Mistake #1: Is Your Estate Planning Attorney Helping You?
Under the new laws (that may or may not last beyond 2012) tools exist for doctors to easily leave $10 to $15 million tax-free dollars to their children, grandchildren and future generations. More importantly, doctors can do this in a way that allows them to retain control and access to the funds while alive. They can leave the funds to their children in a way that protects the kids from:
• Losing their drive to be productive
• Losing the inheritance to a divorce or lawsuit
• Having to do estate planning for their children
Unfortunately, as is the theme with almost all planning that doctors get, you need customized planning and often get “off the rack” solutions that don’t work for you. More than 90% of American families will never earn more than $150,000 annually, never be in the highest marginal tax bracket, and never be worth more than $2,000,000. This means that accountants, financial advisors, insurance agents and even estate planning attorneys do not spend the majority of their time dealing with people who have the relatively unique challenges you do.
There is nothing wrong with advisors wanting to streamline and scale their businesses so they do not have to reinvent the wheel with each client. In fact, by doing so, they can become more efficient and work less expensively to help you. The problem arises when you hire advisors whose average client is NOT in a similar financial situation as you.
Make sure you talk to attorneys who handle clients much bigger than you and whose clients are very happy with their services and results. If you would like a no-cost review of your plan, the authors are happy to do a quick review for you to see if there are any glaring weaknesses.
Mistake #2: Are You Getting Bad Advice from Your Insurance Agent
Has your financial planner or insurance agent explained that there are two very different, but equally acceptable, ways to purchase life insurance? Do you understand how “max funding” and “minimum funding” options work and why everything in the middle is a waste of your money?
Do you fully understand how funds in insurance policies may or may not be protected even if you have to file bankruptcy? Are you aware you can get a partial net tax deduction for your life insurance premiums or that you could buy life insurance within your retirement plan (pre-tax) dollars and leave almost all of the death benefit to your spouse tax-free? Did you know you could buy life insurance, leave the death benefit to your heirs and still have access to the cash value while you are alive?
If you answered “no” to any of the questions above, then you either hastily purchased the insurance you have or the agent hastily sold it to you. Cash value life insurance CAN BE a very valuable tool for asset protection, tax management, wealth accumulation, and estate planning. BUT (yes, all caps), it must be used properly. Unfortunately, to use it properly, the advisor needs to know a lot about your situation, needs to take a great deal of time explaining the countless options, and needs to coordinate the insurance purchase with the other advisors on the team to make sure you maximize the benefit you receive.
In our experience, the insurance purchases of most doctors are either a) poorly designed so cash values are not accumulating as well as they could with a better design; b) owned improperly so that funds will be left in the estate; or c) owned in irrevocable trusts where cash values are not available to you in the event you need them. There is a great deal of discussion on insurance in our book, For Doctors Only: A Guide to Working Less and Building More – available for free at www.ojmgroup.com. Please take some time to get a better understanding of how life insurance may work for you and don’t just assume that you did everything right because your agent told you that you did.
Mistake #3: Unwittingly Leaving Your IRAs and Pensions to Uncle Sam
Did the advisor who set up your retirement plan explain, “you must spend your retirement plan FIRST once you retire?” The vast majority of the assets in pensions, 401(k) s, and IRAs could end up being owed to state and federal tax agencies at death. It is an unpleasant truth that after paying taxes for a lifetime of work a physician’s tax qualified plans could be taxed at rates above 70 percent. When hearing these facts, most physicians are shocked and want to learn how to do something about it. The good news is that there are techniques that can be incorporated to avoid this loss of wealth. Some strategies are to simply spend the retirement assets first or take advantage of a Roth IRA conversion before that option goes away.
More advanced strategies may include the purchase of insurance within a retirement plan (to avoid tax on benefits for your spouse) or the creation of significant deductions (from $10,000 to $1,000,000) to offset the tax on taxable withdrawals. Such techniques are too involved to be described in a short article, but more importantly the right strategy is dependent on your family financial goals, your net worth, your income and tax levels and the types of assets you want to leave to your family.
Conclusion
With the right team of sub-specialists, you can protect your assets from lawsuits, taxes and divorce while maintaining control and access to funds AND successfully transferring $10-$15 million or more to future generations. If you aren’t confident that these goals are being met by your advisors who have worked together to adjust your plan since the tax law changes in December 2010 or you would like a second opinion (review) of what you do have, please seek out the advice of those who may be able to help you get to a place that you want to be. The author can be reached at (877) 656-4362 to set up a time to discuss your particular situation.
SPECIAL OFFER: For a free copy of For Doctors Only: A Guide to Working Less and Building More, (plus shipping charge) please call (877) 656-4362. Jason O’Dell is a principal of the financial consulting firm OJM Group, with offices in Ohio, Arizona, Florida and New York. He has co-authored seven books for doctors. You can contact him at (877) 656-4362.
OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
