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6 Action Steps to Protect Your Heirs and Cut Estate Taxes


You wake up in the middle of the night, gasping for breath while cold sweat drips down your face. You've just had a nightmare… about lawyers.

You wake up in the middle of the night, gasping for breath while cold sweat drips down your face. You’ve just had a nightmare… about lawyers.

With our litigious society, physicians have a lot to be worried about—malpractice lawsuits and a government breathing down your neck. Those nightmares could easily become reality—leaving your spouse or your kids with only half of your assets or perhaps virtually nothing for months while your estate is settled. You may be wondering, how can I protect my family? How can I make sure this doesn’t happen to me?

Many of us grow so focused on our families, careers, and growing wealth (and then one day spending it) that we become so caught up in our busy lives and we don’t take the time to ensure that our estate is set up properly. There are many pitfalls if you don’t take the proper steps. Some common mistakes—that easily can be avoided—could make settling your estate a time-consuming hassle and possibly cost your heirs a fortune.

Here’s a brief guide how to maximize protection for your family and minimize legal fees and taxes.

Have an Up-to-Date Will

Your will lets you decide how you want to distribute your assets and your estate. Without it, the state gets to figure out who gets what rather than you!

The laws that govern what happens if someone does not have a will are called “intestacy laws” and they can vary wildly from one state to another. In general, current spouses and kids receive the inheritance in the event of not having a will. But what if instead you are single or don’t have kids? Then the state gets to figure out which blood relatives get what.

Have your will reviewed every 10 years to keep up with current laws and regulations. However, if you have been through a major life event such as divorce, marriage, new baby, new stepchildren, or death of a child, then you will need to revise your will.

Avoid Probate

Probate is the process of transferring property at the death of a person to their heir(s). A lawyer has to file various documents and place notices in newspapers to fulfil legal requirements.

Lawyers often charge a percentage of the estate value that can range from 1% to 10%, depending upon the work required. That could add up to a lot of money! Basically, it’s a scheme by our legal system.

Fortunately, there are several incredibly cheap and even free ways to avoid probate. It’s often as easy as titling assets properly, such as using a transfer on death designation or titling an account jointly with a spouse and/or kids.

Federal Estate Taxes

In 2014, there is a federal exclusion for the first $5.34 million of an estate. If your estate is larger than that, then you need to be concerned with federal estate taxes, which can be very hefty, up to 40% of an estate!

Here are some tax-reduction strategies to consider:

Annual Gifting. You can gift up to $14,000 a year to any person tax-free. A married couple can thus give away $28,000 a year to any individual.

Spend Your Assets. Enjoy life! Take a few more trips. Check off your bucket list. Give to charity. Just be careful that you have enough to take care of your day-to-day needs until you are 90 or 100 years old.

Irrevocable Life Insurance Trust (ILIT). You can remove money from your estate by gifting annually to an ILIT. The death benefit from the insurance policy owned by an ILIT becomes separate from your estate. This will reduce your estate tax as long as you play within the rules required by the administration of the ILIT.

Review Beneficiaries

Go over each and every one of your accounts has named beneficiaries to ensure that all is in order. Keep in mind that IRAs, 401Ks, annuities, and life insurance policies all declare specific beneficiaries—and that’s who’ll get the assets, regardless what your will says. On the other hand, if you don’t have any listed beneficiaries, the assets are controlled by your will, and they won’t bypass probate.

Most people, I find, have named their primary beneficiaries. But many folks fail to name their contingent beneficiaries—who would inherit the assets if the primary beneficiaries are deceased. IRAs, 401Ks, annuities, and life insurance policies all require specific beneficiaries.

Have your spouse (if applicable) as the primary beneficiary and the kids (or their trust) listed as the contingent beneficiary. I strongly suggest consulting a financial advisor or estate planner to ensure that the beneficiaries are properly named.

Need a Trust?

Many people are very concerned with how their kids will spend money they inherited. They want to protect it from divorces and greedy spouses, and sometimes from the kids themselves. This is why various forms of trusts exist. For example, your trust can specify at your death the formation of an irrevocable trust for the care of a given beneficiary who can only spend 3% or 4% (whatever you choose) annually.

Final Thoughts

With estate planning, what you don’t know can and will hurt you. Education is the key. Seek help from a capable financial advisor or estate planner that can know your specific situation and is familiar with these concepts.

Get empowered! Take action today and put this knowledge to work. This way you can only dream sweet dreams and those pesky lawyer nightmares can bother another doctor.

He is also the author of 5 Steps to Get out of Debt for Physicians, The Insurance Guide for Doctors, The Tax Reduction Prescription, and his new book, The Freedom Formula for Physicians. He’s glad to answer any questions about estate planning or other financial matters. You can contact him at (800) 548-1820, at dave@daviddenniston.com, or visit his website at www.DoctorFreedomBook.com to get a copy of The Freedom Formula for Physicians.

Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with.

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