American Medical News

Splitting Heirs: Do's and Don'ts of Estate Planning

Planning ahead for the distribution of your estate will ensure your wishes are followed, and help keep your loved ones out of court -- and away from each other's throats -- after you die.


Katherine Vogt
AMNews

Your prized porcelain figurine could become a divisive force in your family, pitting siblings against each other, if you don't have a will.

And if the language in your will is vague, the $49 statuette could become the center of expensive litigation costing your heirs thousands of dollars as they battle for its ownership after your death.

"Some of the biggest fights I've seen in my practice were over knickknacks and china cabinets," said Les Kotzer, a wills and estate attorney in Toronto. "It sounds petty, but these things destroy a family."

Experts say basic estate planning can help avert major family feuds that erupt over even the slightest ambiguity about the wishes of a deceased relative. Whether it's choosing how to distribute assets among heirs, designating an executor of the will or bequeathing wealth to charity, the decision must be weighed carefully and properly documented, they say, or it can cause long-lasting rifts.

Without a will or other beneficiary arrangement, assets end up in probate court and are distributed to surviving relatives through a state formula and legal proceedings that identify heirs and value property. Though the process can pass assets to heirs, estate planners often recommend that clients with larger estates, like those of many doctors, use a will or a trust to distribute their wealth in a more precise, faster and perhaps tax-advantaged way that also may protect their assets from creditors.

"Generally, physicians' estates are larger, and that brings added planning needs. And they are more exposed than most people to lawsuits, so then the size of their estate and extra exposure makes them more in need of asset protection than most people," said Mike Janko, executive director of the National Assn. of Financial & Estate Planning.

Jerome Melchior, MD, a 60-year-old urologist in Vincennes, Ind., already has gone through the estate planning process twice and expects to update his plan again sometime soon.

"My father died when I was a senior in high school. I wanted to make sure that if such a catastrophe happened in our life, my family would be well-protected," Dr. Melchior said.

Dr. Melchior's first plan was drawn up while his children were still in preschool. He appointed a guardian for them in the event that he and his wife died. About 10 years later, he changed the plan because he had more property and tax laws had changed.

His current plan includes using several different trusts. He expects to tweak it soon, now that his children are adults.

"To do estate planning and to do a will means you have to recognize that you are going to die. And a lot of people don't like to see that as a possibility. Certainly we as physicians see it more than most. But we as physicians put off things like that more often than we should," Dr. Melchior said.

To get started, Janko recommends getting professional advice from a financial planner or accountant. Without it, a person would have to do considerable research and paperwork to properly create a plan. He said an attorney also should be involved at some point to review legal documents.

Once a dialogue is opened with a professional and basic facts about the family and assets are determined, Janko said the first decision would be whether to rely on a will or to create a trust.

A will can designate how assets should be distributed after the debts of the deceased person's estate are paid. It also can designate guardianship for any minor children left behind.

Most wills appoint an executor who is in charge of settling the estate, paying debts and distributing assets. Kotzer warned that being an executor requires a great deal of responsibility, and permission should be asked before naming someone an executor. He said the role can be shared, so parents may want to consider appointing all of their children as executors to avoid causing hard feelings.

For people with smaller estates, a will may be an adequate vessel for distributing assets, and probate court may be avoided. But probate still may be required even with a will if the estate includes property that is titled in the deceased person's name.

"That's lengthy and expensive; it's an open invitation to lawsuits and claims of all types, and it's public information, so most people like to avoid probate. And a trust will help do that really nicely," Janko said.

A matter of trust
Leigh-Alexandra Basha, a tax and estate planning attorney in Vienna, Va., said wills are good companion documents to trusts, providing a safety net to properly direct the distribution of any assets that were excluded from the trust.

Two main kinds of trusts -- revocable and irrevocable -- are commonly used in estate planning. Both are legal arrangements created to hold assets for designated beneficiaries, which could be people or charities. The trusts can contain anything from stock portfolios to real estate. Different types of trusts have different tax implications.

A revocable trust allows the person who created it to maintain control of its assets during his or her life, meaning assets can be moved and the trust can be changed, amended or revoked. These trusts are considered ideal for people who want the privacy benefits of a trust while keeping control of the property. But revocable trusts do not provide asset protection from creditors.

For that, an irrevocable trust can be used. These trusts generally cannot be amended or revoked, and assets within them are off-limits to creditors. For physicians who may be concerned about malpractice lawsuits, the asset protection may make irrevocable trusts an attractive tool.

Janko said trusts in general provide flexibility about how wealth is distributed after death. For example, a trust can hold onto assets for periods of a time, allowing young heirs to mature before inheriting any money.

Robert Brown, an estate planner and attorney in St. Louis, recommends trusts for higher-income clients. He said trusts can be more expensive than other estate planning tools -- a basic one costs about $1,300 compared with roughly $400 for an average will -- but they also have advantages. The key to making them work, he said, is ensuring that the assets they hold are titled properly.

"We're forever amazed how many people put a lot of time into the whole estate planning process, then no one follows through to title the assets and make sure what they want to happen, happens," Brown said.

Most assets up to a certain limit are exempt from being taxed after a person dies, meaning the heirs shouldn't have to pay taxes on property left behind. The limit is $1 million this year, but anything on top of that can be taxed at a rate of 49%. The limits and rates are scheduled to change through 2010.

John Frantz, MD, an internist in Monroe, Wis., has his estate set up so his heirs won't have to worry about what is left over when he dies. His goal is to get the value of his estate as close to zero as possible while he is alive, depleting but not outliving his nest egg.

"My guiding principle in estate planning is to arrange for my estate to self-destruct, so it's all over when you're done. Meanwhile, you've got more to play with," Dr. Frantz said. "You tell your heirs that you've got your estate rigged up to be more generous."

Dr. Frantz advocates using annuities and charitable remainder trusts to maintain income while giving away wealth. He also grants interest-free loans to charities, which gives him the option of calling in the money if he needs it while he is still alive. "It destroys the income," so it has tax benefits, he said. "And you're providing it to a charity that you want to support."

Dr. Frantz and his wife -- also an 80-year-old practicing internist -- have picked each other to take charge of the estate if the other becomes incapacitated. The role is called a durable power of attorney. Dr. Frantz said their children were fine with the decision. "They don't live nearby and were just as glad we didn't pick them."

Experts say designating someone to have durable power of attorney is a critical choice because in the event of incapacity, the appointee will have access to and control over everything from tax returns to payment of medical reimbursements.

A similar role is assigned by designating a medical power of attorney, which varies in different states. The appointee carries out a person's medical decisions in case of incapacity.

"Oftentimes the individual you would choose for a medical power [of attorney] would be very different [than a durable power] because you would want different qualities and characteristics," said Basha, the tax and estate planning attorney. "I've had clients whose kids say, 'I don't feel comfortable knowing I pulled the plug on Mom or Dad. Don't ask me. I can't do it.' "

She said it was important to have an attorney draft the documents that grant powers of attorney so they can survive any legal challenges. She also said it was important to update the documents at least every three to five years to ensure their legitimacy.

Updating the plan
Updating the estate plan every few years can help ensure that names on titles are correct and all property is catalogued. Basha said updates are especially critical following a divorce because the former spouse's name might remain on some assets. Those items that were owned in joint tenancy by a couple go to the surviving spouse after the other's death unless they have been retitled.

"Maybe everything was OK when Dad was around, but you take him away and suddenly Dad's children don't get along with Dad's wife," she said. "If everything has been done and is in place, that's the best legacy the parent can leave the children. It's to have cared enough to put their own fear of mortality aside, to sit down and say my children won't have to pick up the pieces of this mess."

Basha said estate plans succumb to legal challenges when people try to do them "on the cheap." She knew a man who went to Bolivia to do his estate planning because he thought it would provide savings. Instead, after his death, his estate racked up a fortune in costs going through probate in the United States.

But challenges can arise to any estate, especially if heirs feel confused about the wishes of the deceased person, said Kotzer, who co-authored the book, "The Family Fight: Planning to Avoid It." He recommends cataloguing personal belongings, possibly even videotaping them, so they can be easily itemized and directed properly after death. Also, he said it can be helpful to leave directions for heirs about where to find important documents and other belongings such as keys.

Deb Harper, MD, a pediatrician in Spokane, Wash., said she and her husband periodically talk to their children about the choices they have made regarding estate planning.

"It's certainly important within my family not to have living members fall out as a result of squabbling over something that's left in the estate," Dr. Harper said. "That's one of the reasons we go over this pretty regularly.