The term estate planning is commonly known to dermatologists, as well as most individuals, as the type of planning one does in anticipation of death – creating wills, trusts and other documents to deal with issues after his departure. Although this is part of the discipline, it is not all. On the contrary, good estate planning should encompass several tactics that can have a significant impact over the lifetime, from annual gifts to planning for the possibility of being legally incapacitated.
In fact, estate planning can be thought of as the following 3 distinct areas of planning:
- Disability planning deals with decision making regarding legal, financial and medical issues if one is unable to make decisions on their own.
- Estate distribution planning deals with what happens to assets upon death.
- Addresses transfer tax planning and plans for the various gifts, estates, and other taxes that may be triggered under state and federal laws when transferring wealth during life or death.
In this article, we’ll provide an overview of incapacity planning and estate distribution planning, including recommended documents for each.
Planning for your own incapacity (i.e. what happens if you are unable to make decisions for yourself) is never pleasant but always important.
For example, what if you are hospitalized and cannot express your wishes regarding decisions about your medical care? Many doctors assume that their family members would automatically be able to make decisions in this scenario. However, the rules vary widely from state to state. In some cases, the decisions are left to the health care providers and facilities in charge of your care. Also think about what can happen if such decisions can be made by your family members, but they don’t all agree on the best course of action.
You should have several key documents in place. Exact names and requirements are controlled by state law and vary. These documents include the following:
- living will. It is a written record of the type of medical care you would need in specific circumstances.
- Health care proxy. This document names someone you trust as your proxy, or agent, to express your wishes and make health care decisions for you if you are unable to speak for yourself.
- Advance directive. This term often refers to a combination of living will and health care power of attorney documents.
- Proxy. This document names someone you trust as your proxy to make property, financial, and other legal decisions on your behalf.
Estate distribution planning
If you die without a will, your property will pass to the regime your state legislature has drafted for its citizens. This is called dying “intestate”.
Death intestate has various negative consequences. Although the precise rules vary between the 50 states, the laws are generally very rigid and stereotypical. Usually your closest relatives get part of your property, but no one else does – not friends, cousins, charities or anyone else. Moreover, no one receives more than the share allocated by the state, even if it seems unfair. Often this ends up hurting the surviving spouse if there is one. In this all-too-common scenario, the adult children of the deceased may receive some of the money intended for the surviving spouse, even if it means the surviving spouse then has too little to live on. In larger estates, this could have the highly impractical effect of creating an estate tax payable on the death of the first spouse if the children’s ab intestate share in the estate exceeds the federal or state exemption amount. In addition, the intestate can lead to long and costly legal battles between family members who dispute the division of property.
Perhaps the most troubling thing about the intestate is what happens if one has minor children: if both parents die without a will, the courts will decide who becomes the legal guardian of the children. Additionally, any minor children will receive their share of the estate at age 18, rather than at a more appropriate later age that can be specified with proper planning.
Living trusts and wills for-over
Although estate planning documentation is entirely state dependent, we can say that in every state it is better to have a will than not to have one. However, in many states, with one will, your entire estate will be locked into the probate process. Probate is the public, court-controlled process by which the state administers your will.
In most states, knowledgeable estate planning advisers recommend combining an inter vivos trust with a short will known as a will of installment, as this combination ensures that a large portion of an estate will avoid probate. Depending on the state, probate can be time-consuming, public, and very expensive. In many states, the goal is to avoid the process as much as possible.
The Living Trust: A Foundational Estate Planning Document
Living trust (or “family trust”) is a common name given to a revocable trust (which, unsurprisingly, is revocable, meaning you can revoke or change it at any time in your life).
Regardless of its trade name, an inter vivos trust is a revocable trust that directs the use of your assets both during your lifetime and upon your death. During your lifetime, the assets transferred to the trust are managed and controlled by you, as trustee, as if you owned them in your own name. Upon your death, these trust assets pass to the person you designate in the trust, automatically, outside of the probate process. Other advantages of the inter vivos trust include the following:
- prevention of judicial control of assets if you become incapacitated;
- protection of beneficiaries with special needs; and
- the ability to appoint guardians to care for your children if you are incapacitated (but still alive) or upon your death.
Estate planning is a must for dermatologists of all ages
Disability planning is essential for physicians of all ages, and estate distribution planning is valuable for those with even minimal assets. Every dermatologist should engage in basic estate planning as early as possible.
Mandell is a lawyer and founder of the OJM Group wealth management firm in Cincinnati, Ohio. Foos is a partner and tax advisor at OJM Group.
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