The Executive Suite: Current legal, political issues effect physicians assets

With the election around the corner the country may be in for some significant legal and political changes that can affect physician’s assets.

Estate Planning for Affluent Physicians

We’ve examined various estate planning issues for physicians from many angles including the biggest mistakes physicians make and when you should update your estate plan. If the thought of your own mortality during the COVID19 crisis and the need to protect your heirs with an estate plan hasn’t prompted you to get an up to date estate plan in place already, perhaps this will. There are pending expected changes to the current estate tax exemption limits that will create an estate tax exposure for many physicians, the ‘mass affluent’, and ‘HNW’ categories.

I recently reviewed these issues with estate planner Mike Ferrin, a partner at the law firm of Davis, Miles McGuire Gardner* in Phoenix, AZ, who handles estate planning for HNW doctors and business owners. Mike shared some specific numbers, what the estate planning world thinks is going to happen and his concerns on why this issue should be considered time sensitive.

If your current net worth is at or above $3,500,000, or soon will be, you should seriously explore whether you need to do some additional estate tax planning before the end of the 2020 calendar year. Failure to do so could result in a significant estate tax exposure that would reduce what you leave to your heirs being taxed by as much as .40 cents on every dollar (current rate assumed as carrying forward) over the exemption amount.

The current federal estate tax exemption (a.k.a. “death tax”) for 2020 is $11,580,000 per individual and that doubles to a whopping $23,160,000 that a married couple can pass to anyone they want free of federal estate tax exposure. That’s a big number and frankly, a good problem to have, but that is set to decrease dramatically in 2026, decreasing to $5,000,000. Some current lawmakers and political candidates are calling to lower it even further, to $3,500.000 (estate tax) and $1,000,000 (for gift tax). If there is a new administration in place following the November election, the decrease may be enacted even sooner; legislation passed in 2021 could potentially be made retroactive to January 1st.

In plain English, you currently have a limited opportunity to transfer up to $11,580,000 double for married couple) of assets to one or more trusts that may not be subject to either gift tax while you are alive or estate taxes when you die. If you don’t act, that number could be reduced to as little $1,000,000 (double for married couple). This could result in a savings of over $4,000,000 (double for a married couple) in estate taxes.

Given these numbers, strategic gifting and sales to specialized trusts before the end of 2020 should immediately be considered by higher net worth doctors to take advantage of current high exemption rates, provide asset protection for the assets and to maintain the greatest degree of control and economic benefit possible, potentially including any income those assets currently produce. Planning strategies (fact specific, get expert help) may include the potential sale of gifting of assets to irrevocable trusts established for your spouse or children, including tools like ‘Spousal Lifetime Access Trusts’ (SLATs) or by using ‘Grantor Retained Annuity Trusts’ (GRATs).

These trusts hold assets outside your estate so they are exempt from estate taxes but can still be directed by you and/or your spouse subject to the terms established in the trust. Under current law, you are ‘grandfathered’ in and as long as the funds are formally transferred to a trust of this type before the exclusion amount changes, there should not be estate tax due upon death of the individual.

Those physicians to whom this discussion applies have typically put very significant educational efforts, labor, discipline and risk (and perhaps a little luck) into building their net worth. In many cases physicians say that one significant motivation for doing so is to provide a predictable future for their families, and in some cases that wealth can be multi-generational, invest in your legal planning accordingly. Please strongly consider your current and target financial position and planning needs now, while you can still act. I’m not the only person providing this information and top estate planners I work with across the country are already booked over a month out. Add the election, holidays and COVID related delays…the clock is ticking.