No. of Recommendations: 18

Please note: Nothing in this post should be taken as direct advice. No professional relationship is intended. I am not a lawyer nor am I a financial planner. It does sound to me, though, that you could use the services of both.

It sounds to me suspiciously like you're dealing with someone who is trying to sell you something. Perhaps anything, as long as it's something.

You've given us some of the options that are out there and have been presented to you, but nowhere near enough about you, your family, your current asset base, your dependents, the size of, disbursement options available in, or premature-death valuation of your pension. Nor have you told us what, precisely, are you primary goals with your estate plan. Without more complete information along those lines, there is little anyone can do for you.

The considerations you listed are important factors to keep in mind, but they are not really full-fledged goals.

1. Asset protection
What assets are you trying to protect? And what are you trying to protect them from? Your pension, house, and IRAs may already be partially or totally protected from creditors and/or shielded from lawsuits, thanks to laws in many states protecting some or all of those assets from creditors and/or from bankruptcy. As a physician, you are (unfortunately) exposed to significant personal liability risk from your practice. You really should have insurance that will cover you professionally. Also, as a physician, people think you're rich, so you're probably at higher risk of being sued by 'opportunistic' people looking to make a quick buck. You should also carry sufficient personal insurance protection to mitigate the personal risks that exposure brings (home, auto, umbrella liability, for example). Asset protection is usually the job of property titling and insurance, not really part of an estate plan.

2. Tax savings current and upon death
I'd personally rather pay $100,000 in taxes and end up with $1,000,000 spendable than pay $0 in taxes and end up with $500,000 spendable. But if it's tax savings you're looking for, you could probably find someone who would gladly borrow money from you and then default on the payments... You'd get to write off the bad debt from your taxes.

In all seriousness, tax reduction really should not in and of itself be the primary goal of an estate plan. A properly designed estate plan can often help you pass on your estate efficiently, but there are way too many traps that will reduce your taxes primarily through reducing your estate...

Additionally, with current investment laws, ordinary brokerage accounts look quite nice... With Qualified Dividends and Long Term Capital Gains taxed at 15% for the near term, a person such as yourself with only a few compounding years left before distribution may not want the higher taxes of things like annuities - whose 'income' distributions are taxed as ordinary income. Don't forget the old stand by of the rich and not so famous - municipal bonds. Municipal bond income is federally income tax free, and depending on the bonds you purchase, may be state and local income tax free. Some municipal bond income may also be exempt from the Alternative Minimum Tax...

Don't put the tax cart before the estate plan horse - it wrecks the cart and ticks off the horse. Focus, instead, on what your primary goals are, and then work your estate plan to meet those goals as efficiently as possible. Who do you want to get your money? Are they of age and capable of managing it effectively? Do you have any 'intermediate' beneficiaries (such as a spouse) that will need to be supported before your assets make their way to their 'final' destinations (such as your children)?

Remember, too, that anything you bequeath to your spouse will go completely free of estate taxes at your death, and depending on the nature of the assets, the year you die, and the size of the estate, it may also receive a "step-up" in basis. Also, with the current estate laws, if you time your death to be in 2010, most if not all of your heirs can inherit from you, completely (federal) estate tax free. I have no idea what the future estate tax laws will be, but between now and 2010, if nothing changes, an estate has to be pretty large before (federal) estate taxes kick in.

3. Availability of money
In a standard brokerage account, your money is a phone call or mouse click away. In a pension, you can get your benefits paid out to you direct-deposited to your checking account. You're over age 59.5, so any IRA distributions or post-separation pension distributions will be free from tax penalties. You'll also be pleasently surprised to find out that pension, IRA, and investment income is completely free from Social Security and Medicare taxes.


As for the plans you outlined - at first glance and without sufficient knowledge of any special circumstances like a transferrable business with a large value that may benefit from a Family Limited Partnership, they all look lousy for you, expensive for you, and very lucrative for the folks pitching you the plan. Well, except for plan 4, which just looks (nearly) criminally stupid from an estate tax perspective.

Without even touching the divorce issue, from an estate tax perspective, under current law, spouses inheriting property is usually a much, much better idea than spouses receiving that property as a gift. The reason is that inherited property receives a "step up" basis adjustment to the then current (and presumably higher) market value as of the estate valuation day (typically day of death), and it immediately qualifies for long-term capital gains treatment, as well. Your wife can inherit everything from you without any estate tax worries from your death, no matter how large your estate.

Say you own $1,000,000 in stock where you have a basis of $300,000. If you gift that stock to your wife, her basis is $300,000. If you die and she inherits that stock, her basis is fair market value when your estate is valued (for the sake of argument, we'll say $1,000,000). If, after your death she goes to sell the gifted shares, she'll owe taxes on $700,000 (the difference between her $300,000 basis and the $1,000,000 selling price). If, after your death, she goes to sell the inherited shares, she won't owe taxes at all, since her basis will be stepped up via inheritance to the $1,000,000 the stock (in this example) is worth at the time of your death and the time she goes to sell.

I know you are worried about protecting your assets - especially since you are in the medical profession. That's why there are things like professional liability and personal umbrella liability insurance, as well as property and casualty insurance. Make sure you are properly insured, and let your insurance company fight to protect your remaining assets for you. To pull it back to the appreciated stock example above - What's more expensive? A $10,000 insurance premium or an otherwise avoidable $105,000 capital gains tax?

There are trusts (key term: QTIP) and the like that you can set up now, so that your estate transfers efficiently to a trust supporting your wife at your death, can take care of her, and be transferred to your children relatively efficiently after her death. And if you want your money to go elsewhere, well, there are other vehicles as well.

Remember - tax minimization should not be your primary goal. I can save you taxes by robbing you blind. What's more valuable to your intended beneficiaries? Receiving $1,000,000 after your estate paid $100,000 in taxes or receiving $500,000 after your estate paid $0 in taxes?


You really need to know what you really have and what you really want done with it before you set up an estate plan. And with the assets and income you're alluding to, you really want your estate plan set up by someone who you will pay directly (and not indirectly through commissions or hidden kickbacks) for setting up your plan. Even if the upfront fees are higher, paying a one-two combo of an ethical estate attorney and a fee-only certified financial planner to put together a real plan will be worth far more than trusting commisioned hucksters promising you asset protection and tax savings through life insurance, retitling of assets, annuities, and potentially unnecessary corporate shells.

Best of luck to you,
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