php?oldid=369806390 Contributors: Beland, Che090572, Cutler, Darth Panda, Epbr123, Espoo, Fortdj33, JSimmonz, Jll, Leontios, MBRZ48, Mattisse, Nietzsche 2, Phil Boswell, Rubensni, Vince-booth, 12 anonymous edits Credible witness Source: http://en.wikipedia.org/w/index.php?oldid=447060612 Contributors: Bearian, Drpickem, Eastlaw, EvilResident, Graham87, Jim.henderson, Nick Number, 2 , anonymous edits Cy-prs doctrine Source: http://en.wikipedia.org/w/index.php?oldid=442503522 Contributors: BD2412, C0pernicus, CalJW, Cybercobra, Derekbanducci, Dinostan, Dooley, Famspear, Fingers-of-Pyrex, Gabbe, Gabriel Duvall, Gaius Cornelius, Grimhelm, Ironholds, James Kessler QC, KickahaOta, Kwamikagami, Legis, Mais oui!, Mauls, Mendaliv, N5iln, Pensezbien, Rjwilmsi, SJK, Sardanaphalus, Tim!, Varlaam, 24 anonymous edits Disclaimer of interest Source: http://en.wikipedia.org/w/index.php?oldid=431647010 Contributors: BD2412, Balster neb, David Haslam, Everybody is Hungry, MrBoo, Postdlf, PrincessCaitlai, Robofish, Sardanaphalus, 2 anonymous edits Doctrine of exoneration of liens Source: http://en.wikipedia.org/w/index.php?oldid=365152865 Contributors: Neutrality, Pink Bull, Pnm Donatio mortis causa Source: http://en.wikipedia.org/w/index.php?oldid=401034098 Contributors: BD2412, Headbomb, Ironholds, Jlittlet, Legis, Mr.sandmannn, Psiphiorg, SunCreator, 7 anonymous edits
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Patrick, Jeffq, Kbthompson, Lobsterthermidor, Mholland, Modify, Necessaryx, Neutrality, Ngchen, Noclevername, Notuncurious, Owain, Peter Greenwell, PiAndWhippedCream, Pnm, PrincessWortheverything, Pseydtonne, PullUpYourSocks, R'n'B, Radon210, Rekleov, RetiredUser2, Richard75, Rjgibb, Rlaager, Rreagan007, Ryan Roos, ShelfSkewed, Speight, Stbalbach, Tcncv, Tedernst, Teleutomyrmex, Ubermonkey, Umrs, Walton One, Wikibofh, Wjhonson, 31 anonymous edits Estate Planner Source: http://en.wikipedia.org/w/index.php?oldid=453624284 Contributors: Acroterion, Admiralwaugh, Alisonbroderick, AndyJones, Aquarius Rising, Aranel, Arons17, BD2412, Babybear2, Barek, Brightflash, CanFinancial, Caringeditor, Cindylange, CliffC, Cyberbytes, DS1953, Dgeorget, Diannaa, Dsanders21, EECavazos, Ed Pittock, Elipongo, Ellsworth, Enochlau, Erisa Goss, Ethics2med, Grafen, Gurt Posh, H Padleckas, Imthetwit68, Interwebs, Investored, Jackol, Jamessingler, Jersyko, John wesley, Johnbod, Jojalozzo, JonMcLoone, Kuru, Leszek Jaczuk, Lizchimpanzee, Lyseong, Malik Shabazz, Mdlawmba, MegaHasher, Mild Bill Hiccup, Minasirkin, Misterx2000, Nirvana2013, Nnp, One more night, Paulmcdonald, Pearle, Perspicacite, Prestonmarkstone, Rbeatrice, Requestion, Rhobite, Rich Janis, Ronz, Sardanaphalus, Severo, Shalom Yechiel, SiobhanHansa, Sjgrant, Slp1, Ssk352, Stephenb, Subuyoung, Taffenzee, TastyPoutine, Taxman, TheTriumvir, Thechiefseo, Themfromspace, Tom harrison, Yworo, 84 anonymous edits Estate planning Source: http://en.wikipedia.org/w/index.php?oldid=453626657 Contributors: Acroterion, Admiralwaugh, Alisonbroderick, AndyJones, Aquarius Rising, Aranel, Arons17, BD2412, Babybear2, Barek, Brightflash, CanFinancial, Caringeditor, Cindylange, CliffC, Cyberbytes, DS1953, Dgeorget, Diannaa, Dsanders21, EECavazos, Ed Pittock, Elipongo, Ellsworth, Enochlau, Erisa Goss, Ethics2med, Grafen, Gurt Posh, H Padleckas, Imthetwit68, Interwebs, Investored, Jackol, Jamessingler, Jersyko, 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Spirelli, Sverdrup, Tabletop, Taxman, Thesteve, Vwhenry, WRK, WWGB, Wayland, WikHead, Wikidea, Wikilocky, Wipsenade, Zippanova, 80 anonymous edits Charitable remainder unitrust Source: http://en.wikipedia.org/w/index.php?oldid=448084375 Contributors: 65tosspowertrap, Chrisbolt, Dwight666, EECavazos, Eastlaw, Grafen, Leszek Jaczuk, Rzlaw, SiobhanHansa, Zariane, Zebulonlaw, 10 anonymous edits Child Trust Fund Source: http://en.wikipedia.org/w/index.php?oldid=442256922 Contributors: AuldScratch, Beetstra, Chelseawoman, Dave t uk, David.Mestel, Dongk, E-shark, EconomicsGuy, Edward, Gabbe, Goatchurch, Goldfish 23, Ground Zero, Ian3055, ImperfectlyInformed, Jkl678, KevinCuddeback, Kiore, MER-C, Malcolmcoles, Markz17, Martpol, Ndeezy, Pafcool2, Rd232, Rich Farmbrough, Rjwilmsi, 37 anonymous edits Constructive trust Source: http://en.wikipedia.org/w/index.php?oldid=441135609 Contributors: Alphachimp, Asclepius, BD2412, Barkeep, Bejnar, Bp28, Colonies Chris, Craddocktm, Eastlaw, Famspear, Henning Makholm, Ironholds, Jbruin152, Jeremybrennan, Legis, LilHelpa, Lilac Soul, MBisanz, Mild Bill Hiccup, Olegwiki, RJFJR, Sardanaphalus, Thelb4, Wikidea, 28 anonymous edits Corporate trust Source: http://en.wikipedia.org/w/index.php?oldid=443416173 Contributors: Bartonhillwiki, Cantonnier, Cmcfarland, Draperst, GeeCee, J CMac79, Jmaioran, Kernel Saunters, Penbat, R'n'B, Rjwilmsi, Shinpah1, Tabletop, Woohookitty, 12 anonymous edits Crummey trust Source: http://en.wikipedia.org/w/index.php?oldid=430758080 Contributors: Arthur Rubin, Bongomatic, Hardrivepolio, Player 03, Smm650, Taxman, 2 anonymous edits Discounted gift trust Source: http://en.wikipedia.org/w/index.php?oldid=421462451 Contributors: Canis Lupus, Dainamo, Dr Gangrene, Gil Gamesh, John of Reading, Lilac Soul, MuffledThud, Oscarthecat, RJFJR, Trevordurham, Wenttomowameadow, 3 anonymous edits Discretionary trust Source: http://en.wikipedia.org/w/index.php?oldid=412311940 Contributors: Cwmhiraeth, EECavazos, Fconaway, Frankie816, Herbythyme, John of Reading, Legis, Minasirkin, Patrick, Plrk, Raymondwinn, Rugmuncher123, Sardanaphalus, Tualha, Verne Equinox, Zzuuzz, 12 anonymous edits Express trust Source: http://en.wikipedia.org/w/index.php?oldid=414168190 Contributors: Anirvan, Cburnett, Circustop, Dooley, Legis, Materialscientist, Mhockey, Pol430, Sardanaphalus, Truthflux, 14 anonymous edits Fiduciary trust Source: http://en.wikipedia.org/w/index.php?oldid=312169794 Contributors: Clicketyclack, Flcelloguy, Kernel Saunters, Severo, Woohookitty, Zileaafari, 1 anonymous edits Foreign trust Source: http://en.wikipedia.org/w/index.php?oldid=400568262 Contributors: Canis Lupus, Dbm11085, Lawguru20002, Nil Einne, Rich Farmbrough, Tangurena Grantor Retained Annuity Trust Source: http://en.wikipedia.org/w/index.php?oldid=414454399 Contributors: Alan Liefting, Alansohn, Ask123, Bruce.Dallas, Eastlaw, Famspear, MBisanz, Morphh, New.Orleans.JD-MBA, Nowa, Rich Farmbrough, 9 anonymous edits Henson trust Source: http://en.wikipedia.org/w/index.php?oldid=449823754 Contributors: Ardenn, AzaToth, BD2412, Bearcat, Kenneth Pope, Legis, MCB, NTK, Ohnoitsjamie, Pearle, PierreAnoid, SunCreator, 8 anonymous edits Honorary trust Source: http://en.wikipedia.org/w/index.php?oldid=260680239 Contributors: BD2412, Bearian, Coccyx Bloccyx, Legis, Misterx2000, Sardanaphalus, 1 anonymous edits Incentive trust Source: http://en.wikipedia.org/w/index.php?oldid=403224154 Contributors: Cwr105, Hmains, Sardanaphalus, Utcursch Interest in possession trust Source: http://en.wikipedia.org/w/index.php?oldid=404722883 Contributors: AK Auto, BD2412, Dooley, Eastlaw, Ewlyahoocom, Lilac 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http://en.wikipedia.org/w/index.php?oldid=211172809 Contributors: Hesperian Pet trust Source: http://en.wikipedia.org/w/index.php?oldid=443642269 Contributors: BD2412, Biscuittin, ChildofMidnight, Flowanda, Rjanag, Ronz, Sampsonhm, Snicksnark, Soupboneh, 7 anonymous edits Private annuity trust Source: http://en.wikipedia.org/w/index.php?oldid=390326959 Contributors: Andrew Delong, Bwpach, DMCer, David Ayton, Eurodave, GoodExplainer, GreenReaper, Have Gun, Will Travel, JustAGal, MKS, Poodlette, Tmock5, Tullywinters, 33 anonymous edits Protective trust Source: http://en.wikipedia.org/w/index.php?oldid=347334243 Contributors: Cburnett, Colonies Chris, Crzrussian, Dooley, Legis, Professorgupta, Robofish, Ruud Koot, Sardanaphalus, 5 anonymous edits Purpose trust Source: http://en.wikipedia.org/w/index.php?oldid=426362484 Contributors: AndyJones, DuncanHill, Gaius Cornelius, Greenrd, Ironholds, Legis, Nimbulan, Pbwchaplin, Rjwilmsi, Sardanaphalus, User27091, Wikidea, 11 anonymous edits Qualified personal residence trust Source: http://en.wikipedia.org/w/index.php?oldid=416907787 Contributors: Avalon, AvicAWB, BD2412, Cameron Scott, GregorB, Hjal, Hkass, Johnbod, Lawguru20002, Mhockey, Nuvarande, Perspicacite, Robofish, 9 anonymous edits Rabbi trust Source: http://en.wikipedia.org/w/index.php?oldid=403981390 Contributors: Anomalocaris, Argon233, Arthur Rubin, Bona Fides, Bongomatic, Brendanconway, EECavazos, Eastlaw, JCurshen, MrBoo, Pechmerle, Shanel, Taxman, Zzuuzz, 7 anonymous edits Real estate investment trust Source: http://en.wikipedia.org/w/index.php?oldid=453039995 Contributors: 121a0012, Abune, Adamparish, Agrawalavinash1, Aher & Aher, Aka042, Al guy, Amicusbg, Antandrus, Arman.office, Arthena, Aude, AxelBoldt, Aymatth2, Babybear2, Barrylb, Bdiscoe, Bearian, Becca347, Beetstra, Bellenion, Bezer, Borgx, Bpringlemeir, Casimir, Cehokan, Chris the speller, Chuckstar, Cjs56, Cobaltbluetony, Csbaker80, Curzon, Cwmhiraeth, Decora, Deflective, Deipnosophista, Deville, DocendoDiscimus, DriverDan, Easterangel, Ehheh, Eric-Wester, Erwilso, Ettrig, Exit2DOS2000, Falling glass, Feco, Fjtemprano, Fletch22, Flowanda, Ggr68, IKnowUthink, Iowahwyman, JHunterJ, JWBito, Jcscefa, Jenito, Jerryseinfeld, Jishnus, Jogurney, Juntung, JustPhil, Katanada, Kate, KathrynLybarger, Kbdank71, Khym Chanur, Kimchi.sg, Kuru, Kwamikagami, Ldonna, Lewney, Listed property, Llavigne, Lotb, Lotje, Lukobe, M@sk, Mark Malcampo, Martpol, Maurreen, Mcrisler, Mfvianna, Mhockey, Miki Roth, MrOllie, Mydogategodshat, NAREITErin, Neelkanthaher, Nick74, Nuttycoconut, Ohconfucius, Omicronpersei8, Orlady, PaulHanson, Pdryan, Pjslevin, Pnm, Postdlf, Postlebury, Quarl, Ranjeet.pandey, Rasmus Faber, Realkyhick, Requestion, Rob.au, Robert.c.johnson, Robinsoz, Room 40, SDC, Salmonforgey, Saltlakejohn, Search4Lancer, Sekicho, Sewebster, Shanes, Shawnc, SheldonKalnitsky, ShelfSkewed, Shimgray, Shirley Locks, Shotwell, Simon123, Sir Nicholas de Mimsy-Porpington, SpuriousQ, Steve Wonski, Stevewhittle, Sunshinemind, Syrthiss, THB, TastyPoutine, TechnicallySound, TexasAndroid, Theswissarmy, TimShell, TimesSqLawyer, Totallesliemove, Transit1, Tree Biting Conspiracy, Tregoweth, Trgiii, Tritium6, Veganfood, Vegaswikian, Visuelya, West.andrew.g, WikiDon, Wikipageedit, Willpeavy, Winhunter, Yee004, Yeu Ninje, Zain Ebrahim111, Zzuuzz, 972 , anonymous edits Resulting trust Source: http://en.wikipedia.org/w/index.php?oldid=423254783 Contributors: Arpitt, BD2412, Cburnett, Crackerjackson1, Discospinster, Famspear, GoingBatty, Gurch, Jamiesanderson2, Jezzabr, Kohfamey, Neurolysis, PullUpYourSocks, Sardanaphalus, Siobhansmum, Thiskey, Trey, Welsh, Wikidea, 31 anonymous edits Secret trust Source: http://en.wikipedia.org/w/index.php?oldid=380291872 Contributors: Drunkenmonkey, 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Supplemental Needs Trust Source: http://en.wikipedia.org/w/index.php?oldid=421025764 Contributors: Argon233, BD2412, BirgitteSB, Bondolo, Brad101, Dooley, Ground Zero, Klizatt, Laura1822, Legis, MrBoo, Nehrams2020, Neilrones, Neutrality, NorthernThunder, Nthep, Radagast83, Sardanaphalus, Saros136, Selket, TastyPoutine, 28 anonymous edits Testamentary trust Source: http://en.wikipedia.org/w/index.php?oldid=442068634 Contributors: Als0123, Davewho2, ELNO Checking, Eastlaw, JCurshen, Legis, Raymondwinn, Robofish, Shanel, Tim1357, Tomnason1010, Waacstats, Xhin, 10 anonymous edits Totten trust Source: http://en.wikipedia.org/w/index.php?oldid=452137993 Contributors: Auntof6, BD2412, Bearian, Bona Fides, DS1953, Eastlaw, Jaysbro, Lawdroid, Legis, Mangoe, Misterx2000, MrBoo, Ohnoitsjamie, Sardanaphalus, Wkfswebmistress, Wl219, , 11 anonymous edits Unit Investment Trust Source: 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Hugo999, Richard75, Tagishsimon, Tim!, Tom harrison, 1 anonymous edits Thomas v Times Book Company Source: http://en.wikipedia.org/w/index.php?oldid=428892804 Contributors: Chrism, Iohannes Animosus, Tim!, Tuckmantom, Wikidea Trusts of Land and Appointment of Trustees Act 1996 Source: http://en.wikipedia.org/w/index.php?oldid=453506057 Contributors: Gabbe, Iridescent, RTV User 545631548625, Rjwilmsi, Road Wizard, Sfan00 IMG, Stuartwilks, Wikidea, 2 anonymous edits Uniform Gifts to Minors Act Source: http://en.wikipedia.org/w/index.php?oldid=359573591 Contributors: 2D, Admiralwaugh, Cje, EECavazos, Gbroiles, GoldRingChip, Johnbod, Karl Dickman, Nedarmand54, RBBrittain, Superm401, Taxman, Wkfswebmistress, Xorkl000, 13 anonymous edits Uniform Probate Code Source: http://en.wikipedia.org/w/index.php?oldid=369237791 Contributors: BD2412, Bll arch, Eastlaw, HarryHenryGebel, John Paul Parks, Jurusie, MmmmJoel, Robb0082, Sardanaphalus, 3 anonymous edits Uniform Simultaneous Death Act Source: http://en.wikipedia.org/w/index.php?oldid=449153948 Contributors: Briaboru, Butseriouslyfolks, Cburnett, ChrisCork, Cyde, Dale Arnett, Damian Yerrick, Dpwkbw, Drseudo, Elloco1711, Kdau, Mazca, PullUpYourSocks, 19 anonymous edits Wills Acts 1837 & 1918 (Soldiers and Sailors) Source: http://en.wikipedia.org/w/index.php?oldid=453208849 Contributors: Cutler, Eastlaw, Graham87, Ironholds, James500, Lilac Soul, Nick Number, Richard75, Road Wizard, Tabletop, Welsh, Wikidea, Woohookitty, 5 anonymous edits Abatement of debts and legacies Source: http://en.wikipedia.org/w/index.php?oldid=430908719 Contributors: Aivik, BD2412, Can't sleep, clown will eat me, Cburnett, Conversion script, David3156, Fram, Kathleen.wright5, Misterx2000, Neutrality, Rich Farmbrough, Sardanaphalus, StubMcAdams, Thelighthouse, 10 anonymous edits Acts of independent significance Source: http://en.wikipedia.org/w/index.php?oldid=407382808 Contributors: BD2412, Glenfarclas, Mark83, Misterx2000, NickBush24, Sardanaphalus, Wackjum, 6 anonymous edits Ademption Source: http://en.wikipedia.org/w/index.php?oldid=400554586 Contributors: 2uno1dan, BD2412, Bearian, Eastlaw, Gary King, Gogo Dodo, Sardanaphalus, ViresetHonestas, Wesley, Why Not A Duck, Woohookitty, 21 anonymous edits Administrator of an estate Source: http://en.wikipedia.org/w/index.php?oldid=405904356 Contributors: Dooley, J.smith, Kablammo, Legis, Miljoshi, Misterx2000, Mldlaw, Pixie2000, Reyk, Rich Farmbrough, Sardanaphalus, Shawn in Montreal, Sir192, Skysmith, StubMcAdams, The Thing That Should Not Be, 2 anonymous edits Administration of an estate on death Source: http://en.wikipedia.org/w/index.php?oldid=445772243 Contributors: Alphaboi867, Beland, Colobikeguy, CyclePat, Dumelow, Dzimmerman, Eastlaw, Garethbrown76, Gilliam, Hexane2000, John Maynard Friedman, Mais oui!, Neutrality, Nick, RobDe68, Sardanaphalus, ShelfSkewed, Silverhorse, Xn4, 7 anonymous edits Advance health care directive Source: http://en.wikipedia.org/w/index.php?oldid=454249957 Contributors: 7triton7, Aghibner, Ajrsferreira, Akerans, Alan Liefting, Alex756, AlzWebTeam, AndyJones, BD2412, Bader isu, BenFrantzDale, Benc, Bioethica Americana, BloodGrapefruit2, Bobblewik, Brian Kendig, Caesura, Candide66, Capndeb, Cbiordi, Ceora, Charles47smith, Chase me ladies, I'm the Cavalry, Cindylange, Ckatz, Closeapple, Colorprobe, DS1953, Dans, Dargitatur, Dcflyer, Dcljr, Devmage, Dickvb4, Dizzydaveman, Eastlaw, Erich gasboy, Evenin' scrot!, EverSince, FS61, Face3344, Falcon8765, Flowanda, Fvw, Gmaxwell, Gogo Dodo, Goog, GordonWatts, GraemeL, GregorB, Ground Zero, Hadal, Hike395, Hob, Ikiwaner, Immunize, Isis, Javert, Jesanj, Jesster79, Jheald, Jim10701, John of Reading, Johncapistrano, JonHarder, Joshbrez, JzG, Karada, Kku, LIVINGWILLS-FREELEGAL, Lawtalk, LegalBeagle, Levineps, Lindes, Lumberjake, Machina.sapiens, Marskell, Maxxicum, McGeddon, Mediawhore, Mervyn, MontanaProf, MrDarcy, Musical Linguist, Nealmcb, Needsleep99, Neutrality, OldNick, OllieFury, Oyoyoy, Pacdude9, Palfrey, Patricia Meadows, Patrick, Petersam, PhDReviewer, Pharaoh of the Wizards, Phil Sandifer, Pinktulip, Pop832, Prestonmarkstone, Psychopomp, Quebec99, RBO Consulting, REStutes, Radiojon, Rettetast, Rochoa, Roving Wordslinger, Sabin4232, Sardanaphalus, Scatterall, Selket, Seth Ilys, SiobhanHansa, Skysmith, Sliquenick, Snoyes, Sole Soul, Space Ghost 900, Spartaz, TSBrown 78, TastyPoutine, Taxman, Tetraminoe, Thibbs, Tmikulka, Toscaesque, Tregoweth, Vapier, Versageek, Vincej, WArthurton, WhatamIdoing, Wiki alf, Wikipelli, Xajaso, Zandperl, Zariane, Zhou Yu, 152 anonymous edits Advancement (inheritance) Source: 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Dooley, Edcolins, Felix Folio Secundus, InkSplotch, Into The Fray, John254, Kapgains, Magnius, Neutrality, Penguinwithin, Sardanaphalus, Signalhead, SiobhanHansa, Svato, TastyPoutine, Tbone, Tommyirl, Waacstats, World Book Willie, 30 anonymous edits Digital inheritance Source: http://en.wikipedia.org/w/index.php?oldid=447552500 Contributors: Agora, Balloonguy, BenMoll, Cloudsafe, Decltype, Dsmithsmithy, EastTN, Grafen, Jarry1250, Jeffrey Mall, John of Reading, Juergen.sommer, Kjellmikal, Kwiki, Malcolma, Mild Bill Hiccup, N zbinden, Rrburke, Shadowjams, SimonP, Stamari, Ugobechini, VanBurenen, 13 anonymous edits Exempt property Source: http://en.wikipedia.org/w/index.php?oldid=332294747 Contributors: Ashadeofgrey, BD2412, Eastlaw, Gaius Cornelius, Lockley Forced heirship Source: http://en.wikipedia.org/w/index.php?oldid=445037360 Contributors: DNewhall, Dumpsticks, Flibjib8, Graham87, Jtrainor, Lawrence Cohen, Legis, Mootros, R'n'B, SemperBlotto, Superm401, WA Burdett, Woohookitty, 5 anonymous edits
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Freedom of testation Source: http://en.wikipedia.org/w/index.php?oldid=383270543 Contributors: E235, Woohookitty Holographic will Source: http://en.wikipedia.org/w/index.php?oldid=446526877 Contributors: Anwalt-frankfurt, Awg1010, BD2412, Bearian, Bporopat, Brewcrewer, David.rand, Economy1, ElKevbo, Erianna, Felix Folio Secundus, Fluffernutter, Funper, Ivan tambuk, Jonathan.s.kt, Lawbuff, Legis, Magicmike, Mr Serjeant Buzfuz, Mydotnet, NellieBly, Neutrality, Nikai, Nonenmac, Postdlf, PullUpYourSocks, Quaerere, Sardanaphalus, Sharnak, Shii, Sir, SteveHFish, SudoGhost, Unbitwise, Vampchick47, Wittyname, 17 anonymous edits Inheritance Source: http://en.wikipedia.org/w/index.php?oldid=454179587 Contributors: -- -- --, 16@r, Aboluay, AdamRetchless, Aesopos, Alfonso Mrquez, Andre Engels, Austreneland, Automatic Mongoose, BD2412, Bearian, Beetstra, Billhpike, Bluemilker, Bobo192, Bongwarrior, BrainyBabe, Branddobbe, Buddha24, Cabe6403, Cat Parade, Charles Matthews, Chrcharity, Chris Roy, CillanXC, Cleared as filed, Conversion script, Courcelles, Dantadd, Darwinek, Davehi1, Dglynch, Dleonard55, Dominus, Dostal, Dzimmerman, Edward, Ellsworth, Embaentropy, Emerson7, Erntab72, Ewawer, Famspear, Fastilysock, Fgrose, Fourthords, Geoffreysf, Gerry Ashton, Gioto, Giraffedata, Globalrightpath, Gogo Dodo, Golftold, Ground, Guanaco, Gwib, Gkhan, Hakeem.gadi, Hdt83, Heartunc, Iago4096, Ihcoyc, Infinitynomore, Ithunn, JHunterJ, JMcLuskey, Jakohn, Jalo, Japanese Searobin, Jeff Magliola, Jhsounds, Jim Lange, John Biancato, John Maynard Friedman, Jpbowen, Kaizar, Karmafist, Khoikhoi, Kittybrewster, Kotniski, Levineps, Lexor, LilHelpa, Lotje, Louisep39, Lubnahussain, Lytonya, MBisanz, Magister Mathematicae, Mais oui!, Matthew9876, Maurreen, Mbecker, Measles, Merbabu, Mervyn, Mfandersen, Michael Hardy, Michaelsanders, Mild Bill Hiccup, Mintguy, MisteryX, Modster, Monterey Bay, Mormat, Morphh, Mpaschal, Musical Linguist, 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Bearian, Ben Ben, Captain-tucker, Chris the speller, Chzz, Colonies Chris, Cybercobra, Dabomb87, Dale Arnett, Dennbruce, Doops, Edward, Ellsworth, Esasus, Gdr, Graham87, Great Scott, Hannum7, Hugo999, Ihcoyc, Jim Michael, John Maynard Friedman, Jrackham81, Julien Foster, Kapgains, Kuru, Lapsed Pacifist, Leonard^Bloom, Lmurra55, Longhair, MBRZ48, Mauls, Nbarth, Nonlegal, Olborne, Postdlf, PullUpYourSocks, Qwyrxian, Radagast83, Richard001, Robberbar, Rossami, Sardanaphalus, Shadowjams, Spangineer, Taxman, Thumperward, Vgranucci, Websi7, Welsh, WikiFlier, Wrelwser43, XLerate, 47 anonymous edits Joint wills and mutual wills Source: http://en.wikipedia.org/w/index.php?oldid=442069205 Contributors: BD2412, Darklilac, Dooley, JHunterJ, Kewp, Legis, Longhair, Sardanaphalus, 8 anonymous edits Laughing heir Source: http://en.wikipedia.org/w/index.php?oldid=390688721 Contributors: BD2412, Jblewitt, Lockley, Rechtstaat, 1 anonymous edits Legatee Source: http://en.wikipedia.org/w/index.php?oldid=265553358 Contributors: Misterx2000, Nikai, Sardanaphalus, Swampyank, Tpb3jd, Useight, 3 anonymous edits Letters of Administration Source: http://en.wikipedia.org/w/index.php?oldid=332180129 Contributors: Eastlaw, Ellsworth, Esasus, Pixie2000, RobDe68, Sardanaphalus, TheObtuseAngleOfDoom, 2 anonymous edits Missing heir Source: http://en.wikipedia.org/w/index.php?oldid=401813751 Contributors: AssetsInternational, Bearian, DGG, Dvcroft, Jeff3000, Kberrr, Lostkin, MichaelZwick, Neelix, Od Mishehu, Rich257, Sardanaphalus, Sigger61, 3 anonymous edits No-contest clause Source: http://en.wikipedia.org/w/index.php?oldid=451846780 Contributors: BD2412, Bearian, Interwebs, Jersyko, Laynerushforth, Legis, LilHelpa, Maltese otter, Ryan Roos, SaddleAdam, Scott MacDonald, Speight, Swesbroj, Tomj2374, Woohookitty, YHoshua, 8 anonymous edits Oral will Source: http://en.wikipedia.org/w/index.php?oldid=400581174 Contributors: Deathardath, Dooley, Eastlaw, Ewlyahoocom, Mitch Ames, Neutrality, Nihalchandani, Psiphiorg, Sajt, Sardanaphalus, Skysmith, 5 anonymous edits Personal representative Source: http://en.wikipedia.org/w/index.php?oldid=443975576 Contributors: Aquarius Rising, Bearian, Cutler, Dooley, Eastlaw, Esasus, Geo Swan, Kingdon, Legis, Lupinelawyer, Meheller, Neutrality, Rich Farmbrough, Rich257, Sardanaphalus, SimonP, Uncle G, 5 anonymous edits Pour-over will Source: http://en.wikipedia.org/w/index.php?oldid=404675178 Contributors: B.S. Lawrence, BD2412, Cburnett, Dooley, Elizabeyth, Lawdroid, Legis, Lockley, Neutrality, Sardanaphalus, 5 anonymous edits Probate Source: http://en.wikipedia.org/w/index.php?oldid=453459652 Contributors: Aleenf1, AndyJones, Artaxiad, BD2412, Bearian, Charles Matthews, CliffC, Cusop Dingle, Cybercobra, CyclePat, Davecrosby uk, Dooley, Doug, Dumpsticks, Dzimmerman, Eastlaw, Eekerz, Ellsworth, Epbr123, Erianna, Esasus, Esstmaeb, EstateGuy, FR Soliloquy, Flowanda, FotoPhest, Fratrep, Freedomfighter018, Frozen4322, Geoffreysf, GeorgeLouis, Gilliam, Glenn, Gogo Dodo, Hooperbloob, Hue White, IGeMiNix, Iamtheari, JUSTIN D SPEALMAN, Jersyko, Jguad1, Jlking3, John Maynard Friedman, Johnbibby, JonMcLoone, Jpatter238, Kdar, Kevinbsmith, L Kensington, Leasnam, Leo R, Lucky 6.9, MER-C, Mhking, Minasirkin, Mrstonky, Ms2ger, Mslimix, NEMT, Nnp, Palaeovia, Pastel kitten, Pigman, PlopperZ, Pomte, Postdlf, PullUpYourSocks, R'n'B, Rfc1394, SFVRealtor, Sardanaphalus, SasiSasi, SchmuckyTheCat, SkreeHunter, SujinYH, SunCreator, TJRC, TastyPoutine, Taxman, Tempshill, Thu, Toby100, Toop, Twigmoor, Umofomia, Umrs, Vianello, Washington Probate, Weliwarmer, Xanzzibar, Zheisey, Zimzim10, 142 anonymous edits Probate court Source: http://en.wikipedia.org/w/index.php?oldid=421913800 Contributors: Appraiser, December21st2012Freak, Elpredicto, Esasus, Iph, Jusjih, Mwtoews, N5iln, Neutrality, R'n'B, Sgt. R.K. Blue, Station1, Student7, 16 anonymous edits Probate sale Source: http://en.wikipedia.org/w/index.php?oldid=439045069 Contributors: Flowanda, January, Pmj005, SFVRealtor Pretermitted heir Source: http://en.wikipedia.org/w/index.php?oldid=385765855 Contributors: BD2412, Dale Arnett, Fjkohut, Sardanaphalus, SilasW, 2 anonymous edits Residuary estate Source: http://en.wikipedia.org/w/index.php?oldid=264085405 Contributors: BD2412, Longhair, Misterx2000, Rogerb67, Sardanaphalus, 3 anonymous edits Satisfaction of legacies Source: http://en.wikipedia.org/w/index.php?oldid=332269534 Contributors: BD2412, Eastlaw, Postdlf, SkyBoxx Simultaneous death Source: http://en.wikipedia.org/w/index.php?oldid=454171821 Contributors: Arctic Night, BD2412, Bearian, Bkell, Dale Arnett, Eastlaw, IgorMagic, Kevin McE, Mboverload, Misterx2000, NellieBly, Raul654, Sardanaphalus, VengeancePrime, 8 anonymous edits Slayer rule Source: http://en.wikipedia.org/w/index.php?oldid=442511004 Contributors: BD2412, Bcrago77, Crystallina, Damian Yerrick, Darkfrog24, Garr1984, Gordon Ecker, Mandarax, Mboverload, Rich Farmbrough, Sardanaphalus, Tangurena, Zddoodah, 10 anonymous edits Succession conflicts Source: http://en.wikipedia.org/w/index.php?oldid=453046960 Contributors: BD2412, Bachrach44, Bdmccray, Blue-Haired Lawyer, Bporopat, Colonies Chris, David91, Deodar, Eastlaw, Grafen, Jafeluv, Jlittlet, Jojalozzo, PabloStraub, Sardanaphalus, SasiSasi, TJRC, Theo10011, Vgranucci, 19 anonymous edits Swynfen will case Source: http://en.wikipedia.org/w/index.php?oldid=419426570 Contributors: Brett Dunbar, Closeapple, Cutler, Cyde, Legalskeptic, Mauls, Ordyg, Rjwilmsi, Ser Amantio di Nicolao, Tim!, 2 anonymous edits Testamentary capacity Source: http://en.wikipedia.org/w/index.php?oldid=363650967 Contributors: BD2412, Bearian, Eastlaw, Hesperian, Ihcoyc, Jersyko, Kipruss3, Lquilter, Rechtstaat, Sardanaphalus, Wjhonson, Woohookitty, 17 anonymous edits Testamentary disposition Source: http://en.wikipedia.org/w/index.php?oldid=359673102 Contributors: Bearian, Eastlaw, G.-M. Cupertino, Kjkolb, Misterx2000, Rjwilmsi, Sardanaphalus, Xe7al, 1 anonymous edits Testator Source: http://en.wikipedia.org/w/index.php?oldid=382030629 Contributors: BD2412, Bearian, Big Bird, Colobikeguy, EagleFan, Eastlaw, Jeepday, Kjkolb, Kukini, Misterx2000, Natl1, Nonenmac, RobDe68, Sardanaphalus, 9 anonymous edits Undue influence Source: http://en.wikipedia.org/w/index.php?oldid=448696339 Contributors: BD2412, Baby Jenga, Cbane, [email protected], Curps, Db099221, Deathby, Dr. Sunglasses, Enochlau, Funandtrvl, Longhair, McGeddon, Mmmbeer, Ncmvocalist, Neutrality, Ohnoitsjamie, Piotrnikitin, Sardanaphalus, Shentino, Versus22, Woohookitty, YHoshua, 24 anonymous edits Wills Source: http://en.wikipedia.org/w/index.php?oldid=453912338 Contributors: 1sunflower, ALargeElk, Aarongman, Abjurer, Adam Bishop, Agnosticaphid, Agradman, Alex756, Allenb11464, Alloy33, Alphaboi867, Alvin-cs, Amarant, Andeggs, Andre Engels, AndyJones, Anubis3, Aratuk, Arman Cagle, Avihu, BD2412, Bearian, Bethlaurence, BirgitteSB, Bkepisto, Bluerasberry, Bobo192, Bporopat, BrokenSphere, Bruguiea, Bte99, Cambalachero, Carnildo, Charleswj, Chase me ladies, I'm the Cavalry, ChinaandUSSR, Chris55, Chuckw-nj, Chzz, Cinik,
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anonymous edits Will contract Source: http://en.wikipedia.org/w/index.php?oldid=418197780 Contributors: BD2412, Cruiklaw, Misterx2000, Sardanaphalus, Vortex Dragon, 2 anonymous edits The high net worth individual Source: http://en.wikipedia.org/w/index.php?oldid=454258182 Contributors: Alansohn, Aymatth2, Beland, Bigsean0300, Billgordon1099, Bovineone, CMacMillan, Cafelano, Cgrhodes, Crocodile Punter, DARTH SIDIOUS 2, DMCer, DamianZaremba, Doradus, Eastlaw, EdEColbert, Edmoft1, Elsewhen, Entrepreneuradvocate, Eugene-elgato, Gary King, Ged UK, JHP, Jacob Lundberg, Jondel, Krashlandon, Kwiq8, L Kensington, Latka, LilHelpa, Malinaccier, Michael Hardy, Nirvana2013, Nurg, Ny156uk, OwenX, Paine Ellsworth, Praddy06, QuantumEleven, Rjwilmsi, SD5, Saahilk, Shawnc, Simon123, Slon02, Tide rolls, Tooby, Trident13, Trusilver, TwistOfCain, Uncle Dick, Viking59, Wwjonesy, Xiaoyu of Yuxi, Xihe, 130 anonymous edits Uniform Prudent Investor Act Source: 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accounting Source: http://en.wikipedia.org/w/index.php?oldid=453450376 Contributors: DocWatson42, Gary King, Hakseng, HiLo48, Jay-Sebastos, Julesd, Kookiethebird, Landroni, Levineps, LilHelpa, Meffo, Mike Rosoft, MrOllie, R'n'B, RJN, Seomad2010, The Gnome, Versageek, Wavelength, , 26 anonymous edits Return on capital Source: http://en.wikipedia.org/w/index.php?oldid=435407132 Contributors: 1-is-blue, A papalexandris, Afa86, Aldo samulo, Ask123, Banknote, BenFrantzDale, Bluefinancer, Bluemoose, Chakreshsinghai, Cherkash, Closedmouth, Cwmhiraeth, Dave6, DocendoDiscimus, EPM, Feco, Gregalton, Hu12, Infinity0, Jerryseinfeld, Jurriaan, Kingpin13, Kourii, Kuru, Lamro, Mannafredo, Maurreen, MonideepGupta, Octopus-Hands, Pocopocopocopoco, Psantora, Sagaciousuk, Sam Hocevar, Shawnc, SirIsaacBrock, SpuriousQ, TheProject, UnitedStatesian, Urbansuperstar, Verbum Veritas, 41 anonymous edits Appraisal Source: 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http://en.wikipedia.org/w/index.php?oldid=452742887 Contributors: 1-is-blue, A. 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Clarke, Eastlaw, Sctechlaw, 2 anonymous edits Expected value Source: http://en.wikipedia.org/w/index.php?oldid=454117387 Contributors: 65.197.2.xxx, A. Pichler, Aaronchall, Adamdad, Albmont, Almwi, AxelBoldt, B7582, Banus, Bdesham, BenFrantzDale, Bentogoa, Bjcairns, Bkell, Brews ohare, Brockert, Bth, Btyner, CKCortez, Caesura, Calbaer, Caramdir, Carbuncle, Cburnett, Centrx, Charles Matthews, Chris the speller, Cloudguitar, Coffee2theorems, Conversion script, Cretog8, Dartelaar, Daryl Williams, DavidCBryant, Dpv, Draco flavus, Drpaule, El C, Elliotreed, Erianna, ErrantX, Fibonacci, FilipeS, Fintor, Fresheneesz, Funandtrvl, Gala.martin, Gary King, Giftlite, Glass Sword, GraemeL, Grafen, Grapetonix, Greghm, Grubber, Guanaco, H2g2bob, HenningThielemann, Hyperbola, INic, Iakov, Idunno271828, Ikelos, JA(000)Davidson, Jabowery, Jancikotuc, Jcmo, Jeff G., Jitse Niesen, Jj137, Jordsan, Jrincayc, Jsondow, Jt68, KMcD, Karol Langner, Katzmik, Kazabubu, Kurykh, LALess, LOL, Lee Daniel Crocker, Leighliu, Levineps, Lluffy, Lponeil, MHoerich, MarSch, Markhebner, Mccready, Melchoir, Melcombe, Mgreenbe, Michael Hardy, Mindbuilder, Minimac, MrOllie, N419BH, Netheril96, NinjaCharlie, Ninly, O18, Obradovic Goran, Oleg Alexandrov, Openlander, Ossiemanners, PAR, Patrick, Percy Snoodle, Pgreenfinch, Phaedo1732, Phdb, PierreAbbat, Pol098, Poor Yorick, Populus, Puckly, Q4444q, Qwfp, R3m0t, Reetep, Reric, Rjwilmsi, RobHar, Robinh, Romanempire, Ronald King, Rray, Ryguasu, Saebjorn, Salix alba, Schmock, SebastianHelm, Shredderyin, Shreevatsa, Skarl the Drummer, Stevan White, Steve Kroon, Steven J. 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967

Inflation Source: http://en.wikipedia.org/w/index.php?oldid=454381461 Contributors: $1000000000ten0one1, 03md, 1122334455, 165.121.110.xxx, 172, 1exec1, 2004-12-29T22:45Z, 216.60.221.xxx, 24.93.53.xxx, 2D, 4twenty42o, A2Kafir, AGConsulting, ASmartKid, AThing, Aarktica, AbsolutDan, Acctorp, Addshore, Addy14, AdjustShift, AdnanSa, Ahoerstemeier, Airplaneman, Ajh16, Akshayaj, Alansohn, Allixpeeke, Altenmann, Anaraug, Andonic, Andre Engels, Andres, Angela, Anne, Annexatious, AnonEMouse, Antandrus, Anthony Appleyard, Apeloverage, ArsenalHenry2, Arthur Rubin, Arvindn, Ashaktur, Ashmoo, AubreyEllenShomo, Audacity, BRAZILHYPERINFLATION, Baa, Baig hyder, Barek, Bbarkley, Bbarkley2, Beagel, Beefyt, Bellstarr, Bencherlite, Bensaccount, BernardH, BigK HeX, Bilby, Bithongabel, Bjohnson925, Bkwillwm, Bluemoose, Bobblewik, Bobby131313, Bobo192, Bobrayner, Bobron, Boggabri, Bongwarrior, Boothy443, BovineBeast, Brian the Editor, Brusegadi, Bryan Derksen, BryanDeMorton, Bucketsofg, Buddha24, Buldri, C'est moi, C4andrei, CSWarren, CWii, Cadwallader, Calabe1992, Calltech, Calmypal, Cameronthom, Capricorn42, Carbonate, Cardsplayer4life, Carlosguitar, Carolmooredc, Casperdc, Cassowary, Catgut, Causa sui, Causeality, Cedders, ChemGardener, Chenx064, Chimbwidz, Chochopk, Chris the speller, Chris1219, Chrisbecks, Chrisnoscrub047, Christopherlin, Chwyatt, CigarStoreIndian, Civil Engineer III, Claire McLachlan, Cleapow223, Click23, Closedmouth, Clydesidemounter, Cmdrjameson, Cminboone, Cmoti, Cofax48, Colchicum, Colonel Warden, Commander Keane, CommonsDelinker, Confuzion, Conversion script, Crashdoom, Crazycomputers, Cretog8, Crh66, CriticalKnowledge, Crosbiesmith, CryptoDerk, Cumulus Clouds, Cyktsui, DG, DJBullfish, Dalen ath, DanielRigal, Daninbrisvegas, Darkmasterjoey, DaveApter, Davewho2, David Biddulph, David0811, DeadEyeArrow, Deception, Decoyjames, Deltabeignet, Denoir, Deor, DerHexer, Dhp1080, Diberri, DickClarkMises, Dickman115, Digvijaytrivedi, Diletante, Dillon256, Dina, Dirkbb, Discospinster, Discovery Drive, Dissipate, Ditsem, Doczilla, Dodge1884, Dollarbills, Donald12, Doopdoop, Dotter, Doulos Christos, Download, DrTh0r, Dreish, Drvrage, Dudeedud, Duoduoduo, Dustimagic, Dwrcan, Dysepsion, DArtgnan, E. 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Sirmont, Sisalto, Skarsa72, Slakr, SlamDiego, Sleekgray, Smack, Smallman12q, Smartal, Smoggyrob, SmokeyTheCat, Snigbrook, Snowolf, Soaringbear, Some jerk on the Internet, Sonical, Sordomudo11, Soxwon, Sparky1234567890, SpeedyGonsales, Splash, SpookyMulder, Ssk352, Staffwaterboy, Stanleywinthrop, Stephen lau, Stephenb, Stirling Newberry, Strait, Stupid2, SturmTiger42, Subdolous, Suman231, Supa15, SuperCow, Superbub, Susurrus, Svv, SystemicDestruction, T Gholson, TFJamMan, Tabletop, Tacitus Prime, Tanthalas39, Tawker, Teac82, Teknari, Teles, Terjepetersen, Texture, Thajigisup, Thatcher, The Anome, The Nut, The Thing That Should Not Be, TheRothbardian, TheWeakWilled, Thecheesykid, Thedreamdied, Therebelcountry, Thetorpedodog, Thingg, Thomasmeeks, Tide rolls, Tiles, Tim Shell, Timwi, Titoxd, Tjss, Toh, Tokenhost, Tom harrison, Tomi, Tony1, Tonyrocks922, Totalloss, Tpbradbury, Troy 07, Trusilver, TruthComesFromAGunBoat, Tv316, UBeR, Ubitubi, Ulbsterlad, Ultraviolet scissor flame, 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Trust Law in Wealth Management and Estate Planning

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Trust Law in Wealth Management and Estate Planning

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Trust law in wealth management and estate planning

Forum & jurisdiction

Trusts & estates

General statutes & case law

Probate, wills & intestacy

Banking & money

Private banking Saving Time deposit

Returns & profits

Employment-related income & funding sources

Government-related income & funding sources

Miscellaneous income and funding sources

Taxable income Taxation of trusts (United Kingdom)

American Cancer Society offices in Washington, D.C.

Federal tax relief

List of relevant organizations

General compliance issues

Foundations in civil law

Foundations in common law

Foundations under US law

Foundations under US law

Limited liability company

Flexibility and default rules

Limited liability company

Limited liability company vacancy.

Bosnia and Herzegovina

Limited liability company

Limited liability company

Limited liability company

Limited liability company

The trend towards civil forfeiture

Asset forfeiture in the United States

Asset forfeiture in the United Kingdom

Asset forfeiture in Ireland

Abuses and controversy

Notable United States forfeitures

Relationship with knowing receipt

Duty in different jurisdictions

Breaches of duty and remedies

Fiduciary Swiss Fiduciary (http://www.evco.ch/)

Types of fraudulent acts

Serious Fraud Office

National Fraud Authority

CIFAS - The UK's Fraud Prevention Service

Criminalizing money laundering

The role of financial institutions

Value of enforcement costs

Laws and enforcement by region

Money laundering in its literal sense

Anti money laundering software and methods (http://finance.vsoni.com/money-laundering-1)

Tracing (law) action.

Forum & jurisdiction

The rules in the United States

Forum shopping by the plaintiff

Forum shopping by the civil defendant

Forum shopping in criminal cases

Efforts to dissuade forum shopping

Australian trust law

English trusts law

English trusts law

English trusts law