Impart values, consider what-ifs before calling the estate-planning attorney.
Lloyd LoCascio, MD, and his wife, Cheryl, were determined to make sure their daughters grew up with strong values around money, and to protect them as much as possible, even if something happened to the couple.
“We had a son with severe medical problems who died when he was three and a half,” says Lloyd, a radiologist in Baton Rouge, Louisiana, and a partner in a large group practice. “During his illness we began thinking that if something happened to us we need to make sure [our children were] taken care of, so we started estate planning.”
At the same time, however, the LoCascios wanted to avoid the familiar scenario of wealthy parents doing so much for their kids that, as adults, the children lack ambition and independence.
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Regardless of salary differentials, physicians in virtually every specialty feel compelled to help their adult children, but how much is too much? Is there more to estate planning than simply avoiding inheritance taxes? Before putting an estate-planning attorney on the clock, it’s important to think about the financial legacy you want your children to inherit, which has to do as much with financial habits and priorities as it does with taxes and trusts.
“A lot of children are somewhat coddled nowadays, to the point where they expect everything and it comes without a grain of sweat,” LoCascio says. “I wanted my kids to know that the things my wife and I have now, we worked very hard to get them. As the kids get older, we want them to have some skin in the game.”
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Couples typically don’t think through these issues as thoroughly as the LoCascios, but their experiences can be a benchmark for others, says Lauren Lindsay, CFP, director of financial planning at Personal Financial Advisors LLC in Covington, Louisiana. She and colleague Robert Reed, CFP, advise the LoCascios, a relationship that includes spending time recently with the LoCascios’ daughter Olivia, a college student, helping her learn to budget her part-time work income, among other financial tasks.
Even before starting college, Olivia says she always knew her parents had been saving, and the family discussed her 529 plan, which is a college savings account that offers tax breaks for contributions and earnings. (See www.savingforcollege.com.) Originally set on attending a private university, she switched at the last minute to a lower cost in-state school when her dad told her whatever she didn’t use, he would pass down to her children for their college some day.
“Money has always been a comfortable topic between me and my parents,” Olivia says. “About the time I started driving, my dad got me my first debit card to make me aware of the purchases I was making. I started out with an allowance and then did some babysitting in high school, both of which taught me the cost of things.”
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Her parents also often help with bigger purchases like cell phones and vacations, but she is expected to carry a portion of the costs. As for their estate plans, the couple has stipulations in their documents that require their children to complete college before receiving any inheritance, and staggers that inheritance until nearly middle age instead of making it available immediately, should the couple both pass away while the children are still relatively young. Even at that, expectations for a windfall are low.
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That attitude is becoming more common as people live longer and therefore have much longer retirements for which to cover expenses, Lindsay says. While many baby-boomer physicians feel the need to use big inheritances to make up for years of not being around much for their kids, younger physicians seem fine with leaving smaller financial legacies, she says. Both groups tend to prioritize education in their estate plans, however.
“There does seem to be more of a concern, not that they owe a big inheritance, but to make sure college is paid for,” she says. “They want their kids not to have student loans like they did,” she says.
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Another problem is when children end up with substantially different inheritances. Often, well-intentioned parents try to divide their assets according to their childrens’ needs instead of equally, but the idea frequently backfires, advisers say.
“Part of the problem with estate planning is, it’s a snapshot,” Lindsay says. “A doctor could have a stroke and end up needing crazy amounts of care,” and decimating any inheritance that might have been coming to the siblings of the child who received an inheritance early, for example. Or children’s circumstances could change. A parent might leave more to a social worker daughter and less to a lawyer son, but years down the road the son might face a health issue or layoff, and the daughter’s star may be rising.
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Regularly updating a will or trust can allow flexibility in leaving certain assets to certain children based on their circumstances, experts say.
“If you have one child in a low tax bracket and another in a high one, consider leaving traditional IRAs, which are taxable at withdrawal, to the child in the lower bracket,” Carolyn McClanahan, MD, CFP, an adviser with Life Planning Partners Inc. in Jacksonville, Florida, suggests. Give the higher-bracket child the Roth IRA, which isn’t taxed at withdrawal, she says.
Particularly for do-it-yourself investors, making sure IRA beneficiary forms are correct is vital, McClanahan says, because there won’t be a planner around to make those reminders.
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“The biggest mistake people make is thinking IRAs go through the will, but they don’t,” she says. In other words, even if a will gives assets to heirs equally, for example, if just one child is listed on a beneficiary form, that supersedes the will, she says.
When working with blended families, setting up an estate plan needs even more careful thought, experts say. Just leaving a lump sum to a spouse with the remainder going to children after the spouse dies can be fraught with conflicts.
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If a trust doesn’t specifically state how the money is to be invested and withdrawn, for example, there could either be nothing left for other heirs or not enough income to sustain a spouse during life.
“There is not a lot of portfolio income right now in this environment, which may make a fiduciary take too much risk or too little risk,” says McClanahan.
She helps clients come up with an actual dollar amount that a surviving spouse would need to live on after the first spouse dies. If the trust can’t generate that amount from investment income, then a trustee is allowed to dip into principal to generate the cash flow. It provides flexibility so that the trustee doesn’t have to invest the money in potentially risky ways just to generate the right amount of income, she says.
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For example, if a trustee were locked into only taking income, it might cause the portfolio to be heavily skewed toward risky high-yield bonds, she says. Likewise, an investment philosophy tilted too heavily in favor of the children holding the principal might lean aggressively on stocks, creating extreme volatility in a portfolio that is being used for withdrawals to sustain the widow.
Sometimes, it may make sense to structure assets so that children never actually take possession of all the money, notes Dave Yeske, CFP, PhD, managing director of Yeske Buie, a financial planning firm in Vienna, Virginia and San Francisco.
“One way to think about leaving assets is to leave it in trust forever, so that children receive income from the assets but can’t touch the principal,” he says. This strategy carries some creditor protections in addition to ensuring that it will be sustained through multiple generations, he says.
Another way to go is to use matching funds, says Ike Devji, JD, a Phoenix, Arizona attorney specializing in asset protection. Rather than tying distributions to beneficiaries’ ages, he says, they can be set up to pay out as a percentage of income earned.
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Particularly when there are several children in a family and sizable assets, it may make sense to hire an institutional trustee at a law firm specializing in probate and estates to oversee a trust rather than giving the task to one sibling, Yeske says.
“There’s a lot to be said for having a professional make sure the tax returns get filed, the bookkeeping is done and investments get managed,” he says. It costs money to hire a professional for these tasks, of course, but it can smooth the process and help sidestep hard feelings if one sibling is chosen over others to run the estate plan, he says.
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Devji agrees. Retitling investment accounts and closing out an estate are exceptionally time consuming and people routinely name a sibling without realizing how complicated it can be, he says. Look for someone with a strong professional background and malpractice insurance and give only limited discretion, he recommends.
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“The one universal theme I hear from clients is they all feel a responsibility to do whatever they can to educate their kids through at least undergraduate school and maybe grad school, so they come out as close to debt-free as possible,” Yeske says. “Then, not as universal, but a majority seems to feel some responsibility to help with a house down payment. After that it really thins out,” he says.
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About 20% of Yeske’s clients are physicians. “The biggest thing is to think about how your estate plan is not just a transmission of wealth, but of values,” he says. “The way in which you leave your wealth is the final tangible opportunity to transmit values to your kids. It tells them what you value about them and society as a whole, what responsibilities they have to make their own way and how you’d like all that reflected in your final arrangements.”
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Naming a favorite charity as a co-beneficiary of the estate not only is becoming more popular, but it is a great way to impart values to kids for years into the future, Yeske says.
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He cites a retired physician client who maintains two multi-million dollar IRAs. He keeps one of the accounts, which names a charity as beneficiary, at a static balance, siphoning off earnings annually into the other IRA to continue building his retirement income. The other account fulfills his charitable interests.
With the federal estate tax exemption now set at $5.45 million, far fewer people need to worry about complex strategies to elude the tax, notes Rebecca Kennedy, CFP, principal with Kennedy Financial Planning, LLC in Denver, Colorado.
“It’s more complicated with blended families, but many physicians don’t need the complex planning we once recommended,” she says.
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Doctors in blended families who think there may be conflict between children from a previous marriage and a current spouse should explore using insurance as a way to maximize estate assets, Kennedy says.
Assuming the physician is insurable, having policies that pay out an amount equal to (or some share of) the overall estate can create a cleaner break for heirs, she says.
Finally, nothing really replaces simple conversations with children over time to communicate wishes and put minds at ease, says Steven Gitt, MD, a Scottsdale plastic surgeon.
“I talked to my [young adult] daughter not long ago and I just said, ‘You know, I’m doing well and healthy, nothing is wrong, but here are the people you need to reach out to if something should happen,’” he says. His own blended family and the employees in his practice count on him to make sure these issues are dealt with, he says. “You need to have these talks.”