Develop a Golden Strategy for Estate Planning Success

Physician's Money Digest, September15 2004, Volume 11, Issue 17

When it comes to procrastinating, itwould be nice if activities were onlyput off for another day or two. Theproblem arises when important activitiesare delayed even longer. In the case of estate planning,they are often postponed indefinitely.

Consider the results of a recent survey commissionedby Charles Schwab & Company. Not only do25% of affluent Americans aged 45 and older indicatethat they have not yet made any plans for their estates,two thirds (66%) of them indicate that they "justhaven't gotten around to it yet."

"The number-one estate planning issue that I faceevery day is doctors failing to implement the advicethat they're given," says William Lewis, CPA, partnerat J.H. Cohn LLP (www.jhcohn.com). "It's much thesame as a physician writing a prescription, giving it tothe patient, and the patient either never fills the prescription,or worse, fills the prescription but nevertakes any of the medication."

Contrary to popular belief, most people need anestate plan, explains Carrie Schwab Pomerantz, presidentof the Charles Schwab Corporation Foundation. Inmost cases, the older you get, the more assets yourequire and the more complicated your family structurebecomes. By not preparing an estate plan, the personaldecisions of where many of your assets should go couldbe determined by others, and your heirs could findthemselves faced with legal obstacles and unwelcometax burdens, not to mention family strife.

Begin with the Basics

To keep a tall office building standing you need asolid foundation. The same is true when it comes todeveloping an effective estate plan. For physiciansthat means wills, trusts, powers of attorney, and sufficient life insurance so that their families are notimpoverished if something happens to them. It couldalso mean life insurance on the spouse so that thephysician can continue working and still provide thesame level of childcare.

When Lewis talks with a client, the first thing hedoes is take a two-part inventory. The first part is atangible inventory. This looks at everything in a physician'sfinancial world, from investment accounts andpension benefits to wills, trusts, and life insurancepolicies. But that's only half of the equation.

Lewis asks a series of probing questions, such as,"What are your real objectives? When do you thinkyou want to stop working? What do you think yourlifestyle will be when you do stop working?"

"Many physicians believe their expenses should godown," Lewis says. "But then I probe deeper and askwhat they plan to do with their free time. Are they goingto play golf, buy a second or vacation home, or do moretraveling? Depending on the answers, it could be thatthey're going to have greater financial needs when theyretire than they had originally thought."

The probing questions, Lewis says, are intended toprompt physicians to think about what they're tryingto accomplish. Many times these questions will touchon topics that physicians have not yet considered,especially where their children are concerned.

"Many physicians say that they want to leave theirkids a lot of money so that they have a financial legacy,"Lewis explains. "However, do you want to leave$2 million to your 22 year old? Is the child ready tohandle that kind of money at such a young age? So weeducate physicians on the use of trusts and other techniques,what they can do to protect their childrenfrom themselves, and from others."

In addition, "simple" is sometimes better when itcomes to setting up an estate plan. According toDiedre Wachbrit, PC (www.wachbrit.com), physicianssometimes set up elaborate asset protection systemsthat they aren't able to maintain. A commonexample is having a corporation own all of your capitalequipment and lease it back to the practice.

"I rarely see these entities being maintainedaccording to the formalities that the law requires,"Wachbrit says. "Even the best office manager is notgoing to be familiar with complex asset protectionstrategies and how to maintain them. So if physiciansare going to set up these strategies, they have to becommitted to maintaining them."

Ponder the Practicality of Trusts

There are several effective tools or strategies whenit comes to estate planning. For example, one basicstrategy is to have the physician's spouse own many ofthe family assets so that creditors cannot reach them.

A key tool, according to Roy Patterson, JD, anaccredited estate planner with Hartford Life, is the useof trusts. A trust is a legal and financial arrangementin which one or more persons (trustees) take title toproperty and hold it for the benefit of one or moredesignated beneficiaries. The beneficiary can be anindividual and/or an institution, such as a charity.There are two general types of trusts: revocable andirrevocable. A revocable trust can be changed orrescinded during your lifetime. An irrevocable trustgenerally cannot be altered once created.

"The trust can indicate that a child receives a portionof the money when they attend college, or onethird when they reach age 30 and another third at age35," Patterson explains. "All of that is spelled out inthe document."

Another advantage to using trusts as estate-planningtools is a feature known as the generation skippingtransfer (GST) exemption. This allows each spouse toavoid tax not just upon their death but also on thedeath of any children they may have. Each individual iscurrently allowed a GST exemption of $1.12 million.And the GST, just like the federal exclusion amount, isnot portable. If you don't use it, you lose it.

Trusts also allow for flexibility in an estate plan,an important factor considering changes in tax lawsthat call for a gradual increase in the federal taxexemption until it reaches $3.5 million by 2009.Wachbrit suggests that anyone with at least one milliondollars in projected estate worth, including lifeinsurance, should be using a credit shelter (A/B) trust.

Coel explains, "You can structure the A/B trust sothat the surviving spouse can decide how much goesinto it based on the year in which the individual diedand how much the estate is worth," Wachbrit says.

She also suggests being a bit more conservativeabout the kinds of irrevocable entities that are established."There are some places where an irrevocableentity still makes perfectly good sense, such as anirrevocable life insurance trust. Even if there's noestate tax, it gives the spouse beneficiary asset protectionfor all that money for life."

In addition, don't forget to take advantage of theannual gift tax exclusion, which currently stands at$11,000 per person. "Gift-giving internally to one'sfamily is often overlooked," Lewis says. "For a physicianin their early 50s, they should very consciouslystart to gift away at least the $11,000 per year.

Remember the Practice

A critical element of estate planning is asset protection.For many physicians, their practice is a hugeasset, particularly the practice's accounts receivable.Mark Coel, CPA, with Michaud, Buschmann,Mittelmark, Millian, Blitz, Warren & Coel, explainsthat an entire cottage industry has sprung up inFlorida designed to protect a physician's accountsreceivable. The reason, he says, is that the rising costof medical malpractice insurance has prompted manyphysicians to go without coverage.

Coel says, "To the extent that you're not carryinginsurance, or a claim comes in that's in excess of yourpolicy limits, not only will the individual physician beexposed, the group will wind up being responsiblethrough vicarious responsibility, because employers areultimately responsible for what their employees do."

As a result, many physicians have moved to liquidatetheir accounts receivable, using the cash to fundannuities and life insurance policies, or enter into adeferred wage agreement with the partners of thepractice, and then funding that agreement with insurance.A state statute that affords protection to lifeinsurance policies, annuities, and an individual'swages to the extent that they're the head of the household,is designed to keep creditors at bay.

However, Coel cautions that if physicians are consideringsuch action, they need to take steps well inadvance of dropping their medical malpractice coverageor incurring a claim. "Otherwise, creditors can claimthe activity was taken simply to keep them from gettingto the assets, and everything the physician did to protectthe accounts receivable can be undone," Coel says.

When it comes to your practice, don't forget thatthere will come a time when you decide to hang it up.According to Wachbrit, that time could come soonerthan you think. "I see physicians who are burned outat younger ages than people would be in other professions,but they're going to have to carry on for another5 years just to get their practice ready to sell,"Wachbrit says. "They've thought about leaving theirpractice, but they have never developed a clear-cutplan. They only have a vague idea of what wouldoccur if something happened to them prematurely.And they haven't thought about just how little value asurviving spouse can realize from a practice that hasnot been structured to be sold."

For solo practitioners who have had their ownpractice for the bulk of their career, Lewis suggestsentering into a contingent, reciprocal practice successionplan with a colleague. In that scenario, the survivingphysician agrees to purchase the charts andequipment from the deceased physician's practice.

"A lot of physicians that have been in practice for20 years or more don't want to give up the autonomythey've worked so hard for by bringing in a partner,or merging their practice," Lewis explains. "The alternativeis to have an agreement in place with a colleaguewith whom the physician is comfortable."

Weigh the Costs of Decisions

There is, of course, a cost-benefit analysis associatedwith most types of estate planning strategies. A physicianthat has not accumulated a significant amount ofwealth, spending a lot of money to set up offshore trustsor entering into family-limited partnerships might notbe cost effective. Coel suggests that physicians considertheir actions and review them with an estate plannerbefore putting things in motion.

Some actions, such as funding an A/B trust, are relativelyinexpensive. "It requires very little out-ofpocketto do that, yet it's going to save physicians asubstantial amount of money in taxes. And all you'vedone is take advantage of the law as it stands today."

One thing that Coel does advocate, if affordable,is for physicians to maintain their medical malpracticeinsurance. "Not only does the insurance get you anindemnity component, meaning you have someonewho is going to pay the claim for you, but you've gotan insurance company that will pay your defensecosts," Coel says. "It can cost upwards of $150,000to defend a malpractice claim. That's a big deal."

Coel adds that physicians should not focus on thepercentage increase in premiums, but rather the overallcost. For example, an internal medicine practitionermight receive an insurance renewal quote that's25% higher than the previous policy.

"I try to put that in perspective," Coel explains."There are OB/GYNs that are getting renewal quoteson policies that are almost as high as the policy limits.So if you can afford the insurance, hold on to it."

In terms of maximizing the benefit of your estateplan, Wachbrit points out the misconception that once anestate plan has been assembled, you can check it off yourlist, and it's done forever. In reality, the more complicatedyour family relationships and assets are, the more frequentlyyour plan should be reviewed.

"An estate plan is really something that needs to bereviewed each year, or at a minimum, every 3 years,"Wachbrit says. "Unfortunately, the average trust hasn'tbeen reviewed in 12 years. And there's a very goodchance that by omitting that review, your estate plan willnot do what you want it to do."