Is It Important for Physicians to Have an Estate Plan?

When the newly minted physician completes their residency and begins practicing, the last thing on their minds is getting their estate plan in order. Instead, they should make it a priority, according to a recent article titled “Physicians, get your estate in order or the court will do it instead” from Medical Economics. Physicians accumulate wealth to a greater degree and faster than most people. They are also in a profession with a higher likelihood of being sued than most. They need an estate plan.

Estate planning does more than distribute assets after death. It is also asset protection. An estate planning attorney helps physicians, dentists and other medical professionals protect their assets and their legacies.

Basic estate planning documents include a last will and testament, financial power of attorney and a medical power of attorney. However, the physician’s estate is complex and requires an attorney with experience in asset protection and business succession.

During the process of creating an estate plan, the physician will need to determine who they would want to serve as a guardian, if there are minor children and what they would want to occur if all of their beneficiaries were to predecease them. A list should be drafted with all assets, debts, including medical school loans, life insurance documents and retirement or pension accounts, including the names of beneficiaries.

The will is the center of the estate plan. It will require naming a person, typically a spouse, to be the executor: the person in charge of administering the estate. If the physician is not married, a trusted relative or friend can be named. There should also be a second person named, in case the first is unable to serve.

If the physician owns their practice, the estate plan should be augmented with a business succession plan. The will’s executor may need to oversee decisions regarding the sale of the practice. A trusted friend with no business acumen or knowledge of how a medical practice works may not be the best executor. These are all important considerations. Special considerations apply when the “business” is a professional practice, so do not make any moves without expert estate planning assistance.

The will only controls assets in the individual’s name. Assets owned jointly, or those with a beneficiary designation, are not governed by the will.

Without a will, the entire estate may need to go through probate, which is a lengthy and expensive process. For one family, their father’s lack of a will and secrecy took 18 months and cost $30,000 in legal fees for the estate to be settled.

Trusts are an option for protecting assets. By placing assets in trust, they are protected from creditors and provide control in complex family situations. The goal is to create a trust and fund it before any legal actions occur. Transferring assets after a lawsuit has begun or after a creditor has attached an asset could lead to a physician being charged with fraudulent conveyance—where assets are transferred for the sole purpose of avoiding paying creditors.

Estate planning is never a one-and-done event. If a doctor starts a family limited partnership to transfer wealth to the next generation but neglects to properly maintain the partnership, some or all of the funds may be vulnerable.

An estate plan needs to be reviewed every few years and certainly every time a major life event occurs, including marriage, divorce, birth, death, relocation, or a significant change in wealth.

When consulting with an experienced estate planning attorney, a doctor should ask about the potential benefits of revocable living trust planning to avoid probate, maintain privacy and streamline the administration of the estate upon incapacity or at death.

Reference: Medical Economics (Feb. 22, 2022) “Physicians, get your estate in order or the court will do it instead”

Succession Planning for Farm Transition and Estate Planning

If you think it’s bad that 60% of farmers don’t have a will, here’s what’s even worse: 89% don’t have a farm transfer plan, as reported in the recent article “10 Farm Transition and Estate Planning Mistakes from Farm Journal’s Pork Business. Here are the ten most commonly made mistakes farmers make. Substitute the word “family-owned business” for farm and the problems created are identical.

Procrastination. Just as production methods have to be updated, so does estate planning. People wait until the perfect time to create the perfect plan, but life doesn’t work that way. Having a plan of some kind is better than none at all. If you die with no plan, your family gets to clean up the mess.

Failing to plan for substitute decision-making and health care directives. Everyone should have power of attorney and health care directive planning. A business or farm that requires your day-in-day-out supervision and decision making could die with you. Name a power of attorney, name an alternate POA and have every detail of operations spelled out. You can have a different person to act as your agent for running the farm and another to make health care decisions, or the same person can take on these responsibilities. Consult with an estate planning attorney to be sure your documents reflect your wishes and speak with family members.

Failing to communicate, early and often. There’s no room for secrecy, if you want your farm or family business to transfer successfully to the next generation. Schedule family meetings on a regular basis, establish agendas, take minutes and consider having an outsider serve as a meeting facilitator.

Treating everyone equally does not fit every situation. If some family members work and live on the farm and others work and live elsewhere, their roles in the future of the farm will be different. An estate planning attorney familiar with farm families will be able to give you suggestions on how to address this.

Not inventorying assets and liabilities. Real property includes land, buildings, fencing, livestock, equipment and bank accounts. Succession planning requires a complete inventory and valuation of all assets. Check on how property is titled to be sure land you intend to leave to children is not owned by someone else. Don’t neglect liabilities. When you pass down the farm, will your children also inherit debt? Everyone needs to know what is owned and what is owed.

Making decisions based on incorrect information. If you aren’t familiar with your state’s estate tax laws, you might be handing down a different sized estate than you think. Here’s an example: in Iowa, there is no inheritance tax due on shares left to a surviving spouse, lineal descendants or charitable, religious, or educational institutions. If you live in Iowa, do you have an estate plan that takes this into consideration? Do you know what taxes will be owed, and how they will be paid?

Lack of liquidity. Death is expensive. Cash may be needed to keep the business going between the date of death and the settling of the estate. It is also important to consider who will pay for the funeral, and how? Life insurance is one option.

Disorganization. Making your loved ones go through a post-mortem scavenger hunt is unkind. Business records should be well-organized. Tell the appropriate people where important records can be found. Walk them through everything, including online accounts. Consider using an old-fashioned three-ring binder system. In times of great stress, organization is appreciated.

No team of professionals to provide experience and expertise. The saying “it takes a village” applies to estate planning and farm succession. An accountant, estate planning attorney and financial advisor will more than pay for their services. Without them, your family may be left guessing about the future of the farm and the family.

Thinking your plan is done at any point in time. Like estate planning, succession planning is never really finished. Laws change, relationships change and family farms go through changes. An estate plan is not a one-and-done event. It needs to be reviewed and refreshed every few years.

Reference: Farm Journal’s Pork Business (June 28, 2021) “10 Farm Transition and Estate Planning Mistakes

Can I Be Sure My Estate Plan Works?

Most estate planning attorneys will tell you that the same mistakes recur with frequency whether the estate is worth a billion dollars, several hundred thousand dollars or anywhere in-between. Of course, the biggest mistake of all, reports the article “7 Steps To Ensure A Successful Estate Plan” from Forbes, is not having an estate plan at all. Having an outdated estate plan can be just as bad.

Everyone should have a complete estate plan and it should be reviewed every few years and revised as life and laws change. The estate plan should include a will, trusts, power of attorney, advance medical directives and other planning elements. However, there’s more to an estate plan success than documents.

Education and communication. If the next generation isn’t prepared for the contents of the estate plan, it’s going to be challenging for them to carry out your wishes. They may mismanage assets, or even lose them to scammers. At any age and stage, people who are not ready for an inheritance may easily go through their entire inheritance and find themselves at a loss for what happened.

One solution is to leave the estate in trusts and limit access. A better solution is to ensure your heirs are prepared and understand how to handle money. Children benefit from their parent’s teaching them about managing, accumulating and donating money.

Prepare for family conflict. Sometimes tensions are out in the open, but other times they hide below the surface until one or both parents die, or learning the details of the estate plan leads to family conflicts. Thinking the children will work things out on their own is asking for trouble. Siblings with very different economic situations or lifestyles respond differently to their parent’s estate plan. Don’t ignore these potential problems. Talk with your estate planning attorney. It’s likely that your estate planning attorney has seen just about every situation and will have good ideas for preserving family harmony.

Plan ahead for gifting. Gifting is often a large part of an estate plan. Gifts are a good way to get the next generation comfortable with inherited wealth. However, don’t just write checks. Create and execute a strategy. Know that cash gifts are definitely spent faster, while property gifts tend to be kept and held for the future.

Make sure you understand the plan. You’d be surprised how many smart and sophisticated people don’t actually understand their own estate plans. Meet with your estate planning attorney on a regular basis and ask questions – and keep asking until you understand everything. Take notes during your meeting, so you can go back and review to see if you have any other questions.

Get organized and prepare. The best estate plan in the world is at risk, if the executor doesn’t know where documents are located. Make sure the information is written down and the person you chose to serve as executor knows where things are. We should all be simplifying our lives and records as we age, both to make our lives easier as the inevitable cognitive decline occurs and to make the settlement process faster.

Create a business succession plan. Most business owners fail to do this. It makes it all but impossible for the next generation to keep the business going. The value of a small business declines rapidly and sometimes evaporates, when there is no plan for succession. If the intent is to sell or pass the business on, a succession plan needs to be prepared, long before it is needed.

Fund trusts. The most common mistake in estate planning is creating trusts and then failing to fund them. If the trust is created but assets are not retitled, the estate plan will fail. Real estate, vehicles, boats and financial accounts that are intended to be put into the trust need to be retitled.

Reference: Forbes (May 27, 2021) “7 Steps To Ensure A Successful Estate Plan”

What Is Family Business Succession Planning?

Many family-owned businesses have had to scramble to maintain ownership, when owners or heirs were struck by COVID-19. Lacking a succession plan may have led to disastrous results, or at best, less than optimal corporate structures and large tax bills. This difficult lesson is a wake-up call, says the article “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’” from Bloomberg Tax.

Another factor putting family-owned businesses at risk is divorce. Contemplating the best way to transfer ownership to the next generation requires a candid examination of family dynamics and acknowledgment of outsiders (i.e., in-laws) and the possibility of divorce.

Before documents can be created, a number of issues need to be discussed:

Transfer timing. When will the ownership of the business transfer to the next generation? There are some who use life-events as prompts: births, marriages and/or the death of the owners.

How will the transfer take place? Corporate structures and estate planning tools provide many options limited only by the tax liabilities and wishes of the family. Be wary, since each decision for the structure may have unintended consequences. Short and long-term strategic planning is needed.

To whom will the business be transferred? Who will receive an ownership interest and what will be the rights of ownership? Will there be different levels of ownership, and will those levels depend upon the level of activity in the business? Will percentages be used, or shares, or another form?

In drafting a succession plan, it is wise to assume that the future owners will either marry or divorce—perhaps multiple times. The succession plan should address these issues to prevent an ex-spouse from becoming a shareholder, whose interest in the business needs to be bought out.

The operating agreement/partnership agreement should require all future owners to enter into a prenuptial agreement before marriage specifically excluding their interest in the family business from being distributed, valued, or deemed marital property subject to distribution, if there is a divorce.

An owner may even exact a penalty for a subsequent owner who fails to enter into a prenup prior to a marriage. The same corporate document should specifically bar an owner’s spouse from receiving an ownership interest under any circumstance.

A prenup is intended to remove the future value of the owner’s interest from the marital asset pool. This typically requires the owner to buy-out the future spouse’s legal claim to future value. This could be a costly issue, since the value of the future ownership interest cannot be predicted at the time of the marriage.

Many different strategies can be used to develop a succession plan that ideally works alongside the business owner’s estate plan. These are used to ensure that the business remains in the family and the family interests are protected.

Reference: Bloomberg Tax (April 5,2021) “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’”

What You Should Never, Ever, Include in Your Will

A last will and testament is a straightforward estate planning tool, used to determine the beneficiaries of your assets when you die, and, if you have minor children, nominating a guardian who will raise your children. Wills can be very specific but can’t enforce all of your wishes. For example, if you want to leave your niece your car, but only if she uses it to attend college classes, there won’t be a way to enforce those terms in a will, says the article “Things you should never put in your will” from MSN Money.

If you have certain terms you want met by beneficiaries, your best bet is to use a trust, where you can state the terms under which your beneficiaries will receive distributions or assets.

Leaving things out of your will can actually benefit your heirs, because in most cases, they will get their inheritance faster. Here’s why: when you die, your will must be validated in a court of law before any property is distributed. The process, called probate, takes a certain amount of time, and if there are issues, it might be delayed. If someone challenges the will, it can take even longer.

However, property that is in a trust or in payable-on-death (POD) titled accounts pass directly to your beneficiaries outside of a will.

Don’t put any property or assets in a will that you don’t own outright. If you own any property jointly, upon your death the other owner will become the sole owner. This is usually done by married couples in community property states.

A trust may be the solution for more control. When you put assets in a trust, title is held by the trust. Property that is titled as owned by the trust becomes subject to the rules of the trust and is completely separate from the will. Since the trust operates independently, it is very important to make sure the property you want to be held by the trust is titled properly and to not include anything in your will that is owned by the trust.

Certain assets are paid out to beneficiaries because they feature a beneficiary designation. They also should not be mentioned in the will. You should check to ensure that your beneficiary designations are up to date every few years, so the right people will own these assets upon your death.

Here are a few accounts that are typically passed through beneficiary designations:

  • Bank accounts
  • Investments and brokerage accounts
  • Life insurance polices
  • Retirement accounts and pension plans.

Another way to pass property outside of the will, is to own it jointly. If you and a sibling co-own stocks in a jointly owned brokerage account and you die, your sibling will continue to own the account and its investments. This is known as joint tenancy with rights of survivorship.

Business interests can pass through a will, but that is not your best option. An estate planning attorney can help you create a succession plan that will take the business out of your personal estate and create a far more efficient way to pass the business along to family members, if that is your intent. If a partner or other owners will be taking on your share of the business after death, an estate planning attorney can be instrumental in creating that plan.

Funeral instructions don’t belong in a will. Family members may not get to see that information until long after the funeral. You may want to create a letter of instruction, a less formal document that can be used to relay these details.

Your account numbers, including passwords and usernames for online accounts, do not belong in a will. Remember a will becomes a public document, so anything you don’t want the general public to know after you have passed should not be in your will.

Reference: MSN Money (Dec. 8, 2020) “Things you should never put in your will”

Avoid Estate Planning Mistakes

Estate planning should be a business-like process, where people evaluate the assets they have accumulated over time and make clear decisions about how to leave their assets and legacy to those they love. The reality, as described in the article “5 Unfortunate Estate Planning Myths You Probably Believe,” from Kiplinger, is not so straightforward. Emotions take over, as does a feeling that time is running short, which is sometimes the case.

Reactive decisions rarely work as well in the short and long term as decisions made based on strategies that are set in place over time. Here are some of the most common mistakes that people make, when creating an estate plan or revising one in response to life’s inevitable changes.

Estate plans are all about tax planning. Strategies to minimize taxes are part of estate planning, but they should not be the primary focus. Since the federal exemption is $11.58 million for 2020, and fewer than 3% of all taxpayers need to worry about paying a federal estate tax, there are other considerations to prioritize. If there is a family business, for example, what will happen to the business, especially if the children have no interest in keeping it? In this case, succession or exit planning needs to be a bigger part of the estate plan.

The children should get everything. This is a frequent response, but not always right. You may want to leave your descendants most of your estate, but ask yourself, could your lifetime’s work be put to use in another way? You don’t need to rush to an automatic answer. Give consideration to what you’d like your legacy to be. It may not only be enriching your children and grandchildren’s lives.

My children are very different, but it’s only fair that I leave equal amounts to all of them. Treating your children equally in your estate plan is a lot like treating them exactly the same way throughout their lives. One child may be self-motivated and need no academic help, while another needs tutoring just to maintain average grades. Another may be ready to step into your shoes at the family business, with great management and finance skills, but her sister wants nothing to do with the business. The same family includes offspring with different dreams, hopes, skills and abilities. Leaving everyone an equal share doesn’t always work.

Having a trust takes care of everything. Well, not exactly. In fact, if you neglect to fund a trust, your family may have a mess to deal with. A sizable estate may need revocable or irrevocable trusts, but an estate plan is more complicated than trust or no trust. First, when an asset is placed into an irrevocable trust, the grantor loses control of the asset and the trustee is in control. The trustee has a fiduciary duty to the beneficiaries, not the grantor of the trust. The beneficiaries include the current and future beneficiaries, so the trustee may have to answer to more than one generation of beneficiaries. Problems can arise when one family member has been named a trustee and their siblings are beneficiaries. Creating that dynamic among family members can create a legacy of distrust and jealousy.

My estate advisors are all working well with each other and looking out for me. In a perfect world, this would be true, but it doesn’t always happen. You have to take a proactive stance, contacting everyone and making sure they understand that you want them to cooperate and act as a team. With clear direction from you, your professional advisors will be able to achieve your goals.

Reference: Kiplinger (Sep. 17, 2020) “5 Unfortunate Estate Planning Myths You Probably Believe”

What Do Farmers Need to Create an Estate Plan?

Planning for the end of life is intimidating for everyone, but when the plan includes a family business like a farm or ranch, things can get even more challenging. That’s why estate planning, that is, planning for the distribution of assets once you die, is especially important for aging farmers. The details are in the article “How farmers can start an estate plan” from Bangor Daily News.

Death and dying are not easy to talk about, but these conversations are necessary, especially if the family wants to continue as a farming or ranching family. For aging farmers and their families, here are a few tips to demystify the planning process and help get things started.

What are your goals? Think of estate planning as succession planning. This is about making decisions about retirement and handing down a business to the next generation. If you had a regular job, you’d have far less to consider. However, succession planning for a family business owner involves more resources and more people. Having a clear set of goals, makes that transition easier. Add to that list: your fears. What don’t you want to happen? If your children don’t know how much you want them to keep the farm in the family, they may take other actions after you die. Share your goals, hopes and yes, worst case scenarios.

Build a team of professionals. The number of moving pieces in a family farm means you’re going to need a strong team. That includes an estate planning attorney who has worked with other farm families, an accountant, a financial advisor and an insurance professional. Depending on your family’s communication skills, you might even consider bringing a counselor on board.

List out your assets. Don’t assume that anyone in the family knows the value of your assets. That includes deeds to land, titles of ownership for vehicles, information about any property mortgages or loans or leases. If you are leasing land to others, you’ll need the lease agreements as well as property titles. If your lease agreements are based on a handshake, your attorney may request that you formalize them. A verbal agreement may be fine while you are living, but if you should pass and your heirs don’t have the same relationship with your tenant, there could be trouble ahead.

Consider who will be in charge when you are not there. Whether you are planning to work until you die or making a retirement plan, one of the hardest decisions will be to name a successor. Inter-generational politics can be tricky. You’ll need an unbiased evaluation of who the best candidate will be to take things on. However, going into this now is better than hoping for the best. That’s when things go south.

Talk to your estate planning attorney. Just as people should start planning for their retirement as soon as they start working, planning for the transition of the family farm is something that should start when it is years in the future, not when the transition is a few months away. It’s a process that takes a long time to do right.

Reference: Bangor Daily News (March 5, 2020) “How farmers can start an estate plan”

Business Owners Should Start End-Game Planning Now
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Business Owners Should Start End-Game Planning Now

Most parents understand that the ultimate goal of child-rearing is to help a child become an independent adult. For the business owner, this means building a business that would continue after they have retired or passed away. However, when it comes to estate planning, says the article “Why Business Owners Should Think About Estate Planning Sooner Than Later,” from Forbes, many business owners think only about their personal assets and their children.

For a successful business owner who wants to see their business continue long after they have moved on to the next chapter in their lives, the best time to start succession planning is now.

Succession and estate planning should not be something you wait to do until the end of your life. Most people make this mistake. They don’t want to think about their own mortality or what will happen after they’ve died. Very rarely do people realize the value of estate planning and succession planning when they are engaged in a start-up or when their companies are just getting solid footing. They are too busy with the day-to-day concerns of running a business than they are with developing a succession plan.

However, any estate planning attorney who has been practicing for more than a few years knows that this is a big mistake. Securing assets and business planning sooner, not later, is a far better way to go.

Business continuity is the first concern for entrepreneurs. It’s not an easy topic. It’s far better to have this addressed when the owner is well and the business is flourishing. Therefore, the business owner is making decisions and not others, who may be emotionally invested but not knowledgeable about the business.

A living trust and will can put in place certain parameters that a trustee can carry out. This should include naming the individuals who are trusted to make decisions. Having those names and decisions made will minimize the amount of arguing between recipients of assets. Let them be mad at you for your choices, rather than squabbling between each other.

Create a business succession plan that designates successor trustees who will be in charge of managing the business, in the event of the owner’s incapacity or death. A power of attorney document is used to nominate a fiduciary agent to act on your behalf if you should become incapacitated, but a trust should be considered to provide for a smoother transition of the business to successor trustees.

By transferring a business to a trust, the inconvenience and costs of probate may be avoided and assets will be passed along to chosen beneficiaries. Timely planning also preserves business assets, since they can take advantage of advanced tax planning strategies.

Estate and succession planning is usually not top-of-mind for young business owners, but it is essential planning. Talk with an experienced estate planning attorney to get yourself and your business ahead of the game.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

How Business Owners Undo Their Years of Hard Work

When it comes to preparing for retirement, transitioning their business and putting a succession plan in place, many small business owners simply aren’t realistic, says the article “Business Owners Dream (Wrongly) of an Easy Retirement Transition” from Plan Advisor. While it’s great that they believe in their businesses, by putting every last dollar they have into the business, thinking they will reap the rewards when it’s time to sell, they put themselves in a risky position.

Many small business owners treat their business as their nest egg. That may not be wrong, but if there is no other estate planning or retirement planning, there are a number of ways this could go wrong.

For one thing, it’s not likely that the value of the business at the time of the sale can be guaranteed. What if the value of the business is not as strong as the owner thinks it is? It’s better to have more than a few eggs in a retirement basket, including savings in retirement accounts that provide tax advantages.

The business owner can open a 401(k), SEP-IRA, SIMPLE or a pension plan. Because these types of accounts are tax deferred, the investments can grow while avoiding taxation. The best retirement plan for any small business owner depends upon how much income the business generates, how stable earnings are, how many employees there are and how generous the business owner wishes to be with the full-time employees.

This last factor matters because the law requires most tax-deferred plans to be fair to all employees. A business owner cannot open a 401(k) for themselves and exclude full-time employees. However, the appreciation of employees for having a 401(k) plan should be considered. By investing in an employee retirement plan, and perhaps a matching program, the business becomes more attractive to current and future employees.

Estate planning is a critical piece of the succession plan. A true family legacy plan needs to go beyond defining who will be in charge of the business and estate if the owner dies, and how the business and any other assets will be divided. If there is no will, the state’s laws will govern how assets are divided.

An estate planning attorney who routinely works with business owners will be able to help with the formation of a succession plan, with an eye to fulfilling the owner’s goals for themselves and their family. It should be understood that any succession plan needs to work in conjunction with the overall estate plan, so that both can achieve their respective goals.

For a succession plan to work, it needs to be put into place five to ten years in advance. If a sale of the business is at the heart of the plan, it can take five years to value the businesses’ profitability, formalize the management structure, identify a solid buyer, determine how the transition will be made, etc.

Reference: Plan Advisor (December 12, 2019) “Business Owners Dream (Wrongly) of an Easy Retirement Transition”

Succession Planning for Family Owned Farms

Succession planning is not thought of as fun, simple, or quick. That’s true. A recent article from Ag Web puts it clearly: “Succession Planning Takes Leadership.” It also takes time, knowledge and the guidance from smart professionals, including estate planning attorneys, financial advisors and accountants. Let’s look at these four important elements.

Clarity. Transitioning leaders need to answer a few questions. What do they want for themselves, for their operation and what do stakeholders want? Developing a successful plan by guessing what other family members want, rather than asking them directly can undo good planning. Having private conversations with individual members of the family will lead to more honest answers.

Certainty. Many times, families are not in perfect harmony about what succession looks like, which can lead to some uncertainty. Family leaders must step up and be decisive, and their decisions may not be popular with everyone. However, if a leader lets someone else make decisions, the situation becomes murky and confusing.

Continuity. It can take two or five years to create a succession plan, depending on the complexity of the operation and the number of family members involved. The actual succession itself can take ten years to unwind, depending on the time horizon for the transitioning leadership. A big problem for any process that takes so long, is the loss of focus and momentum. Your team of professionals should be able to help mitigate this challenge.

Communication. A strategy for communication needs to be built into the succession plan, although it is often overlooked. Develop a timeline and establish when you will communicate progress and/or milestones to stakeholders. Your professional team may be needed to help with both the timeline and the communication strategy. Family members need to know what is happening, even when it seems like nothing big is occurring.

With strong leadership in each of these four factors, the succession plan is more likely to succeed. With less stress and an increased level of trust and clear communication, the family will work together to achieve the leader’s goals.

Reference: Ag Web (December 5, 2019) “Succession Planning Takes Leadership”