Estate planning is a broad plan of action for how to direct and manage your assets once you have died. This is different than a will, which is one part of an estate. A will dictates the names of specific people who will execute your estate plan. Below are examples of what is included in an estate and directions for how the individuals named in the will should take action:
- Physical possessions, i.e., collectibles, jewelry, etc.
- Investment accounts
- Real estate
- Retirement accounts
- Business insurance policies
- Life insurance policies
- Physician personal loans
- Credit card balances
- Medical school debt balances
- Taxes due
Although each estate is unique in its size and complexity, everyone has one regardless their profession or stage in their career. Outlining everything you own, how you want it handled and who should handle it is a big task, let's get started. No matter your age or stage in your career, estate planning is a necessary step in financial planning for physicians.
If you have young children, who should take over their guardianship? If you haven't passed away but instead are incapacitated, who should handle your medical care and liaise with the doctors? Remember that the person you want to watch your kids may not be the person who manages your finances. Once you decide who is in charge of what, the next step in making it official by putting into writing who should do what.
Define your estate's executer
This individual is responsible for carrying out the provisions of your will, which defines who should get which assets or control certain aspects of your estate. This person is usually an attorney, but may also be a close family member or friend
Who is the Trustee of your estate?
This individual manages the assets you place inside of your trust. He or she will also enforce any stipulations you place on it. To learn more about trusts, see here for a crash course for doctors on trusts.
Beneficiaries of your estate
These individuals will inherit the contents of your estate, i.e., your bank account, your physician mortgage, your retirement accounts and so on. Your must specify in your will who is to receive which assets. You also need to ensure you have beneficiaries listed for your life insurance policies and retirement accounts.
Your decisions and designations are not official until they've been documented. The legal documents you will need to complete your estate plan include:
If you do not have a will, you should prioritize creating one with the help of an attorney. A will is the part of your estate plan explains how to distribute your assets to family and other beneficiaries upon your death. This legal document also communicates who you want to appoint guardianship of your minor children.
One important limitation of a will is that it does not allow for asset management or guardianship if you’re incapacitated. It only applies in the event of death. That’s why it’s critical to have other estate planning documents to carry out your wishes if you’re alive but unable to make your own decisions.
That's what an advance care directive (commonly referred to as a living will) is for. This document specifies what medical treatments you wish to receive if you are unable to choose for yourself.
Power of attorney
This legal document is used to designate an individual to act on your behalf, typically in the event you are in a coma or not of sound mind.
The responsibilities of a power of attorney can be as broad or as limited as you like. Typically, it gives a person the ability to manage your financial affairs, including:
- Paying bills.
- Investing money.
- Selling assets.
A traditional power of attorney terminates upon your disability or death. A durable power of attorney continues during incapacity and terminates upon your death.
List of assets
Your designees won't be able to distribute your assets if they don’t know they exist. That's why it's important to make sure you leave the following in an accessible location:
- Bank statements.
- Insurance policies.
- Brokerage accounts.
- Retirement accounts.
- Tangible assets, including vehicles, jewelry, artwork and anything else of value.
- Location and contents of safety deposit boxes and/or safes.
- Liabilities, including your mortgage, credit card debt and other outstanding loans.
Given the financial nature, this should include account numbers, estimated values and institutions.
Finally, consider establishing one or more trusts to make it easier to manage your estate.
A trust enables a third party (known as a trustee) to manage assets on your behalf. One of the main advantages of a trust is that assets inside a trust typically avoid probate. This enables more efficient transfer of assets to beneficiaries.
Another benefit of trusts is that you can specify its terms in order to maintain some control over your assets. For example, if you’re leaving an inheritance to children, you can specify how much those heirs can receive at a time. (This is oftentimes used to minimize the possibility of them squandering their inheritance.) Some trusts even allow you to maintain control of assets inside the trust while you’re living.
If your estate becomes large enough that estate taxes are a concern, certain types of trusts can remove assets from the value of your estate. This will minimize the tax liability your heirs incur.
To be clear, setting up a trust is only half the process. You also have to fund it. Otherwise the trust agreement may not take effect and assets may not pass to beneficiaries as intended.
Estate planning, regardless of your age, is a vital step on the physician finance checklist. Many people associate estate planning with the 1%, or close to retirement age. Although some physicians have secured generational wealth for their families, everyone needs an estate to distribute their assets upon death no matter how big or small. Unexpected life events happen every day. Who is going to make sure your mortgage gets paid? What if you are divorced or in a serious relationship, should that person have a say?
Understandably, many people don’t want to deal with the process and just hope they live forever. Because of this, some never get around to communicating their wishes before it's too late. And once you do construct your estate plan, it's crucial to revisit and revise it as your life evolves. This is not a "set it and forget it" type of plan. If done properly, your estate plan will protect your loved ones and keep your estate out of court. Here is a list of considerations for you and your attorney as you work through your estate plan.
While estate planning is rarely quick or easy, there are four major reasons it's relevant to everyone. Let's take a closer look.
1. Your estate plan communicates your care wishes.
As a physician, you may have witnessed family disputes regarding the treatment of a person suffering from terminal illness or injury. Although most of estate planning deals with assets, a key component is a list of instructions for your care if you become disabled before passing away. Your estate plan should also name who will make health and financial decisions on your behalf if you become incapacitated.
2. Your estate plans explains how to transfer your assets.
A proper estate plan provides detailed instructions on who receives what. It also determines when your beneficiaries will receive the assets they inherit. If you’re married at the time of death, your assets will automatically transfer to your spouse in most cases. However, in some states, it may also be split between your spouse and children. If your children are still minors, the court can dictate the terms of their inheritance. Above all, an estate plan should prevent your assets from being distributed against your wishes. In order to do so, consult an experienced attorney to make sure your estate plan contains all the proper documentation.
3. Your estate plan takes care of your loved ones.
If you have minor children, it’s critical to have a plan that communicates your wishes for their care in the event that both parents pass away. Otherwise, a judge will appoint a guardian. An estate plan is also helpful in cases where one or more of your beneficiaries could be susceptible to bad decisions or influences. This works by either placing assets:
- In a trust
- In the care of a responsible party who will respect your wishes
If you have a child or other family member with special needs, your estate plan should provide for their care when you’re not there. A proper estate plan should also minimize the taxes, legal fees and court costs of estate transfer. These expenses are usually deducted from the value of the estate, which means less inheritance for those you intend to pass your wealth on to.
4. Your estate plan keeps the courts out of your belongings.
So, what happens if you pass away without preparing a plan? It all depends on the probate laws of your state of residence. (Probate is the legal process of transferring property upon a person’s death.) Without a sufficient estate plan, the courts will likely determine who gets your assets instead of your family. This process can take months, sometimes even years. Unfortunately, these proceedings have been known to divide families over who has the right parts of the decedent’s estate.
Another common misconception surrounding estate planning is that having a will is enough to avoid probate. Often times, it is not. There are other important components of a complete estate plan, such as trusts. Together, they work to ensure that your wishes are carried out, rather than being up left up to the court's judgment.
Planning your estate is full of difficult conversations and decisions you simply cannot afford to avoid. A strong estate plan should:
- Communicate your care wishes
- Explain how to transfer your assets
- Protects the financial well-being of your loved ones
- Prevent the courts from interfering with your estate
Although your estate may never reach the status of the late, great Prince, you can certainly plan yours better than his.
Jack is a Creighton University graduate and former advertising creative who has written extensively about topics in personal finance, employee benefits, and technology. You can find Jack's writing on Calendar.com, StartupNation, and Muck Rack.