Many physicians think they have protected their family’s future by making sure they have sufficient insurance coverage. But securing the right insurance policies is only one part of the picture.
If your insurance planning isn’t coordinated with the appropriate estate planning elements, the results can be entirely different from what you expect.
Insurance in Place, Estate Plans Neglected
While most physicians prioritize insurance planning, many overlook estate planning. In fact, one of the very first questions we ask physicians with families is whether they have a will in place. Many do not, let alone a full estate plan.
A 2016 study of U.S. physicians found that only 53 percent of practicing physicians have an updated will, 44 percent have a power of attorney, 30 percent have a living trust and 23 percent have a plan for estate tax. 35 percent do not have any estate planning elements in place.
A physician couple recently partnered with us. Like many physicians, they already had an “insurance guy” and an “investment guy,” but no other formal plans. They had two school-aged children and an estate worth more than $22 million.
While their insurance agent did a very good job making sure the couple had the appropriate policies and coverage levels for their family, he failed to coordinate the insurance with wills, trusts and other estate plans. Because of this lack of coordination and the amount of insurance sold, the couple’s family would have had to deal with significant inheritance tax issues.
After purchasing the right insurance coverage to benefit their children as the couple wished, their children would in fact lose much of that inheritance to the IRS—something the couple could have prevented by appropriately structuring their estate.
What Happens if Something Happens to You
One of the first things we worked on with this couple was establishing their wills, trusts, healthcare proxies, powers of attorney, an estate tax plan and other appropriate estate planning elements, all integrated with their insurance. If something had happened to this couple before executing these plans, their insurance coverage would have applied, but their family would run into a number of considerable problems as a result of incomplete and uncoordinated planning.
If you die without a will, state law serves as your will. This may lead to undesirable effects if one person passes away, but what if both parents die in an accident? The results are much less palatable.
In the case of this couple, their two younger children would be entrusted to guardians appointed by the state, not carefully selected by the parents based on their children’s needs, relationships with extended family and friends, and other considerations only the parents fully understand.
Similarly, the state would choose a trustee to manage the children’s inheritance until they reach age 18. What will be the character or qualifications of this person given stewardship of such a large estate? Will they truly have the children’s best interests in mind? Will they oversee the estate in a way that increases its value over time, or will they make imprudent decisions?
At the same time, the children would come into their full inheritance as soon as they turn 18. Generally speaking, most young people simply aren’t prepared to handle that kind of wealth at one time. They may quickly lose that hard-earned inheritance or even spend it to their own detriment. Parents can protect their children and help ensure they will benefit from their inheritance for many years to come if they construct the right estate plans.
Finally, there’s a scenario that most couples don’t contemplate: What if you and your spouse are in an accident and survive but are incapacitated? If you don’t have a healthcare proxy or power of attorney in place, the typical rule is that your spouse would act on your behalf. But if both of you are rendered incapable of making medical, financial and legal decisions, the state will once again step in, and a court will choose someone for you.
Once again, the question is, will this person truly have your best interests at heart? Will they know what your wishes would be? Will they have the character, knowledge or experience to make wise decisions with your health and wealth? It’s also entirely possible that the court could appoint one person to make decisions for you and another to make decisions for your spouse, further complicating the situation.
What happens to your children if these appointees mismanage your health and estate before you ultimately pass away? What happens if you and/or your spouse eventually recover, only to find that the wealth that should have taken care of you and your family in the event of an accident or death has been squandered away?
You can avoid this scenario by including a contingent to your spouse in your various estate plans.
Integration Ensures All the Pieces Fall into Place
If you have a strong insurance plan in place, that’s great. But if you haven’t set it up in coordination with detailed estate plans, now is the time to ensure these plans are fully integrated.
Partnering with a team of experts in insurance, tax and estate planning will help you avoid the potential problems this couple weren’t even aware they had. Doing so will give you certainty that your family will be provided for in the best possible way, no matter what happens to you. After all, isn’t that the whole point of purchasing insurance in the first place?
*Consult your own personal attorney legal or tax counsel for advice on specific legal and tax matters.
After purchasing the right insurance coverage to benefit their children as the couple wished, their children would in fact lose much of that inheritance to the IRS—something the couple could have prevented by appropriately structuring their estate.