Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)
Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them
Wills are the key instrument to pass property on death in many, if not most, estates, and they should be used at least as a backup even if a physician also uses a living trust. Proper use of a will can provide certainty and security for the family of the physician, and the failure to take full advantage of the protections a will can provide may prove costly and disruptive to the physician’s family at a very difficult time.
Mistake 1 Not Having a Will
Every physician needs a will. It may be the only dispositive instrument needed in some cases. In other cases, it will be a backup to a living trust “pouring over” assets into the trust, where the assets may not have been placed in trust during the physician’s lifetime, either intentionally or unintentionally. It can name guardians for children and specify who is to control the property and the terms on which property is to pass. It can be simple or it can be complex as the physician’s needs, desires, and circumstances dictate. Some physicians, as with other people, shy away from wills because wills are a reminder of mortality, because they are concerned about the probate process, or because of a mistaken belief that a will is not needed if the physician has a trust or power of attorney or if the physician has orally stated his or her intentions to family members. Unless the physician is willing to risk allowing the state legislature to dictate through the intestate succession statutes where his or her property is to go on death, a will is a necessary component of every estate plan. In many states, the probate process is not overly burdensome, but even where a living trust is used to avoid probate, a backup pour-over will is a safety net that also needs to be used. Probate has certain benefits, including a generally very short period to bring claims. This short claim period can protect the physician’s family against potential malpractice and other claims in a way not always achievable with a revocable trust alone.
Action Step Physicians should have an experienced estate planning lawyer help them write a will and advise them to take other action as appropriate.
Mistake 2 Not Sufficiently Considering Who Should Serve as Personal Representative or Trustee
A personal representative, sometimes called an executor or executrix, may be named in a will as the person who will see that the terms of the will are carried out and that the physician’s estate is properly administered: assets collected, debts paid, tax returns filed, and estate and inheritance taxes paid, and property distributed. The job may last from about six months for a simple estate to maybe three years for a complex estate. Trustees, on the other hand, may be required to administer a trust for many years, perhaps even whole lifetimes. Both a personal representative and a trustee may be named in a will and need not be the same person. However, both jobs require similar attributes and abilities: absolute honor and integrity, the ability to fairly and even-handedly deal with family members or other beneficiaries, the willingness to abide by the terms of the governing documents, the ability to deal collegially with any co-personal representative or trustee, and prudence in dealing with financial matters. All these attributes and abilities must be present; the failure of even one can be disastrous. Thus, selecting a fiduciary, personal representative, or trustee deserves a good deal of thought, but the decision is too often made quickly and so as not to offend someone who may feel honored by being named as a fiduciary. The fiduciary will have a great deal of power in the physician’s family and needs to be able to exercise the power wisely and well. Physicians should bear in mind that family members may otherwise be fine people yet not possess all the necessary attributes and abilities. Professional trustees and personal representatives, such as bank trust departments and trust companies, deserve serious consideration as a sole fiduciary or as a co-fiduciary with an appropriate family member. The cost of a professional fiduciary is always less than the cost of the litigation that will result if the wrong family member or members are chosen.
Action Step Physicians should carefully consider who should be the financial fiduciaries and whether it would be best to use a bank or trust company as the sole fiduciary or as a co-fiduciary.
Mistake 3 Failing to Name an Appropriate Guardian
Wills can be, and generally are, used to name guardians for minor children, disabled adult children, or disabled spouses. Guardians are responsible for the personal care of the ward and need not be the same person as the personal representative or trustee. In fact, some physicians are well advised to keep the guardian different from the fiduciary who has the key financial responsibilities in order to provide a check-and-balance system. The guardian must be someone with good people and personal care skills and also able to work well with the financial fiduciary. Selecting a guardian with appropriate skills and values is often the most difficult choice that must be made in writing a will.
Action Step Physicians should carefully consider who should be the guardian for minor or disabled persons and name such a person in their will. If possible, physicians should also name a backup in case the first named person is unable to serve.
Mistake 4 Failing to Consider Staggered Distributions
A gift to someone under a will need not be immediate; rather, it can be staggered over time. Such a distribution scheme may be something like: “one third at age 22, one half of the remaining amount at age 25, all the remaining amount at age 27.” For a minor, or for a young adult, when substantial assets are at stake, such staggered distribution dates are often far better than immediate distribution at the physician’s death or when the beneficiary reaches age 21. During the period before final distribution, the property can be held in trust with a trustee who has discretion to distribute income or principal as needed between the scheduled distribution dates. The failure to use such staggered distribution dates has resulted in a great deal of financial and human waste where significant assets become the property of immature and ill-prepared beneficiaries. The assets may be lost to poor financial management, be used in ways harmful to the beneficiary, or both.
Action Step Physicians should consider the use of appropriately staggered distribution dates, taking into account the age and maturity of the beneficiary and the size of the gift to the beneficiary.
Mistake 5 Failing to Consider the Use of “Pot” or “Sprinkling” Trusts
Far too often, physicians divide their assets equally among their children before the youngest children have had the opportunity to enjoy the benefits the older children have had. However, until the youngest children have had the same opportunity to obtain a basic education and training, “equal” is not truly equal or fair. Consider the case of four children: Two have graduated from college, one is in college, and one is in high school at the time the physician parent dies. An “equal” division at the time of death results in the oldest receiving a full education and a larger inheritance. For many families it is better to hold assets in a single “pot” to be “sprinkled” out as needed (e.g., for education or medical needs) until the youngest child has reached an age (say, 22), when he or she will have had the opportunity to use the sprinkling benefits to achieve the same basic education as the older children. At that time, an equal division can be made, with immediate or staggered distributions as appropriate.
Action Step Physicians should consider the use of a pot trust until the youngest child reaches an appropriate age. They should be sure to provide for an alternative disposition if the child fails to survive to the specified age.
Mistake 6 Not Using Trusts Under the Will Where Appropriate
Not all trusts are “living trusts” set up while the trustor is alive; trusts can also be set up after death pursuant to a will. Trusts set up by will are called “testamentary trusts.” They may be used for tax planning the same as living trusts can be, for example, by establishing marital deduction trusts for surviving spouses and family trusts for spouses and children designed to take advantage of the unified credit against the estate tax. They may also be used to provide benefits for minors or disabled persons. Where there are minor children, a trust should almost always be used to help the minor beneficiary at least until he or she reaches the age of majority, or some other appropriate later age. It is a big mistake to leave assets to a minor or disabled person outside of trust because then there is no one to manage the property for the minor or disabled person until a court proceeding is brought to name a conservator or similar fiduciary for the child or disabled person. Such a court proceeding can be eliminated by the use of an appropriate testamentary trust for the minor or disabled person. Further, trusts can be tailored to fit the circumstances, while conservatorships tend to be one size fits all.
Action Step Physicians should consider whether the will should contain trust provisions, particularly where there are minor or disabled beneficiaries or long-term restrictions are desirable.
Mistake 7 Failing to Take Both Sides of the Family into Account
Physicians ordinarily consider how property is to pass to their surviving spouse, children, and further descendants. Too often, however, they leave it at that and fail to specify who is to receive property in the event that no immediate family survives. This throws the matter to the intestacy laws of the state, and in many states, leads to the problem of the “longest liver.” The problem is that the side of the family of the husband or the wife, whichever lives longer, is likely to take all the property where no immediate family survives, while the side of the family of the spouse to die first takes nothing. Many physicians find that such an approach is not fair or appropriate in their circumstances. To avoid the problem, the will needs to specify a division between the sides of the family or some other dispositive scheme fitting to the circumstances. It is generally not a good idea to leave the matter to the intestacy laws of the state.
Action Step Physicians should consider what will happen to property on the death of the last spouse to die where collateral relatives (other than direct descendants) may receive benefits. They should also consider whether the families of both spouses are appropriately treated.
Mistake 8 Failing to Name an Ultimate Charitable Beneficiary
After taking care of a surviving spouse, surviving children and descendants, and other collateral relatives or friends, physicians too often stop. In that event, the physician’s will does not provide for disposition if everyone he or she cares for predeceases. This throws the matter to the intestacy laws of the state. Those laws will typically pass the property to relatives to a certain degree of consanguinity and then, if there are none, escheat the property to the state under its unclaimed property law. By no more than a sentence or two, the physician’s will could provide that if everyone he or she cares about is dead, the property is to pass to one or more charities. This may in large families be a long shot, but the situation does occur regularly even if rarely. The property would generally be better used by a charity chosen by the physician than by unknown or unsatisfactory relatives or the state itself.
Action Step Physicians should name one or more charities as ultimate beneficiaries in case all those they care about fail to survive them.
Mistake 9 Failing to Take Into Account Transfer Restrictions
Property may be restricted in one way or another and if so restricted could adversely affect an otherwise well-laid plan under a physician’s will. The areas of greatest concern are restrictions imposed by divorce decrees, business buy-sell agreements, trusts created by others, and retirement plans. The physician could easily assume that particular assets will pass to people as the physician desires pursuant to the physician’s will, only to have the gifts voided or unacceptably changed after death when it is too late to try to cure the problem or at least to take it into account in planning.
Action Step Physicians should review divorce decrees, business buy-sell agreements, prenuptial agreements, and similar documents that may restrict their assets or their disposition and bring them to the attention of their estate planning attorney.
Mistake 10 Assuming That the Will Passes Everything
Some physicians believe that having a will finishes the estate planning process. Although a will is a necessary component of any estate plan, it is not necessarily the only dispositive instrument. There are many ways to pass property outside of the use of a will, and a will does not change the disposition made under other dispositive instruments. Thus, a will must be carefully coordinated with other dispositions. Other ways property is transferred include trusts; joint tenancies in real estate, or in bank, brokerage, or other financial accounts; life insurance and annuity beneficiary designations; and retirement plan and IRA beneficiary designations. Also, spouses, but only spouses, typically have rights under state law to elect against wills if the will does not provide a certain minimum level of benefits for them. All these sorts of matters must be disclosed by the physician to his or her estate planning attorney so they can be properly taken into account or modified where possible.
Action Step When preparing a will, physicians should take into account all other forms of transfers, so they may be appropriately coordinated with their will.
Physicians who take the recommended steps will be able to pass their property in the way best suited to their family situation.
About the Author
Langdon T. Owen, Jr., Esq.
Peer reviewed by:
John Parsons, Esq.