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Protect Your Assets from Estate Tax


At the end of 2012 some rather advantageous tax provisions are set to expire. While there's no magical place to put your money to avoid estate taxes, there are some strategies you can employ.

At the end of 2012, some rather advantageous tax provisions provided by The Tax Relief, Unemployment Insurance Reauthoriztion, and Job Creation Act of 2010 regarding the protection of assets from the estate tax are set to expire.

Some particularly favorable provisions were that the estate tax applicable exclusion amount became $5 million, a top tax rate of 35%, and a surviving spouse could take advantage of whatever exclusion amount may not have been used by the estate of the deceased spouse.

So what happens at the end of the year?

“Are they going to go back and reinstate the laws that existed prior to 2010?” asks Wendy Prestwood, CMFC, CRPC, founder of the Overland Park, Kan.-based Prestwood Financial Group, rhetorically. “The thing that makes it difficult for my physician clients is trying to plan for that while not knowing what the tax rate is going to be.”

Challenging strategy

Prestwood suggests that while there is no magic product available where physicians can put their money in order to avoid estate taxes, there are a number of successful strategies they can employ.

The first strategy is that physicians can still make tax-free gifts of up to $13,000 per recipient per year. If you have children in college, you can also make tuition payments on behalf of them directly to the educational institution.

“To be honest, I don’t see that many clients taking advantage of these strategies,” Prestwood says. “But those are some very viable tax-free giving opportunities.”

Paul Shane, CPA, says that it’s just as important to protect the liquidity of a physician’s professional practice as it is his or her family. One of the best tools, he says, for group practices is disability buy-out insurance, also known as key man insurance. If a physician in a group practice dies, the practice can use the insurance it receives to cover the cost of buying the deceased physician’s interest out of the practice. Or, in the case of a disability, bring in another physician to replace the one who is disabled.

“It can save the practice from having to pay the widow of the estate what the physician’s interest in the practice was worth,” Shane explains. “And key man insurance is tax-free to the practice, so it’s a win-win.”

He adds that in the case of a solo practitioner, office overhead expense as opposed to disability insurance should be considered.

“It covers the disability of the doctor, but you can usually get it in larger amounts, and the premium is a lot less,” he says.

Have trust

Marisa Alvarado, director of advanced estate and gift taxation with Haskell & White LLP, says that few high net worth individuals are taking advantage of “one-in-a-lifetime” $5 million exemption created by the 2010 Tax Act. They are missing out on a significant opportunity to preserve wealth for future generations at a lower tax rate. Alvarado says that physicians can take full advantage of this exemption through strategies including irrevocable life insurance trusts, and charitable remainder trusts.

Shane agrees. He points out that while irrevocable life insurance trusts don’t have any impact on a medical practice, the physician’s personal life insurance can be placed in such a trust, and thereby the death benefit is not included in his estate. Charitable remainder trusts, he says, are also viable options.

“If a family is charitably inclined it’s a great way to provide for charities, whether it’s now or at the time of death,” Shane says. “You set these things up, and gifts to the charitable remainder trusts that the family controls don’t go into the estate when the physician dies. And most major charities, universities, medical schools, have development partners that will pay for and create for you a charitable remainder trust to your specifications, with the money going principally to that charity.”


hane is also an advocate of strategies like LLCs, to hold investment real estate and business other than the physician’s professional practice, and Family Limited Partnerships, to own and manage the LLCs. Those entities allow physicians to gift minority portions of the assets to their families and get them out of their estate, while still retaining control of the income and properties.

Going forward, Prestwood says the most important thing physicians can do is to stay focused on what’s going to happen to the tax law in 2013.

“It’s important to understand what the legislation is now, but also how it could change, and how that might affect their planning,” she says.

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