Estate Planning for Physicians
Estate Planning for Doctors
Estate planning for everyone is important. However, for physicians, estate planning becomes even more important for three reasons: 1) Asset Protection or Liability Protection; 2) Proper Structuring of Your Professional Practice; and 3) Tax Planning for High Wage Earners and Larger Estates.
Estate Planning Basics
As stated above, estate planning for everyone is important. There are certain basic benefits to every estate plan, including: 1) choosing proper beneficiaries; 2) appointing the proper people to control the assets; 3) naming guardians for your minor children; and 4) avoiding probate. These benefits should not be overlooked, and every person, doctor or not, should consider these benefits to be a major reason to have a proper estate plan in place.
Estate Planning Issues Specific to Physicians
Physicians often fall into one or more of the following categories, which make estate planning for physicians unique.
Unlimited Personal Liability for Medical Malpractice: Unlike other jobs, physicians are not shielded from malpractice liability by simply creating a corporation or LLC. Therefore, the first line of defense is often medical malpractice coverage. Coverage limits vary, but typical coverage per claim is $1 million according to Gallagher Insurance. According to Medscape, the average trial award for medical malpractice is over $1 million. So what happens when your coverage is insufficient? Short answer: you are personally responsible. And when you are personally responsible, the plaintiff/creditor can go after all of your assets, including those assets held in California LLCs. I repeat: Creditors can go after all of your assets, including assets held in LLCs. There is a common misconception that assets in a California LLC are protected from a lawsuit. This is simply not true.
Owning a Medical Practice: While owning a business is not unique to physicians, a medical practice must be controlled by the physician. If something happens to you, whether incapacity, disability or death, who will be in place to manage the practice? Will doctor in charge simply take your patients? Or will they keep the business afloat until you recover or the business is sold?
High Income and High Net-Worth: Again, not unique to physicians, but as high wage earners and having significant assets, these issues must be addressed. Are you structuring your estate plan to minimize taxes upon death? Are you structuring your corporation to minimize income taxes?
Estate Planning Solutions for Doctors
Revocable Trust: Your revocable trust is the starting point to every estate plan. With physicians, it is important that your Trust consider the need for Special Trustee that is licensed to manage the medical practice until it can be sold. Your Trust should also be structured to minimize estate tax. While the estate tax has gone up significantly recently, the increased estate tax exemption is scheduled to “sunset” (i.e. expire) at the end of 2025 and will be reduced to approximately $6 million.
It should be noted that your revocable trust does not provide you with any protection from malpractice claims while you are alive.
Buy-Sell Agreement: For those doctors in a partnership with other doctors, the partners will often fill the role of caring for your patients. However, it becomes important to have an agreement with your partners to determine the value of your practice. Otherwise, the other partners will simply consume your practice and your family/estate is left with no value from the business.
Asset Protection Trusts: While your typical revocable trust does not provide any asset protection, a domestic or offshore asset protection trust does provide you with a better level of protection against malpractice claims. Combining an asset protection trust with LLCs and Family Limited Partnerships can provide you with additional protection. Depending upon your assets, other asset protection vehicles such as Private Retirement Trusts may be an option.
Division of Business Assets: With the 2018 Tax Reform, physicians are limited or excluded from many of the income tax cuts. By dividing your business assets between the practice of medicine and medical equipment/office you may not only create better asset protection, you may also be able to meet the required income thresholds for bigger tax breaks. We work closely with CPAs to properly structure these agreements.
Disparity of Income Between Spouses: Often doctors are the breadwinners or sole source of income in the household. When the discrepancy of income between spouses is significant, several issues arise. These issues range from the desire to keep assets separate (prenuptial or postnuptial agreements) to the desire to replace income to care for your spouse and children should you pass away (life insurance). Read our article about why you’d want to name your trust as your life insurance beneficiary.
Estate Planning Attorney for Physicians
Certainly, there is no “one-size-fits-all” approach to estate planning. Even among doctors, the issues and concerns can vary greatly. However, we have worked closely with hundreds of doctors and understand the issues they face with estate planning. If you’d like to learn more about estate planning for doctors contact, John L. Wong, Orange County Estate Planning Attorney.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
