Physicians and dentists work hard throughout their lives to take care of their families and experience a stress-free retirement. Estate planning is an important part of retirement planning, especially for those who want to leave a lasting legacy for their loved ones. This type of planning may not be as fun or glamorous as planning for vacations or buying a dream car, but it is crucial to decide who will inherit your assets after you are gone.
Estate planning is a broad term that covers a variety of methods for determining what happens after your death, including the disposition of assets and appointing a guardian for your children. To put it simply, your estate plan is arranging the management and ownership of everything you own during your life and after death. Without an estate plan, you risk leaving those decisions up to a judge and the laws of your state.
An essential piece of an estate plan and probably the most common term is a will. Surprisingly a will is the least effective tool for transferring assets at death.
In fact, the will is just the “catch-all of last resort,” because the first rule governing the transfer of assets is ownership.
With that being said, a will is a good place to start to ensure you have a plan so that you can streamline the process for your loved ones.
The estate planning basics are composed of many terms and documents you need to understand. Not having estate documents is a colossal error that can be so easily remedied. A way to remedy this is to hire an estate attorney. By hiring an estate attorney, you know that you will have a sound plan that is perfected by a professional. Here are some of the basic documents your estate attorney needs to get started:
One of the biggest estate planning mistakes is to die without a will. Dying without a will means you are “intestate,” leaving it up to the courts and state law to determine guardianship for your minor children and how your assets are distributed. This may mean the spouse who survives gets everything, or maybe must split the assets with your children.
What if you are legally separated but not divorced? Children entitled to a share under intestacy will receive it outright upon reaching the age of majority (usually 18) – is this what you would have wanted? Putting a will together can help you decide these things ahead of time and prevent disputes amongst family members left behind.
In addition to naming a guardian and providing instructions for your children’s inheritances, a will allows you to name an executor for your estate. An executor, usually a trusted friend, family member, or financial professional, is in charge of making sure the estate is distributed correctly, paying debts, and paying taxes.
Now that you are familiar with these basic estate planning terms, the main component of estate planning is protecting your beneficiaries. As mentioned earlier, there are three items that trump a will when it comes to the order of transfer - displayed in the image to the right.
OwnershipThe first rule governing the transfer of assets is ownership. A house that is owned jointly with a spouse will transfer to them at the first spouse’s death.
Some assets like retirement accounts or life insurance don’t have a joint owner but can have a beneficiary. In this case, the beneficiary will supersede the directions of the will. As an example, if a physician started in practice 5 years ago, they named their parents as beneficiaries on their 401(k). Now the physician is married and dies, the parents will receive the 401(k) regardless of the current spouse’s needs. This leads me to an important question to ask yourself- when was the last time you reviewed and updated your beneficiary designations?
Whether it’s a vacation home or stock portfolio, designating heirs for your assets will give you control over who receives them. Without an estate plan, the courts will often decide who gets your assets. This can be a grueling process that can take years and rack up a costly attorney or court fees associated with probate proceedings for your loved ones.
A trust is another effective way of holding or transferring assets that give you control over who and how money is distributed.
Finally, for anything that does not have a joint owner, beneficiary, or is not in trust, the will governs the distribution. A living will, or advance medical directive, is another element of estate planning. You may be familiar with an advance medical directive as a physician or dentist in the field.
Other steps in preparing an estate plan include assigning power of attorney to someone who can act in your place, should you become incapacitated. The person with designated power of attorney can pay your bills, manage investments, and make other decisions while you are still alive.
Another reason for estate planning is to reduce the amount of potential taxes on your estate. To make the most of your will, you should also collect revocable trusts, credit shelter trusts, and irrevocable trusts. Even though these documents are not generally part of an initial estate plan, it is good to be aware of them.
According to Investopedia, “couples can reduce much or even all of their federal and state estate taxes and state inheritance taxes, which can get very pricey.” This is often accomplished by setting up trusts that can shelter assets from taxes.
A valid will is a cornerstone of any estate plan. You can receive tax benefits by maximizing the potential of your will. You can do this through unlimited marital deduction and applicable exclusion amount. On the other hand, property passing through a will is subject to probate fees.
The foundation of a will is the durable power of attorney. (This is especially important for elderly and disabled clients.) The person given power of attorney can make gifts and reduce the principal’s estate.
A revocable living trust provides no tax advantage to the grantor since the grantor will be taxed on the income and the assets will be included in the grantor’s taxable estate at death. A revocable living trust can allow for a quicker distribution of assets by immediately transferring assets to your named beneficiaries. Furthermore, this type of trust is also used because it does not require the cost of probate court, which administers wills. It is becoming more common for physicians to leave their assets and insurance for their children’s benefit in a trust, rather than giving it to them outright. This can also provide effective asset protection for your heirs.
It is no secret that estate planning can be quite overwhelming. A good financial planner can make the process easier for you as they are in a position where they understand your big financial picture. Because they are an expert in your finances, a financial advisor is the holder of your beneficiary designations, bank accounts, retirement accounts, investments, trust documents, and other personal property. They can help you compile the necessary information as you prepare to meet with your estate planning attorney.
At Spaugh Dameron Tenny, we are always happy to help you understand your financial documents. We can also help you find a trustworthy estate planning attorney that will help you create a secure estate plan that includes all your assets.
So, what are you waiting for? Don’t let the state make your decisions for you. We offer a complimentary discovery call to any doctor who has retirement or estate planning questions.
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As the Director of Financial Planning for Spaugh Dameron Tenny, Jordan applies his academic and practical experience in the creation and maintenance of the firm’s financial plans, as well as coordinating research efforts for products and strategies that may benefit clients. Originally from Canada, Jordan came to Charlotte on a golf scholarship where he attended Queens University of Charlotte. In addition, Jordan has a Master’s degree in Wealth and Trust Management.
