Estate planning is something every middle-aged and older person should think seriously about, in particular, if you’ve accumulated a significant amount of wealth over the years. As a successful surgeon, developing an estate plan can provide financial security for you, your spouse, your children, and future generations.
Consider all the effort you’ve put into building your wealth, starting with years of education, an internship, and a residency. Without a solid estate plan, there’s a real risk that your hard-earned assets might not end up where you want them to—whether that’s your spouse, supporting causes close to your heart, or passed down to future generations.
Taxes can take a big bite out of your estate, leaving your family with less than you may have intended. This includes income, estate, gift, and even generation-skipping taxes, where the U.S. government can take up to 40% and even more in some states (tough break for physicians in Hawaii and Washington).
It’s a fact: no one wants to pay more taxes than the law requires.
As wealth managers serving surgeons nationwide, we have a deep understanding of your industry and the challenges you face as a high-income earning medical professional. Based on this specialized knowledge, we develop sophisticated estate plans that keep those tax bills as low as possible.
In this blog, we will walk you through a few estate planning strategies that could help you reduce your tax liabilities while passing on more of your wealth to the people and causes you care about.
Annual Gifting Strategies
One way to reduce taxes on your estate is to consider using annual gifts. This allows you to transfer wealth during your lifetime rather than after your demise. This method leverages the yearly gift tax exclusion, enabling you to give an individual $18,000 (in 2024) in cash, stocks, real estate, or other tangible assets without incurring a gift tax or reducing the recipient’s lifetime gift and estate tax exemption.
Gifting investments like stocks can be particularly beneficial, as your recipient(s) can assume the market value at the time of the gift and potentially benefit from a lower capital gains tax if the assets appreciate even more in the future.
By gifting annually within the exclusion limits, you effectively decrease the size of your estate. This reduction can lower the estate tax liability upon death because the transferred assets are no longer part of your estate.
As of 2024, the total lifetime gift exemption is $13.61 million for individuals and $27.22 million for couples. This is the total you can gift, tax-free, during your lifetime, or at death.
With potential tax changes looming in 2026, now may be an appropriate time to consider making gifts to maximize your exemptions.
Grantor Retained Annuity Trust (GRAT)
A Grantor Retained Annuity Trust (GRAT) is a financial tool that allows high-income-earning individuals, like surgeons, to minimize taxes on large financial gifts to family members. This tool can be particularly advantageous if you expect your invested assets to outperform the IRS’s assumed interest rates, thereby allowing you to pass on more wealth to your heirs with reduced tax consequences.
Here’s how they work:
You create a GRAT by placing an asset likely to appreciate into a trust. The trust is set for a specific term. During this period, you will receive an annual annuity payment based on a fixed percentage of the initial asset value.
Suppose the asset grows more significantly than the IRS-assumed interest rate (Section 7520 rate). In that case, the excess growth passes to your beneficiaries, typically family members, free of additional gift taxes at the end of the trust term.
You retain a level of control over the trust assets during the annuity period, receiving regular payments that can be reinvested or used as personal income.
Charitable Remainder Trusts (CRTs)
A Charitable Remainder Trust (CRT) is a financial instrument that allows individuals to support a charitable cause while also securing economic benefits for you and your family.
The process begins when you place an asset into the trust. These can include stocks, real estate, or other types of assets. The trust then provides you (or another designated beneficiary) with a stream of income for a set number of years.
Upon the demise of the surviving spouse or the conclusion of the income distribution period, the remaining assets in the trust are transferred to one or more predetermined charities. This setup offers several advantages for you as a high-income earning surgeon:
- CRTs offer immediate tax deductions based on the charitable component of the trust, which can be particularly advantageous if you are looking for ways to reduce your current taxable income.
- You avoid capital gains taxes if an appreciated asset is sold inside the trust.
- You can receive income from the trust tailored to your financial needs, providing additional income during retirement.
- By removing the assets from your estate, you can potentially reduce estate taxes, ensuring more of your legacy goes to your beneficiaries and causes that you want to support.
- CRTs enable you to make a significant contribution to your preferred charities, reflecting your values, beliefs, and personal interests.
Family Limited Partnership (FLP) or Family Limited Liability Company (LLC)
A Family Limited Partnership (FLP) or Family Limited Liability Company (LLC) can assist in managing and protecting your assets. Family members can hold shares or interests in both entities, allowing for the centralized management of assets and facilitating estate planning and asset protection.
A Family Limited Partnership (FLP) is a tool where family members own limited partnership interests. The general partners, typically you and your spouse, manage the FLP and make decisions about investments for its assets. Limited partners, often the children or other relatives, have an equity interest but are not involved in the day-to-day management.
This structure benefits you by enabling you to retain control over assets while transferring wealth to the next generation, potentially reducing estate taxes and providing a shield against creditors.
A Family Limited Liability Company (LLC) operates similarly, with members (your family) owning interests in the LLC. It offers more flexibility in management and operations compared to an FLP.
A key advantage for you is the LLC’s liability protection, which can safeguard personal assets from professional and business risks. Additionally, it allows for efficient wealth transfer and can offer tax advantages through the distribution of profits to members, potentially at lower tax rates.
If you’re ready to learn more about how you can protect your estate, connect with the team at Surgeons Capital Management.
