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
Most young physicians start their medical careers with a lot on their minds. The demands of their profession leave little time for physicians to concentrate on themselves or their future plans. Consequently, estate planning is usually one of the furthest things on their written or mental checklists of things to accomplish. They do not fully realize the effect of dying or becoming incapacitated with no written estate plan. If they fail to have a written estate plan, the state in which they are domiciled provides a default estate plan for them known as the laws of descent and distribution or as the laws of intestacy. By having a written estate plan, young physicians can control their property while they are alive; take care of themselves and their loved ones in the event of disability; give what they have to whomever they want, the way they want to, and when they want to; and save every last tax dollar, court cost and professional fee legally possible.
Mistake 1 Failing to Recognize Their Own Mortality
Some young physicians, after dealing day in and day out with the disability and the death and dying of their patients, start to lose sight of their own mortality. A constant concern of others and the placing of others’ health needs before their own have many young physicians putting any thoughts about their own mortality on the “back-burner.” Then again, some young physicians adopt the common misconception of young people in general, that, because of their youth, death or disability is only a remote possibility. The old saying “none of us are going to get out of this life alive” is easily forgotten.
Action Step Physicians need to recognize that death (and maybe disability) is something that will eventually happen to them and that they need to plan for these events.
Mistake 2 Failing to Estate Plan
When an individual dies without a written estate plan, he or she is said to have died intestate. When an individual dies with a written estate plan, he is said to have died testate. When one dies intestate, the state in which the decedent’s domicile is located has its own default estate plan, the laws of descent and distribution or the laws of intestacy. Each state’s legislature decides: (1) who should be considered an “heir” of the intestate individual, and (2) which “heirs” are entitled to receive which portions of the intestate’s assets. Heirs are therefore the default persons who receive an intestate individual’s assets.
On the other hand, when one dies testate, the written estate plan (i.e., a will, trust, life insurance policy, or retirement plan) controls. By having a written estate plan, an individual is expressing his or her legal right to disagree with the laws of descent and distribution or the laws of intestacy and is exercising his or her legal right to leave his or her various assets to the persons that he or she wants to name as beneficiaries.
Action Step Physicians should have a written estate plan so that they can express their desires to give what they have, to whom they want, the way they want, and when they want, instead of depending on the state’s default estate plan.
Mistake 3 Failing to Believe They Have Enough Assets to Do an Estate Plan
In the context of estate planning there are two categories of assets that individuals can own: titled assets and untitled assets. Titled assets are those for which a paper document is needed to prove ownership and a paper document is needed to transfer ownership. For example, real estate is a titled asset because a deed is needed to prove ownership and a deed is needed to transfer ownership. A checking account is a titled asset because an account with a financial institution is needed to prove ownership and a check is needed to transfer ownership from the account. Conversely, a watch, a set of golf clubs, or other tangibles are examples of untitled assets. With untitled assets, the cliché “possession is nine-tenths of the law” is applicable. This is because possession of an untitled asset is needed to prove ownership, and the voluntary transfer of its possession is all that is needed to transfer legal ownership.
An individual’s estate consists of all the assets, both titled and untitled, that he or she owns and possesses during lifetime and upon death. The size of an individual’s estate is irrelevant when it comes to designing and creating an estate plan that meets the definition of proper estate planning. This is true because the size of an individual’s estate may also include assets that his or her estate may acquire after death, such as life insurance proceeds or the proceeds from a lawsuit against a person or entity that may have been responsible for the wrongful death of the individual.
Action Step Physicians need to have a good understanding of what types of assets they own during their lifetime and what types of assets and the value of such assets their estates will own at their death.
Mistake 4 Failing to Fully Understand the Definition of Proper Estate Planning
The definition of proper estate planning encompasses all of a person’s estate planning hopes, fears, dreams, values, needs, and desires. It is the foundation, and each hope, fear, dream, value, need, and desire are the bricks. A proper estate planning definition builds a proper estate plan from the individual’s unique perspective. It is the prime directive of estate planning and should never be violated. The definition of estate planning is as follows:
I want to control my property while I am alive. I want to take care of my loved ones and me if I become disabled. I want to give what I have to whom I want, the way I want, and when I want. Furthermore, if I can, I want to save every last tax dollar, court cost, and professional fee legally possible.
Obviously, this definition is extremely subjective. If an estate plan ever fails to either fully meet or continue to fully meet any word, phrase, or sentence of an individual’s subjective opinion of the definition of proper estate planning, it will violate the prime directive, and the estate planning should be revoked or modified until the definition is fully achieved.
To review each part of the definition:
I want to control my property while I am alive. The key word is “control.” Any provision of a plan that takes control away from the person doing the estate planning violates the prime directive. Control should not be confused with ownership. One does not need to own an asset to control it. Ownership is what causes the value of an asset to be included in the value of one’s gross estate, for estate tax purposes. Ownership of an asset is what a judgment creditor can easily take away, but a judgment creditor cannot take control of an asset that is not owned. It is not unusual, in the design and creation of an estate plan, to give up ownership but not control, to legally avoid estate taxes or to legally protect assets from a judgment creditor.
I want to take care of my loved ones and me if I become disabled. A proper estate plan must include a disability plan for taking care of not only the individual in the event of a mental or total physical disability but also a plan for taking care of the person or persons that the individual was taking care of before becoming disabled. It is extremely important that a plan include written instructions that specifically spell out not only who is to be taken care of in the event of the disability of the individual but also how those individuals will receive that care.
I want to give what I have, to whom I want, the way I want, and when I want. Many lawyers refer to this part of the definition as the “golden rule of estate planning.” If you own or control the gold, you have the right to make the rules. Everyone has this right. When a state tells its citizens to whom they must leave a portion of their assets, through its forced heirship laws, it is not unusual for those citizens to transfer their assets to a trust that is governed by the laws of another state, to legally get around the forced heirship laws.
Furthermore, if I can, I want to save every last tax dollar, court cost, and professional fee, legally possible. Death taxes, probate court costs, and probate professional fees are optional expenses paid only by the estates of individuals who fail to create plans that can legally avoid these expenses. The living trust is the premier way of legally avoiding these expenses. While some estate planning professionals argue that a will can do just as well at saving estate taxes as a living trust, most wills are poor tools for saving estate taxes (see Mistake 6). Also, a will-based estate plan can never help to save every probate court cost and probate professional fee that is legally possible. It is impossible for a will to avoid probate. In fact, wills guarantee probate because a will is not valid as a title transfer substitution document until the testator dies and the will is admitted to probate by a probate judge. In other words, admitting a will to probate means that the will has been approved by a probate judge as a substitution for a title transfer document, such as a deed or bill of sale that a decedent could have signed while alive.
When a person dies owning titled assets that are titled in his or her name, there is a problem in that a probate court’s assistance will be needed to determine how to get title to a titled asset out of the deceased person’s name. Likewise, when a person becomes mentally disabled and owns titled assets that are titled in his or her name, there is a similar problem in that a probate court’s assistance will be needed to manage or transfer titled assets that are titled in the name of a person who is mentally disabled. Death probate and living probate (also known as guardianship or conservatorship) were established to solve both of these problems. The problem with the probate solution is that it is costly, time consuming, and a matter of public record. Furthermore, probate is a lawsuit that you file against yourself, with your own money, for the protection of creditors and disgruntled heirs. Probate also serves as a legal system that makes sure that the creditors of a decedent or of his or her estate get paid before any beneficiaries and heirs are distributed any assets and that disgruntled heirs get their day in court.
The definition of proper estate planning therefore mandates that the estate plan be designed to avoid probate. A properly designed and created living trust avoids both living and death probate because it owns the title to all of the trustmaker’s titled assets. If the individual becomes mentally disabled or dies, there are no assets titled in his or her name that will need the assistance of a probate court to manage or to transfer out of his or her name. Lawyers usually refer to a living trust that owns the title to all of the trustmaker’s titled assets as a fully funded living trust.
Action Step Physicians should plan their estates to meet their own personal definition of proper estate planning regardless of the present size of the estate. Physicians should plan their estates with the assistance of a qualified estate planning attorney, who fully understands the definition of proper estate planning through the use of fully funded living trusts.
Mistake 5 Failing to Carry Adequate Amounts of Permanent Life Insurance
Most young physicians, like most young people in general, fail to see the value of any type of life insurance program, let alone the value of a permanent program of life insurance. Young physicians need to look at themselves as if they are “legal money printing machines.” If the U.S. government allowed an individual to own a legal money printing press, that person would be wise to protect it and insure it because it might get stolen or be damaged or destroyed in a fire, storm, or other calamity. Since it makes sense to carry insurance coverage for an occurrence that might happen, it also makes sense to carry adequate amounts of insurance for an event that will definitely occur. At a minimum, a young physician should carry at least $1 million of term life insurance and plan to convert it to permanent life insurance. Life insurers report that they pay death claims on only about 2% of all term life insurance policies. There are three reasons for this low payment rate:
- The cost of the coverage eventually becomes so unaffordable that the policyholders drop the coverage;
- When the time period of the term coverage runs out or the temporary need for the term coverage is gone, the insureds drop the coverage (besides the fact that when the term coverage ends, the insureds will be older and possibly uninsurable), and
- The insureds will convert the term coverage to permanent coverage.
Since all physicians need a permanent plan of life insurance, it makes sense to buy such insurance when they are young and healthy and the premiums are relatively low and affordable.
Action Step Physicians should work with an estate planning attorney and a life insurance agent recommended by the attorney to acquire a permanent plan of life insurance that is coordinated with the estate plan created by the estate planning attorney.
Mistake 6 Failing to Coordinate All Assets Into a Unified Plan
Among titled assets, there are subcategories. The first subcategory involves assets titled only in one individual’s name or in more than one name, without rights of survivorship. These assets are clearly subject to the living and death probate process in the event of a mental disability or death. In the event of death, these assets will pass under the estate plan created under a will, or by intestacy if there is no will or if the will fails to distribute these assets.
A second subcategory of titled assets is survivorship assets. These assets usually do not avoid the living probate process, but usually do avoid the death probate process. As such, they will not pass under the estate plan of the will. These assets pass by operation of law to the named survivor and include such assets that are titled in joint names with rights of survivorship or in a single name with a payable-on-death designation.
A third subcategory of titled assets is beneficiary designation assets. These assets usually do not avoid the living probate process but usually do avoid the death probate process. As such, they do not pass under the estate plan of the will. These assets pass by operation of law to one or more named beneficiaries. These assets include life insurance and annuity policies and retirement plans, such as pensions, and profit-sharing plans and IRAs.
When an individual creates an estate plan by a will, especially a will that is designed with various testamentary trusts to manage assets for beneficiaries and/or to eliminate or reduce estate and inheritance transfer taxes, assets in the second and third subcategories will not become part of the plan under the will. If an estate plan under a will is intended to be an asset management and delivery vehicle and a death tax elimination or reduction vehicle, the will as an estate plan does not have enough asset fuel to reach the asset management and tax savings destination. An estate plan contained within a fully funded living trust does not suffer from this asset deprivation problem because when a living trust estate plan gets fully funded, the second subcategory survivorship assets are eliminated, and the third subcategory beneficiary designation assets get coordinated with the living trust estate plan.
Action Step Physicians should create fully funded living trust estate plans. Physicians who prefer estate plans through a will need to eliminate the survivorship aspect on all titled assets, even though these assets then have to pass through probate (this assures that these assets become part of the estate plan within the will) and will need to coordinate all beneficiary designation assets with the estate plan within the will. If a physician goes through all that trouble, he or she may as well have a fully funded living trust and avoid probate.
Mistake 7 Failing to Have the Physician’s Parents or Other Relatives Leave Their Share to a Judgment-Proof Trust
The trust laws of all 50 states permit the use of what is generally referred to as a spendthrift provision. A spendthrift provision within a trust provides that a beneficiary of the trust is prohibited from alienating his or her interest in the trust (such as by selling it or pledging it as collateral for a loan) and that creditors of a beneficiary are prohibited from invading the assets of the trust to satisfy their claims against the beneficiary. With the exception of five states as of the date of this writing (Alaska, Delaware, Nevada, Rhode Island, and Utah), the trust laws of the remaining 45 states disallow the protection of a spendthrift provision in regard to the interest reserved by the creator of the trust for his or her own benefit. This type of trust is usually referred to as a self-settled trust. However, when someone (such as a parent) creates a trust for the benefit of another person (such as a child), the spendthrift provision of the trust will protect the assets of the trust from the creditors of both the parent and the child. In many states, the protected beneficiary may even be one of the cotrustees of the trust. So long as the trust provides that there must always be at least one trustee who is not a beneficiary of the trust, the beneficiary trustee may even be given the power to appoint a new nonbeneficiary trustee and then remove the old nonbeneficiary trustee.
In addition to the benefits just described, a spendthrift provision may also protect the beneficiary’s interest in the trust assets from divorce, death taxes, and probate. Some of the design features of these asset-protected trusts are discussed further in Mistake 8.
Action Step Physicians should encourage their parents and other persons who want to leave them assets to leave the assets to them in a spendthrift trust. The spendthrift trust may be created by a parent or any other person for the benefit of the physician in various ways. The spendthrift trust may be designed as a separate living trust, as a remainder subtrust within the parent’s or other person’s own living trust, or as a testamentary trust created within the last will of a parent or other person.
Mistake 8 Giving or Leaving Assets Outright to Beneficiaries Instead of in Trust for Life
For the same reasons discussed in Mistake 7, a physician should never give assets to anyone or leave assets to anyone outright. Gifts and inheritances should always be made or left to an asset-protected spendthrift trust for the life of the beneficiary. Distributions of income and principal from the trust must be restricted to distributions for the benefit of the health, education, maintenance, and support of the beneficiary and/or persons supported by the beneficiary. Beneficiaries may be given the limited power to appoint their remaining interest in the trust when they die, in trust to persons of their own choosing. The beneficiary must be prohibited from exercising this limited power of appointment in favor of the beneficiary’s creditors, the beneficiary’s estate, or creditors of the beneficiary’s estate. This “in trust for life” design feature works well to ensure that family wealth is not lost to creditors, death taxes, and those who are not descendents.
Action Step Physicians should always design and create living trusts that give or leave assets to their loved ones in trust for life, with distributions restricted to the needs for health, education, support, and maintenance of the beneficiary and persons supported by the beneficiary.
Mistake 9 Treating Children Unequally
When physicians raise children, they usually treat each one as an individual. It is rare, however, to have children who are all equal in their needs, desires, abilities, ages, talents, and so forth. Nevertheless, many estate plans say something like this: “I leave my entire estate to my spouse, if my spouse survives me. Otherwise, share and share alike to my children.” If there is no surviving spouse, this form of disposition is not equal, especially if any of the children are minors or young adults and if the parents raised each child as an individual. With this type of dispositive plan, the older children usually profit at the expense of the younger children. There is nothing as unequal as the equal treatment of unequals.
Suppose a physician has three children: Alex, age 24 years; Barbara, age 16 years; and Clark, age 9 years. Alex has just finished his MBA at Harvard School of Business. Barbara has just finished her third year of high school, and Clark is entering the fourth grade. One summer night, a hit-and-run drunken driver kills the physician and his or her spouse. Mom’s and dad’s wills leave everything to the three children to be divided equally. Alex already has had four years of college and two years of graduate school paid for in full, and Alex is now free to make his life’s fortune with his one-third share. Barbara has to use her one-third share to get through her senior year of high school, plus four years of college. Clark has to use his one-third share to get himself through grade school, middle school, high school, and college. If the physician and his or her spouse had wanted to treat their unequal children equally they would have had a plan that kept all of their assets in one common trust, until the youngest child, Clark, attained the age of 23 years or graduated from college, whichever came first. The trustees would be allowed to use the funds of the trust for each child’s individual needs for health, education, maintenance, and support, just as if the physician and his or her spouse were still alive.
When Clark attains the age of 23 years or graduates from college, the remaining assets of the trust can be divided fairly into equal shares. In the meantime, while the common trust is being administered, the trustees could make advancements to the older children for such expenses as a first wedding, home, business, or professional practice. On division day, the trustees could offset the shares of the older children by the advancements made to them.
Action Step Physicians should use a common trust in their estate plans when planning for young children.
Mistake 10 Considering Estate Planning as an Event Rather Than an Ongoing Process
When most physicians visit a lawyer to have their wills created, they view it as a completed process. They sign the wills, bring the originals or copies home, stuff them in a file cabinet or a safe deposit box, and forget about it. This is usually because the will planning event is not very joyous. Living trust planning, on the other hand, can be much more enjoyable. The living trust planning process does not and should not center on death planning but rather focus on planning for the rest of one’s life while living in health, in disability, and then lastly, planning for death. The living trust planning process involves not only the design and creation of a living plan, but also the transfer and future acquisition of assets to or in the name of the living trust. This process requires periodic review, monitoring, and updating. Just as physicians have always recommended annual physical exams to protect one’s heath, living trust estate planners recommend a periodic review to protect one’s wealth. Over time, the law, the physician’s needs, desires, and wealth will change, and as such, the living trust plan also needs to be changed.
Action Step Physicians should view estate planning as a lifelong process that needs to change as the process of life changes.
With a fully funded living trust estate plan, young physicians are able to control their property while they are alive, take care of themselves and their loved ones in the event of disability, give what they have to whom they want the way they want and when they want, and save every last tax dollar, court cost, and professional fee legally possible.
- R. Esperti and R. Peterson, The Living Trust Revolution (Viking Penguin Press 1994)
- R. Esperti and R. Peterson, Loving Trust (Viking Penguin Press 1988 and 1992)
Peter J. Parenti, JD, LLM
Peer reviewed by:
Malia Ann Ploetz, Esq.