Comprehensive Capabilities

  The foundation of AWP Life Brokerage is the belief that firms are strengthened by the ability to work in tandem as a unified consortium.  Our specializations include insurance concepts and...

Industry Leader

  AWP has proven continual leadership in delivery of benefits solutions for companies of any size as well as we continue to be a leading enterprise in life insurance planning and...

Institutional Relationships

Institutional accounts are integral to our overall distribution plan.  We define institutions as banks, wirehouses, regional broker dealers, and CPA networks. AWP has acquired recognition as a player in the institutional...

Pioneering Captive Insurance

Introduction Despite the fact that the concept of “captive” traces its origins to the beginnings of formalized trade, many people believe captive insurance companies to be a relatively new phenomenon.  Formed...

Premium Financing

Many affluent clients are aware of the benefits that life insurance can provide.  However, clients often harbor concerns that a substantial income tax liability will result from liquidating low basis...


Estate Planning

Estate Planning: The Minimum Requirements and Beyond



Creating an Effective Estate Plan

Estate planning arranges one’s financial affairs through asset ownership and legal documents to make provisions for one’s goals related to the management and disposition of their estate.  Your estate planning goals may involve the desire to provide for lifetime needs protect assets against lawsuits and other claims, assure distribution of your estate to your intended beneficiaries, reduce or eliminate taxes and other expenses, coordinate business and retirement planning with other planning, protect beneficiaries from mismanagement and from the claims of creditors and ex-spouses; and/or discourage or encourage certain types of conduct for family members.  Most people focus on having a will or trust to meet minimum legal requirements, but for an estate plan to be truly effective and worthwhile, these minimum legal requirements alone are inadequate gauges.  An effective estate plan must be one that truly accomplishes your objectives and balances competing objectives in accordance with your priorities.

The Role of Asset Ownership

Estate planning takes shape and is implemented with legal documents, including change-of-ownership or change-of-beneficiary documents.  Asset ownership and beneficiary designations are a crucial element of effective estate planning.

a. Methods of Death-Time Asset Transfers.  Assets are transferred at death in one of three ways.

i. Operation of Law.  By legal definition, some forms of property ownership determine who will immediately succeed to a deceased co-owner’s interest in property.  Examples of this include joint tenancy, community property with a right survivorship, and life estates.  Financial accounts held by you “in trust for” a designated beneficiary and registered securities held by you “transferrable on death to” a designated beneficiary will be given to the designated beneficiary upon your death.  When these circumstances are met, legal title passes instantaneously with death.

ii. Contract.  Using various contracts, such as life insurance, trusts, retirement benefits, annuities, partnership agreements, and stock-purchase (“buy-sell”) agreements, you can arrange to have money or other assets transferred to designated beneficiaries upon your death.  The beneficiaries’ rights become active at the moment of your death.  This can include living trusts, whether revocable or irrevocable.

iii. Probate.  All of your assets that do not pass by operation of law or by contract pass through probate or intestacy proceedings.  Your personal representative is known as an “executor” if named in your will or “administrator” if not.  “Probate” refers to the required court proceeding in order to transfer the assets of a decedent that do not pas directly by law or contract.  To avoid probate, one must use the non-probate forms of ownership allowing assets to pass to beneficiaries via operation of law or under contract.  A will does not alleviate the need for probate and, although it may clarify and simplify probate, it is of very limited value until it is probated.  Probate proceedings vary from state to state, but similar rules apply in most states.

b. Importance of Ownership Designations.  An effective estate plan is hinged on ownership and beneficiary-designation documents being consistent with the plan.  All too often it happens that a person’s ownership and beneficiary-designation documents are inconsistent with his/her will or trust and with his/her true objectives.  As an example, you cannot own a home in joint tenancy with one person (which passes title at death by operation of law) and leave that same home to someone else in your will (which only affects property subject to probate).  Similarly, you cannot designate one person as a beneficiary under a life insurance policy (which passes the proceeds by contract) and expect that person to share with siblings or use the insurance proceeds to pay off debts or pay funeral expenses.

Distribution at Death; Management during Life

With assets owned in a manner consistent with your will or a living trust, those documents can provide for the distribution of your estate at death.  In most states, however, probate proceedings are necessary for a will to be effective, and a will on its own does nothing practically speaking to provide for management of one’s estate during life.  Contrastingly, a revocable living trust has the ability to provide for the management and disposition of your estate both during life (even if one becomes incompetent), as well as after death.  One or more irrevocable trust(s) can protect assets from creditors, reduce transfer taxes, and provide a financial safety net for the designated beneficiaries.

Transfer Taxes

Current federal law names three taxes that can be imposed on the transfer of assets: the gift tax, the estate tax, and the generation-skipping transfer tax (“GST tax”).  Income tax can also reduce transfers, in addition to those transfer taxes that may be applicable.

a. Gift Tax.  Any transfer of property for less than its fair market value justifies what is known as a taxable gift, with two exclusions.  The annual exclusion eliminates tax on transfers of property valued at $13,000 and lower per recipient within each calendar year.  The applicable exclusion (also known as the “lifetime exclusion”) eliminates tax until the point during one’s life when the cumulative gifts made surpass the exclusion amount.  During 2011, the annual exclusion amount was $5 million and the applicable exclusion amount was $5.  Upon lifetime exclusion being depleted, the rate of gift tax for gifts made in 2011 and 2012 is 35%.

b. Estate Tax.  For people dying in 2011 or 2012, the applicable exclusion for estate tax is $5 million and the estate tax rate is 35%.  Applicable exclusion for estate tax becomes reduced in accordance with the amount of the applicable exclusion used for gift tax.

c. Generation-skipping Transfer Tax.  GST tax is applicable in cases of transfers to grandchildren and others in lower generations to the extent the cumulative transfers, either during life or at death, exceed the GST exemption.  For 2011 and 2012, the GST exemption is the same as the applicable exclusion for gift and estate taxes.  Following 2012, Congressional action will determine regulations surrounding GST.  The GST tax is imposed at the highest rate imposed for federal estate tax purposes, now 35%, as mentioned in paragraph (b), above.