Creating an estate plan that charts a stable financial future for your family is a true act of love and generosity. However, many physicians procrastinate on documenting their final wishes with the reasoning there is ample time to take action down the road. At the very least, parents need to establish wills to protect their spouses and children and powers of attorney for healthcare and property to nominate someone to make decisions in the event they are no longer capable.
An effective estate plan typically goes beyond having just a will and powers of attorney in place. Establishing a trust for your loved ones gives you the flexibility to customize distributions, allowing you to pass on your values and legacy along with your assets. With a carefully planned trust, you can rest assured that the right assets are being transferred to the right hands at the right time. You can also establish benchmarks and financial incentives that encourages your beneficiaries to achieve goals and build character as they inherit your wealth.
There are several trusts that can be utilized for estate planning purposes, and choosing the best one for your situation often depends on your objectives, state of residence, assets and several other factors. Below is a brief overview of some trusts commonly used by doctors as they are developing an estate plan.
This is a section of your will that lays out terms to guide a designated trustee in creating a trust with the oversight of the probate court. The trust, once created, determines how, when, and for what purposes your children should receive the proceeds from your estate and is essential for anyone with young children. If there is someone you trust wholly with the stewardship of your children’s finances, you can designate them as a trustee and give them full discretionary authority over the money.1
These trusts may also contain a “spendthrift provision,” which shields the assets within the trusts in the event of a child’s divorce, bankruptcy or other potential financial hardships. A testamentary trust is established after you die. The probate court oversees the trust throughout its existence, so legal fees can add up. There is nothing you need to do while living except sign a will stating that it should be established at death.2
Revocable Living Trust
A living trust is established during your lifetime and can actually own your assets during your life. You are the trustee and beneficiary of the trust during your life, and any income that the trust assets generate would pass through to your personal tax returns. No separate tax returns are required. You retain complete control of the trust assets during your life and have the ability to change the terms of the trust or revoke the trust in its entirety. A revocable living trust keeps wealth confidential at death, unlike a testamentary trust. Once you die, the trusts can have asset protection benefits for a surviving spouse as well as your children.3
Irrevocable Life Insurance Trust
This trust is often a good solution for young doctors whose estate-tax issues are caused primarily by the amount of life insurance death benefits. When in use, these trusts technically own your term life insurance policies. When you die, the proceeds from your term life insurance go into a trust for your spouse and/or children’s benefit, with the death benefit amount not included in your estate upon your death, thus lowering the size of the taxable estate.4
Asset Protection Trusts
Asset protection trusts are irrevocable trusts designed to protect and pass on your assets. These trusts are typically established in a state that allows the grantor of a trust to also be the beneficiary of the trust. These are called self-settled domestic asset protection trusts. Trusts set up for third parties such as children can also be referred to as an asset protection trust, but you do not have the benefit of potentially remaining a beneficiary. Typically, the asset protection features of these trusts exist by putting the control of the assets in the hands of a bank, trust company or law firm. By not controlling the assets yourself, you are allowed to retain access and a court cannot force you to make any distributions to yourself. If you set up a trust for a third-party beneficiary, you may be able to retain control of the assets yourself.5
There are many other types of trusts with potential benefits for an advanced estate plan. However, many of them require you to give up some degree of control over your wealth. On the other hand, these less-flexible trusts could be worth pursuing as you near retirement age. Like many things in life, timing is everything.
There are numerous estate planning strategies with the objective of minimizing taxes through any legal means possible. However, it is highly recommended that you consult with an experienced estate planning attorney with knowledge of your family’s individual circumstances when establishing a trust.
- Investopedia, LLC, “Testamentary Trust” http://www.investopedia.com/terms/t/testamentarytrust.asp
- Law Offices of John W. Callinan, “Testamentary Trusts” (November 2016). http://www.eldercarelawyer.com/blog/2016/11/testamentary-trusts/
- Steven Merkel, CFP, ChFC “Establishing a Revocable Living Trust” http://www.investopedia.com/articles/pf/06/revocablelivingtrust.asp
- Investopedia, LLC, “Irrevocable Life Insurance Trust” http://www.investopedia.com/exam-guide/cfp/life-insurance-estate-planning/cfp4.asp
- Investopedia, LLC, “Asset Protection Trust” http://www.investopedia.com/terms/a/asset-protection-trust.asp
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