Physicians have worked too hard and have sacrificed too much to throw it all away with an inadequate estate plan. After undergraduate college, four years of medical school, a grueling residency lasting anywhere from three to eight years, and often a fellowship, physicians enter practice with high debt and have to play catch-up to their college peers, who have already been in the workforce for years and have begun accumulating assets. Physicians accumulate significant assets over the course of their career and have high liability, and special protections and strategies are needed to pass on and preserve those assets while minimizing the estate tax bite.

Doctors Need Asset Protection

Two strong indicators of the need for and willingness to plan for asset protection are having wealth and having a high income. Many doctors have both of these indicators. According to recent statistics, the wealthiest 10% of U.S. physicians and surgeons control over $350 Billion dollars in wealth. In what is currently an almost recession-proof business, 95% of the 700,000 to 1,000,000 U.S. physicians and surgeons earn over $250,000 per year. That is 665,000 to 950,000 U.S. physicians and surgeons. Another strong indicator of the need for and willingness to plan for asset protection is being in a profession whose members are more likely than average to be sued. Here, again, we find doctors. Nearly 100% of neurosurgeons, cardiovascular surgeons, and OB-GYNs will be sued at least once during their careers, as will 90% of general surgeons and radiologists. In fact, each year, 50% of the U.S. neurosurgeons, and 33% of U.S. orthopedic and trauma surgeons and emergency room (ER) physicians are sued. Other types of doctors are also sued far more often than those in other professions. Being sued is a very personal and painful experience.

Estate Planning

What is Estate Planning?

Estate planning involves preserving your estate for the transfer to your heirs and the proper distribution of your estate’s assets. Proper planning is important to avoid dying intestate which means passing away without a will or trust that provides instructions as to how your estate is to be transferred and to whom.

A will is a legal document created by the owner of an estate that sets forth his or her plan for the disposition of assets after death. In most cases, wills need to be in writing and witnessed by another party. In addition, the testator (the person creating the will) must be competent and free of duress at the time he or she makes the will. The Unlimited Marital Deduction.  Provision that allows your surviving spouse to inherit all of your estate free of estate and gift taxes at your death (your spouse must be a U.S. citizen to qualify for the marital deduction). However, once your surviving spouse dies, his or her estate may be subject to estate taxes depending upon the value of the assets in the estate. Proper planning, including use of trusts, can help alleviate these estate taxes.

What is a Trust?

A trust is an agreement made between two parties for the benefit of a third party. The Trustee holds legal title to property for the benefit of others.

A life insurance trust is a trust formed to own a life insurance policy. An accountant or attorney can help set up a trust. Trusts can be revocable or irrevocable.

What is an Irrevocable Trust?

An irrevocable trust is a trust in which the grantor cannot change the terms of the trust or terminate it. In addition, the grantor does not have access to the funds in the trust. Often such a trust is funded with life insurance and called an Irrevocable Life Insurance Trust (ILIT).

What is an Irrevocable Life Insurance Trust  (ILIT)?

Life insurance is a unique asset in that it assumes its greatest value at the time of greatest need: at the demise of the insured.

The problem with large amounts of life insurance, however, is that the full face amount of the policy can be taxed in the estate of the insured if they own the policy. To avoid this occurring, it is important to establish an alternative entity as the owner of the insurance.

The most common method is for the insured to create an Irrevocable Life Insurance Trust (ILIT) which will apply for, own and pay the premiums on the insurance.  If properly administered, this approach will have the result of bypassing estate inclusion at the death of the insured.  This is normally considered the most efficient method of producing large amounts of liquidity at the moment it is most needed: when taxes or debts are due.

Typically, the grantor of the trust will make gifts to the trust each year to pay the premium.  In order to keep the insurance out of the estate, it is imperative that the gifts qualify under the Annual Gift Exclusion.  This is accomplished through the use of annual letters to the beneficiaries of the trust by the Trustee, offering them a window during which they can withdraw the gift.  If that window expires or the beneficiaries decline this right in writing, the Trustee can use the gift to pay premiums or for other purposes allowed by the Trust document.  These letters are usually referred to as “Crummey Letters,” after the court case wherein they were first utilized.  They must be done each year a premium gift is made.

The Charitable Deduction

You can donate an unlimited amount of assets to a qualified charity free of estate and gift taxes. This is one way to make sure you are not paying estate taxes (or lowering your estate tax exposure). The amount contributed to charity is fully deductible before the estate tax rate is applied. Some estate holders prefer to have control over who gets the benefit of their estate. They may prefer to select a charity or cause they care for rather than giving the funds to the federal government. There may be other tax deductions available to charitable donations. You may be able to reduce your income tax and capital gains tax on appreciated assets.

Estate Planning and Life Insurance

You work a lifetime to accumulate an estate; however, at your death the assets you pass onto your heirs may be subject to federal estate taxes and state inheritance taxes. If your estate is subject to estate taxes, taxes are due usually within 9 months of your death. Life insurance can play an important role in estate planning by providing the liquidity necessary to pay estate taxes and other expenses and avoid a “fire sale” of highly illiquid assets. Some expenses that must be paid upon an individual’s death may include:

• federal estate taxes
• state inheritance taxes
• probate fees
• legal and administrative fees
• debts
• funeral expenses

Options to pay estate taxes and expenses include:

• Use cash (assuming sufficient cash available).
• Borrow the money (assuming loan can be secured on favorable terms).
• Pay the IRS in installments under IRC Section 6166 (only available for closely held family businesses or farms and there will be an IRS lien placed on the business).
• Pre-pay now by purchasing a life insurance policy with the possibility of paying pennies on the dollar. The funded irrevocable life insurance trust (ILIT) can be one of the most cost-effective ways to pay for estate taxes.