Physician Estate Planning Guide for 2017
Estate planning looks a lot like two things most doctors would rather avoid: paperwork and lawyers. For physicians with children or dependent spouses, a solid estate plan can save time, avoid probate, reduce or eliminate estate taxes and ease the post-death transition for surviving family members. You can use this step-by-step guide to create your own estate planning checklist, making the whole process more efficient.
Identify heirs and beneficiaries
While most people use word “heir” and “beneficiary” interchangable, an “heir is someone who receives property on the physician’s death via probate while a beneficiary receives property as a result of being named by a trust for doctors.
For most physician families, heirs and beneficiaries will include your spouse, your children, your grandchildren, and perhaps a charity or two. Make sure to name alternate beneficiaries in case your chosen beneficiaries predecease you. Many trusts will include a “wipeout clause” that says who receives a physician’s assets in the event that everyone named in the trust is dead.
Consider guardians and custodians for minor children
Doctors with families need to carefully consider who will take care of their surviving children. A “guardian” is the person who will look after your child’s well-being, filling your role as a parent, looking after their physical and emotional needs. A good guardian may share your personal values and your goals or expectations for your children. A “custodian” looks after money and other property that belongs to the child and makes decisions about how to use those resources to benefit the child. A good custodian will have a strong understanding of personal finance, budgeting and investing. Some physicians may be fortunate enough to know one person who can fulfill both of these duties.
Choose a personal representative / executor
A personal representative is a person who handles the estate for a deceased physician, usually one who dies “intestate” or without a will. An executor does practically the same thing but for a deceased doctor who has made a will. In either case, this person will carry out the decedent’s wishes. A good executor or personal representative will do their best to protect the estate while efficiently distributing the decedent money, property and other assets to loved ones named in the will or designated to receive property under the intestacy laws. When choosing an executor or personal representative, physicians should look for a trustworthy person who is adept at handling financial and legal matters in an efficient manner. It also helps if this person is younger than you so that they are less likely to die before you do!
Compile net worth statement and list of life insurance policies
A physician’s net worth statement is nothing more than a list of your assets (everything you own) and liabilities (everything you owe). Assets include cash, bank accounts, financial accounts, securities, homes, business interests, investment real estate and other personal property. Liabilities include credit card debt, student loans, mortgages and other debts. Your “net worth” is simply the sum of the value of your assets minus the sum of the value of your liabilities. This may also be called a “balance sheet.”
Even if your net worth statement doesn’t list the exact value of “your stuff,” it will help your attorney and your financial advisor to identify everything, so it’s more important that the list of assets and liabilities be absolutely complete rather than totally accurate.
Physicians who own life insurance should gather a copy of every policy in which they are named as an owner or an insured. Together with the net worth statement, this information allows an estate planner to know whether the overall estate will be subject to federal estate taxes, gift taxes, state death and inheritance taxes or income taxes.
For 2016, the federal estate tax unified credit equivalent amount is $5.45 million, meaning that each individual has an exemption that shelters $5.45 million worth of net worth from federal estate taxes. For a married couple, this amount is doubled to $10.9 million. States also levy estate taxes and they vary from state to state.
Shop for an estate planning attorney
To select the right estate planning attorney, physicians can begin by asking their financial advisor or tax preparer who they recommend. Self-employed physicians should also their business attorney who they recommend for estate planning.
Here are a few questions doctors can ask when interviewing an estate planning attorney:
- “What is probate?” Even if you already know the answer, the way the attorney answers the question will tell you a lot about their ability to speak your language.
- “What are the benefits of an inter vivos or revocable living trust?” Some attorneys recommend a living trust for almost every client while others are more judicious in recommending them. Trusts require administration, and the right answer will include an explanation of the administrative burden.
- “If you draft a trust for me, how will it get funded?” Again, trusts require administration and funding the trust is the beginning of the administrative process. Given their time constraints, most doctors will skip this part of the estate planning process which may render the trust useless.
- “How much will this cost me?” Doctors often hesitate to ask, directly, about the price of an estate plan. That’s a big mistake since fees vary greatly and may or may not include follow up work to implement the estate plan. It’s better to find out up front than harbor misgivings.
- “How often should I consult with you after this project is complete?” The answer to this question tells you something about how the relationship and how it may unfold over time. Ideally, physicians would consult their estate planners every time they take title to property or an account, especially if the doctor’s estate plan involves a trust.
- “When was the last time one of your clients got sued for malpractice?” While every doctor is certain they will get sued, few physicians realize that good estate planning includes asset protection planning too. If you can find an estate planner who has a depth of experience with physicians—especially one who has seen their client survive a nasty malpractice lawsuit—there’s a good chance you’ve found the right attorney.
Meet with your estate planning attorney… twice
While it may sound easy, setting an appointment to meet with an estate planning attorney can be a bit tricky, especially for busy doctors who actually want to put their estate plan into action. The best practice is to schedule TWO meetings in your first call: one to outline your estate planning goals and one to review and execute legal documents. It is very common for busy doctors to overlook the second meeting, such that their wills, trusts and powers of attorney are drafted and paid for but never executed. Scheduling both appointments up front will create a deadline for everyone involved.
Review your estate planning documents very carefully
Doctors expect other professionals to observe the same standard of care that they themselves observe but this expectation may lead to disappointment, even in estate planning. A common practice among attorneys is to duplicate or “clone” another client’s estate planning document and use it as a starting point for your documents. That’s fine in many cases but it may mean that your document inadvertently contains someone else’s name, someone else’s family members’ names, and somebody else’s estate planning wishes. To prevent this, READ YOUR DOCUMENTS WORD FOR WORD at least one time and make a note of anything you do not understand. Physicians aren’t supposed to know about estate planning, so attorneys won’t be surprised if you have a question, even if asking that question makes you feel dumb. Ask it, so that your family’s future will be protected.
Implement your estate plan
Most physicians believe that signing their will, trust, power of attorney and advanced directive means they are finished with the estate planning process. Wrong! There are several steps doctors need to take in order to put an estate plan in place.
- Store the original estate planning documents in a safe place but not your safe deposit box since that box may be sealed upon your death. Instead, store your documents in either a fireproof and waterproof box or in a safe in your home. If you use a safe, make sure your executor and trustee have access. Some attorneys may offer to store the originals too.
- Distribute copies to everyone who needs to know. It may seem like a good idea to give everybody a copy of everything but that may be a mistake. While the probate process will ultimately cause your will to become a matter of public record, your trust is a private document. To keep your trust’s inner secrets, give a complete copy only to your trustee and provide a “certification of trust” to everyone else, including your financial advisor and financial institutions where your trust is registered.
- Fund your trust! Physicians who have a living trust, inter vivos trust or irrevocable trust need to know that they must actually “fund” or put things into the trust in order to avoid the probate process. While funding a trust is very straightforward, it can be paperwork intensive and easily botched. A Certified Financial Planner™ may be able to help physicians with this task and most law firms have a clerk who can handle the task.
- Double-check beneficiary designations. Life insurance, individual retirement accounts (IRAs) and other qualified retirement accounts pass by “will substitute” meaning that they can skip the probate process—and the will—entirely. Doctors should check to see that the beneficiaries named on life insurance and retirement accounts will direct those assets to the correct parties. Be very careful when naming a trust as the beneficiary of a retirement plan account and ask your attorney to see if your trust has a “conduit provision” that will avoid immediate income taxation of the account.
- Keep your estate plan alive for as long as you shall live. Life happens, things change, and the estate planning laws change all the time. Physicians should revisit their estate plans at least once every three years to make sure everything is in order AND consult their estate planner whenever they are about to acquire or take title to a major asset such as a home, a car, or an interest in a medical practice or medical office building. Doing this the wrong way may undo some or all of the work you put into your estate plan.
We hope that our Physician Estate Planning Guide can help you make sense of the personal finance issues that affect doctors while helping you avoid mistakes and seize opportunities as you and your family plan for financial security that can last a lifetime.