What physicians need to know about living trusts

One common question that doctors face in estate planning is whether to establish a trust. This topic gets brought up in the doctors’ lounges, especially after someone gets a pitch from their financial planner. Most doctors who bring up the topic are quite enthusiastic, and cite that doctors need a trust because “we make a lot of money.”

Fair enough.

Medical students and residents probably do not need a trust

I’ll get this one out of the way. If you’re still in training and have very little wealth tied to your name, you don’t need a trust. You can always establish one later.  If you actually need a trust while you are in residency, then you already know why. In this case, your parents probably already have set one up for you. I had several classmates in college and medical school who did have living trusts, and it was obvious. It’s good to have old money.

Establishing a living trust doesn’t necessarily break the bank

Doctors (and everyone else) can have strong opinions. Some of us can’t be convinced that we are wrong. I’ve long decided that my job in this world isn’t to convince everyone else who is right or wrong. Living trusts, along with insurance policies, real estate, and gold are various financial vehicles that can make sense for some people but can instigate argument to no end.

Establishing a living trust won’t break the bank. If you decide to do it yourself, you might spend a few hundred dollars. If you go through official channels with a professional, it might cost you several thousand dollars. If you must, put in a few extra shifts in the ER or cut back on some of your other spendings. It’ll be healthier for both you and your coworker who is trying to talk you out of getting one.

The fundamentals of living trusts

In a nutshell, living trusts are written so that your assets are distributed according to your wishes after you are no longer able to make decisions.  You also have to have some net worth that is to be distributed to your heirs too.

Let’s rephrase it:

You probably won’t be enjoying any of your hard-earned assets when the trust comes into play.  So the entire premise in establishing a trust is so that your beneficiaries will benefit from your demise. If you wish to have a clear allocation of your assets to those other than your spouse or heirs, then you can specify on your trust.

Won’t a will give me the same results?

Once you die, your will has to be executed through probate court. The exact policies vary per state, but the intention is to make sure that your debts are paid off prior to distribution of your assets to your heirs.  This often does not happen immediately and will incur attorney fees.

A living trust allows heirs to bypass probate courts, because the assets in the trust are considered to be part of the trust in the eyes of the probate court (but not to Uncle Sam). Interesting, eh?

There are two types of living trusts: revocable trusts and irrevocable trusts. The main difference is that the designated instructions in an irrevocable trust cannot be changed once you’ve finalized it unless the benefactor grants her permission. The entire premise behind an irrevocable trust is that you established it for tax reasons. This means that you have enough assets to benefit from this vehicle. Most doctors aren’t going to fall into this category because we probably aren’t going to reach the estate tax limits. In 2018, the gift tax limit is over $11 million. Even if your net worth exceeds this amount, there are plenty of ways to draw down your assets beforehand.

Revocable trusts provide an instruction set on how to handle one’s assets during her lifetime, once she loses her ability to make financial decisions, and death. The person who establishes the trust is labeled the “grantor.” In a revocable trust, the grantor has full control of the assets of the trust during her lifetime, and can add or remove assets into the trust at any point. All taxes from the trust are treated as pass-through to the grantor.

Where the revocable trust comes into play is when the grantor is unable to manage the assets or dies. The designated trustee in the trust will then take over and execute the instructions given by the grantor accordingly. This transition proceeds seamlessly without any involvement of local probate courts.  Of course, the grantor’s debts will still have to be paid off, but someone (not the grantor) will end up saving several thousand dollars and the beneficiaries will likely get the inheritance more quickly.

There are also nuances and clauses that can be attached to living trusts, just like in any job contract. What might be most helpful for some doctors is a spendthrift clause. Suppose that you wanted your child’s inheritance dispersed annually until she is an adult instead of in a lump sum. You can specify the terms in the spendthrift clause of your living trust down to the tiniest details.

Interesting material, although it is somewhat morbid to think about it. After reviewing all of the stipulations, I’d imagine that whether to establish a trust is going to be a 50/50 split for doctors.

“Smart Money, MD” is an ophthalmologist who blogs at the self-titled site, Smart Money MD.

Image credit: Shutterstock.com

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