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Meaning / Definition of

Charitable Remainder Trust

Categories: Estate Planning, Legal, ,

A kind of charitable trust in which someone places substantial assets into an irrevocable trust.The trust is set up so that the donor (or other beneficiaries named in the trust) receives trust income for a number of years or for life, after which the assets go to a tax-exempt charity. The IRS allows a large deduction in the year the assets are donated to the trust. The tax savings are sometimes used to buy an insurance policy on the life of the donor payable to children or grandchildren at the donor's death. This way the donor can make the gift to charity, receive income from the trust, and still make a large gift at death to family members. There are several kinds of charitable remainder trusts, including charitable remainder unitrusts and charitable remainder annuity trusts. Compare: charitable lead trust

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Definition / Meaning of

Tracking Stock

Categories: Investing and Trading, Stocks,

Best defined with an example. Suppose Company A purchases a business from Company B and pays B with 1 million shares of A's stock. The agreement provides that B cannot sell the 1 million shares for 60 days, and also prohibits B from hedging by purchasing put options on A's shares or short-selling A's shares. B is worried that the market may fall in the next 60 days. B could hedge by purchasing put options or selling the futures on the s&p 500. However, it is possible that A's business is much more cyclical than the s&p 500. One solution to this problem is to find a tracking stock. This is a stock that has high correlation with A. Let us call it Company C. The solution is to sell short or buy protective put options on this tracking stock C. This protects B from fluctuations in the price of A's stock over the next 60 days. Because the degree of the protection is related to the correlation of A and C's stock, it is extremely unlikely that the protection is perfect. Multidivisional firms have used a form of restructuring called tracking stock since 1984 to segment the performance of a particular division -- similar to a spin-off or carve-out, except that the parent firm does not relinquish control of the tracked division. Previously, this was known as alphabet stock, but the technically correct name is tracking stock (e.g., EDS traded for years as a tracking stock of GM). This is a way to reward managers for good divisional performance with an equity that is tied to their division-rather than potentially penalizing them compensation for bad performance in a division they have no control over.

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