President Biden’s tax proposal and its effects on estate and income tax planning for physicians

This article is sponsored by Wall Street Alliance Group.

While physicians provide a vital service to the U.S., they often have blind spots when it comes to maintaining their own financial health. Many in the medical field believe that financial planning is as simple as having an IRA account and that estate planning will be taken care of by a will. Unfortunately, particularly for those in this profession, financial planning is more important than ever, and President Biden’s proposed tax changes could have a profound effect on physicians’ financial planning in particular. Working with a fiduciary financial advisor to understand how the new laws affect physicians and implementing strategies that can lessen the impact is key to navigating these changes.

Who will be affected?

The first category who will be impacted is those with an income over $400,000, which is not rare for those working in medicine. The marginal tax rate will increase from its current 37% rate to 39.6% for these individuals. Social Security taxes will also increase to 12.4%. As an added challenge, itemized deductions, a tax-saving strategy for many, will be phased out for those with an income higher than $400,000.

The second impacted group is those who are making over $1,000,000. For those in this tier, there will be a significant increase to the long-term capital gains tax. At a new rate that is 20% higher than where it was previously, the tax rate for capital gains will now be 43.3%.

Lessening the impact

There are several strategies that can be employed. As the “magic number” for income is $400,000, ideally these strategies will lower the overall income amount to get it below that amount.

For self-employed physicians, we propose maximizing contributions to the types of investment vehicles available:

• Cash benefit plans
• SEP IRA, IRA, or HSA account

For physicians employed at hospitals, the strategy for investment is largely the same; only the types of accounts may vary. Again, to lower overall income, maxing out contributions is the key:

• 401(k), 457(b), and 409(a) plans
• Backdoor Roth IRA accounts

Many physicians own their practice’s building, and there’s been a real estate ownership increase in general since 2018. Real estate can provide tax savings as well.

• Opportunity zones: Investing in low-income areas with this designation will provide returns with zero capital gains tax if held for 10 or more years.
• Cost segregation: Accelerating the depreciation schedule of a building down to at little as 5 years through a cost segregation analysis can provide large tax savings.
• Charitable contributions: For those who have a philanthropic bent, charitable giving can reduce overall income through trusts designed to provide income while also allowing for charitable giving.

Biden’s tax changes and estate planning

One of the challenges that the proposed tax changes present is doing away with the step up in basis for inherited stocks. Coupled with this, the current estate tax exemption amount of $11.7 million will go down to $5.49 million in 2025, meaning for any assets over that amount will be taxed at about 40%, leading to substantial estate taxes for families of wealthy individuals.

To minimize the amount in an estate and save beneficiaries from large tax bills, we propose several strategies:

• Irrevocable trusts: By funding an irrevocable trust for your beneficiaries, you will lock in that exemption limit. You can also put appreciated assets into a trust to avoid capital gains taxes. You can even move your life insurance into the trust to save your beneficiaries the taxes on the death benefit. All of this while also ensuring those assets aren’t counted in your estate.
• Second-to-die life insurance policy: This relatively inexpensive policy pays out a death benefit when the second spouse passes. The payout can be used to cover the ensuing estate taxes.
• Annual gifts to children: An individual can gift $15,000 tax-free annually to each child, removing funds from your estate while still giving them to your heirs.
• Charitable Remainder Trust: These trusts can be used to reduce taxes while also giving money to both your beneficiaries and the charitable organizations of your choice.

Estate planning under the SECURE Act

When the SECURE Act went into effect in 2020, the new rules stipulated that beneficiaries of an IRA must exhaust the account balance within 10 years, rather than the lifetime previously allowed. This could result in substantial income taxes due for large accounts. We recommend several strategies including:

• Roth IRA conversions: While these accounts are subject to the same 10-year rule, there are no taxes on distributions.
• Using IRAs first: By using IRA accounts for living expenses and leaving Roth IRA accounts to be inherited, the Roth IRA can continue to grow tax-free and will not be taxed on withdrawal by beneficiaries.
• Life insurance: Inexpensive policies like second-to-die policies can be purchased so that the death benefits cover taxes for beneficiaries.
• More QCDs from IRAs: Qualified Charitable Distributions are RMDs taken and then immediately used for charitable giving.

The main thing to keep in mind with all of these changes is that the way to lessen their impact for every situation is unique. Physicians lead busy lives, personally and professionally, and it is important to work with a fiduciary financial advisor, who has a legal responsibility to work in your best interest. The best plan for your financial future and ongoing legacy is likely a combination of several strategies to make sure that retirement, estate planning, and asset protection are all considered for overall security.

Syed Nishat and Aadil Zaman are partners, Wall Street Alliance Group. They are regularly quoted and interviewed in media outlets like Medical Economics, Forbes, US News, Bloomberg, and Yahoo Finance.

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.

Image credit: Shutterstock.com

Transcript

Kevin Pho: Welcome, everybody, to the KevinMD and Wall Street Alliance Group webinar, “Biden’s tax proposal and effects on financial planning for physicians.” My name is Kevin Pho, founder and editor of KevinMD. I’m also the host of The Podcast by KevinMD, the only daily medical podcast, 15 minutes a day, seven days a week. Listen and subscribe on your favorite podcast platforms.

This evening, I’m joined by Syed Nishat and Aadil Zaman. They are partners at Wall Street Alliance Group. Syed is a regular contributor for KevinMD, and their articles and interviews about asset protection and common financial mistakes by physicians are published in MedPage Today and Medical Economics. Syed and Aadil are regularly quoted and interviewed in media outlets like Forbes, U.S. News, Bloomberg, and Yahoo Finance. They can be reached at www.wallstreetag.com. That’s www.wallstreetag.com.

This evening’s webinar is an interactive webinar, so please ask your questions in the chat box. I will stop and ask Syed and Aadil your questions throughout the webinar. Also, this webinar is being recorded and will be posted throughout the KevinMD platform. Now let’s get started. Can you please explain the latest on President Biden’s tax law proposal and how it impacts physicians?

Aadil Zaman: Great to be with you, Kevin. So, we at Wall Street Alliance Group do wealth management for physician families, and there are two categories of physicians that are going to get impacted by this proposal.

The first category is physicians that make more than $400,000. For these physicians, the top marginal tax rate is going to go up from 37 percent to 39.6 percent, so that’s a 2.6 percent increase in tax. Secondly, the Social Security tax is going to go up for this group. The Social Security tax for the portion of the income that they’re making over $400,000 is going to be 12.4 percent. And a lot of physicians that are making income in that category take something called itemized deductions, so itemized deductions for those making more than $400,000 are going to get phased out.

The second category of physicians that is going to get impacted by this is those that are making more than a million dollars. The long-term capital gains tax rate for them is going to go up to 43.4 percent. That’s higher than where it is right now. So what does that mean, Kevin? That means that if you have a stock of Apple that you bought, or real estate that you bought, and you have a profit in it and you sell it after a few years, then the taxes that you’re going to pay are 43.4 percent, which is about 20 percent higher than what you would pay right now. So these are significant increases in taxes, and there are planning strategies that need to be implemented to safeguard against these.

Kevin Pho: Can you explain what strategies physicians can use to keep their tax bracket low so that they are not impacted by both the high marginal income tax rate and a high capital gains tax rate?

Syed Nishat: Sure, Kevin. Thank you for asking this question, and we want to start by thanking you and all the health care providers for their hard work and sacrifice during this pandemic.

As Aadil mentioned, the magic number we’re looking for is $400,000. The physicians who will get impacted the most are those who earn over $400,000. So ideally, you’d like to come up with some strategy that can lower your overall income. The best way to lower your overall income, or adjusted gross income, is when you contribute to a retirement account. For every $10,000 you contribute to a retirement account, not only do you get a deduction, but if you’re in a 35 percent tax bracket, for example, you save close to $3,500 in taxes.

There are different types of retirement accounts out there, but I just want to share my screen with you to give you an idea of how a defined benefit plan or cash balance plan works. It’s not uncommon for physicians to do locums or have 1099 income besides the hospital, or to be self-employed. If you’re self-employed and you’re 60 years old, for example, you can contribute almost $260,000 into a defined benefit plan or a cash balance plan, and this money is completely tax-deductible. So if you’re in a 35 percent tax bracket, you’re looking at a tax savings of almost $90,000.

If you’re looking not to contribute too much money but a lesser amount, you can always consider opening a SEP IRA account. You can contribute 25 percent of your W-2 or $57,000, whichever is less. Or there’s a straightforward IRA account. A husband and wife over the age of 50 can contribute almost $7,000 each every year, and again, this is pre-tax money.

And lastly, Kevin, a lot of physicians have an HSA, either through the hospital or their own practice. HSA means high-deductible health insurance account. For the family, you can contribute almost $7,100 from your salary, and this money can also come out of your income as well. So everyone’s situation is different, but the first strategy we recommend is to max out your SEP IRA or your cash balance plan if you’re self-employed, to lower your overall income.

Kevin Pho: So one of the questions that I have from the audience is about estate planning, and especially during the pandemic, we’ve had so many physicians wondering about what their estate plan is. I have a lot of physicians on my podcast and my blog, and they ask me what the pitfalls are when it comes to estate planning and wills. So I’m going to ask either one of you: What are some of the top estate planning mistakes that physicians need to avoid?

Syed Nishat: When we do estate planning, the number one mistake we see is that people just create a basic will, and that’s it. There’s no trust. A will is basically a legal document that specifies what will happen if anything happens to you, and who will get the distribution of the property. But if you just have a will and no trust, depending on the state you live in, the trustee has to take a copy of the will and send it to the judge, and the judge actually has to authenticate it and then release the money. This takes time. It’s called the probate process, and in some states, the probate process is around four months to even seven months. Meanwhile, the beneficiaries need access to the money, and they cannot have access to the money.

So the number one mistake we see is just having a will and no revocable trust. It’s not uncommon for a physician to have a substantial amount of assets, so make sure you don’t just have a basic will. Have a revocable trust as well. Aadil, you can point out a couple of mistakes as well.

Aadil Zaman: Yeah, I think one of the mistakes, Kevin, that we see people make is that they’ll have a trust, but they’ll distribute the assets to the kids outright. Now, if the child goes through a divorce or the child goes through a creditor issue, those assets very easily get depleted. So the key here is that when you give the assets to your children, give those assets to the kids inside of an irrevocable trust, and that irrevocable trust should be a lifetime trust. So in case there’s a divorce, in case there’s a creditor issue, those assets are protected, but at the same time, they remain accessible if the child needs them.

Kevin Pho: Someone is asking: What tax year do these new taxes kick in?

Aadil Zaman: The capital gains tax is going to kick in for this year, and we are waiting for clarity on the other taxes. All of these could potentially be effective 2021 onwards, but we are waiting for some more clarity as far as their guidance is concerned.

Kevin Pho: For physicians who work in the hospital, hospital-employed physicians, what options from a tax standpoint are available to them?

Syed Nishat: Physicians who are not self-employed and are actually hospital-based should definitely max out their 401(k) and 457 plan. In a 401(k) and a 457 plan, over the age of 50, you can contribute almost $26,000, and again, all this money is pre-tax. Also, some physicians overlook a 409A plan. It’s not provided by all hospitals, but depending on your employer, speak to them about whether they offer a 409A plan. The difference between a 409A and a 457 plan is that you can defer almost 90 percent of your salary, and all the money is pre-tax. The problem with the 409A plan is that in the event a bankruptcy happens, the assets are not protected, similar to 457 plans. So we’re not suggesting you put a lot of money into it, but depending on your tax situation, if you have a lot of disposable income, consider speaking to a financial advisor about contributing some money into a 409A plan.

Now, once you max out the 401(k), 457, and 409A, a lot of physicians overlook doing something called a backdoor Roth IRA. A lot of physicians think that they don’t qualify for a Roth IRA because of the higher income limit, but the backdoor IRA is a strategy where we don’t have to worry about income restrictions. The way the backdoor Roth IRA works is that you open a post-tax IRA account, and at the same time, you open a Roth IRA account. You contribute to the post-tax IRA and immediately convert the money to a Roth IRA. Since you’re converting the money immediately, there are no taxes on the principal, and the taxes on the profit will be very minor because you’re doing it instantaneously. But once you have converted the money to the Roth IRA, the funds will grow tax-free, and the withdrawal is also tax-free after the age of 60.

And it’s extremely powerful, especially after five years. If you just wait after you open a Roth IRA, the funds can be used to buy a qualified house if you are residents, and you can take out $10,000 from a Roth IRA, actually all tax-free. And if you’re going to college, a lot of qualified expenses could be done through a Roth IRA. So I think it’s extremely powerful. Aadil and I, Kevin, were talking about a client of ours in New Jersey and how powerful the backdoor Roth is, and he can give an explanation.

Aadil Zaman: Yeah, so we have had a long-term relationship with this couple, husband and wife, both physicians, and they’ve been diligently contributing to the Roth IRA, $7,000 a year. We were just doing the math that if you’re doing $14,000 a year over 20 years, that’s more than $600,000 that’s accumulated, assuming a 7 percent per year rate of return. And that’s a sizable chunk of money, because it’s growing tax-free and the withdrawals are also tax-free. So it’s really a very solid strategy for physicians to take advantage of.

Kevin Pho: Are there other tax deduction vehicles besides retirement accounts? Besides the retirement accounts, we’re talking about other sources of income. For example, if you have real estate income or if you have some passive income, what are the strategies for that?

Syed Nishat: For example, we see a lot of physicians invest in real estate. Since 2018, real estate has been very popular. But once you invest in real estate, try to invest in something called an opportunity zone. What does it mean? An opportunity zone basically means that you’re investing in an area where there’s a 20 percent poverty rate. Once you buy a property, a hard property, in an opportunity zone and you hold on to the asset for 10 years, when you sell it, there’s no capital gains tax on it. You can actually create your own LLC, title it as an opportunity zone, and defer taxes in it. I’m just giving you the ideas. There’s more to opportunity zones, and there’s no way I can cover all of this. But again, if you invest in real estate, speak to a financial advisor about whether opportunity zones make sense for you.

Secondly, 60 percent or more of the physicians we deal with actually have their own practice. If they have their own practice, we do see that they actually pay themselves rent, or they actually invest in a surgical center. These are very common, like if you’re a gynecologist and oncologist. So if you have your own property, consider doing something called cost segregation. In commercial real estate, the depreciation schedule, Kevin, is about 39 years. What it means is that the depreciation happens every year, and you get to write it off from the income from the property. All cost segregation does is depreciate the property faster. It brings it down from 39 years to five years. In this way, you actually have a bigger depreciation, and you get to write off the depreciation from any income.

Just to give an idea, we had a client in Texas, a surgeon. He invested in a surgical center for a million dollars; he bought it last year. We did an advanced cost segregation for the million dollars, and we got an advanced depreciation of $250,000, so on any income derived from the property, that client doesn’t have to worry about paying any taxes, up to $250,000. So again, if you have your own practice or invest in real estate, consider cost segregation.

And charitable contributions are also a great way to reduce your overall income if you’re charity-minded. But again, there’s no way I can cover it, because charitable contributions could be a webinar of their own. Just to give an idea, if you are charity-minded, we can open up a charitable remainder trust, set up in such a way that you can actually get income from the charitable foundation as well. But again, speak to your financial advisor about opportunity zones, cost segregation, and even charitable contributions, if that will help you to lower your overall income.

Kevin Pho: All right, I’m going to go back to the audience questions, and we have a few. My accountant said that since I have an old, small Roth plus a maxed-out SEP and 401(k), I’d actually pay taxes twice on any money I put into a backdoor Roth. Is that true?

Syed Nishat: Yeah, so you have to understand the way the backdoor Roth IRA works. What your CPA is trying to explain is something called a conversion ratio. What do I mean by conversion ratio? Let’s say you have an old SEP IRA whose value is $50,000. I’m giving an example. You open up an IRA account, put $5,000 in it, and convert it to a Roth IRA. You’re expecting the $5,000 to be converted, right? The problem is going to be that, since you have the existing old SEP IRA that the audience member is mentioning, it will not be all $5,000. You have to divide $5,000 by the $50,000 old SEP IRA you have, so the ratio will be only 10 percent. It’s called the conversion ratio, and that’s the problem you’re going to face. So it’s not going to work if you have an existing SEP IRA account open.

So the best way to handle it, if you have old SEP IRAs or other IRAs, is to merge all of it into a 401(k) plan, like through the hospital, or your own self-employed 401(k), because at that time, the conversion ratio doesn’t matter. So the solution to this conversion is to merge all the money into the 401(k), open up a brand-new IRA account, and then convert it to a Roth IRA.

Kevin Pho: How much can you put into a backdoor Roth IRA?

Syed Nishat: You can put $7,000 into an IRA, and then you can convert it to a backdoor Roth IRA.

Kevin Pho: What do you mean by a new open IRA to take advantage of the backdoor IRA?

Syed Nishat: Yeah, what I mean by that is that if you have an old IRA account and you have a balance in it, that balance will count toward the conversion. So what we are saying is that if you have an old IRA, merge it with the 401(k), then open up a brand-new IRA account and then convert it.

Kevin Pho: And the last audience question for this segment. Someone’s asking: Can you explain a SLAT, the spousal lifetime access trust?

Aadil Zaman: A SLAT is basically an irrevocable trust. Let’s say you’re a physician and you’re at a high risk of lawsuits. For physicians, like it or not, lawsuits are a reality, and asset protection becomes very important. You’re a physician, and you want to protect your assets. What you could do is open an irrevocable trust for your spouse and give the assets into the spousal trust. That’s an irrevocable trust, so now they are out of your estate. If you get sued, those assets are protected, because they’re in your spouse’s irrevocable trust.

Now the question becomes, “Hey, I put all this money in my spouse’s trust. How do I get access to money for my expenses and day-to-day living?” For that, there’s a rule that the spouse can give you an unlimited amount of gifts, so the spouse can make the withdrawals and pass those along to you. So it’s an important tool when it comes to discussing asset protection for physicians.

Kevin Pho: What are President Biden’s proposed estate planning changes, and how will they impact physicians?

Aadil Zaman: What Biden wants to do is get rid of the step-up in basis. Now, the way step-up in basis works, just to give you a simple example, is this. Let’s say you bought a stock of Apple for $100, and at the time of your death, the price of Apple is $500, right? Under the current rule, the cost basis for your inheritors, who might be your kids, is going to go up to $500. So if they sell Apple, there will be no taxes due, because the cost basis has stepped up. What Biden is saying is, “I want to close this loophole.”

If he is able to close this loophole, just to give you a simple example, this is how it’s going to work. You bought the stock of Apple at $100, and at the time of your death, Apple is at $500. On the $400 in profit, taxes will be due in the year of your death. Now, because a lot of people conceivably could have substantial capital gains in the year of their death, that could bump your income above a million, and then you would be subject to the 43.4 percent long-term capital gains tax.

Parallel to this, Kevin, what’s also happening is that the current estate tax exemption amount is $11.7 million. What that basically means is that if you die and you have assets that are greater than $11.7 million, for the portion that is above $11.7 million, there will be approximately 40 percent estate taxes due. That limit is set to go down in 2025 from $11.7 million to $5.49 million, inflation-adjusted. So what does that mean for physicians that are listening to this broadcast? If you have worked hard all your life, you’ve accumulated a net worth of $11 million or $12 million, and you pass away, you could have substantial estate taxes due as well.

So now think about it. If this proposal goes through, at death there’ll be capital gains taxes, and at death there will be estate taxes. Because of this, the Tax Foundation did a study, and they said that some families could face a combined tax rate of as much as 61 percent on inherited wealth. So this is a significant increase in taxes, and what we are recommending is estate planning strategies to reduce the impact of this increase.

Kevin Pho: And that’s going to lead me, of course, to my next question. What are some of those estate planning strategies for physicians to avoid high taxes at death?

Aadil Zaman: These are just some of the strategies, Kevin, that we are using at Wall Street Alliance Group for our clients. One is that you can lock in the current high exemption of $11.7 million by gifting it to an irrevocable trust for the benefit of your family. This way, that $11.7 million is out of your estate, it grows estate tax-free, and it is for the benefit of your family. Now, if tomorrow they turn around and reduce the limit down to $5 million, you’re not impacted by it, because you already locked in the $11.7 million.

The second thing to note here is that if you have appreciated assets and you gift them into the irrevocable trust, then you don’t owe capital gains tax on that gift, as long as you do it this year, as far as the proposal stands right now. If you do the same thing next year, capital gains taxes would be due. So there’s a small window of opportunity to do this tax-efficiently.

Secondly, if you have children, a husband and wife combined could gift $15,000 each per child, so a total of $30,000 you could gift per child every year, getting it out of your estate and growing estate tax-free. If you’re anticipating a significant amount of estate taxes, what you could also do is purchase a second-to-die life insurance policy, which would pay a death benefit at the death of the second spouse, which is typically when estate taxes are due, and the proceeds can be used to pay off the estate taxes. And you could take it a step further. If you have life insurance, you could move it inside an irrevocable trust so that the death benefit would remain out of your estate, and there will be no estate taxes on it.

And lastly, if you’re charitable-minded, you can use some charitable trust strategies, which would essentially enable you to give some money to charity, give some money to your beneficiaries, and reduce the estate taxes. So these are customizable strategies. There’s no one size fits all, but these are some of the strategies that we are working on with our clients.

Kevin Pho: All right, let’s go back to those audience questions. So one question I have is: Is a life insurance benefit taxable?

Syed Nishat: There’s no income tax on life insurance, but the benefit is part of your estate calculation. What I mean by that is, like Aadil mentioned, $11.5 million per person: When both die, it will be part of your estate. So the life insurance proceeds will be calculated toward the estate. The best way to handle it is to move it to an irrevocable trust, like Aadil mentioned, so that the benefit will not be part of your estate.

Kevin Pho: The next question: Can you speak about the conservation easement contribution as a help to decrease taxable income?

Syed Nishat: I can speak a little bit on it, Aadil, and then you can talk from your experience too. With a conservation easement, basically, you get a higher deduction. There are a lot of projects out there, and depending on the state, you can invest in them. The reason why people do it is that the deduction is four times the amount you contribute. Let’s say you put in $100,000. Sometimes it’s five times, so you get a deduction of half a million. The issue is that a lot of people misuse it, a lot of high-net-worth individuals, and due to that, a lot of times we see audits happen. And then you can talk about the experience we have and whether it’s worth it or not.

Aadil Zaman: Yeah, so this is a high-risk item. This is on the radar right now. Like what Syed was mentioning, there are a lot of other strategies which are cleaner, safer, and more effective. The cash balance strategy is a low-risk strategy. It’s a great thing, and you save a decent amount of money in taxes. Then there’s the cost segregation analysis to get accelerated depreciation. At a time like this, we would guide you to take advantage of those strategies more.

Kevin Pho: Are there any recent changes in tax laws, like the SECURE Act, that physicians need to be aware of in estate planning?

Syed Nishat: Yeah, so we’d like to point out one more thing in this webinar, which is called the SECURE Act. This is not part of Biden’s law. This was already a law in the year 2020. SECURE Act means the Setting Every Community Up for Retirement Enhancement Act, which was passed in the year 2020.

Before the SECURE Act, the way the inheritance would work is that if anything happens to you, your beneficiaries inherit the money, and they have their whole life to stretch the benefit. What I mean by that is, let’s say you have $5 million in an IRA account, and husband and wife both pass away. Your children inherit the $5 million, and they have their whole life to slowly withdraw the money, and meanwhile, the money can grow as well. The whole idea is called stretching, and that went away last year.

Now, due to the SECURE Act, in the same example, the $5 million you inherited, you have to exhaust within 10 years. So in this situation, you can withdraw half a million, $500,000, every year for 10 years, or at the end of the 10th year, you have to withdraw all $5 million. You might be saying, “OK, what’s the big deal?” The problem is that you actually have to worry about a huge amount of taxes that’s due within 10 years. Previously, you could stretch it out. That’s an issue. It’s not uncommon, we have seen, for physicians to put most of their money, because they’re professionals and they work for the hospitals, into the retirement account, the 401(k). So they will be impacted a lot by this law, and they should speak to their financial advisor about incorporating the income tax that might be due from the SECURE Act.

Kevin Pho: What are the ways to reduce the tax burden from the SECURE Act?

Syed Nishat: Yeah, so the solutions for the SECURE Act are somewhat similar to the solutions Aadil has mentioned for estate tax as well. For example, you can buy a second-to-die life insurance policy, which is very cheap. If anything happens to the husband and wife, then the life insurance kicks in, and that can pay for the income tax that will be due on the income derived from the IRA account. This could be one solution.

A second solution could be that you do something called a Roth conversion. We spoke about the backdoor Roth IRA. Remember, with a Roth IRA, it’s the same law, and in 10 years we have to withdraw it, but with a Roth IRA, there are no taxes, because it grows tax-free. So that could be the second option.

The third option could be this. As financial advisors, we usually recommend our clients withdraw from the Roth IRA first, then the joint account, and leave the IRA for the children. But due to the SECURE Act, one option could be that you start using the IRA account for yourself during retirement and leave the Roth IRA for your children for a long period of time. In this way, the money can grow long-term as well. Or if you’re charitable-minded, you can actually give some proceeds to charity and derive an income as well. It could be a combination of all of it, but everyone’s situation is different. There’s no one cookie-cutter solution for anyone, and that’s why it’s important you speak to your financial advisor, who, depending on your situation, can customize a solution for you.

Kevin Pho: Great. So let’s go back to our last segment of audience questions. I have incurred a substantial gain from stock investments this year. Do you have any advice to lower taxes?

Syed Nishat: Yeah, so I will share one idea, and Aadil, you can share one idea too. If you have a substantial amount of income from stocks, we spoke about opportunity zones. One option could be that you can defer the money, depending on the date you actually sold it and had the capital gain. You can create an LLC and transfer the money before the taxes. The way the opportunity zone works, within 180 days you have to identify the property and invest the money. As long as you can identify it and then hold the property for a 10-year period of time, there is a way you can defer the taxes. Again, it’s for long-term-minded people as well. Aadil, you can share some of your ideas too.

Aadil Zaman: So if you’ve incurred the gains last year, typically, if you adopt a cash balance plan, which Syed spoke about, you have to do it within the year. But because of COVID and because of some adjustments, if you haven’t filed your business tax returns as yet, you can actually, for last year, if you’re self-employed, adopt the cash balance plan and make a significant amount of contribution to it to reduce your overall taxes. As long as you haven’t filed your business returns, that’s a pretty effective strategy. We’ve had a number of cases that we’ve actually done this for. If it is this year, you can do the same thing.

There’s also something called tax-loss harvesting. This is a strategy we used extensively in 2008. If you have a stock that is at a loss, you could sell that stock, and as long as you don’t buy it back within 30 days, you could use that loss to offset gains. If you still want the equity exposure, you could buy something similar, which would still give you that upside, or buy that stock back within 30 days. So this is just to give you a flavor of a couple of things we have, but there are a number of strategies that we can use to actually reduce that tax burden.

Kevin Pho: So I have a question here about a special needs trust. If you, on death, have a beneficiary that is directly related to an established special needs trust, does the trust have to pay taxes on it as a person would? The trust is not for an immediate family member.

Syed Nishat: Yeah, so with special needs trusts, we do a lot of advanced planning. A special needs trust could be revocable or irrevocable. It could be both. Any money that goes to the special needs trust must be used for the child who has special needs. That’s the most important thing. But remember, if you just inherit the money, that money that you inherited is part of your estate, obviously. As Aadil mentioned, it depends on the value of your estate, and if the step-up is going away, that still remains, so you do have to worry about paying some taxes, depending on what the amount of your net worth is. But once you put the money in, after paying the taxes, with the step-up going away, if you invest in any stocks, the trust itself will have to pay the taxes, but the money can be used ultimately for their benefit.

Kevin Pho: We are approaching the conclusion of this webinar, and I want to ask each of you for your take-home messages. Once again, we are talking to Syed Nishat and Aadil Zaman. They are partners at Wall Street Alliance Group, and they can be reached at www.wallstreetag.com. That’s www.wallstreetag.com. So Aadil, I’m going to start with you. What is your take-home message from this webinar?

Aadil Zaman: So, Kevin, for physicians that make more than $400,000, estate planning, tax planning, and asset protection are extremely important. What happens is that life circumstances keep changing, rules keep changing, and physicians, with their day job, are extremely busy. So what we tend to notice is that people in this income category tend to have a lot of blind spots, and it is very important that you work with a fiduciary financial advisor who can look at the full 360-degree angle and help you safeguard against those blind spots and plan for them.

Kevin Pho: And Aadil, what do you mean by a fiduciary financial advisor?

Aadil Zaman: So, Kevin, as a physician, you are a fiduciary. That means that it is your legal responsibility to act in the best interest of your patients. In the same way, as financial advisors, we work in a fiduciary capacity, where it is our legal responsibility to act in the best interest of our clients. Not all financial advisors are fiduciaries. In fact, there was research done by PBS Frontline many years ago which concluded that only 15 percent of financial professionals work in a fiduciary capacity. So if you’re working with a financial advisor, it is prudent to work with a fiduciary.

Kevin Pho: And Syed, what is your take-home message from this webinar?

Syed Nishat: The whole financial planning cannot be complete without talking about asset protection. As Aadil mentioned, physicians are in a high-risk profession. There’s a statistic done by the American Medical Association that 60 percent of physicians over the age of 50 get sued at least once, and this statistic is quite high for certain professions like OB/GYN and surgeon. So make sure that when you create a financial plan with a fiduciary financial advisor, it is designed in such a way that if the physician gets a lawsuit, the assets are protected. That’s number one.

And number two, when we talk about this Biden tax law planning and the SECURE Act, you can see there are a lot of moving parts. It’s not like there’s one solution we can just suggest. It involves speaking with the CPA, actuaries, and attorneys and coming up with a customized financial plan. So when you deal with a fiduciary advisor, make sure he or she has a team of experts in-house, so you don’t have to go to 10 different places to get the job done. A fiduciary advisor can take a look at the 360-degree angle and can take care of all your financial planning needs under one umbrella very efficiently.

Kevin Pho: Well, thank you so much for joining me on this webinar. Once again, our experts can be reached at Wall Street Alliance Group at www.wallstreetag.com. That’s www.wallstreetag.com. And that concludes this evening’s webinar. Thank you so much for joining me. This webinar will be posted on the KevinMD platform, and the audio version will be available on various podcast platforms as well. Thank you very much, and good evening.