Physicians have a front-row seat to the show of life, and witness how suddenly life can change. This should motivate them to work on their estate planning, but it often doesn't. The daily pressures of work and family take precedence over planning for what we all hope is an event that will take place far in the future (ie, our death), and we hope that the passage of time will take care of the problems that might occur. Unfortunately, that's a prescription for unnecessary pain.
Many changes have been made to the unified gift and estate tax structure in recent years, all aimed at tax relief. In 2004, while an unlimited amount of assets may pass to a surviving spouse, the amount of assets that may pass to any other beneficiaries free of estate tax is $1.5 million. In future years, the estate tax rate and the amount of assets that may pass to beneficiaries other than spouses free of estate tax are scheduled to increase (see Table).
However, gift and estate tax planning is not just about reducing taxes. It's about making sure that the people you care for continue to be cared for in the event of your death. If at the same time your planning allows you to minimize administrative and tax costs, it's a better result, since it reduces financial and emotional pain for your beneficiaries. The treatment plan is as follows:
â€¢ Get a good team together to work for you. At minimum, you need an estate planning attorney and an experienced accountant or financial planner. Make sure your team has a complete understanding of your personal circumstances, assets, liabilities, and special concerns about your beneficiaries. If you are in a group practice, it's very important that your estate plan coordinates well with the business agreements that govern your group practice. Don't assume that those agreements will take care of everything for your beneficiaries.
â€¢ Make sure that assets are properly titled. You should review copies of all your asset statements to confirm whether assets are properly titled for estate planning purposes. For instance, consider with your advisors whether you should own assets as a tenant in common with others. Perhaps you should own assets as a joint tenant with rights of survivorship with your spouse, or have assets transferred to your spouse.
â€¢ Update all beneficiary designations. You and your team should review the beneficiary designations in place for all your insurance coverages, IRAs, and retirement plans. Too often, these designations are not updated. Outdated beneficiary designations are often the cause of unnecessary income tax and estate tax dollars.
â€¢ Don't skimp on life insurance. Think of the worst-case scenario for your beneficiaries. You die prematurely, your loans are unpaid, your children are young, and your family has a huge house and a huge mortgage. Buy enough insurance to cover those contingencies. The same applies to disability insurance. You can often utilize level premium term insurance to obtain the maximum coverage at the most reasonable cost for the number of years you need the insurance (eg, 15, 20, or 25 years).
â€¢ If you can afford to, make gifts during your lifetime. Any individual may make gifts of up to $11,000 per donee per year as an annual exclusion gift, which is not subject to gift or estate taxes. In addition, medical expenses and tuition costs paid directly to the qualified provider or institution, from nursery to graduate school, are also exempt from the gift tax. If you are financially set for life, use your gift tax exemption of $1 million by making major transfers of assets during your lifetime. Your beneficiaries can thank you in person and all the appreciation on that $1 million will not be subject to estate taxes, since it will be out of your estate.
â€¢ Don't be afraid to use trusts. Life insurance trusts are a very effective tool for exempting life insurance proceeds from estate tax. Others, such as grantor-retained annuity trusts and charitable trusts, may serve to reduce both estate and income taxes. In certain states, advisors may recommend that you utilize revocable living trusts to reduce estate administration expenses.
â€¢ Determine whether family vehicles are right for you. Talk with your advisors about whether your assets and objectives can be packaged in a family vehicle (eg, a family limited partnership or family limited liability company). These vehicles can both facilitate the application of discounts to the valuation of assets passing to your heirs and centralize the management of those assets.
â€¢ Make sure that your team draws effective documents for you. These include wills, trusts, powers of attorney, and health care proxies. Discuss the documents and estate plan with your beneficiaries and execute them promptly. Your spouse shouldn't find out after it's too late that you named their least favorite sibling as a trustee.
Now you can finally take those flying lessons.
is a principal of Eisner
LLP, one of the 20 largest regional
accounting and consulting firms in
the country. She serves as a financial
advisor to wealthy individuals and
their families, as well as to trusts,
estates, and private foundations. She has been invited
to speak on financial planning topics before organizations,
including the NYU Institute of Law and
Taxation, the Practicing Law Institute, the New York
Women's Bar Association (Trust & Estates Committee),
and the Network for Women's Services. She
welcomes questions and comments at 212-891-4071,
or for more information visit www.eisnerllp.com.