Rachel Podnos, JD

We are often asked for guidance on how to approach a planned inheritance from an elderly parent.  With physicians in particular, there are some very important considerations.

Many physicians have a continued exposure to malpractice liability throughout their careers.  This is superimposed on the ever-present liability concerns of teenage drivers, business liability, other accident liability, and marriage.  Physicians should think twice about inheriting significant assets outright, even including an inherited IRA.

Take a scenario in which you are engaged in a lawsuit of any type. During the lawsuit, you inherit a large sum of assets left outright to you.  That inheritance is now on the table for creditors if you have a judgment that exceeds your insurance coverage. 

Instead, if the assets left to you were held by a trust for your benefit, it would be nearly impossible for creditors to attach the funds. In most cases, trusts such as these are created during life by parents (living trusts).  They can also be funded and/or formed by will at death (testamentary trust). 

In either case, these trusts become irrevocable at the parent's death.  It is the irrevocability of the trust that gives the assets contained in it true protection from creditors.

Note that parents can specify what happens to these trust funds if you (the intended beneficiary) die prematurely.  The money could be left in trust to provide for your children, or be moved to your sibling if you leave no issue.

There are standard clauses that might allow such a trust to protect the assets if you are both the trustee and the beneficiary.  These clauses are often called “ascertainable standards” clauses, and contain language stating that the trust assets can only be used for the beneficiary’s health, education, maintenance, and support.  It is a much stronger option, however, to include a co-trustee (a friendly one is fine) who cannot be coerced by a judge or judgment creditor to release any funds. Also, have the trust state that neither trustee can act alone. 

Keep in mind that some states offer specific protection for inherited IRAs, but most do not.  If you have liability concerns in the future and are likely to inherit an IRA, ask your parent(s) to leave the IRA to a specially written trust.  Discuss your options here with a good estate planning attorney.

The point we are making is that anyone with liability concerns and the expectation of a substantial inheritance should do some proactive planning with their parents and with an estate planning attorney.  Doing so may make a tremendous difference in the safety of the funds when it matters most.

Articles

Physicians should take some special precautions if they expect a substantial inheritance. Here's why. 

Physicians: Is Your Planned Inheritance Protected? 

Albert Einstein once declared compounding interest to be the most powerful force in the universe.  Anyone who has seen what compounding interest can do for their savings over time would probably understand what he meant by that.  In previous articles, we have discussed the importance of 

 in your career.  Let's spend some time on this issue to understand its importance.

Although investment returns rarely are consistent year by year, we can make assumptions based on annualized returns over a period of many years.

A balanced portfolio of 60 percent stocks and 40 percent bonds has provided an annualized return of 6 percent to 10 percent in general over the last 70 years (depending on the 10-year plus time period in question).  Let's take an annualized return of about 7 percent a year as your outcome on early savings.

There is the rule of 72 (divide 72 by the given interest rate), which approximates the number of years to double your money at any given interest rate.  If we are taking a long-term annualized rate of return of 7 percent, it would take a little over 10 years to double our money.

So, one dollar deposited on year one of your savings would double every ten years.  If you start at 25, that dollar would become 16 dollars when you turned 65 (assuming no taxes, such that it was put into an IRA or retirement plan).  Proportionally, $10,000 would become $160,000!  Money deposited in year two would be very marginally less, but would be expected to total the same at age 66.  On and on this goes. 

Conversely, if you start saving just 10 years before retirement, your money will have grown at a doubling rate instead of 16-fold.  Truly, your money is doing a great deal of work for you just by sitting in an account and letting the powerful force of compounding interest do it’s thing.

How much money you have for retirement is very closely correlated with how much you save annually and for how long you have saved.  How much you earn on the investments themselves is rarely a major factor (assuming you don't make severe investing mistakes). A good tip in this regard is to save half of any raise or increase in income you get.  If you do this over the long term, you will end up saving a significant amount of money while still enjoying the benefits of increased funds for enjoying life and paying expenses. 

Saving early also has the benefit of keeping your lifestyle expenses lower than if you spend most of your income.  This too is a powerful way to have a financially successful retirement.  If you are used to spending 95 percent of your income, you will have to have much more saved to provide this lifestyle from savings.  Conversely, if you have learned to live on 75 percent of your income, your goals will be much easier to reach. 

The bottom line is this: Saving for retirement really comes down to three simple things: saving early, saving continually, and letting compounding interest work its magic.

Three Tips for Physicians Saving for Retirement 

Occasionally, we come across situations in which a high-income earning spouse transfers a substantial amount of family assets to the nonworking (or lower risk) spouse.  Usually, this is done to isolate the assets from creditors of the higher income earning spouse (usually in a profession with higher liability such as medicine or business).  There are several reasons this is a mistake.

1. First, in some states, assets owned together are either partially or fully protected from creditors of a single spouse.  For example, only half the assets are available to a creditor of only one of the spouses in many states if the assets are held "joint with right of survivorship." In some states, ownership "as tenants by the entireties" provides strong asset protection of the entire asset from challenge by a creditor of a single spouse.  Moving the asset to the ownership of a single spouse opens the entire amount open to creditors of either that spouse or both spouses.  Additionally, owning the assets in a revocable living trust provides absolutely no additional protection.

2. Second, if the spouse transferring the assets continues to manage the assets, a court may assume that this control in fact implies a form of ownership and may in fact result in a creditor of the former owner attaching the asset.

3. Third, divorce happens in up to 50 percent of marriages.  A marital gift of substantial assets may end up being considered exempt as marital property in a divorce proceeding.  There is case law in this respect with a wealthy individual being left almost penniless after making an "asset protection" transfer to a spouse who subsequently filed for divorce.

Note that there are  other good ways to protect your assets and avoid the issues noted above.  For example, under federal and many state laws, employer-sponsored retirement plans are given unlimited protection. Most states offer solid protection for most IRA accounts, and federal law offers even bankruptcy protection for rollover IRAs and for most traditional IRAs (up to $1 million in bankruptcy).

Many states have laws on the books protecting the cash value of life insurance policies and in annuities from creditors.  However, not all states afford the same protections for these assets so it is always important to make asset protection decisions with your state law in mind.  In addition, there are many facets of risk avoidance and risk sharing to consider.  Finally, there are a series of protective structures available to help.

Lastly, it is important to remember that asset protection is not a replacement for insurance.  Rather, it should be thought of as a supplement to your liability and professional insurance.

The seemingly simple process of gifting is rarely an equitable form of asset protection.  This is a serious issue and should be approached with the help of a skilled estate planning attorney in conjunction with general estate planning.  Like most things in life, it is best to start planning in this regard before a crisis arises.
 

High-income earners sometimes transfer substantial amounts of family assets to their nonworking spouses. Here's why this is a big mistake. 

Why Physicians Should Not Put Assets in a Spouse's Name

Trusts are one of the least understood items in both financial planning and estate planning. In a prior column we shared some guidance on revocable 

. Here, we will discuss how they differ from irrevocable trusts.


Every trust has a trustee (or trustees), who is/are empowered by the trust document to follow the instructions on how to use the assets inside. There are also trust beneficiaries, those who are intended to benefit from the assets managed by the trustee.

The major difference between a living trust and an irrevocable trust is the very important fact that the grantor, (the person who created the trust and placed assets inside of it), does not have any control as a trustee of an irrevocable trust.

Once it has been created, the grantor cannot revoke it. This can be either because the grantor has given away the assets inside the trust during life or because he has died and can no longer serve as the trustee of what was once a “living trust.”

In this scenario, the trustee would be the person designated as the grantor's successor when he created the trust. In either case, the trust assets are now totally controlled by the trust document and the trustee(s) that administer it.


An irrevocable trust provides for some interesting features. First, since the grantor does not technically own or control it, the trust is not considered part of his estate (and therefore it is not subject to estate tax). This feature is crucial to one of the most common uses of irrevocable trusts: the ILIT (Irrevocable Life Insurance Trust). Those individuals and families lucky enough to be subject to estate taxes at death can own life insurance inside an ILIT. At their death, the trust is funded with the insurance death benefit and governed by the document and trustee. There will be no estate tax or income tax applied to the funds.

If the insurance had been paid to the estate, it would have been subject to estate taxes (if the estate was large enough). Given the current $5.2 million estate tax exemption, the ILIT is now used only by the wealthiest families. Other than an ILIT, there are very few reasons to create an irrevocable trust during life.

More commonly, an irrevocable trust results when an individual dies with a living trust in place. The living trust may have been funded during life or by the will at death. Now the trust is irrevocable and governed by the trust document and trustee. This feature provides both control and excellent asset protection in most cases.

The trust document spells out the terms and conditions under which trust assets are dispensed to beneficiaries (control). The use of an independent or co-trustee allows the trust to protect the beneficiaries from creditors (asset protection). In most cases, it is not advisable for the trustee and beneficiary to be the same and only person.

It is very important to understand the difference between a revocable living trust and an irrevocable trust. Many believe the former type of trust carries the same asset protection that the irrevocable trust does, but this is a big error.

The key difference between a revocable living trust and an irrevocable trust and when and why physicians should consider using them. 

What Physicians Should Know About Irrevocable Trusts

One of the least understood items in both a financial plan and with estate planning is that of a living trust.  These estate planning tools exist in almost every estate plan, yet their uses and meaning are vague to most.

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Think of a trust as a bucket that holds assets.  A living trust is a bucket that holds assets while you are living.  Since you retain the right to put various assets in and out of the trust bucket during your lifetime (“living,” right?), it is a “revocable” trust.   This is a crucial understanding. A revocable characteristic means that you can be compelled (by a judge) to remove assets from the trust in order to satisfy a creditor judgment.  The majority of individuals with a living trust believe that it provides some asset protection, but it provides none.  This is perhaps the most important thing to understand.

There are two main groups of people involved with a trust: trustees and beneficiaries.  Trustees hold legal title to the assets in the trust and are instructed by the trust how to use the assets for the benefit of the beneficiaries.  The beneficiaries of the trust are those who ultimately benefit from the assets.  In some cases, the trustee and the beneficiary are the same person.


For younger individuals, not too much.  The trust does provide continuity of the control of assets (as you would want), but only after you are dead.  And even then, the trust property is subject to your lawful debts.  This would be a very unfortunate scenario for the ultimate beneficiaries. 

So, you have two choices here. The first is to have the trust own your assets during life (remember, you can put assets in and out of the trust bucket at will without taxes or other considerations).  This provides a very smooth transition when you die.  The trustee (or successor trustee if you were the trustee during life), just goes on to manage the trust assets according to the document and its instructions.  No probate, no publicity.

A second choice is to have the trust document written, but have it own little or nothing until your death.  In this case, your will would instruct your personal representative/executor to “pour over” all of your assets (after probate) into the Trust.  Note that when you die, your trust becomes “irrevocable,” since you are no longer around to change it.  An irrevocable trust is a totally different device that will be discussed in a separate column. 

Whether or not you should actually have your living trust own anything during your lifetime is an individual decision to ponder with your advisers.  One downside of doing so is the loss of asset protection afforded by certain types of asset ownership in certain states.  For example, a husband and wife in Florida can own assets “as tenants by the entireties” for asset protection purposes.  Moving the assets into even a joint living trust might void that protection. 

It is also important to note that for many assets, you cannot place them in the trust simply by listing them in the trust document.  For example, if you want to leave your home in a trust, you must sign a new deed showing that the trust owns the house. 

Lastly, do not forget that a trust is not a replacement for a will.  A will is an absolutely essential part of any estate plan, without which, any property not held in the trust when you die would be distributed according to state law without regard to your wishes.
 

Living trusts exist in almost every estate plan, yet their uses and meaning are vague to most. Here is some guidance. 

What Physicians Should Know About Living Trusts

Most estate plans contain both a will and a trust or trusts. While a function of both is to name beneficiaries for your property, the differences sometimes cause confusion.

Join us Sept. 19 & 20 in Philadelphia at 

, our new conference for physicians and office administrators to help improve your medical practice and your bottom line.


Having a will is a “must do” for every physician.  If you die without one, you are said to be “intestate” and the courts and established law in your state determine what happens to both your minor children and your assets. An unpleasant thought.

As noted above, a will basically establishes your intent as to who will take care of minor children (guardians if no parent is living), and who will receive your assets when you die.  A simple will names a guardian (and successors) for the children, and includes a simple outright disposition of assets to adult heirs (or in the interim, to guardians of assets for minor children).  In any event, when inheriting children reach the age of majority (usually 18), they get the assets outright with no inherent protection. 

A will also allows you to name your executor, the person who will be in charge of distributing your estate and paying debts and taxes from it.  Most choose a trusted adviser or family member for this role.  As if having control over where your assets go and who is in charge of them isn’t enough of a reason to have a will, the probate process is much more costly and time-intensive for those that die without one. 

Wills do have some limitations.  For example, retirement accounts and life insurance policies that have named beneficiaries will pass on to those named, regardless of what the will dictates.  The same goes for some types of jointly titled property. 


Trusts allow control and protection over many assets that wills do not cover.  Trusts have nothing to do with the care of minor children, just assets.  Unlike a will, a funded trust can also be set up to provide for the care of your needs and your assets even during life, should you become incapacitated temporarily or permanently. 

A will can actually set up a simple trust.  More commonly, a will instructs the probate court to “pour over” your solely held assets into a free standing trust set up during life.

A major difference between wills and trusts is that to name beneficiaries via a will, you simply describe who should get the asset.  To accomplish the same with a trust, you must actually retitle the assets in the name of the trust.

A benefit of having assets already in a trust is that the assets avoid the costly and time consuming probate process that assets distributed via a will must go through.   Another benefit is that a trust protects assets from claims to your estate.   The same trust may offer excellent asset protection for your heirs.

It is important to note that a trust does not replace a will. Most trusts deal with specific pieces of property while a will should govern the distribution of everything else in your estate. 

Trusts are particularly useful for people with larger estates, people who have very specific instructions as to how the estate is distributed, and people who own a lot of real estate.  While a simple will can be set up on the Web without enlisting an estate planning attorney, the more complicated nature of most trusts makes it wise to enlist the help of an estate planning attorney.

It is important to review both wills and trusts  every few years to ensure that they still reflect your goals and are also in line with tax and other estate law changes.
 

Most estate plans contain both a will and a trust or trusts. While both can name beneficiaries for your property, the differences sometimes cause confusion.