Estate Planning

September 1, 2003

Estate planning basics

Estate planning isn't much fun to discuss or to write about. That's because none of us likes to think about our own demise. But if you haven't made plans for what will happen financially after you're gone -- or if you haven't reviewed your estate plans for a few years -- it's essential that you do it now.

The timing is right for several reasons. First, Congress has made complex changes to the laws governing federal estate taxes over the next eight years. More changes will likely be forthcoming. You'll have to stay aware of the new laws to maximize the amount you can leave to your heirs.

Second, the economic downturn of the past few years has actually given us a bit of a respite -- a chance to reflect on what it is we want to achieve financially. During the boom years of the '90s, when everything was going well, it was easy to overlook the shortcomings of our financial plan (including an estate plan). But we have been forcefully reminded that nothing -- including a strong market -- lasts forever. Take advantage of this slower cycle to go back and clean up some of the economic details that you may have overlooked when times were good. Planning for the financial protection of your heirs is one of the most important of those details.

Let me emphasize that estate planning is not for novices. I strongly recommend that you work with an attorney who not only specializes in estate and tax planning, but also does it a lot. Such specialists will be more efficient, since they work day in and day out with tax laws that affect estates. That allows them to develop the experience and the creativity to solve many estate planning problems. (If you were having surgery, wouldn't you choose a surgeon who performs the operation frequently, rather than someone who does it only once or twice a year?)

There are several ways that you can find a good estate attorney. Check with your financial planner for references. You can also contact your local Estate Planning Council, which is made up of professionals who specialize in estate planning; every major city has such a council. Your local bar association should also be able to refer you to members that specialize in estate planning.

Begin with the basics

Do you have a will? Although your will is not the only tool that you'll use in planning your estate, it is the basic building block and vitally important. If you don't have a will, set up an appointment -- today -- to make one.

If you and your family members have ever disagreed about the use of money or property, you know how such arguments can strain relationships. Now, without a will, imagine how much harder it will be for your family to settle financial matters after you're gone, at a time when they will be under great stress. A carefully drawn will can help your family get through this emotionally charged time with fewer problems.

If you have a will, take it out and read it today, to make sure that it still expresses your wishes. Have some of your children become self-supporting since your will was written? Do you have a parent who has become dependent upon you financially? You will need to make changes now to reflect those kinds of circumstances.

Often, the best approach is to start with a clean slate. Take out a note pad and jot down your thoughts:

  • Do I want to leave my financial legacy to my spouse? My children? My grandchildren?
  • Are there other people financially who are dependent on me? How do I want to take care of them?
  • Are there charitable organizations that I want to remember? Many physicians have high incomes and high net worth, but little discretionary income because of lifestyle choices, including children's education. If you weren't able to make the charitable contributions that you would have liked during your lifetime, you may have an opportunity to make a charitable bequest when you die. (In some cases, giving away part of your estate can actually enhance its overall value.)

Choose someone to act for you

As a physician, you've undoubtedly seen cases in which a terminally ill person has been kept on life support long past the time when there was any quality of life -- and long past the time he or she would have wanted to be kept alive. What's lacking is a healthcare power of attorney -- a legal document that designates someone who can make healthcare decisions when the patient himself is unable to do so. Each state has its own legal requirements for drawing up and delegating powers of attorney.

You should also have a document giving a general power of attorney to someone who can act on your behalf if you are unable to do so. I've seen some frustrating situations when people have not taken that precaution. For example, suppose a man has a stroke and is not capable of making any decisions -- and he hasn't drawn up a power of attorney. He has a fairly new car that he'll never drive, and that no one else in the family needs. But his spouse and his children can't sell the car because the title is only in his name. The result? The car sits in limbo, rusting away.

Little things like this add up until they become major aggravations. Would you really want your spouse or your children to have to go to court to get permission each time they want to take care of a financial matter like selling a car? That's a time-consuming and expensive process.

Bottom line: make sure you have decided which people you'd like to have act on your behalf (a primary designee and a backup) and make sure that you have all necessary powers of attorney (financial and healthcare) drawn up as part of your estate planning process.

Don't count on qualified plans


If you've built up a hefty balance in some type of qualified retirement plan (a defined benefit plan or a profit-sharing plan, for example), you may assume that your heirs will get all the money in that plan if you don't use it before you die. The truth is, taxes can eat up more than half of the money in such a plan after you die.

The accumulated funds in a qualified plan generally pass to a surviving spouse without being taxed. But the money does not transfer in the same way to other heirs. The assets of such plans become part of the estate of the last surviving spouse -- and they are subject both to regular income tax (because they grew tax-free) as well as state (and possibly federal) estate taxes. Your heirs could lose a minimum of 50 percent of the total value of the account -- or as much as 85 percent. Fortunately, there are strategies that a good financial planner or tax attorney will know to reduce and defer such tax liabilities.

Congress makes it complicated

As if estate planning wasn't difficult enough, Congress has further complicated the process with the Tax Act of 2001. This legislation eliminates the estate tax over a 10-year period. The law is a systematic reduction of the tax, gradually raising the amount exempt until the tax is completely eliminated in 2009.

Great news, right? Unfortunately, there is a substantial catch. Unless the exemption is reauthorized before 2010, it falls back to the $1 million level that year.

Because Congress couldn't build the consensus to permanently eliminate the tax, it has created an almost impossible task for you and the team that is working to plan your estate. Until Congress acts, you and your planners will have to monitor the situation carefully to ensure that you are using the best strategy possible for each yearly scenario.

More to consider

There are many sophisticated estate planning strategies available today -- strategies such as gifting, family limited partnerships, planned giving trusts, and charitable remainder trusts. Although these techniques are too complex to be discussed in detail here, you should ask your estate planner about them. Depending on your situation, they could significantly reduce the amount of money that your heirs will have to pay the government when you die.

Trevor 'Chip' Lewis, Jr., CFP, is Managing Director of PSA Financial Center, Inc. in Lutherville, Md. He was designated one of the Top 250 Financial Planners in Worth magazine in 2001, and the Top 150 Best Financial Advisers for Physicians in Medical Economics in 2002. Among other professional organizations, Mr. Lewis has been active in the leadership of the National Financial Planning Association and the National Association of Planned Giving. He can be reached at chip@psafinancial.com or via editor@physicianspractice.com.

This article originally appeared in the September 2003 issue of Physicians Practice.