Optimized Estate Plan for Doctors

Advanced Ideas in Estate Planning for Doctors

Doctors, even those who enjoy DIY finance, need an optimized estate plan, too.

While often neglected, an optimized estate plan is a vital part of a doctor’s legacy. Yet, we begin appropriate asset protection early on in our careers, the first step of an optimized estate plan. But, of course, we have no assets to protect at that time.

The need to protect your assets never goes away; legacy and the tax-efficient gift of money become important later in life.

Estate planning is so much more than the $11M plus Federal Estate Tax Exclusion amount. Sure, if you are a deca-millionaire, estate planning takes on new aspects as no one wants to pay a 40% Estate Tax.

Let’s look at an optimized estate plan for doctors, discuss issues in-depth, such as giving to children, giving to grandchildren, upstream giving, then discuss Asset Protection, SLATs, and finally, disclaimer planning for doctors.

First: why is it important that DIY finance folks optimize their estate plan?


What is the Primary Goal of an Optimized Estate Plan for Doctors?

The primary goal of an optimized estate plan is to pay the least in taxes over your life. Actually, it is to pay the least amount in taxes over your and your heir’s life.

While taxes are important, they are not the only primary goal. The primary goal is to see your desires are met: the right person gets the right assets per your goals. So while wills and trusts are important, those are table stakes for these Advanced Ideas in Estate Planning for Doctors.

First goal, next purpose.

What Does an Estate Plan for Doctors Ensure?

What is the purpose of estate planning for doctors?

Well, you want to ensure that our assets (and our minor children!) go where they are supposed to when we die. Next, you want to minimize your death’s pain for your family, including limiting the assets that go through the public, expensive, and time-consuming probate process.

Finally, some have estate taxes to consider. Know the laws in your state to optimize your estate plan.


What are the Elements of an Estate Plan for Doctors?

The basic elements of an estate plan are the same for doctors and the rest of the people.

What is different about a doctor’s estate plan?

  • Private Practice (Usually set up as a professional corporation to limit the liability between the individual doctors, and may have an LLC to limit the liability of the business)
  • Unlimited Personal Liability for Medical Malpractice (though judgments almost never reach individuals). Protecting your assets against such liability is huge but usually an insurable risk.
  • Incapacitation (Especially if you own a practice, what will happen to your patients if you are mentally incapable of working?)
  • Delay in Making Money
  • Estate Distribution
  • Transfer Tax Planning (also known as the death tax, covers estate and inheritance taxes). More often a state issue rather than a federal one currently.


Purpose of an Optimized Estate Plan for Doctors

For doctors, an estate plan can be offputting. First, we don’t make a lot; then, we are busy and in debt. The next phase seems like riding the bull by the horn as you practice and maybe have a family.

An estate plan is optional and causes us to face our possible disability and inability to practice. Or death. And there are hard decisions to make, like who gets the kids if we both die?

However, the purpose of an estate plan is to avoid probate and meet your desires for your family and assets. You can minimize taxes and allow your hard work, which you turned into assets, to pass to charity or children, as is your desire.

It is going to go somewhere. So, where does it go that best serves your life’s purpose?

What if you wanted to leave it to the kids?


The Best Way for Doctors to Leave Money to their Kids

Inheritance. A goal for some is to leave behind money for their heirs. What is the most tax-efficient way to leave money to your children? What is the best way to leave money to heirs?

If your goal is your kid’s inheritance, consider which accounts you should leave behind, gifting during life, and tax implications of leaving money to your kids.

Which Accounts Should You Leave to Your Children?

There are three different types of assets from a tax perspective.

These asset buckets are: Never Taxable, Sometimes Taxable, and Always Taxable. Some are more tax-efficient to leave to your kids than others.

Never Taxable

An example of a “Never Taxable” account is a Roth IRA.

Roth IRAs are the best accounts to leave to your children as they will never pay taxes since you already did! In addition, these accounts continue to grow tax-free after inheritance.

Since the SECURE Act, these Roth IRAs must be closed before the end of year 10. The optimal way to receive this inheritance is to leave it in the Roth for ten years and then pull it out at the end.

Sometimes Taxable

“Sometimes Taxable” accounts are brokerage and savings accounts.

When invested, these accounts get a “step-up” in basis when you die. Say you bought VTI at $10, and when you die, it is worth $200.

If you sold the fund before death, you pay capital gains tax on the $190 of profit. When gifted during life, the basis transfers with the gift resulting in capital gains taxes.

But your heirs get a full step-up in basis of $200 at your death. Then, they can sell at $200 without paying capital gains.

If you have appreciated assets in brokerage accounts, leave them there until your death rather than giving them away. Then, your kids get a full step-up in basis! There are no Required Minimum Distributions on brokerage accounts, but any future growth is taxable.

Always Taxable

Always Taxable accounts require the most attention.

These “qualified accounts” are pre-tax retirement accounts. Whenever distributions are taken from these accounts–by you or your heirs–taxes are due.

I’ve included a few advanced strategies to deal with these accounts at the end of this blog.

Other Types of Assets Left Behind

Let’s briefly look at some other assets you leave behind when you die.

Real property gets a step-up in basis upon death. Titling of these properties is important and deserves an entire blog of its own. The short lesson: don’t tile these properties as joint tenants with rights of survivorship with your children. If you do so, it only gets a partial step-up in basis.

Bank accounts similarly should not be titled as joint tenants. If you have a bank account, keep it in your name and ensure it has a Transfer on Death designation. This will keep it out of probate.

Stock and mutual fund accounts can also have a Transfer-on-Death designation. They get a full step-up in basis and shouldn’t be gifted. If you must gift stocks, gift those with the highest basis as basis transfers upon gifting.

Payouts from life insurance are tax-free.

Gifting During Life

It is best to give with warm hands.

Under current law, each spouse can give a maximum of $16,000 a year to a person without filing a gift tax return. If you give more than that, you won’t pay gift taxes until you reach the $11+ million-dollar estate tax exclusion limit ($22 million for a couple), but you have to file the return with your taxes. If you gift split—a married couple can give up to $32,000 a year to any individual—a gift tax return must be filled out as well.

You can give an unlimited amount to a university or hospital to pay for anyone’s educational or medical expenses. Just make the check directly out to the institution.

Also, think about a super-annual gift into a 529 for grandchildren. If married, put in 5 years’ worth of gift tax exclusions into a 529. This is $30,000 x 5 = $150,000 per grandchild. Remember, if grandparents own the 529, don’t use the account until the second semester of sophomore year. This keeps it from counting as income for the student for financial aid purposes.


Doctors need More than a Will

It is important to understand that whenever possible, assets should pass outside of probate. Having assets pass via a Will means they go through probate.

Probating a Will can be costly time consuming, and it is a matter of public records. Assets pass via the rule of law, trusts, and beneficiary forms before being included in probate. This is a vital topic to understand.

At bare minimum, know the beneficiary forms and have them filled out appropriately. Notably, a trust not explicitly designed for a retirement account is unsuitable. Don’t have any old trust named as a beneficiary of an IRA. This will blow up the IRA, and taxes will be due on the entire account.

Do Doctors Need a Living Trust?

In some states, you don’t need a living trust. Assets can pass on after your death via other mechanisms (see above). If there are assets that you cannot pass on any other way, consider a living trust. With this document, you make the trust owner of assets, so they don’t pass via probate. Essentially, you do the work of probate before your death, re-titling the assets to your trust. Setting up the trust is not enough. Assets must actually be re-titled into the trust. Living trusts are smart in some states where probate is particularly expensive or otherwise offensive.

Considerations for your Always Taxable Accounts

If you are a 401k Millionaire, then you have a problem. The IRS will crack open these accounts and tax the deferred income inside them. See my previous blog on The Tax Planning Window as reference, but partial Roth Conversions are an excellent strategy for gifting to your children.

What if you have a starving artist child in the zero-tax bracket? Or is your child a high-income doctor practicing in a high-income tax state? There are different considerations for partial Roth conversions during your lifetime, depending on your heir. The goal is to pay the least in taxes over both your and your heir’s lifetime.

Child in the Zero Tax Bracket

If your child has low income, why pay a lot of taxes now to convert to a Roth? When they inherit your IRA, hopefully, they will “stretch” it over ten years to pay the least amount in tax possible.

estate plan for doctors

(Low Tax Bracket Heir)

Above is an example of a partial Roth conversion strategy for a couple with an heir in a low tax bracket. You can see in green they retire at age 60, and income drops from the 24% tax bracket to zero.

Note that the tax brackets have two values. The Tax Cut and Jobs Act (TCJA) expires in 2025. Tax rates will go back up from 12% to 15%, from 22% to 25%, and from 24% to 28%. Most people think that the TCJA will not be renewed, and taxes are “on-sale” currently.

There are two overlapping scenarios demonstrated above. Without partial Roth conversions, see in green, RMDs start once they turn 70. These RMDs kick them up into the 22%/25% tax bracket, and once they are 75 years of age, they pay at the 24%/28% tax bracket.

Let’s optimize this scenario for an heir in the zero percent tax bracket. You heir has access to the standard deduction and the 10% and 12% tax bracket to absorb income from the inherited IRA.

It is not cost-effective to convert too much into a Roth IRA and pay significant taxes now when your heir will pay less in taxes later.

You can see that they do partial Roth conversions up into the 12%/15% tax bracket in blue. This optimizes their taxes from RMDs but doesn’t convert too much as the heir can inherit what is left and pay taxes at a lower rate.

Remember, your goal is to pay Uncle Sam as little as possible over both your and your heir’s lifetime.

If you have two heirs in very different tax brackets, consider leaving them accounts accordingly. Your high-income heir can get the Roth and brokerage accounts. Your low-income heir can get the qualified accounts (pre-tax IRAs).

Child in a High Tax Bracket

On the other hand, if your heir makes a lot of income, perhaps you are better off paying taxes now. As a retiree, you may have little income and thus access to your lower tax brackets.

Conversely, In the future, when your heir is forced to take RMDs from the inherited IRAs, they will pay tax at their marginal (highest) tax rate.  Again, the goal: pay the least taxes over the combined lives of you and your heir.


doctor estate planning

(High Tax Bracket Heir)

Let’s think about a child who will inherit an IRA who is already very successful. Assume they are paying taxes at a combined rate of 48%. If you want to leave them your IRA, YOU might plan on paying taxes at your lower rate to do partial Roth conversions.

Again, this couple retires at 60. In green are future expected RMDs without doing partial Roth conversions.

Note in blue that they utilize the 24%/28% tax bracket to do partial Roth conversions before RMDs at age 70. In addition, despite the increased taxes on their social security (and other taxes like IRMAA), they continue to do partial Roth conversions into the 22%/25% tax bracket until the entire IRA is converted into a Roth IRA.

If their heir inherits a taxable IRA while in the 48% tax bracket, they pay taxes at the marginal rate of 48%. Meanwhile, during retirement, this couple only pay taxes at less than 24%/28%.

What If Both You and Your Heir are in High Tax Brackets?

This is going to get even more complicated. I’m sorry, but this is advanced stuff.

If both you and your heir are in high tax brackets: leverage life insurance and a Charitable Remainder Unitrust.

I know, permanent life insurance is not popular in doctor financial blogs. But, if you don’t need the RMDs from your IRA, yet you and your child are in high tax brackets, this can leverage your Always Taxable money into a Never Taxable life insurance payout.

The basic idea is to get a second-to-die guaranteed universal life (GUL) policy for the death benefit. There is no cash accumulation with these policies. I’ve heard insurance salespeople don’t like GULs as they don’t pay good commissions. Salespeople may also try to sell you on cash value, but what you want is death benefit and nothing more.

Since it is a second-to-die policy, it is less expensive than a single-life policy. Use RMDs from the IRA to pay premiums. Upon the death of the second spouse, your heir gets $1-5 million dollars tax-free. That’s right, death benefits are tax-free! Apparently, these second-to-die policies may have internal rates of return above 5% per year. This is not bad considering you are leveraging an Always Taxable asset into a Never Taxable one.

Next, leave the rest of the IRA into a Charitable Remainder Trust. Without getting too far into the weeds, an irrevocable election to a Charitable Remainder Unitrust (CRUT) can pay income to your heirs for 20 or more years. Generally, depending on the terms of the trust, income is about 5-8% of total assets in the trust. Of course, this money is taxable. And at the end of the term, the remainder (at least 10% of the initial grant) must go to the named charity.

What if the named charity is your heirs’ Donor Advised Fund (DAF)? That way, your legacy will continue on in your family as they can then donate this remainder as they see fit.

That is a lot of verbiage. Best guess: you will hear a lot more about this strategy, as the stretch IRA is on the chopping block in Congress in 2019. If your heirs lose the ability to stretch inherited IRAs, they will rapidly owe massive taxes during their peak income years.

The above strategy gives them a tax-free bolus of money from life insurance. In addition, they get a taxable income for 20 or more years from the CRUT. And in the end, the money goes to their DAF or another charity of your choice.

Conclusion: The Best Way for Doctors to Leave Money to their Kids

So, what is the best way to leave money to heirs?

My advice: convert to Roth if it makes sense from a tax perspective. Roth conversions are amazingly powerful and have many indications.

Leave brokerage accounts at death for a step-up in basis.

And watch out when leaving IRAs and other qualified accounts, as only death and taxes are inevitable in this life and the next.

Finally, make sure you have your beneficiary form correctly filled out with a disclaimer system in place. More on that later.

Well, instead of leaving money to the kids, what if your purpose was to leave money to the grandkids?


How Much Money Can a Grandparent give a Grandchild Tax-Free?



Can Grandparents give money to Grandchildren tax-free? Yes, but it takes some planning and understanding the tax code.

As to how much money a grandparent can give to a grandchild tax-free, well, the number depends on what kind of tax you are talking about. Let’s dive in!


Can Grandparents Give Money to Grandchildren Estate Tax-Free?

If we are talking about estate taxes, then the answer is almost certainly yes! You could give a child nearly $11.8M in 2022, and that would be estate tax-free. That’s right, the estate tax exemption is huge right now, so you could use up your entire unified estate and gift tax amount in a single year in a gift to a grandchild.

The yearly gift limit is $16k per person. If you and your spouse want to split a gift, you could give any single grandchild $32k a year. Though you would have to report it as a gift split on your taxes, this would be a tax-free gift to a grandchild.

Let’s look at some other taxes.


Can Grandparents Give Money to Grandchildren Capital Gains Tax-Free?

The basis on capital gains carries over with the gift. Therefore, you cannot transfer a gift and expect to escape capital gains.

Never gift losses, as losses don’t transfer. If you have a loss asset, sell it, take the loss for tax purposes, and transfer cash. If you have a highly appreciated asset, then you can transfer it, but the basis transfers with it.

For example, if you give them $15k of ABC stock with a basis of $5k, you have transferred the basis over with the gift. If they file their own taxes, they may very well be in the zero percent long-term capital gains tax bracket, and they could sell the stock capital gains tax-free.

This is called downstream gifting and is very effective when grandchildren are initially filing their own taxes but not yet making a lot of money. Watch out for the kiddie tax, however, if they are still on their parent’s tax return!

There is also upstream gifting where you give a grandparent a gift of a highly appreciated asset because you know one day they will pass on and pass back the asset with a step-up in basis.

Let’s look at some other ideas regarding tax fee gifts to grandchildren.


What are the Best Gifts to Give Tax-Free to Grandchildren?

Direct Payments

This is important! A Grandparent can Pay a Grandchild’s college or medical bills without any tax implications. There is an unlimited amount of college or medical costs you can pay for, as long as you directly pay the college or hospital (don’t give it to the child to pay the bills).


Cash is the most common gift, but they will pay ordinary interest on any gains in a savings account (etc.).

529 College Savings Plans

College savings is an excellent idea for most grandparents. There is a $15k limit every year, but you can superfund five years’ worth ($75k) in any one year. So two grandparents could fund $150k at once (for five years) into a 529 for a child. This can be used to pay many college expenses, but also some expenses before college as long as they qualify.

And don’t forget, a 529 plan can be used as a bonus saving account!

Finally, remember that some states have a yearly state income tax benefit for funding 529 plans for grandchildren. You can get a state income tax write-off and yet have the tax-deferred goodness of a 529 plan.

Can Grandparents give money to Grandchildren tax-free? YES, Use a Roth IRA

Perhaps the best way grandparents can give money to grandchildren tax-free is to help them fund a Roth IRA if the grandchild has income reported to the IRS. Even if they spend their money, if they report qualified income to the IRS, you can set up a Roth IRA for them in the amount of the income, up to the $6K Roth IRA limit. This is the best way you can give them tax-free money!

Fund an Employer Retirement Plan

If grandchildren are working but cannot afford to put money in their 401k, a grandparent could give them the money to spend and have them increase their deduction into the 401k. After all, money is fungible, and it doesn’t care where it comes from.

Better yet, if they have a Roth 401k option, fully funding that with $20k a year is a tremendous tax-free gift to your grandchildren!

Be the Bank; Give Grandchildren a Loan for Home Purchase

When grandchildren are ready to buy a home, you could offer to be the bank. Though you need to draw up formal loan documents and charge at least minimal interest amounts (as determined by the IRS), this is a great way to save them some interest and yet have a bond alternative for grandparents.


Education is the best tax-free gift grandparents can give grandchildren. Consider A Simple Path to Wealth as a starting point.


Other Ideas

Custodial Accounts (UTMAs and UGMAs) are accounts that can be opened at most custodians. You can manage them until the grandchild turns the age of majority (18, 21, or 26 – it is state dependent), but it does become their asset when they reach the magic age. Before that, while they are still on their parent’s tax return, custodial accounts can be very tax efficient. If the growth is less than ~2k a year, then there is minimal taxation, and the income does not stack on top of the parent’s income.

Inside, make sure you use low-cost, broadly diversified index ETFs to demonstrate good behavior to them. No individual stocks!

Cryptocurrencies. Just staying, they are going to do it anyway. Why not start young and give them some crypto?

Experiences With You! Perhaps the best gift to give is a time with you! Grandparents can take grandchildren on yearly trips or save up for something unique. This is the best tax-free gift that grandparents can give to grandchildren!


Inappropriate Gifts for Grandparents to Leave Grandchildren

I would suggest you don’t give cash for them to leave in a savings account unless they have goals in the immediate future. While a grandchild must earn, save, and then invest unless you teach them how to invest—who will? Investing in something more than a savings account is the true blessing you can leave a child.

And we all know that children will make mistakes with their money. We all did. The hope is that they make the mistakes early in life rather than with extra zeros at the end later in life.

Similarly, I don’t suggest series EE- or I-Bonds as gifts to grandchildren. These, while hopefully, they will keep pace with inflation, will not grow over time and bless grandchildren like equities will. I suggest a savings bond gift alternative such as stocks, or even better low cost broadly diversified ETFs.

Also, do not give gold or other precious metals. While coins can be a fun gift, there is no learning you are giving them, aside from how to get a haircut when you lose it or try to turn it into cash.

Finally, life insurance for grandchildren is just plum a bad deal. There are indications for permanent life insurance, but a child has no indication.


Conclusion—Can Grandparents Give Money to Grandchildren Tax-Free?

So, the best tax-free gifts you can give your grandchildren are education and experiences!

If you want to focus on monetary gifts, Roth IRAs, 529s, and contributions to employer retirement plans can all be lovely tax-free gifts.

If the concern is estate tax, well, just keep under the $16k yearly exclusion amount, or go ahead and use up some of your lifetime exclusion if you don’t have a massive estate.

Meanwhile, you can’t help them escape ordinary taxes unless you give them cash to help pay the taxes if they fund a Roth IRA or Roth 401k. Capital gains transfer with the gift, so there is a creative way to pay less in taxes if you gift assets between the generations.

Grandparents can give money to their grandchildren tax-free but it does take some Advanced Ideas in Estate Planning for Doctors.

So far, we have covered giving to kids and grandkids. What about giving to parents as a way to optimize your estate plan?


Upstream Gifting and Gifting Gains

What is upstream gifting?

What if you gift your elderly parent an asset with massive capital gains? What if they held them until they get the step-up in basis at death, and then you inherit them back? No one ever pays the capital gains! This is upstream gifting!

While death and taxes are not fun to think about, both will happen. Upon death, when you inherit an asset, its basis gets stepped up. Also, you are allowed to gift anyone 16k a year… even a parent! And if we put the two facts together…

Why not gift away a low basis asset and get it back a few years later with a step up in basis? Let’s talk about upstream gifting and how it might help you erase some capital gains on highly appreciated assets.

An Example of Upstream Gifting 

Let’s say you have a mother who is elderly and will pass on in the next few years. If she is set financially and doesn’t need money, why not gift anyway to get a tax break?

Imagine you have 16k of stock that you paid 1k for. If you sell it, you pay 15k in long-term capital gains tax. Instead, use your yearly gift exclusion to give it to Mom. That is, directly transfer the shares from your brokerage account to hers. She gets the pleasure of paying taxes on the dividends each year, hopefully at her lower rate.

Then, when she passes, you get the 16k in stock back (plus growth). Maybe it is worth more now, but the basis of the stock resets the day she dies. It gets a step-up in basis. When you gave it to her, it kept the 1k basis since gifts retain their basis. After death, however, assets get stepped up and capital gains erased. That is, the stock now has the basis on her day of death, so instead of 15k of capital gains taxes, you owe zero if you sell the stock right after you inherit it back.

Gifting Gains

This gain gifting works well when you keep under the yearly gift exclusion of 16k a year. However, you and your spouse can give 64k to your mom and dad, as this is 16k x 4. You will have to fill out a gift splitting form with your taxes, but you do not lose out on your lifetime estate tax exclusion.

Directly transfer the shares from brokerage account to brokerage account. No selling to cash and transferring that.

Highly appreciated real estate is also a possibility to think about with upstream gifting, but you likely would consume some of your lifetime estate tax exclusion. This may or may not be an issue upon your death (depending on the size of your estate and how much they cut the estate tax exclusion is in the future).

Understand that when you gift an asset, the basis transfers. You can give gifts to anyone. If you give your kids (in a lower capital gains bracket) appreciated assets, they can sell them and recognize the capital gains at a lower tax rate.

Downstream Gifting

Let’s look at an example of gifting to your kids. This is called downstream gifting.

So here, assume you are in the 23.8% capital gains tax bracket, but your kids are under the 12% federal income tax bracket for ordinary taxes. They still have some room in their 0% capital gains bracket. If you gift them appreciated securities, they may be able to sell the asset, recognize the gain, but pay no taxes on it.

When considering downstream gifting, don’t forget about kiddie tax if you claim your children on your tax return. They can still have $2,200 of net unearned income a year, which may help during college age. This gets complicated and is beyond what I want to discuss here.

Giving to your kids is downstream gifting. Giving to your parents is called upstream gifting.

Upstream Gifting to your Parents

Why might you want to gift to your parents?

There are a lot of reasons! First, they might be in a lower capital gains bracket than you are and, like the example above, be able to recognize capital gains at 0 or 15% when you would pay 18.8% (above the NIIT income limit) or even 23.8%. Remember, there actually is no 20% capital gains bracket; review my bit on Capital Gains if you need to.

Note that the gift must be made at least a year before death. If you gift on the deathbed, the gift reverts back without a step-up in basis.

And make sure that Mom doesn’t get a new boyfriend and leave him the assets. After all, once you gifted, they are hers to do with as she pleases!

Other Issues in Upstream Gifting

Step up in basis

You can gift lots of things. Stocks, ETFs, mutual funds can all be moved electronically from account to account. Once the shares are in their brokerage account, the basis should transfer as well.

At death, you get a step-up in basis for inherited assets. Instead of the basis recorded, once the custodian receives a copy of the death certificate and transfers the assets to your account, the new basis should be stepped up to the date of death. Hopefully, you die when the market is up, but that’s pretty morbid!

The Usual Point of Yearly Exclusion Gifting

Generally, we think about yearly exclusionary gifting if you are up against the estate tax limit. For example, a couple can give their married child 64k a year. That is, each parent can provide each of the couple with 16k. The parents will need to fill out a gift-split form when they do their taxes, but this is a way to get money out of your estate.

This usually works best if you give something that is going to appreciate between now and when estate taxes are due. So, for example, you could put your business in an LLC and then gift shares of the LLC that will be worth much more in 10 years. Then, when you pass, the growth of the assets is in your kid’s name and not part of your estate.

Gifting between Elderly in Non-Community Property States

Ownership is also a consideration between spouses in non-community property states. There is “gifting” between spouses, but you have an unlimited marital deduction, so there are no limits on intra-marriage gifting.

You get a full step-up in basis of all assets any time either spouse dies in a community property state. Seems like most people don’t understand this, and it can be tricky when you move to a non-community property state.

In non-community property states, have the spouse who will die first own all the low basis assets in their name. Then when the other spouse inherits them, they will get a full step-up, rather than just a ½ step up that you would otherwise get if owned joint.

Don’t Gift Loss Property

Just as a reminder, or take note if you haven’t heard this before, never give loss property. If you have a loss on the asset, sell and recognize the loss and give away the cash.

If you give loss property, the loss doesn’t transfer, and the asset has a split double basis. Don’t worry about the behind-the-scene numbers; just understand that you don’t gift losses. Ok?

Don’t Gift Assets Before Death

While we are on what not to do, don’t gift appreciated assets before death. If you leave them in your will instead (or beneficiary form, trust, or transfer-on-death account), you will get the step-up in basis. If you gift them, their basis transfers, and you lose the step up!

This is a not-infrequent mistake around titling of the home. If you put your children on the title of your home before death, thinking it will be easier to transfer the home, you lose the step-up in basis on the home! Putting someone on the title is a gift of the property; thus, it does not get a complete step up. This can be a massive mistake as each individual gets 250k of free step up in the home value when they sell (or die).

Summary: Upstream Gifting

In summary, you can take advantage of lower capital gains brackets by upstream or downstream gifting to the yearly gift tax exclusion. Don’t gift loss property! Take the loss.

Downstream gifting has the complications of kiddie tax, but upstream gifting has the advantage of step-up in basis upon death. Even if you don’t think you will have estate tax issues, giving highly-appreciated assets to your parent is a consideration.

These maneuvers don’t take time but can save thousands of dollars in capital gains taxes. Not a bad return on investment as every dollar the government doesn’t get is another one to spend or give away.

Next, we are going to take a hard pivot from giving to asset protection. The purpose of estate planning requires you to have an asset plan in place. What kind of plan you have in place depends on your life stage.


Asset Protection for Doctors


Doctors need asset protection. Asset Protection for doctors depends on their life stage. What do you need to know now to protect your assets?

Well, that depends on your age and your stage in wealth creation.

Let’s look at Asset Protection Strategies and determine which are right for you.

Once you start working, your major asset is human capital. Your ability to work. Protect human capital like the gold mine it is!

Later in life, as you convert human capital to assets, there are additional considerations that pile on top. What type of accounts or investments should you fund? How can you keep those various assets Safe? What are the perils and how can you mitigate them?

Still later, in retirement, tag on aging, estate and legacy considerations. Prior asset protection strategies evolve over time as your goals change, but they never completely resolve.

As a high-income earner, you are a gold mine to overactive lawyers and juries of your “peers.” Your goal– even if you are rich — don’t appear so to someone who might want to take your assets and make them their own! You cannot always prevent all lawsuits, but you can become a smaller target by avoiding some asset protection land minds.

Let’s look at protecting your resources for folks early in their career, mid-career, and in retirement to see what perils or land minds each group needs to consider.

Protecting Assets Through the Life Stages

asset protection for doctors

Asset Protection for Doctors Through the Life Stages

Above, you can see different perils or risk and ideas for mitigation depending on your career stage. Let’s walk through the stages in a doctors career and see what property protection steps you need to consider.

Asset Protection Strategies for Early Career

Perils abound for the newly minted professionals. As human capital is the engine that drives asset accumulation, career risk—that is, you might lose your job—is a huge consideration. There are many ways to mitigate this risk, and maintaining income is the primary concern early in your career.

Beyond that are many insurable risks, such as life, disability, health, and liability. These are discussed below.

Finally, divorce is common and usually devastating to finances. I am not brave enough to reflect on how to mitigate divorce risk. Understand, though, that divorces is not infrequently the largest risk professionals face when protecting assets.

Human Capital

When you are a young, your greatest asset is human capital. This is literally the ability to work and earn income in the future. You convert human capital into over your career with the goal of using assets rather than your labor to support yourself.

How can you conserve your human capital?

If other people depend on you, then life insurance is a must. Most young folks do not have an appropriate indication for permanent life insurance, so stick with term life insurance.

Disability insurance is important. Much has been written on the topic of disability insurance in other blogs so I won’t focus on it.

Health care insurance is a must. Nothing can drain your bank account faster than the broken health care system we have.

As far as personal liability insurance, yes please! “Max out” your home and auto policies and get $2-5M worth of umbrella insurance. As a high-income earner, this is a necessary expense to safeguard your future.

Professional liability insurance is important, but outside the scope of this discussion. Malpractice insurance is a must, obviously, as is other professional liability insurance depending on your career. Despite high impact stories, it is very rare that a suit ever gets above policy limits. If so, it usually is reduced to policy limits on appeal. Personal assets are only very rarely garnered due to professional liability.

Asset Protection in Mid-Career

At least some attention should be paid to creditor protection by mid-career. That is, there is not a zero probability that you will go bankrupt at some point in your life. Many found themselves contemplating bankruptcy in 2008, and as we know the economy is cyclical. At least acknowledge what your State provides for bankruptcy protection.

In mid-career, consider predators in the context of liability. The longer you accumulate assets, the higher the chances you will become a target. In addition, families, houses, and young drivers are also sources of risk.

In order to safeguard assets, start with Exclusion Planning.

Exclusion Planning

First, let’s remember that predator protection (lawsuits) differs from creditor protection (bankruptcy).

That said, some assets are protected from bankruptcy (creditors). This is State dependent, so know what your State-specific statutes say. This is the first stop in property protection. Which assets do you own that are automatically protected by State Law?

A good (though hard to read) resource is here.


Some states are more generous than others. For instance, Montana protects homesteads up to $250,000, whereas other states are more or less generous. Texas and Florida have unlimited homestead protections!

Retirement Accounts-

This is a big one. Remember ERISA plans (401k and defined benefit pensions) have federal protection, whereas other requirement accounts are State-specific. 403b and governmental 457 plans are technically not protected by ERISA but have equivalent significant protection. IRAs are usually covered up to $1M plus, however, inherited IRAs are not considered retirement accounts and treatment is State-specific. Finally, remember non-governmental 457s are not even your asset (they are an asset of your employer and subject to their creditors).


This, again, is very State-specific. Look up and see if annuity payments are protected from bankruptcy, and how much of the cash value of permanent life insurance policies is covered. Disability payments and medical and group payments are also state specific but less frequently considered.


Varies depending on the State. For instance, Montana protects personal property up to $4,500 and Tools up to $3,000. What about my horses and cows?


Tenants By the Entirety is important to understand. This is also State-specific so see below.  Tenants By the Entirety is a way to title assets such that you don’t fully control the asset, so the asset can’t be taken away from you if you are individually named. This is a powerful asset protection trick so find out if your State allows TBE titling.

doctor asset protection and estate plan


Additional Mid-Career Considerations

In reality, there are three paths to wealth.

The first, paper assets, focuses on retirement and brokerage accounts. If there are absolutely no other alternatives, consider insurance products (the dreaded annuities and life insurance) if you have a significant need for asset protection.

Secondly, real assets (owning business and real estate) require professional guidance with titling, incorporation, and other protection issues.

Finally, the entrepreneur who builds businesses should also seek professional assistance.

Protecting your assets depend heavily on your chosen path.

For all three paths, the high-income earner should consider tax-deferred retirement accounts as a primary savings vehicle. Don’t forget beneficiary designations!

This really is the heart of “classic” asset protection. What to do with your growing assets in mid-career? There is no magic bullet, unfortunately. Focus on the titling of assets, risk mitigation, and get professional assistance.

Let’s transition now to estate and legacy issues.

Safeguarding Assets in Retirement

You must address the known risks in retirement. There are many known risks, but health care and Long-Term Care are front and center for most folks, and will be specifically mentioned below.

Estate and Legacy planning are also times to think about safeguarding assets. You have amassed much. How it is spent when you are gone is an important consideration.

Sure, you should have an estate plan in place. This includes a will, but a will is not enough! Make sure you have your designated beneficiaries in place for those accounts that transfer outside of trusts and/or probate. This is an important, yet neglected consideration.

Predators, Creditors, and Long-Term Care

There are actually three monsters to concern yourself with at this life stage: predators, creditors, and Long-Term Care.

I have discussed Long-Term Care Insurance, and it truly is a difficult decision. The current pitch to doctors is hybrid life insurance / Long-Term Care Insurance products. If you are considering one of these hybrid policies, make sure you understand the Tax Implications of Long-Term Care Insurance because the person selling you one surely won’t mention this massive downside.

Traditional Long-Term Care Insurance, while it provides more comprehensive coverage, is expensive and likely to continue to have increasing premiums. Self-funding is a third option. Again, Long-Term Care insurance is a difficult subject and there are truly no good options currently.

What about healthcare costs? Medicare is important. Expect (and plan for) healthcare costs to increase faster than inflation during retirement. This may include a buffer account for future expenses, or build your floor income with especially high health care inflation in mind. Keep IRMAA in mind!

Let’s focus on trusts for a second, as they are also misunderstood.

Trusts for Safeguarding Assets 

If you are a lumper, there are two types of trusts: Revocable and Irrevocable.

Revocable (or living) trusts are NOT for protecting assets. They may make your assets more difficult to discover, but as you control and benefit from a revocable trust, there is no property protection. Remember, these trusts are for passing assets outside of probate and to protect you if you become incapacitated.

Irrevocable trusts remove the asset from your control, thus providing property protection.

Initial irrevocable trusts are intended for estate TAX planning. Currently, the estate tax exclusion is over $11M ($22M with spousal portability), so we are usually not concerned with estate TAX planning.

There are three parties to an irrevocable trust: the grantor (who provides the assets), the trustee (who manages the assets), and the beneficiary (who benefits from the assets).

Generally, the grantor cannot be the beneficiary (as irrevocable implies you give away the assets and cannot benefit from them).

So, in summary, we have revocable trusts which are used for estate planning, and irrevocable trusts which are used for estate TAX planning. In the middle is property protection.

What is the Point of Asset Protection Strategies?

A brief word about the goal or the point of asset protection.

Asset protection seeks to separate control and ownership of assets. That is, you still control the asset, but if someone has a judgment against you, you don’t own the asset so there is nothing to take!

Specifically, asset protection does not protect you from lawsuits, it just makes you a less appealing target. If you don’t own many assets, or it is not easy for lawyers to see through your assets and decide you are a fat target, you are less attractive to sue.

So, when protecting assets, you place a legal barrier between you and your assets. This does not make you judgment proof but does provide you with leverage to settle claims rather than pay them out.

Given fraudulent transfer concerns, protect your assets preemptively, before you are sued.

Asset Protection Structure

estate planning for doctors

Above, you can see a schema of a complicated strategy. There are many different versions of this, but let’s focus on some basic elements.

LLCs own separate assets. Keeping assets in separate LLCs prevents a judgment against one asset from affecting others.

Above that, there is a holding company that may be in a state that provides anonymity for your assets. In addition, this holding company has discretion so it does not have to distribute assets to creditors even if there is a judgment.

As an aside, it is often better to have your brokerage account assets in an FLP or TBE.

On top, all assets are owned by your living trust. This does not provide protection for you, but does avoid probate upon your death and is a source of protection for your heirs.

A full discussion of this type of protection scheme is beyond the scope of this little ditty. It shows you what you might be in for if you truly want a comprehensive strategy…

Conclusion- Asset Protection for Doctors

Asset protection for doctors is not a one-and-done game. It is a process that depends on where you are in your life cycle. Continued learning and assessment of your current strategy is an important component of your overall financial health.

There are no magic bullets. Understand what perils are common and do your best to mitigate known risks.

When you are young, protect your human capital. As human capital becomes assets, optimally utilize State-specific exclusion planning.

Designated beneficiary forms and asset-specific planning are important. Wills and sometimes trusts are early components of a comprehensive estate plan. Moving on to retirement, complexity grows as you access your assets for income and mitigate known risks.

With the growth of assets, safeguarding them becomes more complicated. It is worthy consideration, however, to protect you, your family, and your legacy.


If you have succeeded in your gathering and protection of assets, you just may have a Federal Estate Tax problem. Consider a SLAT.


Worried about Estate Taxes? Consider a SLAT


What is a SLAT used for estate planning? Are you worried about estate taxes, or do you think the exemption amount will go down?

Currently, you can have more than $11.7M in your estate before you pay estate taxes, but talk on the town is that number might decrease. By a lot! Right now, it may be an opportunity to consider a SLAT.

Let’s define SLATs, determine what they can be used for, and talk about the advantages and disadvantages of a SLAT for estate planning.


SLAT Trust Meaning, SLAT Definition

What is a SLAT Trust? Well, first off, the “T” stands for trust so a SLAT Trust is a bit redundant. The meaning of SLAT is “Spousal Lifetime Access Trust.”

The definition of a SLAT: It is an irrevocable gift from one spouse to the other for their benefit. Since it is an irrevocable gift, it uses up the current estate tax exemption.

The idea is to use your $11.7M estate tax exemption now before they go and decrease it. If it is lowered in the future, you will have already used up the higher exemption so you have no exemption left over. Fundamentally, it is a way to make sure you are not hit by estate taxes if the exemption decreases in the future.

Each spouse can use their $11.7M estate tax exemption through SLATs, which means you can tuck away $23.4M and change free from estate taxes. This is also an “estate freeze” technique, which means all future growth of the assets in a SLAT occur outside of the estate.

SLAT trusts are similar to bypass or credit shelter trust, though those trusts are funded at death whereas SLATs are gifts and funded while alive.

A critical point about a SLAT, aside from that it is irrevocable, is that it is meant to avoid the unlimited gift tax marital deduction. Instead of “giving” your assets to your spouse at death (the amount of intra-spouse transfer is unlimited; and the estate tax is portable from one spouse to the other), you force the use of your estate tax exemption before your death. I hope you understand that point!

The spouse receiving the SLAT can benefit from the income of the trust, but it is not “theirs” so it is not included in their estate for tax purposes. You have already “utilized” the estate tax exemption. There are also some excellent asset protection features which will be discussed below.

What can a SLAT be used for?


What Can a SLAT be Used For?

A SLAT can be used by a married couple who want to take advantage of their estate tax exemption now while it is still high.

If you fear the estate tax exemption will be decreased to $5M or $3.5M, then a couple can each use the exemption in current law. The goal of a SLAT is to use up that higher exception now, so they get “credit” for it even if they die in the future when the exemption is smaller.

Thus, a SLAT is sometimes used to avoid paying estate taxes. This is an especially powerful technique if you have more than $23M, but may be appropriate for some with $11M who want to utilize a single spouse’s exemption amount. This may be true if one of the spouses is expected to have a short life than the other.

There is also a business use case discussed below.

It is important to note that there are no Claw Backs for Estate Taxes, so if you utilize your exemption now, you should be good to go even if it is decreased in the future.


No Claw Back for SLATs

Even if the estate tax exemption is decreased in the future, there is no “clawback” of your utilized estate tax exemption. That is, you don’t “owe” $6M or more in estate taxes if you use your $11M now and the estate tax exclusion is decreased to $5M in the future.

Of course, tax law is written in pencil, but this would be a truly evil change to make in the future. Let’s talk more about the current taxation of SLATs.


Taxation of SLATs

A SLAT is a grantor trust, which means the donor pays the taxes on the SLAT. This is good, as the federal income taxes are compressed for trusts (so you don’t want trusts paying taxes when an individual can).

Specifically, individuals have more room to recognize income in at lower marginal tax rates before they hit the highest marginal tax rate, whereas trusts hit the highest marginal tax rates at much lower levels of income.

So, when you sign on the line for a SLAT, your spouse may get the income if they wish, but you continue to pay the taxes on the assets in the trust! This helps as an estate freeze technique and allows the money to grow larger outside the estate rather than within the estate (where estate taxes may be owed).

In addition, you don’t want “leakage” of the trust. If you pull money out and then put it in your estate (or, heaven forbid, a joint account!), then the money is included back in your estate for estate tax purposes. If the purpose of a SLAT is to utilize the Estate Tax Exemption amount, be careful pulling assets back into the estate, which may be double taxed (for estate tax purposes).

Another use case for a SLAT: is asset protection. Let’s look at that now.


Asset Protection of a SLAT

SLATs also provide asset protection, as the assets are held in an irrevocable trust. Specifically, the donor has no access to the trust, and usually cannot be forced to access the assets in the trust. I shouldn’t go overboard, as if the initial funding (conveyance) is deemed fraudulent, a judge might access the assets within the trust on behalf of the creditors.

But as long as this trust is set up well before any creditor problems, it can be an important part of asset protection system.

Also, it is likely that the SLAT has spendthrift provisions which do not allow the spouse who receives the SLAT to access it in order to pay off a judgment. In English, this means that a creditor does not have the authority to force you to access assets of the trust in order to pay your judgments. If there is ongoing income, however, from the SLAT, certainly a creditor may lay claim to that income as it rolls in.

Laws are State specific, so discuss SLATs and asset protection with your estate attorney in your State. Assets should also be protected in the case of divorce as long as they are not co-mingled in the marital estate.

Now that we know a little bit about SLATs, let’s go over the pros and cons.


Pros and Cons of a SLAT

Pros of a SLAT

  • Utilize current estate tax exemption, and growth while in the SLAT is outside of the estate
  • Asset Protection
  • Income for the spouse and other beneficiaries, or access to the principle
  • Taxed to the donor
  • SLATs are relatively simple, low-cost trusts and are mostly quite easy to understand


Cons of a SLAT

  • Irrevocable, difficult to change terms once established
  • Grantor Trust, which may require an Independent Trustee for discretionary distributions
  • No Step-up in basis at death
  • In divorce, you continue to pay the taxes as your spouse benefits from the income, or worse
  • Need to have additional income outside the SLATs
  • Reciprocal Trust Doctrine issues


Reciprocal Trust Doctrine

Avoid the “reciprocal trust doctrine.” This is very important, as if you create two identical trusts, they may be disallowed. The IRS might find that the trust for your spouse is actually for your benefit, thus, the amount will be included in your estate for estate tax purposes.

Here are some ways to keep the trusts non-identical:

  • Fund with different types of assets
  • Fund with different amounts
  • Create and fund at different times
  • Use different trustees, with different powers
  • Have different beneficiaries of the SLAT
  • Establish the trusts in different states
  • Set up different terms for distributions (one may have generous access to income or principle, while the other is limited in distributions)


Example of a SLAT Use Case

A couple has $25M of mixed assets. They set up SLATs for each other (careful to avoid the reciprocal trust doctrine) and get $22M out of their estate. Each has different trustees, different assets, different disbursements, and the trusts were funded in different years and have different beneficiaries.

They plan to live on the income of one of the trusts and utilize the assets outside of the SLATs for their retirement. The SLATs pass on to their children and grandchildren when they die, and the rest of their estate is left to charity.


Other Important SLAT Considerations

Risk of Death or Divorce

When you set up the SLAT, you must consider the death of the non-donor spouse and the impact it has on the donor spouse. Once the beneficiary dies, the donor spouse no longer has indirect access to the trust.

Divorce may be even more devastating, as again the donor may lose indirect access to the trust, yet be expected to continue to pay the taxes of the trust!

Trustee Selection

The trustee of a SLAT is an important selection. The donor should not be trustee, but the non-donor spouse often is a good selection as long as their power of distributions is limited.

Loss of Step-Up of Basis upon Death

As a SLAT is irrevocable, the assets in the SLAT do not receive a step-up in basis at death.

The Estate Tax is 40% in most cases, so you need to consider the tax implications of the loss of step-up in basis of the trust’s assets.

SLAT Assets and Community Property

SLATs can only have the assets of the donor spouse. Take care in community property states as most assets obtained during marriage are considered community property.

Who is Beneficiary of a SLAT Trust?

Obviously, your spouse is the beneficiary of a SLAT. Your children or other descendants, or charity, may also be named.

Of course, if your goal is charitable giving, it may be useful to give while you are alive and reduce the taxable amount of your estate outside of a SLAT. The trustee has the power or discretion to distribute the income of the trust among the beneficiaries, as outlined in the trust document.

Usually, children become the beneficiaries of the trust upon the spouse’s death, but grandchildren may also be beneficiaries. Or, you can leave it to your spouse to assign beneficiaries of their SLAT.

GSTT Issues

There may be generation skipping transfer tax issues, but that is beyond the scope of this document.

Other Ways to Leverage SLATs

SLATs can be used to purchase life insurance, even with yearly (Crummy) gift donations. In addition, valuation discounts are possible when considering LLCs and partnerships.


Limitations of a SLAT

You may only gift (irrevocable) assets that are yours, not yours and your spouses. Thus things like joint bank accounts cannot be given to a SLAT.

Community property states complicate the mix, as most assets acquired during the marriage are community assets.

In addition, distributions cannot go to joint accounts, rather they should only go to the beneficiaries’ accounts.


What Are the Advantages of Creating a SLAT?

SLATs take advantage of the estate tax exemption during your lifetime. The goal is to use the the exemption before it is reduced in the future.

As mentioned above, SLATs may also be used for asset protection.

SLAT may also be combined with ILITs (Irrevocable Life Insurance Trusts), a dynasty trusts for the grandchildren, and even a credit shelter trust if there is any remaining estate tax exemption.


Business Use of a SLAT

SLATs may also be used for family businesses, especially those that are expected to apricate in the future. You can use a SLAT to fill up the estate tax exemption, and any future growth of the asset occurs outside of the estate.


State Estate Taxes

SLATs may also be funded to take advantage of State estate taxes. Check out your State to see if there is a state estate tax.

For most states, while there may be a state estate tax, there is no state gift tax, so you can fund these trusts and get them out of your estate prior to death. Since they are not part of your estate at death, state estate taxes are not levied.

Again, this is a state by state issue so discuss carefully with your estate attorney. There may be, however, an opportunity to escape state estate taxes even if you are not worried about federal estate taxes.


Summary – What is a SLAT for Estate Planning?

In summary, a SLAT is an effective tool for estate planning when you are worried about estate taxes. Utilizing your current estate tax exemption, you can provide your spouse access to income for life, all while providing asset protection and even a dynasty-type trust.

SLATs are flexible and have business use cases, and state estate tax considerations and can be used if one spouse has a shorter expected life span than the other.

There are many advantages to SLATs, but an obvious disadvantage is the irrevocable nature of the SLAT trust.

All in all, SLATs are an effective way to utilize the massive estate tax exemption NOW, before it shrinks in the future. If you plan to avoid estate taxes, you just might do so.

Finally, if you want to optimize your estate plan, you want to know about qualified disclaimer estate planning.


Best Use of Beneficiary Forms: Qualified Disclaimer Estate Planning



Qualified Disclaimer Estate Planning is the most flexible and tax-efficient way to pass on pre-tax retirement accounts to your family. While thinking about death and taxes is not much fun, both are going to happen at some point. Someone is going to pay the taxes after you die! Might as well make a plan!

What is Qualified Disclaimer planning and how can you use it in your estate plan? If you have a large amount in your pre-tax retirement accounts, pay attention! With just a minimum amount of planning, you can save a huge amount in taxes and give your spouse and children the flexibility to spilt your wealth after your death.


What is the Purpose of Qualified Disclaimer Planning?

Let’s start with the basics.

First, when you have pre-tax retirement accounts such as IRAs and 401k plans, the assets pass at your death via a beneficiary form. Not a will or trust, only via the beneficiary form.

It is almost never appropriate to name your estate as beneficiary of these pre-tax retirement accounts. This drags them back into probate which is inefficient and can be costly.

Next, trusts are poor beneficiaries of pre-tax accounts! Read that sentence again. If a trust is the beneficiary of your IRA and you don’t need to control the money from the grave, chances are you needlessly lose 40% of the money due to taxation. If you don’t get that, read my blog on the 10-year rule and retirement accounts.

So, the obvious question is: who should be beneficiary of your pre-tax retirement accounts? Well, it depends on the purpose of the money!

Remember the “I” in IRA stands for individual. It is yours until you die. You cannot transfer it to a charity or even to a spouse or child while you are alive (without paying the taxes first).

This money has not been taxed yet, and when you die, it is called “INCOME in Respect to the Decedent.” This IRD is treated differently than other assets in your estate. It still needs to be taxed! Remember, when you die your IRAs are not assets, they are deferred income that will be taxed.

The purpose of disclaimer planning is to allow the family member who needs the money to access it in the most tax-efficient way. Qualified disclaimer estate planning is tax-efficient, and it is flexible.


What is Qualified Disclaimer Estate Planning?

Since most of us don’t really know when we are going to die, it is really hard to plan for IRDs in an IRA. What tax bracket is your spouse in after you die due to the widow/widower tax penalty? It depends on when you die and other income sources that go with you. Or, what about the tax bracket of your children for the 10-years after you die? Who knows! But post-mortem, they might have a better sense of income needs and future tax liabilities over the next ten years.

Enter qualified disclaimer estate planning: the post-mortem way to maximize the utility of your retirement assets. It optimizes your pre-tax retirement accounts for your heirs.

Remember, since the SECURE Act killed the stretch IRA, you need to change the philosophy of your estate plan. This is especially true for your IRD.


An Example of Disclaimer Planning in Use

Say there is a wife with a large IRA. She lists her husband as primary beneficiary, and her two children as 50% contingent beneficiaries.

When she passes, her husband has 9 months to decide if he needs the IRA. If he needs the money, by all means take it!

If he only needs half, or any percentage of it, then pass the rest on to the kids now and get a head start on a 10-year ‘mini’ stretch. That is, instead of waiting until he dies to pass on all the IRD, pass some on now. Hopefully, it will be 10 more years before he dies, so each heir gets two mini-10-year stretches. This can prevent spiking the income into higher tax brackets for the heirs as bad as if they got all of the IRAs all at once upon the death of the second spouse.

Back to the example, say he has his own large IRA. If he takes his wife’s IRA, he might be hit with the widow/widower tax penalty, and thus it saves in taxes to disclaim his wife’s IRA now. He doesn’t need the IRD as he is in a higher tax bracket as a widow, and his kids can start the mini-stretch with part of the IRA while he is still alive.

Or, if his kids are in really high tax brackets, he should take the IRA and pull out the money at his lower tax bracket. Next, invest the money in a brokerage account to get the step up in basis when he dies.

You can see how flexible this plan is! Once you are dead, your spouse and kids have a sense of their income needs and tax brackets. Keep some, and pass as much as you can on now. Or, if there is no need, pass all of it on now and start the 10-year clock early.


How to Set Up Qualified Disclaimer Planning

Spouse is the primary beneficiary. They can disclaim part or all of the IRA to the contingent beneficiaries.

Make the kids contingent beneficiaries. It is that simple to set up!

Next, tell your spouse that they have 9 months upon your death to disclaim whatever percent they think is appropriate to pass on the most to the kids over the longest period of time.


Is a Disclaimer a Gift?

Next, let’s clarify some other issues in disclaimer planning.

First off, even though your pre-tax retirement accounts pass via a beneficiary form, they are still included in your estate for the purposes of estate taxes. Since the estate tax exclusion is currently greater than $11M per person, this isn’t a huge issue for most folks.

Even if you give your IRA away to charity when you die, it is included in your estate (though your estate gets a deduction for the charitable gift so it comes out in the wash). This is again a reminder that someone will always pay taxes on this deferred income.

Next, when you leave your pre-tax retirement accounts to someone else at death, it may be considered a gift for estate planning purposes. If you leave it to your spouse, it doesn’t count as a gift due to the unlimited marital deduction. If you leave it to your kids, it is a gift, but is not double taxed against your estate tax exclusion. But if you leave your IRA to grandkids you need to think about GSTT (generation skipping transfer tax) but only if you are near the estate tax limit. Yes, that gets super confusing so don’t worry about it unless you might have a taxable estate.

But a qualified disclaimer is not a gift from the primary beneficiary to the contingent beneficiary. Qualified when talking about retirement accounts means that it is subject to ERISA. Qualified when talking about disclaimers means that it is specifically allowed by tax code not to count as a gift.


What Is a Qualified Disclaimer?

A qualified disclaimer is specifically one allowed in the tax code.

Anyone who inherits property can disclaim it, which serves the purpose of allowing the asset to go to the contingent beneficiaries.

In order for a disclaimer to be qualified it must hit the following criteria:

  • Writing: the refusal must be in writing.
  • Timing: the disclaimer must be made within nine months after the date of death unless the disclaiming beneficiary is under age 21.
  • No Acceptance: the disclaiming beneficiary must not have accepted any interest in the benefits. This does not include a final yearly RMD.
  • No Control: the disclaiming beneficiary cannot control to whom the property passes.


Non-qualified Disclaimer

Make sure you follow the rules for this, which should be pretty straightforward in most cases for assets. Assets can be qualified or non-qualified.

If you have a qualified disclaimer, it is as if the primary beneficiary never inherited the property. With a non-qualified disclaimer, on the other hand, the primary beneficiary is treated as if they got the property and then passed it on. This sucks, because there are taxes and gift tax implications. If the disclaimer is non-qualified, then the disclaimant, rather than the decedent, is treated as having transferred the asset to the contingent beneficiary.


The Disclaimer Need Not be for the Entire Amount

There are actually three ways to disclaim an asset:

  • Full Disclaimer. This is pretty self-evident.
  • Pecuniary (or dollar figure) Disclaimer. You can specify how much is disclaimed in dollars.
  • Fractional Disclaimer. Here you can disclaim just a proportion of the account. Say 10%. Or 50 or 90%. Keep what you need, pass on the rest.


Summary: Qualified Disclaimer Estate Planning for a Flexible and Tax-Efficient Legacy

A “qualified” disclaimer is an irrevocable refusal by a primary beneficiary to accept benefits or transfer of property. When done appropriately, the property passes to the contingent beneficiaries as if the primary beneficiary is dead.

The disclaimer can be complete or partial. In essence, disclaimer estate planning allows your family to decide the best way to split up your pre-tax retirement accounts after you die. Flexibility and the ability to control the taxes are key. Remember, there is an optimal way to leave money to charity, and there is an optimal way to leave money to your heirs.

There is little reason that most folks shouldn’t participate in disclaimer planning for their assets that pass via beneficiary form.



Conclusion: Advanced Ideas in Estate Planning for Doctors

We talked about giving and then covered other advanced ideas like disclaimer planning, SLATs, and asset protection.

The goal is the pay less in taxes. The purpose is to leave a legacy.

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