When I sat down to write this article, my thoughts immediately went to the tragic loss of one of my best clients, a physician who recently passed away after battling COVID-19. I remember him not only as an excellent physician but even more so as a great person.
Unlike many physicians I speak to in the course of my work, this client had the foresight to do some careful estate planning. While his loss cannot be measured, this planning has provided his grieving family with some financial peace of mind and allowed them to focus on him during his illness. According to the latest CDC data, physicians on the front lines throughout this pandemic have been some of the most affected by COVID-19; over 460,000 health care professionals have been diagnosed with COVID-19.
Estate plans are not one-size-fits-all, and the various strategies may not work for everyone. Without some experienced professional guidance, anyone might make some mistakes in decisions that seem unimportant at the time but could have huge ramifications on your family’s financial future. Here are some of the most common mistakes that are best to avoid.
1. Only having a will. Most people believe that a will is sufficient planning to ensure their assets will be distributed according to their wishes, but even with a detailed and current will, the estate will still go through probate.
2. Not having a trust. A trust is a legal agreement that sets out terms for property held by one person for the benefit of someone else. For an individual wanting to make easy changes to the trust and move assets into and out of it, a revocable trust is the best option. Because of this simple adaptability, revocable trusts may not be protected from lawsuits even though they do avoid probate.
3. Not funding the trust. With all this talk about trust creation and provisions, it’s important to mention the number one mistake people make with trusts. Establishing the trust is a good first step, but for it to do anyone any good, it must be funded as outlined in the documents. For the best protection, this should include bank accounts, brokerage accounts, house, and other assets being held in the name of the trust, with the trust named as the life insurance beneficiary. For retirement accounts, the primary beneficiary should be the spouse with the trust as a contingent beneficiary. Basically, get everything into the trust.
4. Not incorporating estate tax planning. Any assets remaining in a person’s estate after death are subject to an estate tax which varies between 18 percent and 40 percent. Currently, an estate tax exemption allows $11.58 million (double for married couples) to be exempt from the tax, but about sunset in 2025, and with the new tax initiatives under the Biden administration, it’s likely that future exemptions will be lower. To minimize estate taxes, it’s time now to discuss estate planning strategies, such as moving assets to irrevocable trusts, with an attorney and financial advisor to make sure there are solid plans in place.
5. Not having a health care proxy and power of attorney. Should the situation arise where an individual is unable to communicate while requiring medical treatment, if the individual has not established a health care proxy, their family has no authority to make decisions on their behalf. Also, in the case of an individual being incapacitated, there may be decisions other than medical ones that need to be made. A power of attorney is a legal document giving another person authority to make financial decisions on another individual’s behalf.
6. Not incorporating income tax planning for beneficiaries. Inherited assets can also result in more income taxes for beneficiaries, as adult beneficiaries must take annual RMDs from inherited IRAs and 401(k)s. For those with high net worth, including physicians, tax strategies like second-to-die life insurance policies or Roth IRA conversions may help minimize the income tax burden on beneficiaries.
7. Not having a buy/sell agreement. Physicians often have jointly-owned businesses. Because they trust their partners, they often have informal agreements in place about selling and transferring shares and providing for a surviving spouse. These handshake agreements, however, do not hold up in court. It’s best to establish a formal agreement that covers these issues, often done under a business-designated transfer on death.
8. Not combining asset protection and estate planning. It’s no secret that physicians are more likely to be involved in lawsuits than those in other fields. When creating an estate plan, it’s important to speak with an experienced financial advisor who can suggest strategies such as a domestic asset protection trust, a Nevada asset protection trust, or a family limited partnership (FLP), all of which are designed with asset protection in mind. These sorts of vehicles can be incorporated into estate planning as part of a holistic financial plan.
With this many mistakes listed as “common,” it’s easy to see how very important estate planning is and why it’s one of the most neglected aspects of financial planning. Between the inability to predict the future and the complicated nature of the process, many physicians continue pushing it off to a perpetual “later.” The family of my client who passed recently would be more devastated if he hadn’t had his will and trust set up, as they would currently be coupling their grief with a drawn-out and costly process in court. A fiduciary financial advisor can take a 360-degree angle look at a financial plan to make sure that estate planning is not only included but done properly with even the most unexpected future in mind.
Securities are offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies. You should continue to rely on confirmations and statements received from the custodian(s) of your assets. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.
Syed Nishat is a partner, Wall Street Alliance Group. He can be reached on LinkedIn and on Twitter @syedmnishat. He holds the FINRA Series 7, FINRA Series 63, and FINRA Series 66 licenses, along with licenses for life, disability, and long-term care insurance.
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