While estate planning for doctors is essentially the same as for anyone else, doctors are presented with unique challenges that can sometimes make a big difference in their planning.
Doctors have a delayed timeline for wealth accumulation, due to years spent in school and residencies, followed by skyrocketing income. Some might own their medical practices, and certainly all carry the extra financial burden of unlimited personal liability from medical malpractice. These considerations must be accounted for by attorneys and other trusted stewards when crafting comprehensive business plans and estate plans. But before diving into the intricacies of estate planning for doctors, let’s go back to the basics.
Estate planning ensures that your wishes will be followed upon your incapacity or death. People are usually most concerned about providing for their surviving spouse and children, avoiding probate, minimizing taxes, planning against incapacity, and protecting assets.
Your estate planning documents can be split into two categories: lifetime documents and deathtime documents.
Your lifetime documents are your Durable Financial Power of Attorney, Health Care Power of Attorney, Living Will, and HIPAA Authorization Form. These documents are in effect while you are alive but incapacitated. Upon your death, your lifetime documents become invalid, and your deathtime documents take over.
Your deathtime documents are your Revocable Trust and your Last Will and Testament. You can choose to use only a Last Will and Testament, but many people prefer the added benefits of using a Revocable Trust in conjunction with a simpler Will called a “pour-over” Will.
Here are definitions of these terms.
Now that we’ve addressed the basics, here are four estate planning issues that are unique to doctors.
Whether buying into a practice or starting one up on your own, many doctors own their own practices. Running any business presents its own set of complexities.
First, the practice must be owned and operated under the appropriate business entity, such as a partnership, C Corporation, S Corporation, or a Limited Liability Corporation (LLC).
Additionally, a doctor is one of the enumerated professionals who can form a “professional” entity, such as a professional corporation (PC), Professional LLC (PLLC), or a Professional Association (PA). A professional entity puts up firewalls between each doctor for the medical malpractice of the other. An added bonus: you don’t have to file an annual report every year with the Secretary of State’s Office or pay the $200 annual fee. Approval from the medical board must be obtained to form a professional entity.
The main reason people form corporations and LLCs is to avoid personal liability for the debts of the business they own. By forming a separate and distinct entity, only the entity is liable for the debts and liabilities incurred by the business, not the owners. Selecting the appropriate choice of entity can also provide income tax benefits.
Incapacity planning is important for physicians who own their own practices. The physician’s Durable Financial Power of Attorney should include a provision that authorizes the Agent to generally deal with the physician’s ownership interest in the medical practice. Physicians who are the sole owners of their practices should create a plan for how the practice will be run or sold upon their incapacity.
You should also be concerned about how to cash-out of your business upon retirement or when you otherwise leave the business, as well as how your family members will be paid for your business interest after your death. Important business and estate planning documents can provide clarity. For example, a “Buy-Sell” agreement is a legally binding agreement between the co-owners of a business that stipulates how an owner’s business interest may be reassigned if that owner dies or otherwise leaves the business. The Buy-Sell agreement may provide a predetermined valuation clause. A physician, like any business owner, should coordinate business planning with estate planning.
Unlike with other professions or business owners, merely creating a separate entity like a corporation or an LLC will not fully protect doctors, who face medical malpractice liability. Doctors have unlimited liability from medical malpractice. A malpractice lawsuit is something that every physician dreads, but one that nearly half will experience over the course of their career. That is where medical malpractice insurance comes into play.
A physician may also consider structuring the ownership of their personal assets in such a way that if a malpractice judgment is rendered against him or her, in excess of their insurance coverage, the third party creditor may not be able to collect on the judgment. This may be done through LLCs (limiting the creditor to a charging order), asset-protection trusts, and gifting assets to a non-physician spouse or child.
We usually think of doctors as wealthy. But unlike bankers and other business professionals, doctors usually don’t accumulate a substantial amount of assets or become high income earners until later in life. Doctors enter the workforce later, making substantially lower salaries during residency, while carrying a tremendous load of student debt. After attending four years in medical school and getting three to six years of residency under the belt (depending on the program and specialty), many doctors do not start making their “real doctor salaries” until their mid-thirties.
Listen to this Prosperous Doc episode with Sanjiva Lahkia, DO, to hear his perspective on the financial pressures physicians face.
How might this affect estate planning? An estate planning attorney must understand the realistic projected timeline of wealth accumulation of a doctor when determining what they need. While the doctor may not need certain types of trusts, asset protection planning, or tax planning now, they could in the future. Opportunity for gifting to reduce the physician’s taxable estate may be more relevant, even in the earlier years of planning, given the expected growth of the physician’s net worth.
After a lot of years in school and a lot of hard work, doctors begin enjoying the fruits of their labor and even see their bank accounts grow. As with any high-income earner, the longer you work, the more your net worth will increase — as will your concerns about taxes.
In 2020, the estate and gift tax exemption amount is a very generous $11.58 million per person, and double that for a married couple. This is the amount that you can give away to others without being subject to the 40% estate and gift tax. This exemption amount is expected to revert back to $5 million per individual, adjusted for inflation, at the end of 2025, but it could be sooner, lower, and at a higher tax rate, depending on another tax overhaul.
The estate tax has always been a political football. There is no way to know with certainty what tax laws will be in effect at the time of your death. A skilled estate planning attorney can evaluate your financial situation and determine if estate tax planning is needed. This could be in the form of lifetime gifts as well as mechanisms included in your estate planning documents to ensure that both spouses’ estate tax exemptions are fully utilized.
For anyone selecting an estate planning attorney, you should first select someone with whom you will enjoy working. You need to like and trust the attorney you choose to engage, because you will be doing important work together.
Another thing you should look for when selecting the right estate planning attorney is to look for an attorney with vast experience working with other doctors. You want to make sure that you select an attorney who regularly represented other physicians and recognizes their unique needs.
And lastly, physicians who own their own practices should hire an estate planning attorney who is well versed in business law. By selecting an estate planning attorney that meets all of these requirements, you will be able to create a sound estate plan that is backed by legal guidance.
You may have gotten a late start to wealth accumulation, but it's not to late to start planning for life after medicine. Click the button below to download the Retirement checklist and get started with or update your retirement plan.
To learn more about Laura Rivers, JD, LL.M, visit her website: Click here.
Laura C. Rivers, JD, LL.M. is the owner and attorney of Rivers Law, PLLC. She regularly assists doctors and their families with estate planning, probate administration, trust administration, and general business law. Laura helps her clients gain peace of mind by empowering them to protect themselves during life and to direct the disposition of their assets after death.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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