Financial Glossary
Clear definitions for complex financial, corporate, and retirement planning terms.
401(k) Rollover
The process of moving retirement savings from an employer-sponsored 401(k) plan into an Individual Retirement Account (IRA) or a new employer's plan, typically to maintain tax-deferred status and expand investment options.
Annuity
A financial contract typically issued by an insurance company designed to provide a steady stream of income, often used in retirement planning. Types include fixed, variable, and indexed annuities.
Business Continuity Planning
A comprehensive strategy ensuring that a business can continue operating during and after a significant disruption, including the death, disability, or departure of a key owner or executive. Protects ownership continuity, creates liquidity at critical times, helps reduce disputes among owners or heirs, and supports succession and long-term business value.
Business Disruption
A triggering event in buy-sell agreements referring to circumstances that materially interfere with business operations, such as loss of a major client, regulatory action, natural disaster, or market collapse. May activate buy-sell provisions if defined in the agreement.
Business Succession
The process of transitioning leadership, management, and ownership of a closely held business from one generation or group to another. Encompasses legal, financial, tax, and personal dimensions to ensure the enterprise survives and thrives beyond the founding owner's involvement.
Buy-Sell Agreement
A legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. Often funded by life insurance. A buy-sell agreement is a legally coordinated business continuity strategy that outlines what happens to an owner's interest in the event of death, disability, retirement, or another triggering event. When properly funded, it helps preserve control, protect families, and support a smooth ownership transition.
Buy-Sell Agreement Funding
The strategic mechanism—typically life insurance or a sinking fund—that ensures the capital required to execute a buy-sell agreement is available when a triggering event occurs. Without proper funding, even a well-drafted agreement may fail due to liquidity constraints at the worst possible time.
Cash Balance Plan
A type of defined benefit plan that resembles a defined contribution plan. The employer credits a participant's account with a set percentage of their yearly compensation plus interest charges.
Closely Held Company
A business entity whose shares are held by a small number of shareholders, often family members or founders. These companies face unique succession challenges due to concentrated ownership and the personal relationship between owners and the business.
Disability (as Triggering Event)
A condition where an owner becomes unable to perform their duties due to illness or injury. In buy-sell agreements, disability often triggers a mandatory buyout provision, requiring funding mechanisms such as disability buyout insurance to ensure liquidity.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's overall financial performance and used as an alternative to net income in some circumstances.
ERISA
The Employee Retirement Income Security Act of 1974. A federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
Executive Leadership Team
The senior management group responsible for strategic direction and operational execution. Key-person risk planning protects this team through insurance coverage and succession documentation to ensure continuity if any member is lost.
Family Business
A company in which two or more members of the same family have significant ownership or management control. Family businesses require specialized succession planning to balance family dynamics with sound business practices and fair treatment of all heirs.
Fiduciary
A person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust.
Indexed Universal Life (IUL)
A type of permanent life insurance where the cash value growth is tied to a market index (like the S&P 500), offering potential for growth while providing a floor against market losses.
Key-Person Insurance
Life or disability insurance purchased by a business on the life of an owner, a top executive, or another critical individual whose absence would sink the company. Provides immediate cash to recruit replacements, reassure creditors, cover lost revenue, and fund ownership transition costs.
Liquidity Crisis
A situation where a business or estate lacks sufficient liquid assets to meet obligations—particularly relevant when a buy-sell agreement is triggered but no funding mechanism exists. Can force fire-sale valuations, bank loans, or protracted payment arrangements.
Modified Endowment Contract (MEC)
A tax qualification of a life insurance policy whose cumulative premiums exceed federal tax law limits. Once a policy becomes a MEC, it loses some of the tax advantages of standard life insurance.
Net Unrealized Appreciation (NUA)
The difference in value between the original cost basis of employer stock and its current market value. Special tax rules apply when this stock is distributed from a qualified retirement plan.
Non-Qualified Deferred Compensation (NQDC)
A written agreement between an employer and an employee where the employee agrees to have part of their compensation withheld by the company, invested on their behalf, and distributed at a later date.
Ownership Dispute
A conflict among business owners, heirs, or stakeholders regarding control, valuation, or rights to business interests. Properly funded buy-sell agreements prevent disputes by establishing predetermined processes and valuations for ownership transfers.
Partnership (Business)
A business structure where two or more individuals share ownership, profits, losses, and liabilities. Partnerships require explicit buy-sell provisions because the death, disability, or exit of one partner directly affects all remaining partners' interests and obligations.
Retirement (as Triggering Event)
An owner's voluntary withdrawal from active participation in the business, usually at a predetermined age or date. Buy-sell agreements triggered by retirement allow for planned, orderly transitions rather than emergency sales.
Roth Conversion
The process of transferring funds from a traditional IRA or 401(k) into a Roth account. The converted amount is subject to ordinary income tax in the year of conversion, but future growth and qualified withdrawals are tax-free.
Seller's Discretionary Earnings (SDE)
A metric used to determine the historical cash flow of a business. It is calculated by adding the owner's compensation and discretionary expenses back to the net profit.
Split-Dollar Life Insurance
An arrangement between an employer and an employee to share the costs and benefits of a life insurance policy. It's often used as an executive fringe benefit and can serve as a funding mechanism for buy-sell agreements.
Succession Planning
A strategy for passing on leadership roles and ownership of a company to an employee or group of employees to ensure business continuity after key people move on, retire, or pass away. Coordinates legal structures, funding mechanisms, tax strategies, and family communication.
Triggering Events
Specific circumstances defined in a buy-sell agreement that activate its provisions. Common events include death, disability, retirement, voluntary exit, and business disruption. Each event type may have different valuation methods, payment terms, and funding sources.
Trust (Irrevocable)
A trust that cannot be modified, amended, or terminated without the permission of the grantor's named beneficiary or beneficiaries. Often used for estate tax reduction and asset protection, including holding business interests for succession purposes.
Trust (Revocable)
A trust whereby provisions can be altered or canceled dependent on the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries.
Voluntary Exit
An owner's decision to leave the business by choice rather than due to death, disability, or other involuntary circumstances. Buy-sell agreements should define how voluntary exits are valued, funded, and executed to prevent disruption to remaining owners.
Wealth Preservation
A holistic approach to protecting accumulated assets across generations through coordinated strategies including estate planning, tax optimization, business succession, insurance coverage, and investment management. For business owners, wealth preservation requires integrating personal financial planning with business continuity planning.