Preparing for the future is the key aim of financial planning. Estate planning is a critical part of this, helping to protect your family, wealth, and legacy.
We understand that as a physician, your time is precious. Finding time to address your family’s immediate needs is challenging enough. However, dedicating some time to your estate planning is well worth it. Estate planning is especially critical for physicians, with the high taxes and liability concerns they face. To help simplify the process, we’ll explain the essential elements of an estate plan. We also provide a checklist you can use to get started.
What is Estate Planning?
Estate planning is a plan for managing and distributing your assets in the event of your incapacity or death.
Why Is Estate Planning Important for Physicians in California?
Here are some of the main reasons why you should have an estate plan:
- The default plan may not be good
If you do not have an intentional plan in place, your state’s probate process becomes the plan. In California, the probate process is costly and lengthy, public, and inefficient. And things may not go according to your wishes.
- High Income Taxes: California has the highest income tax rate in the country for high earners, which Physicians typically are. Physicians may have limited opportunities to minimize taxes on a year-by-year basis. Their focus must be on preserving more of their wealth over the long term. This planning often overlaps with estate planning.
- Estate Taxes: California doesn’t tax estates or inheritances. However, physicians may become subject to federal estate taxes as their wealth increases over time. Doctors must consider how they can proactively preserve more wealth to pass on to survivors and heirs.
- Wealth Transfer Challenges: Certain types of assets present specific challenges. For instance, heirs who inherit retirement accounts or real estate could be exposed to high income or capital gain taxes.
These are areas physicians can plan for today to help accumulate, preserve, and transfer more wealth later.
What are Estate Planning Needs for Physicians in California?
Every estate plan includes foundational elements, such as a will. However, physicians must also consider additional components or strategies, such as:
- Asset Protection: Physicians may be vulnerable to legal liability. This can be a significant threat to their wealth. Advanced estate planning strategies can help safeguard their wealth.
- Practice Considerations: If you own a practice, consider steps such as succession or partnership planning. These can help ensure continuity and an efficient transition of your business in the case of your incapacity, death, or retirement.
- Practice-based Risk: As a physician, you are inherently vulnerable to malpractice claims and other practice related liabilities. Consider strategies to help protect yourself and keep your personal assets separate from legal action.
- Insurance Planning: Your profession relies on your physical and mental acuity. Consider additional insurance coverage for injury, illness, or incapacity.
What Are the Key Components of an Estate Plan?
As you begin building your estate plan, consider these essential items:
- Wills outline how to distribute your assets to beneficiaries after your death. If you own a practice, it may also include terms for ownership transition and continuity purposes. If you don’t have a will, your assets and heirs will be subject to probate laws in your state.
- Trusts are legal agreements that help protect your assets and potentially minimize taxes. These are particularly relevant to physicians in California. They also bypass the probate process. This can save time and money for your heirs while maintaining the privacy of your estate’s details. Common types of trusts you may consider include:
- Revocable Living Trusts– these allow you to control your assets while living and pass them on upon your death. They do this by naming a trustee to manage your assets if you become incapacitated. Revocable trusts are very flexible; however, they typically do not provide asset protection. Assets in these trusts are still subject to taxes and personal liability if you face legal action.
- Irrevocable Trusts can help protect you from personal liability in the case of a lawsuit or debt collection. They also can help reduce taxes. However, making changes is difficult, and you will not be able to manage or access the assets. They should be established with the help of an expert.
- Special Needs Trusts help distribute assets to dependents with disabilities. They are designed to preserve essential government benefits, like Social Security and Medi-Cal (California’s Medicaid program.) With strict compliance rules, consulting an expert knowledgeable about these trusts is critical.
- Powers of Attorney (POAs) are essential to help manage key areas and decisions if you become incapacitated. It’s important to choose your POA wisely. Specific POAs you can consider include:
- Financial Powers of Attorney designate a trusted person to manage your financial affairs if you cannot. Things like paying your bills, managing your investments, and overseeing your medical practice.
- Healthcare Powers of Attorney allow an authorized person to make medical decisions on your behalf if you can’t. You can specify your preferences for things like end-of-life, organ donation, resuscitation, and long-term care. Note this may not be the same person as your financial POA and vice versa.
- Life Insurance provides peace of mind to you and your loved ones. It can maintain your family’s security if your income is lost. It can be a valuable tool to help heirs pay estate taxes and other expenses upon your death. It can also fund ownership agreements if you own a practice,
- Tax Strategy may be considered as part of your estate plan, if appropriate. For example, you may include your charitable giving wishes or establishing trust to minimize tax liability.
Estate Planning Checklist for Physicians in California
When building your estate plan, ensure you complete these key steps:
- Consult Professionals: Partner with a trusted financial advisor and attorney to ensure you cover all aspects.
- Draft essential documents: Create wills, POAs, healthcare directives, and trusts. You must also designate an executor, such as a trusted person or attorney, to manage your estate.
- Designate Guardians for Children: Also name backups if you can no longer care for them.
- Authorize Conservators for Children’s Finances: A conservator is the person you want to manage finances and make decisions for your children. Note this may not be the same as the guardian you designate.
- Organize Important Documents and Details: Ensure critical and sensitive information is stored in a secure location and accessible by trusted designees. This includes account credentials, passwords, insurance policies, list of assets, birth/marriage/divorce certificates, property titles, and important contacts.
- Name Beneficiaries: Review and list beneficiaries on your accounts and insurance policies. Ensure you update this information if changes occur.
- Assess Your Insurance Needs: Insurance is an effective tool to cover key risks such as disability, physical or mental injuries or illnesses. It is also needed for property-based risks. Home and auto for accidents and weather, and liability risk from accidents or property situations.
- Monitor and Update Your Estate Plan: Ensure you’re making necessary changes as life events unfold. This can include marriage, divorce, birth, or death. Changes may be needed if your or your dependents’ insurance needs, assets, or liabilities change.
Take Control of Your Future: Partner with Blankinship & Foster to Create Your Estate Plan
With the right advisor by your side, you can effectively manage your financial future while focusing on your primary mission of patient care. Blankinship & Foster team members are fiduciary financial advisors with the expertise to help doctors make smart financial and investment decisions. Whether you need estate planning for physicians, tax strategies, or are looking to retire, we’re here to support you as you navigate significant life events. Contact us today to schedule a free consultation and learn how we can help you achieve financial peace of mind.