How Is Financial Planning for Practicing Doctors Different and More Complicated?

Often after a doctor builds his or her own estate, they are likely to pass them onto their next generations. It is possible that parents give their children a life income interest in some trust. After the death of the child, the trust continues to pay interest to the grandchildren and then the great-grandchildren, depending on the funds available.

However, that is not without Uncle Sam’s intervention. The Generation-Skipping Transfer (GST) Tax usually does not allow the skipping of transfer tax when the trust is transferable between multiple generations.

If you want your next generations to be affluent, you have to pay the government!

In 1976, the Congress first established and enacted the GST tax. It was to reduce the loss of revenue from the estate tax when the estate owner found multi-generational trusts within the estate. The current GST tax law the central government, IRS, and most states follow, is in correspondence with the new GST tax amendment of 1986.

According to the current law, there are three types of tax triggering events:

Taxable terminations

It happens when the transferor establishes a trust that pays for the upkeep of his child or children. When that child passes on, the remainder passes on to the grandchildren, and then to their great-grandchildren. This kind of trust can pay multiple generations of descendants, which is why estate planning for physicians is very critical. The termination of the child’s interest in such a trust can coincide with the death of the child, but the GST tax law treats this completion of interest as a taxable termination.

Taxable Distributions

Any distribution that skips a person, when it is neither is neither taxable termination nor a direct skip. It is usually a distribution of a trust.

Direct Skips

These are when the transferor chooses to bypass the children and give their assets to their grandchildren only. It also holds when the transferor sets up a trust for the benefit of their grandchildren while bypassing his or her children. It is a taxable event as per the GST tax, known as a direct skip.

Is it possible to save on GST tax during lifetime transfers and transfers at death?

During Lifetime transfers and transfers at death, each transferor has a $5.49 million exemption as per the 2017 updates of rules. It holds true for transfers at death and lifetime transfers as well. Doctors can choose either one, but they should also know that these allocations are irrevocable. The exemption is not transferable between individuals, but married couples can share the generation-skipping transfer. Although the amount likely comes from only one among the couple, the GST rule can easily assume that the contribution was 50% from each.

Allocation rules are quite complex and understanding them usually needs some help. Even expert physicians and surgeons need the help of legal practitioners to exploit the allocation rules in their favor. While some allocations are automatic right now, there are specific allocation rules that apply to the exemption of particular generation-skipping transfers.

  • Lifetime direct skips
  • Indirect skips to generation-skipping trust

The transferor and their executors have some control over the allocation of this exemption. Under special circumstances, retroactive distributions are acceptable.

You can easily keep the assets of your irrevocable life insurance trust from being taxable. All transfers you make to the trust must qualify for the annual exemption for the GST tax. The insured must also allocate part of the exemption that exceeds or that is not eligible for an annual exclusion. You can achieve this by filing for gift tax return on time. Keeping track of the GST tax inclusion ratio, the allocated tax exemption and the correct valuation of property can be very challenging for a busy medical professional. That is why the top physicians of the country trust Beam a Life for handling their tax planning and estate planning.

What is the acceptable generation assignment for the exemption?

While making the assignment of the assets, you must remember that a transferor and the spouse always belong to the same generation. The difference in age or the real-world generation gap does not influence the generation assignment rules. Same is true for the children of the transferor or the spouse. Any relationship by half-blood or adoption is equivalent to a whole-blood relationship.

Here, a particular rule is applicable. As per this law, when the child level has predeceased the next generation or the skip person, then the skip person can move up into the generation bracket vacated by the predeceased person. It is the predeceased parent exception, and it extends to taxable terminations. Taxable distributions and direct skips also fall under the predeceased parent exception.

The exceptions extend to certain collateral heirs, in case you do not have any living lineal descendants during the time of transfer. When the transfer occurs outside the immediate family, the person who receives the transfer usually belongs to the same generation in case he is born within 12.5 years of the transferor. The subsequent generations follow a 25-year increment each time.

What is the GST tax you have to pay during taxable distribution, taxable termination or adirect skip?

The GST tax has a flat rate for everyone. That makes it quite simple to calculate. Sadly, the flat rate is 40% of transfer value as per the 2017 tax slab. It is a considerable expense, even for millionaires who just want their kids to live comfortably.

While we understand why paying taxes are essential, we also acknowledge the effort a doctor has to put in to build his empire from the ground up. So why make a mistake that can end up taking away 40% of your assets and savings as tax, when you can just make a call and find out your best options from trained finance planning professionals.

Nothing compares to having dedicated teams of professionally trained and experienced finance lawyers handling your estate plans and tax plans. Not only will you be able to save more with the help of timely tax return filing, but you will also know smart, and IRS approved ways to keep your hard earned fortune within your family. Uncle Sam may be a stickler when it comes to income tax and estate tax, but he has left many secret avenues open for doctors to keep their hard-earned assets. Visit to know more!

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Mr. Merchant
Software Company Owner

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