Estate Planning for Physicians

As a physician, you’re used to helping patients navigate life-and-death decisions, but have you made the necessary decisions to protect your loved ones should you die unexpectedly?

Many physicians benefit from irrevocable life insurance trusts (ILITs). When used as estate planning vehicles, ILITs offer a tax-efficient way to transfer wealth to your beneficiaries outside of your taxable estate. They can also help protect your assets from potential creditors and/or lawsuits.

Here’s how an ILIT works.

• As the grantor, you create and fund a trust that will serve as the owner and beneficiary of a life insurance policy.
• You designate a trustee to manage the trust and pay annual insurance premiums.
• You designate trust beneficiaries who will receive trust assets after you pass away.
• Assets held within the ILIT are considered separate from the value of your overall estate.
• As long as premiums are paid throughout the life of the trust, the policy’s death benefit is paid directly to your trust after you die.
• The trust then distributes the life insurance proceeds directly to you designated beneficiaries.

It’s important to understand that ILITs are irrevocable trusts, which means the terms of the trust cannot be modified or terminated without the designated beneficiaries’ permission.

Estate Planning Benefits of an ILIT

 The main benefit of an ILIT is the ability to transfer assets to your heirs in a tax-efficient manner. However, ILITs also offer the following benefits.

• Asset protection – A life insurance policy held within an ILIT is typically protected from both the grantor’s and the beneficiary’s creditors. This is especially beneficial for physicians, as medical professionals face the risk of malpractice lawsuits.
• Special needs planning – If you wish to provide for a loved one with special needs, an ILIT can help ensure your beneficiary’s inherited assets do not interfere with his or her eligibility for government benefits, such as Social Security disability income or Medicaid. Properly managed distributions from an ILIT will not impact benefit eligibility, but it’s important to work with a qualified insurance professional to ensure the trust is structured to meet your loved one’s specific needs.

Paying for Premiums 

A tax-efficient way to cover your annual life insurance premiums is by using your annual gift tax exclusion. In 2024, the IRS allows individuals to give up to $18,000 tax-free per year, per beneficiary. These assets can be used to fund your ILIT, without being subject to tax.

Once the trust receives these assets, your beneficiaries receive a “Crummey notice,” which offers them the option to take the funds as a distribution from the trust. Your beneficiaries must decline the distribution in order to allow the funds to pay the annual insurance premium in a tax-efficient manner.

You may also have the option to transfer an existing life insurance policy to an ILIT. However, if you die within three years of transferring the policy, any proceeds would be included in your taxable estate.

Could you use some help determining if an ILIT is right for you? Scureman and Associates is glad to assist. We specialize in helping physicians identify, implement and maintain insurance polices that meet their specific needs and protect their loved ones. For a complimentary insurance assessment, please schedule a call.