Estate planning is no more than a chore for maximum medical professionals. It is typical of doctors to find the process somewhat cumbersome, time-consuming and unnecessary. When done correctly, estate planning has three most important benefits. It ensures the future of minor children by bequeathing the property and money at the time of the testator’s death. An estate plan can minimize the amount and net worth of assets that have to pass through the probate process. In fact, estate planning can also save you a significant amount of “death tax,” making the process of inheritance much more comfortable for your survivors.
You may not have to worry right now
Many doctors in the US worry about death taxes. Few will be relieved to know that many general physicians do not save enough or invest enough to build their net estate worth above the federal exemption amount. As of 2017, the exemption limit is $5.49 million. So, if your net worth is lesser than that, you do not have to worry. The exemption laws depend on inflation under current law. Therefore, it should double every 20 years or so.
Research shows that the average primary care physician earns about $6.5 million in his lifetime. That is about 35% lesser than the specialty physicians with the same experience levels, during the same period. The income further depends on the physician’s focus. If you are married, the exemption value is double the initial amount, and that is quite a reassurance for most practicing doctors and physicians out there.
Successful physicians need a proper estate plan and an attorney
If you are fortunate enough to save more and build up the net worth of your estate, then you should surely consider estate planning. Sadly, many states including Delaware, Connecticut, Illinois, Iowa, Hawaii, Maine, Kentucky, Maryland, Minnesota, Massachusetts, Nebraska, New York, New Jersey, Pennsylvania, Oregon, Vermont, Rhode Island and Washington DC have their own estate tax. The exemption amount in these few states is far lower than the federal exemption amount. The amount usually hovers around $1 million for single individuals and doubles for married individuals.
For all physicians living in these states, it is worthwhile to invest in proper estate planning for doctors to save on “death tax.” The key is to give away the amount above your state exemption limit before death. You can always choose to directly give away up to $14,000 to anyone using up your tax exemption. You can give away up to $28,000 if you are married. It will reduce the size of your estate below the exemption limit, and it will keep you away from paying a lot in taxes.
How to enjoy tax deductions smartly?
You can give the money to your children and your grandchildren without any gift tax implications. More often than not, the crummy power for each beneficiary is either $5000 or 5% of the principal (whichever is greater in value). That is the famous five-and-five limit that represents the maximum amount exempted from gift tax. According to the annual exemption limits of a gift trust, an individual can give away up to $14,000 per year to an unlimited number of people without attracting any federal gift tax. Many doctors give away money to their favorite charities. It is a great way to escape paying a substantial amount in taxes at death. Paying to charities strategically and structurally can earn you significant tax deductions each year.
How does having an irrevocable trust help in tax deduction?
In case you do not want to hand out assets to your heirs right now, you can set up a trust. These are irrevocable trusts, which can get the money out of your estate. However, your heirs will be able to use the funds only as per the rules of the particular trust. Typically, most people opt for irrevocable life insurance trusts to avoid estate taxes and meet the liquidity needs of the estate. An irrevocable LIT can also help to pay the income needs of all survivors after the satisfaction of all liquidity costs.
To establish an irrevocable life insurance trust, you must confer with an attorney who has experience in dealing with property law and taxes. The “unfunded” trust is of more help to the doctors since they do not have any property in the trust for paying the premiums. It is dependent on the annual cash gifts from the grantor, and the trust income is not subject to taxes. In case of the “funded” trusts, the grantor transfers his life insurance policy to the trust and the property to the trust. The premium payments come from the property, which may be in the form of security, cash or other assets. In this case, the state can subject the income from the life insurance trust to income taxes upon the death of the grantor.
How can Crummy Power help save on taxes?
There has been much discussion and debate over the gift tax annual exclusion of the irrevocable life insurance trusts. On the one hand, the beneficiaries cannot utilize the policy until after the death of the grantor. It makes the irrevocable trusts gifts of a future interest. On the other hand, gift tax annual exclusion only applies to gifts of a present interest. Therefore, if the trustee notifies the beneficiaries when there is a transfer to the trust, it falls under their Crummy Power. It can turn their annual gifts of the trust into gifts of present interest by bestowing the beneficiaries with the right to immediately withdraw the cash transfers to the trust for a brief period annually. The grantor always hopes that the beneficiaries will not exercise these rights. However, their very knowledge of the withdrawal rights converts the otherwise future interest gifts into gifts of present interest.
Having an estate plan helps you relax and continue with your life knowing that the future of your near and dear ones is safe. It can save your heirs from insurmountable death taxes and income taxes when your life insurance policy kicks in. Doctors need a sound estate plan as soon as they begin to acquire assets. Having one will save you a lot of attorney visits and legal appointments in the future. Get in touch with https://beamalife.com/ to know more about estate planning.