Physicians: Is Your Planned Inheritance Protected?

January 12, 2015

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

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.