Estate planning 101
Experts offer tips on what to do and when to do it.
By Ruth Carol, Contributing Writer, March 1, 2023
They are two of the most difficult decisions to make: who should be your child’s guardian and who should get your assets if something happens to you. As difficult as it is to have these conversations, not having them is worse because others will be left to make these decisions without your input.
The No. 1 mistake individuals, including physicians, make regarding estate planning is not doing it. “People put off estate planning as long as they possibly can because they hate to think about their death,” said Stephanie P. Kalogredis, JD, an attorney who focuses her practice in estate planning at Lamb McErlane, PC, in West Chester, Pennsylvania.
Estate planning is about planning for the transfer of a person’s wealth during their lifetime and after their death, she explained. In addition to ensuring that assets are distributed per an individual’s wishes, estate planning is important for tax purposes and asset protection. It’s the best way to ensure that heirs and beneficiaries receive assets in a way that manages and minimizes tax impacts. Estate planning also ensures that the key components of an estate plan are coordinated, Kalogredis added.
Getting started with estate planning early on is beneficial because the future is uncertain, said Carole C. Foos, CPA, a tax consultant at the wealth management firm OJM Group in Cincinnati. Accidents and health issues can occur at any age, not just when people get older. “It’s good to have, at least, the basic documents in place,” she said.
The first step in estate planning is finding an attorney who specializes in it. Physicians early in their career may go to a general attorney to have a will drawn up. However, given the amount of assets they obtain as they mature into their career, they should work with someone who specializes in estate planning, Foos said. Physicians fall into the top 1% of earners, according to the U.S. Bureau of Labor Statistics.
“You need an attorney who concentrates on estate planning, not a generalist. I wouldn’t go to my internist for the growth on my back. I’d go to a dermatologist,” said Kalogredis, who also cautioned against using a will found on the internet. These wills tend to be very basic; they don’t provide tax clauses, offer advice about beneficiary designation, or coordinate with other estate planning documents, she said. “There’s a lot more soul searching that goes into estate planning than what you can get on the internet,” Kalogredis added.
When she meets with a new client, Kalogredis starts with what she calls a “fact finder.” Kalogredis gathers the individual’s personal information, such as the names of the spouse and children, complete with their addresses and contact information.
Next, she makes a list of the person’s assets and liabilities. When listing assets, estimate their approximate current value, not what it was at the time of purchase. Examples of assets include:
Real estate holdings: primary residence, secondary residence, office building, land
Bank accounts: checking and savings
Investments: stocks, bonds, mutual funds, money market funds, cash
Life insurance policies
Retirement plans: work and individual
Business interests: ownership in full or part
Other personal possessions: art, jewelry
Liabilities are considered an individual’s outstanding debts. These include a mortgage(s) as well as car, school, and personal loans. “Having a list of assets and liabilities helps me frame our discussion from the financial side,” Kalogredis noted. “The rest of estate planning is a discussion about what the client wants to have happen with his or her assets.”
Naming beneficiaries or specified guardians for minor children is part of the process as well, if applicable. If beneficiary forms for bank accounts, retirement funds, and life insurance policies have already been filled out, review them to ensure they are up to date as they can outweigh what is stated in a will. As an example, a previous spouse could still be on beneficiary forms. Guardianship of minor children should be specified if both parents pass away, not just the individual client.
Key components of estate planning are a will, trusts, living will, and durable power of attorney. A will is a legal document that describes how and to whom an individual wants his or her assets distributed after death. Typically, it includes the name of the executor who will carry out the provisions stated in the will, and lists beneficiaries and guardians. Without a will, the state will make these decisions according to its laws.
Various types of trusts are typically used in estate planning; two common types are revocable and irrevocable. A revocable trust, also known as a living trust, can be changed during the trustmaker’s lifetime. The biggest misconception about a revocable trust is that it has tax benefits, Kalogredis said. “But if you retain the right to an asset, it will be taxed,” she said. “You must be ready to give away assets if you want to save death taxes. A revocable trust will not do that.” The primary purpose of a revocable trust is to avoid probate for the transfer of assets after one’s death. Probate, which is a legal process to verify that a will is valid, can in some states be a lengthy and costly process for heirs.
In contrast, the terms of an irrevocable trust cannot be changed once the trust is created. That means after the assets are placed in the trust, they can’t be pulled out, Foos explained. The purpose of an irrevocable trust is to transfer assets out of the trustmaker’s taxable estate to lower the value of the estate, either below the federal exemption amount or closer to it. Timing is key when creating an irrevocable trust and funding it, she added. For example, the physician can create the document but hold off on putting in the assets.
Setting up a minor’s trust for dependent children dictates what amount of assets will go toward their health, education, and welfare, Foos noted. A special needs trust can be used for dependents with special needs, including a sibling or parent, who is disabled or otherwise unable to provide for themselves financially.
There are a variety of specialized trusts that are used to help reduce federal and state taxes, which are especially helpful for people with large estates, Kalogredis said. Most specialized trusts involve a lifetime transfer. “Some irrevocable trusts would allow the physician, for example, to gift $7 million worth of assets today at a gift tax cost of $5 million and remove all appreciation from their taxable estate,” she said. Among the specialized trusts Kalogredis mentioned were the spousal lifetime access trust, zeroed out grantor retained annuity trust, life insurance trust, qualified personal residence trust, and charitable trusts. “The advantage to some trusts is that they make a gift of the current asset and all future appreciation passes to the beneficiaries estate-tax free,” Kalogredis said. “But some trusts, like the grantor retained annuity trust, has a mortality factor built into it that may not work to your advantage.” That’s why it is important to learn about the various options for trusts.
A living will, also known as medical power of attorney or health care directive, details the individual’s preferences for medical treatments if they are unable to communicate or make those decisions in real time. This document also addresses the use of end-of-life and life-prolonging treatments, life support, feeding tubes, and do-not-resuscitate orders. It also identifies the individual who is authorized to consult with your doctors and ultimately sign off on the course of treatment.
Career stage impacts decisions
Dermatologists just starting out in their career, those in mid-career, and those nearing retirement should focus on different aspects of estate planning.
Dermatologists coming out of residency may have a spouse and/or young children for which to provide. Therefore, it’s important to have a life insurance policy and a designated beneficiary, Kalogredis said. Consider establishing a trust for the children and an individual retirement account. “When you start out, you don’t have an elaborate estate plan. It’s a simple plan that will grow with you,” she said.
In mid-career, it may be time to think about how to buy out an older partner in the practice or how to be bought out if just becoming a partner, Foos said. Consider establishing a more robust estate plan such as setting up a trust or at least learning about other available estate planning tools. Review the basic plan started early in the career to see if it is still relevant. If not, adjust accordingly. For example, as a dermatologist’s net worth increases, consider whether they have enough life insurance.
As they near retirement, focus on an exit plan strategy, Kalogredis advised. While focusing on a succession plan for the business, develop a plan to draw down assets in retirement by deciding which assets to use and which ones to leave to heirs, Foos said. “Think about what else you need to do now that you are getting closer to retirement,” she added. “Maybe it’s time to fund some of those trusts in your estate plan.”
Durable financial power of attorney designates another person to make financial decisions should the physician be unable to. One person or multiple people can be given the ability to handle all the finances or specific financial responsibilities. Tasks range from paying daily expenses, handling bank transactions, and collecting Social Security and Medicare benefits to conducting real estate transactions, making investments, and filing/paying taxes.
Both state and federal tax laws can significantly impact estate planning. Although every state is a little different, each state has a provision that explains with whom the tax burden lies — either the estate or the heirs — depending on how the assets are distributed, Kalogredis explained. That can be overridden if addressed proactively with estate planning. Without estate planning, many states award half of a person’s assets to the spouse and half to the children. If an individual has a spouse and no children, many states award half of the assets to the individual’s parents, which is usually not what people want, she said.
Because states have varying laws regarding estates and wills, it’s imperative to talk to a local estate planning attorney, Foos emphasized. This is especially true for physicians because it is common for them to relocate for work.
Additionally, federal tax laws change often. For example, in 2023, individuals can transfer up to $12.92 million to heirs, during life or at death, without triggering a federal estate-tax bill, up from $12.06 million in 2022. With modest planning, married couples are allowed to transfer up to nearly $26 million in 2023, compared with slightly more than $24 million last year. Also, the annual limit on tax-free gifts rose to $17,000 from $16,000 in 2023.
The changes are part of the Tax Cuts and Jobs Act that was indexed for inflation, Kalogredis said. But this estate-tax exclusion has a sunset provision and is slated to expire in 2025. “Unless Congress takes action, this exclusion will revert back to roughly half of that value on Dec. 31, 2025,” she said.
Whether in a large or solo practice, dermatologists should understand what happens to the business in the event of their death. It’s not just about finances, there is also the responsibility to the patients that needs to be addressed, Kalogredis said.
For dermatologists in a multi-physician practice, they should be familiar with the partnership/operating agreement and what happens with their ownership share of the practice if something happens to them, Foos said. The question is how does the surviving spouse and/or children get the physicians’ value out of the practice. Most states don’t allow non-physicians to own a practice, she added. Entities, such as physician practices, typically have a “forced sale on death” clause, Kalogredis said. Many times, this type of clause is tied to the payout of life insurance as the policy provides the liquidity needed in those situations.
For solo practitioners, it is beneficial to establish a succession plan, Foos said. As an example, do they want a younger partner, private equity, or another entity to buy them out? Once they decide what they would like, they should work toward that goal. If they want a younger partner to buy them out, they should be hiring younger physicians to work at the practice who have potential to do that when the time comes. “Consider having the business purchase a life insurance policy on yourself so that a junior partner can use the proceeds to buy you out,” she said.
Unlike in the past, physicians can’t count on being bought out by another local physician. “Other dermatologists in the community don’t necessarily need to buy your practice because they think patients will go to them anyway,” Kalogredis said. Two common mistakes physicians make when looking for a successor are overestimating the value of their business assets and overvaluing the importance of their name or reputation.
The estate plan should be reviewed periodically with life events serving as the trigger, Kalogredis recommended. Professional events include completing residency, moving to a different state to practice, starting or joining a practice, and selling a practice. On the personal side, they include a change in marital status, having a child or additional children, and children going to college or becoming independent. In the absence of life events, reassessing the estate plan every few years helps ensure that it still reflects the individual’s current preferences, Foos said. Changes in estate tax laws also could trigger a review.
More importantly, avoid making the second most common mistake that individuals, including physicians, make when doing estate planning — not following through with it. “I see a lot of physicians draw up estate planning documents, but they don’t finalize them,” Kalogredis said. “They sign the will and draw up a trust document, but they don’t change their beneficiary designations or the title on the assets, or move them into the trust. They walk away thinking it’s done, when everything is still in their name because they didn’t take that final step.”