Plan for Your Family's Financial Future

The other day, as I was waiting for a physician colleague in his office, I decided to do some work but found my pen was out of ink. Imagine my surprise when I opened his desk drawer to look for another pen and found over $30,000 in undeposited dividend checks.

That's not the first time I've experienced that kind of bombshell with a doctor. Many believe that because they are successful in their profession, they can easily apply that level of success to everything and anything, including managing their money. Or they believe they don't have the time to pay attention to their financial affairs. They love what they do, typically with a passion, and usually are so focused on it that nothing else gets done.

If a financial planner can manage to get their attention, it often takes more than the usual amount of time to sort out their affairs. Often their finances are a hodgepodge of investments and legal instruments, resulting in needless complexity in their lives. Following are some of the most common myths that financial planners run into while working with physicians.

Assets in Spouse's Name

"It's in my spouse's name, so everything is taken care of." For various reasons, it's common for doctors to put all of their assets into their spouse's name. Their reasoning is that if there's a malpractice suit, no one can touch their homes and cars. But what if the spouse dies first? The doctor is left with a substantial estate problem. Any transfer directly to a spouse is tax-exempt, which sounds like a good idea until you realize that it negates a substantial tax exemption (currently $1.5 million for the estate of the first partner to die) and will saddle the doctor's children with an enormous tax bill upon the doctor's death.

For many doctors, I suggest a bypass trust. With this trust, the doctor leaves the money to their spouse via a trust vehicle equal to the amount of the current estate tax exemption. Upon the spouse's death, the estate is reduced by that amount so the tax burden on the children is considerably less. The trust also protects the assets in the case of a second marriage or any debt problems. How the trust works is not important. The fact that it works as part of an ongoing planning process is what really matters.

An ongoing planning process is vital, since it's important that you never treat a plan as finished. Suppose you established a bypass trust. Often the wording of that trust requires that it be funded with assets equal to the current estate tax exemption. Right now it's $1.5 million, but in 2009 it goes up to $3.5 million. You'd have an underfunded trust and some serious problems if you left today's arrangements in place. A plan is never finished—doctors need to work with their financial planners on a continuous basis.

Relying on Wills

Many doctors say, "I have a will, I'm all set." Just writing a will doesn't put things to bed forever. In fact, a large number of doctors have wills that are woefully out of date—or none at all. Many don't even know what's in their will. They don't know what provisions they have in there or have any idea what impact the decisions they made (or didn't make) will have on the security of their families.

"I just left everything to my spouse," is a common refrain, but it's not that simple. Will your children be old enough and responsible enough to deal with a potentially large estate? If they are minors, you must designate a guardian and decide if that guardian is going to be the person who manages the money. You also have to consider if the money should go directly to the children or to a trust. There are ways to plan for an orderly distribution as the children age while still providing for their education and everyday expenses.

The number of doctors who have not arranged for important measures (eg, powers of attorney, health care proxies, and living wills) is alarming. Doctors deal with death and the outcome of these decisions every day, but often haven't made them for themselves.

If you've moved or changed your state of residence since any of your legal documents were written, there could be a problem. State law mandates most legal documents. So if any of the documents pertaining to your estate planning were done prior to your current state of residence, a financial planner should review them.

Secure Investments

"My investments are safe because they are in companies I understand." Putting all your eggs in one basket, even one you know intimately through your work, is generally a bad idea. Many doctors put all of their investments in the major drug companies because they understand what the companies are working on, and they feel their medical knowledge allows them to know what's hot in the field. There is a great deal of risk in concentrating on only one asset class, especially without considering factors that affect the market.

Consider Biovail or Schering Plough, where the stock price recently experienced a significant decrease. Doctors with investments in these companies may have been so busy with their practices that they weren't even aware of the decrease—or they believe that the price will go up again. In both cases, the stocks remain in the doctors' portfolios at a decreased value. To have success in your financial life, you must have diversified assets.

What kind of future do you want, the one you design or the one that happens to you by default? Many doctors have thriving medical practices that are generating a lot of income for them today. Yet, they are so busy doing what they love—practicing medicine—that they haven't made time for tomorrow. Don't let the art of medicine block out the need to plan for a time in the future when you and your family can enjoy the art of living.

Steve Golodny is a partner in the firm of Gassman & Golodny LLP of New York, NY, which provides independent and objective tax, financial planning, and investment advisory services to individuals and businesses. He welcomes questions or comments at 212-221-7067 or visit www.gassmangolodny.com