Many Different Assets May Trap Uninformed Doctors

By Lawrence E. Howes; CFP™

By Joel B. Javer; CFP™ 

There are situations where avoiding probate is desirable for physicians who want privacy for their finances after their death. And, there are relatively simple ways to avoid probate, but they all have consequences.

Several of these mechanisms are reviewed below: 

[A] Joint Tenancy

Joint tenancy is the conventional way that property between spouses is titled.  Each spouse maintains a 50 percent-undivided interest in the property.  Upon death, the property automatically, by operation of law, passes to the surviving spouse and avoids probate.   However, the automatic aspect of JT means that a will does not control the disposition of the asset.  Before you title anything think about the consequences and be careful when establishing the ownership of all property.   

[B] Community Property

Community property is another form of co-ownership limited to the interests held between husband and wife. Community property does not automatically pass to your spouse. When one spouse dies, the survivor continues to own only his or her half of the assets. The decedent’s will determines the transfer of the other half. Only eight of the 50 states are community-property states, but it is estimated that 25 percent of the population resides in these states. The eight states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. 

Wisconsin has a form of community property called “marital partnership property.”  The laws of the particular state must be examined to determine the effect on the married couple’s property.  

[C] Life Insurance       

Life insurance is also property.  The two aspects of the property are the face amount and unless it is a term life insurance policy, the cash value. 

The critical item to remember is: if you own the policy, then the face amount or death benefit is included in your estate and probably subject to estate taxes.  The death benefit passes through the operation of a beneficiary designation.  At the time of death most cash value policies include the existing cash value in the death benefit. This is known as a type A policy. Type B excludes the cash value from the death benefit so it would be added to the face amount.        

[D] Retirement plans

Your retirement plans and IRAs are transferred by beneficiary designation.  It is common to see a physician who is divorced still have an ex-spouse as the named beneficiary on a retirement plan or life insurance policy. Making sure that all beneficiary designations are consistent with your current estate plan will avoid these unintended consequences. 

[E] Revocable Living Trust

In a revocable living trust your assets are voluntarily placed in a trust thereby making you a trustor.  The control of the assets in the trust is then transferred to a trustee.  You can make yourself the trustee as well. 

The key word here is revocable, which means the terms of the trust can be changed, altered, amended or terminated. Legal title to the property however is retained by the trust. The trust can provide continuity of investment management, bill paying, collection of accounts receivable and general financial stability until the medical professional is able to resume control of his or her financial affairs.  

In addition, if property is owned in more than one state, ownership of that property by a revocable living trust would eliminate the necessity of dealing with probate in several states. 

[F] Buy-Sell Agreements 

A highly valued medical practice may not have sufficient cash to buy out a deceased partner and face an overwhelming financial burden. Life insurance is commonly considered the best vehicle to provide the cash when it is needed the most, and there several different way to create a practice buy-sell agreement.

Nevertheless, always remember that it too, is an asset. 

Conclusion:

What is your experience with any of the above non-probate assets in your estate planning endeavors? 

More information: http://www.jbpub.com/catalog/9780763733421/

Linuistic terms:  www.HealthDictionarySeries.com

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