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Physician Estate Planning Guide

(Checklist, summary of documents, trusts & tax planning considerations)

An estate is basically all of your things, money and otherwise.  We all accumulate a lot of stuff throughout our lifetime, and most of us would like some say in where it goes.  Estate planning allows you to transfer assets and property to the intended beneficiaries in a manner and time consistent with your wishes, ideally while minimizing taxes and other costs.  It also prevents state law or arbitrary decision makers from controlling where your assets go by, minimizes the chances of there being a dispute about the intended beneficiaries, ensures your dependent children are taken care of by the party you would want and protects their assets until they are mature enough to receive them.

 

Disclosure/Disclaimers:  Please confirm any information on this page with current information, as laws and tax policies are constantly changing, as well as can be different depending on location. Please do your own due diligence and/or confirm information here with your own attorney prior to making any decisions based on this page. This page contains affiliate links, which support the group at no cost to you. We are not formal financial, legal, or otherwise licensed professionals, and you should consult these as appropriate. To learn more, visit our disclaimers and disclosures.

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Emergency Binder: If you want a pre-organized emergency binder, we have partnered with EmergencyBinders.com to help. Their binder will help you organize your family's most important information so you're prepared, no matter what happens.

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Introduction

When setting up an estate plan, your chosen estate attorney will meet with you to discuss your goals/wishes, concerns, and financial situation.  They may ask for you to complete some information beforehand, and it’s important that you be honest so that they can give you the best possible advice. They will then come up with recommendations about the documents that you need as well as possible tax planning strategies and other tips to make the process smoother. 

 

Your plan can be as complicated and specific as you want, but at minimum, having basic documents such as wills and power of attorneys and beneficiary and guardianship decisions in place is generally a good idea.

What does estate planning involve
Checklist

Estate Planning Checklist

[ ] Contact an attorney to help you with necessary documents such as wills and legal and healthcare power of attorneys, and if necessary, formation of pour over wills and trusts.  

 

[ ] If you have young children, discuss with any relevant parties who a good guardian to care for your children in the event you can not would be.  This will be specified in your will, and you should identify backups in case they are not around or willing to perform the duty when the time comes.  

 

[ ] If you have children, decide who you would want to manage their finances (conservator) and major decisions until you are ready for them to gain control of their assets. This may or may not be the same person as the guardian.  This should also be specified in your will, and you should identify backups in case they are not around or willing to perform the duty when the time comes.  

 

[ ] Create an emergency binder that would make it easy for someone to logistically access your assets and preferences.  This includes very detailed things like account numbers, logins and passwords, and information about where assets are stored or located but can also include any information about health insurance, mortgages, the school contact info for your children, the numbers of important friends and family members, utilities, etc.  You (or trusted party) can keep this in a safe or in a password protected USB drive.

 

[ ] Make a list of all of your bank accounts, insurance policies, and retirement/pension accounts. Make sure that you have designated beneficiaries on them.  Also write down all the account numbers and compile the related documentation and contact information.  You’ll want this both for your estate planning team as well as for your emergency binder.

[ ] Compile other important documents like birth certificates, marriage certificates, divorce records, titles to your house, car, or other property, real estate information, etc.  Make copies of them all, and compile them in the emergency binder or safe.  Make sure a trusted person knows where the originals are kept.   

 

[ ] Make a list of all your valuable possessions.  If there’s a specific person you want to have a particular item, write that down.

 

[ ] Make a list of your debts/loans.  This includes mortgage, student debt, and credit cards that you use.

 

[ ] Calculate how much money you want to leave to your dependents to have the lifestyle you want them to have if you are not around.  Account for inflation, and subtract your existing assets.  Use this to determine if you need more life insurance.

 

[ ] Designate an estate administrator to handle your will. Make sure this is a qualified individual as estate matters can be complex and emotional.  Your lawyer can also handle this.  The estate administrator should have the original copy.  Make sure relevant parties keep signed copies of all documents.  Keep copies yourself.

 

[ ] Review your will and beneficiaries every few years or every time there is a major change in your life (divorce, etc.) to see if it needs updating.

Joint Ownership

What Is Probate?

It’s a court-supervised process where your estate pays off any debts, expenses, or claims as applicable, and then distributes your assets according to your will.  If you don’t have a will, your assets will be distributed according to state law.  The more estate planning you do, the less expensive and time consuming this is, as the probate process can get really drawn out and expensive without a plan in place.  Assets that have beneficiary designations (such as insurance plans and retirement plans) typically do not have to go through probate as they specify what percentage of what goes to whom.  You should make sure these are designated, or assets that wouldn’t normally be subjected to tax may become subject to tax.  The other downside of probate is that it is a public process.

Joint Ownership As a Way to Avoid Probate

The other way to sometimes avoid probate is through joint ownership of accounts or assets.  Common examples of this include co-owning real estate or having multiple names on a bank account.  If you are in a community property state and want to avoid probate in these circumstances, check with your attorney about the need to include relevant documentation within the titles of jointly owned assets with wording such as "with rights of survivorship." 

Understand that the decision to do this should be weighed against downsides, such as that you give away partial ownership while you're still alive, and depending on what the asset is it could be subject to the other party's creditors in a lawsuit.  Also know that the normal step up in basis that heirs get on investment accounts or appreciated assets such as real estate upon inheritance, which allows the valuation of the asset to reset without having to pay capital gains/income taxes, will go away if they were listed as owners of the property prior to your death.  This means that they will have to pay more in taxes when they divest themselves of the asset, so it's generally not advised to use this strategy on an appreciating asset. 

Cost

Cost of Estate Planning

As with most expense related questions, the answer is that it depends.  The complexity of your estate and your estate planning needs can vary a lot.  You can put together a will for as little as close to free by just downloading a simple template online and getting it notarized, but if you have a lawyer involved, expect to pay a few thousand dollars (usually between 2-6 thousand, though there are always outliers depending on complexity.  Be sure to ask about what exactly is included and what future updates will cost when shopping around.

Basic documents

Basic Documents in an Estate Plan

This will vary but usually you will have a:

  • Last will and testament

  • Generable durable power of attorney

  • Healthcare power of attorney

  • Living Will

  • HIPAA Release form

I would also advocate for an emergency binder, which is not a legal document or a substitute for estate planning, but will make it logistically easier for someone to take over your affairs.  You can create one on your own or buy one for <$40.

You may also require the formation of trusts or a pour over will.

Last Will and Testament

This is the first document most people think about with estate planning.  It delineates how to transfer assets to the intended beneficiaries, designates a guardian and a conservator to minor children if applicable, and names the individual(s) that will execute your estate plan. If you die without one (“intestate”), the probate process will distribute your assets according to state law.  Usually this will mean everything goes to your spouse if married.  If you are unmarried, generally things will go to your children, and if you don’t have children, it will go to whoever is deemed to be your next of kin.  

Durable Power of Attorney

The General Durable Power of Attorney authorizes individuals or entities that you name to act on your behalf if you become incapacitated during your lifetime, or if you wish to have another party handle your affairs for convenience. This can include things like day to day decisions, finances, and legal or other non-medical decisions. You never know when something will happen, and having a trusted individual, ideally who knows you and your preferences, that can handle your finances or make legal decisions on your behalf is very important.   This will enable them to pay bills, file health insurance claims, accept payments owed to you, file your taxes, access your bank accounts, and more if you can not.  General means it covers everything and durable means it applies for the duration of your life.  You can also get a power of attorney that is more limited with respect to time period or what powers are allowed.  You can also designate different powers of attorney for different individuals depending on what you think someone’s area of knowledge is, or how well they know you in a certain regard. It is also advisable to name several alternatives in the event that something has happened to the person you originally designated in the interim, or if they are no longer willing to perform these tasks.

 

Healthcare Power of Attorney

 The Health Care Power of Attorney authorizes individuals of your choice to make decisions for you related to medical treatment, granting consent for procedures and code status, and other issues related to your health such as burial and cremation, organ donation, and other end of life matters. It ensures that difficult decisions which are in accordance with your wishes can be made when you are unable to make those decisions yourself. Although this document names individuals, authority for them to make decisions on your behalf is only granted if you are unable to make or communicate decisions yourself.  Again, you may limit the scope of what they are allowed to make decisions about, and having some alternative individuals listed is probably a good idea.

Living Will (Advanced Health Care Directive)

This document states your preferences for what medical treatments you wish to receive or avoid, and is useful if you are unable to make decisions for yourself because you are incapacitated in some way.  You can declare your wishes for irreversible and incurable conditions, situations where it is unlikely that consciousness will be regained, or advanced dementia or similar irreversible or significant loss of cognitive function.  The form will state your code status and related concerns, as well as whether your Healthcare Power of Attorney can override your Living Will in special circumstances.  Each state may have different formats. You can also addend this form with a separate letter with more specific instructions about your medical choices.  As a physician, you are more attune to all the grey areas that happen when someone cannot make decisions.  Take the time to specify what you would want and talk to your family about these preferences. Also make sure they know the document exists and where to find it so that they can show it to your healthcare team in the event it is unfortunately necessary. 

Last will
Durable POA
Healthcare POA
Living Will

Trusts

The will is simply a legal document that outlines who receives what assets/property after your death.

 

A trust is a more complicated agreement/entity entered into between yourself and another person or entity (the trustee), who will actually oversee the management of your assets based on your instructions. 

The parties involved in a trust are:

  • Grantor: the person who makes the trust.  This person will personally need to move any existing property into the trust.

  • Trustee: Person responsible for the management of all trust affairs, including uptake of real estate, investment of assets, and making distributions or transferring property out of the trust to beneficiaries and relevant parties.  They can buy assets on behalf of the trust, but cannot move the Grantor's property into the trust.

  • Beneficiary: Person(s), charity/charities, or organization(s) that receive the benefits of the trust. 

Will vs trust
What is a trust

Revocable Living Trusts

Revocable living trusts in many ways are similar to a will, in that they aim to avoid probate.  The other benefit of the revocable trust is that there is a shield of privacy in not going through the public probate process. Therefore, many attorneys advise that all assets without beneficiary designations go into a revocable living trust.  You place your money and assets into the trust by titling them to the trust.  While you hold the trust assets during your lifetime, any taxes generated by the assets within your trust will usually flow through to your personal return.  This allows the designated trustee to then distribute the assets within the trust to the designated parties without probate at the time of your passing.  Of note, there is no asset protection or tax strategy involved with a revocable living trust, and the assets within the trust will still be subject to estate tax, unlike in an irrevocable trust.  However, you maintain the ability to control the assets within the trust during your lifetime and you can take them out of the trust (revocable!) by retitling them.

Moving property out of a revocable living trust involves reversing the process by which you funded the trust with the asset.  Transferring property out of the trust will always require approval of the Trustee.  In the case of a real estate holding, you would draft a deed granting the title back from the trust's name to your name.  The same would apply for titles for bank accounts and vehicles.  If you named the trust a beneficiary of your retirement accounts or life insurance policies, the process is simpler, as you just need to fill out new beneficiary forms.

Irrevocable Living Trusts

In an irrevocable trust, unlike a revocable living trust, you actually give away the asset and control of the asset to the trust at the time of formation.  Therefore, you should only put assets into it that you will not need access to under any circumstance.  Irrevocable living trusts also avoid probate, but come with the added benefit of avoiding estate taxes +/- avoiding income taxes as well as offering asset protection, as since the assets no longer belong to you, your creditors can not go after them. Of note, also because the assets no longer belong to you, you do not pay taxes on any income generated by the assets within the trust.  This will pass on to your trust or heirs.  If you think your heirs will be in a lower tax bracket than you, from a generational wealth perspective, it may make sense to put assets in here for that reason, as the net amount of money your family will hold on to will be greater in that scenario.  The other thing to keep in mind is that gift tax rules do apply so being strategic about how you approach estate planning with this vehicle is important, and you should make sure you discuss this with your estate attorney as well as your accountant.

Pour-Over Will

A pour-over is a legal document used to automatically transfer an individual’s remaining assets to a previously established trust upon their death, and works in conjunction with that trust.  Essentially, it makes sure that any assets that weren’t added to the trust (whether intentionally or by accident) still end up in the trust after execution of the will.  It can be an important tool that can protect against issues related to probate, and is worth discussing with your estate planning team.

Other Types of Trusts

There are so many other trusts for special situations, including special needs trusts, trusts that dictate how your children can use their inheritances, to provide directions for specific assets, educational trusts, credit shelter trusts, generation skipping trusts, spousal trusts (SLAT), dynasty trusts, and more.  You really can spell out anything you want, but know that the more complicated you make things, the more potential for issues to arise with grey areas and possible contesting of your intention.

Revocable Trust
Pour Over Will
Irrevocable Trust
Other Trusts
Beneficiary

Designating a Beneficiary

Some of your assets, such as retirement accounts/pensions, life insurance policies, and annuities, have beneficiary designations in which you specify who will get the assets at the time of death.  Importantly, regardless of whether you have a trust or not, these assets will not require probate of a beneficiary is designated.  Life changes, so you should make sure that you update them regularly with any major life events such as the birth of a new child, the death of a beneficiary, marriage, divorce, or just changing your mind.

One important thing to know is that if you live in a community property state (look up whether your state is considered one), your spouse is considered to own half of your retirement account, so you will not be able to designate more than 50% to others who are not your spouse for retirement accounts. 

Guardian

Designating a Guardian or Conservator

Within your will, if you have children who are still minors, you should designate both a guardian (who will watch over your children) and a conservator (who will manage the assets that you leave for them until they are given control).  These roles could be played by one person or separate people/entities, depending on who you think will do each job the best.  For many, this is the most difficult part of the will making process, as you have to decide who will be most likely to raise your children the way that you would want (and ensure that they would be willing to take on that responsibility).  Note that as your relationships change over time, you may change your mind on who the best person(s) for these roles may be and you can change it.  

Payable on Death

"Payable on Death"

If you designate a bank account as "payable on death" to a person of your choosing, that person can immediately access the assets within that account with proof of passing such as a birth certificate and without probate, be given the assets in the bank account.  You can do something similar with securities, which will actually have a step-up in basis upon death, thus obviating the need to pay taxes on the gains you had during your lifetime in those investment accounts.  

Emergency Binder

Emergency Binder

It is important to have all of your important documents and passwords, as well as other important information, together in case you have an emergency and need to access it.  It's also really important that somebody else be able to take over your affairs if you are unable to or have passed away, and sometimes despite how well things are spelled out in a will, the logistics of accessing assets and other aspects of daily living present significant challenges.  For example, someone may not know all the accounts that they should be looking for, what utilities or subscriptions they need to turn off, or passwords that they may need to access accounts. 

You can definitely put this together yourself, or buy a preorganized emergency binder. It's clean/easy, comprehensive, and organized (and perhaps if you pay for it, you're more likely to just sit down and do it, which you may need the impetus to do it.  At under $40, it's probably one of the best steps you can take to ensure somebody can take offer your affairs if necessary. It's not a substitute for estate planning, obviously, but practically speaking, important. It has organized fillable or printable PDFs that will keep your important documents, insurance information, power of attorneys, financial and retirement accounts, bank accounts, health information, investment information, passwords and logins, and other things that you may not think to have readily available to someone in case you aren't able to pass it on, that would definitely make it easier on everyone. There is a money back guarantee from the creator if it's not what you want.  You can either print it out and put it into a safe, or you can buy a password protected flash drive and put it on there.  Give a copy or instructions on where to find it to someone who you trust.

Tax Strategy

Estates & Tax Planning

Tax Strategy

As physicians, we are fortunate to earn high incomes which can lead to significant wealth accumulation.  Putting some time into estate planning can help reduce the collective tax paid by the physician family through more intentional strategy around avoiding the estate tax. However, it is important to keep in mind that estate tax legislation is always subject to change, and revisiting this strategy whenever there is a major change in estate tax related legislation is important.  

 

Currently, the federal exemption before estate taxes are applied is 12.06 million for one person (24.12 million for married couples, with the rule in place that if one spouse dies first, their assets will go to the other spouse tax free, and the surviving spouse can pass on 24.12 million in assets before the estate owes federal estate tax).  This allotted amount is supposed to increase according to inflation, though the current exemption is supposed to be cut in half in 2026 if not extended.

 

Every state is different in how they approach estate tax, and some states have different limits for exemption from estate tax as well as differing percentages charged.  You should look up your individual state's situation.  Some states opt to have an inheritance tax that is taxed upon the individual that receives the inheritance instead of the estate.  

 

If you are in a situation where your estate will exceed federal and/or state estate planning limitations, you may benefit from enacting some of the strategies below.  

Step Up in Basis at Time of Inheritance

Many appreciating assets such as investment accounts and real estate properties are given what's called a "step up in basis" at the time of death, such that the person inheriting it will inherit it at the value at the time of death.  This can be an incredible tax saving tool, as if the person who passed away had sold during their lifetime, they would have had to pay income tax on the amount that the asset had increased in value since they purchased it (think about when you sell your stock or an investment property).  Therefore, it is often advisable for elderly physicians to avoid selling assets prior to death unless it is absolutely necessary (and even then, borrowing money against the estate may be a better idea).  If they do have to sell, it's better to sell things that have minimally appreciated (high basis) rather than long time holdings which have appreciated significantly (low basis).

Gift Taxes

You are currently (2024) allowed to give up to $18,000 to any individual as a gift before having to declare it with a gift tax return, which will go on file against the amount that you are allowed as an estate tax exemption.  Because of this, some families choose to start transferring wealth to the next generation while they are still alive.  As each spouse can give each child and their spouse $16,000, this allows for transfer of up to $64,000 annually from each married couple to each married child, tax free.

(Remember, contributions to a 529 plan count toward your gift tax limit.)

Step up in basis
Gift Taxes
Appreciating Assets

Other Planning Considerations

Transferring Valuable or Highly Appreciating Assets

This is complicated, and should be carefully planned out with an estate attorney, as there are upsides and downsides to transferring assets.  Timing of transfer should also be planned strategically to avoid gift tax issues.  If for example, you own a business which you expect to sell for a lot of money, it may make sense to give your children shares in that company so that the entire amount doesn't go to you and then be subject to estate tax at the time of sale.  In other situations, you may want to give ownership of valuable assets to an irrevocable trust, a Family Limited Partnership (FLP), a Family Limited Liability Company (FLLC), or to your heirs directly to avoid estate taxes.  

Charitable Giving 

If you know you want to give money to charity, you may want to do so while you are alive for multiple reasons.  For one, it will decrease the value of your estate and the amount of estate tax your estate is subject to.  Secondly, a lot of charitable giving may be eligible for savings on your annual income taxes, so it makes sense to give while you are alive.  

Spending Down Assets

Roth IRAs and Roth 401ks are amongst the best things to leave to your heirs, as they are tax free, and the heirs have 10 years to withdraw the assets, allowing them 10 more years of tax free growth in an asset protected way.  Permanent life insurance is next, as it is also tax free, but is immediately distributed at the time of death.  As discussed earlier, taxable accounts and real estate get a step up in basis at the time of inheritance, which makes them tax free if liquidated immediately, though there will be transactional fees associated with it.  While traditional IRAs and 401ks also allow 10 years to withdraw assets and provide asset protection, since money was put into them in a pretax fashion, withdrawals will be subject to income tax, so if you're looking to spend down money, this is a good place to do so, particularly as you have a required minimum distribution anyways.  HSAs should always be spent down if possible, as they are triple tax free for you, but taxable for your heirs.  Another good outlet for HSA money is as a donation to charity as charities would not have to pay tax on the inheritance.

Charitable giving
Spending down assets
Life Insurance

Life Insurance for Estate Planning

If you follow the Physician Side Gigs Facebook group, you know that we always warn people about mixing insurance and investment.  This is because for the vast majority of physicians who are pitched these products by insurance salespeople who make huge commissions off of their sale, products like universal life and whole life insurance don't make financial sense.  They would be much better off with term life insurance, which has a much cheaper premium, covers them for the time they need insurance before they have accumulated enough wealth to support their families in the event of their untimely death, and getting the investment returns on the difference in term and whole life insurance premiums.

There are a few exceptions to this rule, that should ideally be considered in conjunction with an estate attorney.  These include special needs situations and situations where a physician family is almost certain to exceed estate tax thresholds.  In this case, the subpar returns on a whole life insurance policy may make sense if they avoid estate taxes on that amount of money that they weren't going to use during their lifetime regardless.

Most of the time, this involves gifting an irrevocable trust the premiums for the life insurance policy, and therefore having the policy owned by the irrevocable trust.  This protects it from creditors and allows it to escape income and estate taxes when inherited. Note that if the amount of the policy premium exceeds annual gift tax limitations, the amount paid into the trust will count towards estate tax thresholds.

Learn more about whole life insurance policies.

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