A Doctor’s Guide to Estate Planning

Learn how to create and structure an estate plan specific to physicians

A good and specific estate plan is especially crucial if you’re a doctor, for a few different reasons. As a physician, not only do you need to consider protecting your often-larger estate but you also need to ensure your medical practice is protected along with your assets, both before and after your death.

Here are the basics of what physicians need to know about estate planning.

Estate plan considerations for doctors

There are a few different purposes of creating an estate plan, no matter your profession. These include:

• Tax planning, helping to minimize estate or inheritance taxes paid out at the time of your death
• Protection of assets from the long and often expensive probate process
• Ensuring assets are distributed according to your wishes at the time of your death

For doctors, an additional concern is structuring your practice properly. One thing every physician needs to think about is medical malpractice coverage. Doctors aren’t protected from this liability just by creating an LLC or corporation, unlike other businesses. When your coverage isn’t enough to actually cover malpractice costs, you are personally responsible for those costs. If that were to happen, whoever is suing you or creditors could then go after your assets – even after you die.

Research from the American Medical Association shows that over a third of doctors have been sued at some point during their careers, so this is nothing to shrug off.

Another consideration that’s especially important for physicians is what will happen to your medical practice if something happens to you, whether you die or become incapacitated or disabled.

Let’s look at how these considerations can be addressed with a good estate plan.

What will an estate plan look like?

An estate plan sets forth a variety of wishes that you create based on what you want to happen after you die or become incapacitated. The basic components include:

• Choosing and naming beneficiaries
• Appointing individuals to control assets
• Naming guardians for minor children

These steps ensure that your estate doesn’t enter probate. But what does that mean, exactly?

1.  A will isn’t always enough

If you have failed to create a will (also called having died “intestate”), or if a family member or friend decides to contest your will, your estate will enter probate court. This means that the court will make decisions about how your assets are distributed, and the court will name an executor.

This process can take many months and sometimes up to a couple of years, especially for the larger estates that doctors often leave behind. According to research conducted by EstateExec, the average time to settle an estate was 16 months in 2018. And very large estates of over $5 million took almost three times as long.

Court fees will likely be taken out of the estate when all is said and done. Your already grieving family members will have to deal with this long, complicated process, and emotions and conflict can run high.

Unfortunately, a will on its own isn’t enough for your estate to avoid the lengthy probate process.

2.  Setting up a trust

Setting up your estate plan properly will help your estate avoid probate. Consider setting up a living trust, even if you have already created a detailed will. A trust further protects your estate from entering probate because trusts are much harder to contest. Those wishing to contest a trust would have to show that either a) you were incapacitated when you set forth your wishes or that b) the documents are inconsistent or flawed in some way.

Living trusts are managed by an appointed trustee and, for doctors, this should be a trustee that can also manage your medical practice temporarily upon your death until it’s sold.

There are two types of living trusts:

• Revocable trusts. A revocable trust is one that you can continue to alter or revoke while you’re still alive. Upon your death, the trust becomes irrevocable, meaning your beneficiaries cannot make any changes to your wishes.
• Irrevocable Trusts. If you set up an irrevocable trust, you will give up control of your assets while you’re alive by setting a plan in stone. You essentially give up your rights of ownership to the trustee.

While there are benefits of each, there are a few important downsides as well. With a revocable trust, you don’t have to pay gift taxes on transfers, but you don’t get other tax benefits. And because you still own the assets in a revocable trust, creditors could go after those assets if you were to be sued for malpractice.

With an irrevocable trust, you may have to pay gift taxes on transfers, but you get many more tax benefits, including avoiding the capital gains tax. Perhaps more importantly, because you don’t own the rights to the funds in irrevocable trusts anymore (as they’re managed by a trustee), creditors can’t go after those assets in a lawsuit. And they’re not included when determining estate taxes.

3.  Compiling cash and liabilities

Another good idea estate planning practice for physicians is to create a net worth statement and list of life insurance policies. This list is just a compilation of your assets and your liabilities – everything you own and owe. This will include bank accounts, cash, securities, real estate, student loans, credit card debt, mortgages, and more. Your net worth is determined by subtracting your liabilities from your assets.

Creating this list, along with gathering copies of your life insurance policies, will better allow those taking care of things after you’re gone to determine things like taxes owed if any.

Understanding the new tax law

It’s important to keep up with tax law changes as well when estate planning, as these affect how much estate, death, or inheritance taxes will be incurred. On a federal level, tax planning isn’t as big of a concern because few doctors have had to pay estate taxes and, with increased exemptions recently implemented, this is even more common. But some states impose their own taxes in these areas, so make sure you know your state’s tax laws.

At the beginning of 2018, the Tax Cuts and Jobs Act was put into place. There are a couple of points to know as you’re creating your estate plan.

First, the act doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemptions – now up to over $11 million and double that if you’re married – increasing based on inflation until 2025. (At the end of 2025, these exemptions will revert back to $5 million, indexed for inflation.) This means that until the exemptions “sunset” on December 31, 2025, you can take advantage of higher gifting and asset transfers without transfer tax consequences.

Unless your estate is above the exemption threshold, you will not owe federal estate tax. (The gift, estate, or GST tax rate, is still 40 percent – so avoiding it is a big deal.) This increased exemption is a huge win for physicians with large estates.

But if you do have an estate that’s still over the exemption amount or if you live in a state that implements a lower exemption, there are still steps you can take with estate planning to help lower your taxes. One strategy is to give away assets before you die. You can give away excess funds to family members or charities without using any of your estate tax exemption. This helps decrease your estate size for tax purposes.

An irrevocable trust, mentioned above, can also help. You can transfer assets into the trust that are then not included in your estate and can be only be used according to the trust agreement.

It’s always a good idea to work with a legal professional who has specific expertise and a tax advisor when estate planning. Get in touch with our team at Provident CPAs and Business Advisors today. We can help you minimize the amount of tax you pay as you determine your succession planning.