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Full Transcript: You Don’t Really Have a Financial Plan Until You Do This

Ryan

Are you making critical mistakes when it comes to your financial planning? Whether you’re single with no kids, or married with a large family, you need to listen to today’s guest talk about the four pillars of estate planning.

Ryan

Hello and welcome to the Financial Residency podcast. I’m your host Ryan Inman, and today, we’re going to be talking with Chris Burke. Chris is an estate planning attorney out of San Diego, California. While I had originally planned to release this episode in a few weeks, I decided to launch this episode this week due to the recent events that happened in Las Vegas. For those of you that don’t know, my family and I based out of Las Vegas, Nevada, and what happened last week was truly heartbreaking, and devastating, and horrific. While my family and I are safe, a lot of our friends and friends of friends weren’t as lucky.

I’d like to just tell my story from a different perspective. I was only a block away from where the event had taken place. All weekend, I’d been down on The Strip, which is unusual, but I’m a part of a group called the Dads Married to Doctors group on Facebook. Just like it sounds, it’s a bunch of dads that are married to doctors, and they do their annual Vegas trip, and so they were here last weekend. Some of them decided to stay over, and we went to the Vegan Golden Knights hockey game. Then we went out to dinner, and on our way back from dinner, I was saying my goodbyes, and I was walking out the door, and dozens of people just started running and screaming, “There’s a shooter outside. Run! People are getting shot.”

My wife and I were in Vegas when the shootings began.

So, I grabbed my buddies, and we went up into one of their rooms to watch the whole event unfold. It was really tragic, and sad, and scary. To be honest, it was really scary. We had no idea what was truly going on. There was bomb threats. There was multiple shooters being announced at New York-New York, and Tropicana, and the Mandalay Bay, and we were right next door. As we watched the events unfold, it was really hard. To think about it, it reminded me a lot of 9/11 to be honest, helpless and not knowing what’s going to happen and what’s going on. Are we safe or not?

While I wasn’t close to the Towers on 9/11, I was right next door to this, and it could have easily been while my wife and I were there. We go to a lot of country events, not by choice for me. I go to support her because she loves country music, and I’m not so much of a fan, but I’ll go and do what makes her happy. We were fortunate that we weren’t there. My wife had to work the next morning in Fresno, so we decided that we weren’t going to do that. I was going to stay down there and have dinner with the guys.

As this relates to personal finance in this podcast, a lot of people don’t like to talk about the unexpected, and that it’ll never happen to them. They’re going to either live forever, or they just don’t want to have the conversation of what happens if you were to pass early, or if your spouse was to become incapacitated or to pass early. It’s a tough conversation. It really is, and I understand some of the reasons why you wouldn’t want to talk about it, but by not talking about it, it really puts your financial planning in jeopardy, especially if you have kids. Estate planning is critical if you have kids.

So with today’s guest, we’re going to discuss the estate planning process, and how it relates to physicians. We’re going to jump into what he calls the four pillar of estate planning, which is wills, power of attorneys, healthcare directives, and revocable living trusts. Before we jump in the interview. Here is this week’s digestible tip.

This week’s digestible tip is to invite you to the Financial Residency Private Facebook group.

Ryan

Okay, so here’s this week’s digestible tip, and that is to invite all of you listeners to the private Facebook group that I’ve set up called Financial Residency VIP Community. Currently, there are hundreds of physicians already in the group asking great questions from things that they heard during launch week, the first three episodes that came out last week. So, I encourage you all to jump in there, add to the conversation, ask any questions you may have at the Financial Residency VIP Community. See you inside.

Ryan

All right Chris, thank you. Welcome to the Financial Residency podcast. I appreciate having you on.

Chris

Hey Ryan, thank you so much for having me. I appreciate it.

Ryan

Awesome. Well, I have done a little bit of an introduction to you before the show started here, but can you do a quick overview on yourself and your practice for the listeners to get to know you a little bit better?

Getting into the detail of estate planning.

Chris

Yeah, absolutely. I’m an attorney here in California. I’m based in San Diego. Before we really jump into it, I just want to let all your listeners know that any of the information that I give you today, it is based on a general overview based in California law, so as always, nothing that we talk about today is specific legal advice. You’re always encouraged to visit your own attorney of choice to talk about your own specific situation.

I’ve been practicing now for about three years. I started from day one as my own solo practitioner shop, and I’ve been working with people on different estate planning issues from drafting their estate plans all the way up to administration and probate for, yeah, going on three years now. It’s been quite a while.

Ryan

Awesome. Well, I appreciate the quick legal disclaimer, and of course, everyone is supposed to know this is generic advice. It’s more educational and entertainment purposes than legal advice, but Chris, thank you again for being on and allowing us to get to know you, and little bit more in detail about estate planning. I’d like to jump in from a high-level perspective and just talk about what I call the four pillars of estate planning, which would be wills, power of attorneys, healthcare directives, and revocable trusts. So jumping in with some real basic knowledge for our listeners, what is a will? Why would they need it? Why is it critical for them to have one?

Chris

Sure. A really great place to start is understanding that any of these documents … you mentioned the four pillars wills, power of attorneys, healthcare directives, revocable living trusts, they’re all known by different names as well. When we say wills, that’s the same thing as a last will and testament, that’s the same thing as a pour-over will, a holographic will, they’re all different terms for the same document. What that will’s going to do for you is essentially create a plan to distribute your property and take care of your affairs upon death.

Death is a reality we need to face.

Now, most people don’t really like talking about death, thinking about death, but it’s a reality. We’re all eventually going to face that, so the will is your most basic plan for what you want to have happen at that point. It’s really a roadmap for your family, your loved ones to be able to really wrap everything up for you.

Ryan

Got you. Yeah, that’s really critical to be discussing here, so how does one set up a will? How often do they need to be updated as life changes and things like that?

Chris

Well, the first thing and most important thing that I tell my client is that a will needs to get set up correctly. Each state has specific instructions and requirements that a will has to follow. It’s really easy to miss one of these requirements when putting a will together if you’re doing it without proper advice. So, number one, that’s the most important thing, is talk to an advisor, whether it be an estate planning attorney or other that really knows the ins and outs of what your state requires in putting a will together. The worst case scenario you can look at is you put a will together yourself or without proper guidance, and come to find out years later it’s not valid. That’s not a good situation for anybody.

With the right guidance, putting together a will is fairly simple. You need to decide a couple things. One, who is going to be your representative to manage your affairs after death? Sometimes that’s called an executor, and executrix. Here in California, it’s called a personal representative, so you want to decide who that person is going to be. Second, you want to decide what property is going to be distributed to what people. Do you have certain items that are sentimental family items? Maybe they should go to your children, maybe your brother, sister, maybe you have certain things or funds that you want to go to friends. Really, it’s up to you about how you’d like to distribute your property, and really that’s the main thing people tend to think of when they’re putting a will together. Those are the most important things.

Ryan

I totally relate to people not wanting to really discuss death. It’s a hard thing. With my wife and I, it was a difficult decision, and it took several conversations to go through it. Is that something that an estate planning attorney will really help walk through? Handhold is probably the wrong word, but is it something that an estate planning attorney will help with, or should people have that as they already have that plan before they come in?

An estate planning attorney can help you with advanced healthcare directives.

Chris

Well, it really depends on what aspect of that you’re looking at. Some of your other estate planning documents can assist in creating a plan around someone’s death. Really with a will, that’s your roadmap after death. What you want to have happen with your property, and like I said, who’s going to be in charge of wrapping up your affairs for you. So, you have some other documents like the power of attorney or advanced health care directive that are really for more pre-death planning where you’re looking at situations that might be leading up to death where you’re incapacitated, for example.

So generally, an estate planning attorney, to get back to your question, will help with creating that plan for you, so going into a situation which might result in death, having a plan covered there as well as after the death occurs. So really on both sides that that attorney can help put together a comprehensive plan so you understand what’s going to happen.

Ryan

Perfect. Well, I guess, what is the downside of this then? It seems obviously … Something I always recommend is to have these four pillars put together by a qualified estate attorney, but what happens if you die without a will?

Chris

Well, the good news is no matter what state you’re in, the state has an estate plan for you. The state law sets out who gets your property, who would be the person that would act as your representative. It’s a default essentially, so if you don’t get around to sitting down with an estate planning attorney to write your documents out, all is not lost. You do have that default to fall back on, but it’s not the best case scenario for everyone. For some people, that might be just fine, but for the majority of people, the default doesn’t really work, and they would like to alter that in some manner.

Ryan

Absolutely. For the physicians listening, it won’t work for you. As you do training and building up quite a bit of a net worth and nest egg, this becomes more and more important. I always stress that when kids are involved, all of these things need to be taken care of. With that, I want to switch over to healthcare directive, Chris, and just talk high level on what it is and why it’s really critical to get it, and all that kind of stuff.

Debilitating medical conditions will prohibit you from making decisions when they count the most.

Chris

Sure. I actually like to talk about the healthcare directive and power of attorney really in conjunction, because I look at both of these documents as your incapacity plan. What that means is have plans in place for you to elect to have someone to make a decision on your behalf when you can’t do that. Now, let’s say that you’re in an accident. You’re in a debilitating medical condition where you can’t necessarily manage your own property. You can’t get to the bank to write a check to pay your mortgage, pay your rent. You’re in the hospital, and you’re not responsive to … treatment, so you don’t want that treatment. Who will be the person that you would want writing that check, making that healthcare decision for you?

So that’s where your power of attorney and advanced healthcare directive come in. They’re very similar in that you pick who you want to be your representative. For both, I think it’s something that should be a focus, especially for younger people, because chances are there could be something that happens to you that doesn’t result in death, but you could be in one of these situations. Having that plan to fall back in is really important because otherwise, who would be that person that has to make the decisions for you? Is it a brother, a sister, mom, dad, even further extended family? Who’s to say who really has that authority? It’s sometimes not a great struggle that families have to enter into to make those decisions because they’re trying to decide what you would’ve anted, but you could outline that simply in one of these documents.

Ryan

Mm-hmm, and so with the healthcare directive, I’m basically let’s say … I know that for mine, my wife who is also a physician, is going to make all the decisions based on if I’m responsive or not responsive, and all that detail. What happens if something happened to my wife and I, and that she was not able to make her own decisions as well? Is it customary or normal to have multiple backups to that? What if you had one and you haven’t updated in a while, where does that default to then?

Chris

You almost might find yourself in the same position as if you didn’t have a healthcare directive. So, I always advise my clients that have at least one backup, maybe two. It’s not going to hurt to have three. That way, you at least have a line of succession where you know that someone’s going to be available most likely. Having just one person, you do risk that situation where … It’s terrible to think about, but what if you and your spouse are in the same car accident? Then who would make the decisions? So having at least one other person, I think, is critically important in putting together a comprehensive plan using these documents.

State law or physician decision comes into play when there is no health care directive.

Ryan

Yeah, that makes total sense. So, if, knock on wood here, that it doesn’t happen, or that does happen, that my wife and I are both in a car accident, and she can’t make my decisions, and it’s almost like we don’t have this health care directive, who would then make the decision? Is it just all on the physician that’s working with use? How does that work?

Chris

Now typically, it’s going to be the next closest family member, but again, it’s really going to depend on state law, and where you are, and where that accident is, and who’s available to make that decision. Granted, there’s a lot of times in an emergency situation where you might not be able to reach a family member right away. So, it really is important to have these individuals identified in your documents with updated contact information, so if there’s a situation that does need to be handled, the appropriate people can get in touch with who your decision maker is.

Ryan

How would they know these things? It’s not like I walk around with my healthcare directive in my back pocket or on my phone. How does the hospitals ultimately figure this out and get down to the details?

Chris

You mean you don’t have a stack of documents folded up in your back pocket?

You can store your healthcare directives electronically.

Ryan

I mean, I try not to, but I mean, sometimes it occurs.

Chris

One of the things I do offer for my clients is subscription-based services where they will actually store their electronic documents, so a PDF copy of your health care directive in the cloud essentially. You can actually have a card with the access information for your healthcare directive put right in your wallet. So essentially, you could walk around with access to that right in your wallet if that emergency situation does happen. Some states also have developed healthcare directive depositories. California does have one where you can upload your healthcare directive to this depository to have it available in case of an emergency as well, but one of the solutions that I like the best is really using that card, so you have it on you. Your health care directive is accessible, and you don’t have a big stack of papers in your pocket.

Ryan

Yeah. I have actually never heard of that. Is there a bunch of states that have done that, or is it just California leading the charge?

Chris

I’m not exactly sure if any other states have done it. Again, you do have to rely on the fact that your treating physician would know to check that database. I’m not sure how well known it is, but again, not exactly what I would say I rely on that and advise my clients to rely on it. I think using the cloud storage and having a card with that information on you is one of the best solutions to make sure that that document is accessible at all times for you.

Make sure your healthcare directives are accessible.

Ryan

When you do identify one, two, three individuals, whether it’s spouses or family members, do you advise clients to actually talk with them and say, “Hey look, just so you know, I’ve identified you as this person, and these are my wishes, and I’ve outlined my wishes in writing, but just so you can hear it from me, these are my wishes and you’re number one, two, or three in line.” Do you recommend people do that?

Chris

Absolutely. Now, everyone’s family dynamic is different, but your plan is only as good as you make it. If you really want someone to understand the medical decisions that you would want made for yourself, you absolutely have to talk with that person about it. There’s only so much direction you can include in the document itself, and you can’t plan for every potential or every eventuality that you might face. So having that discussion with the people you’ve identified in your healthcare directive is critically important to just get a really good sense to them of how you would want a medical decision made on your behalf.

Ryan

Yeah, that makes, again, total sense. I want to switch over real quick before we forget about it, is the power of attorney. The power of attorney is a lot to do with your assets and obviously not with your health. Do kids play inside the power of attorney with custodial agreements and things like that?

Chris

Well, your power of attorney is more focused on your financial assets, so think of that as your bank accounts, your vehicles, your property. With the power of attorney, you’re granting your agent the ability to manage that property for you. The power that’s passed on in a power of attorney can be limited, so if there are certain things you wouldn’t want your agent to do, for example, trade stocks in your investment account, you can put those limitations in, but otherwise, it’s like someone standing in your shoes to manage your property.

Keep this in mind when considering guardianships for children.

Now, one of the things you did mention, and I wanted to make sure that your listeners know about this too is guardianships for minor children. Now, the power of attorney and healthcare directive, neither of those documents are necessarily going to nominate someone to be a guardian for a minor. While the power of attorney might allow someone to access funds to support a minor, it doesn’t actually set up that guardianship. So, that’s something that can only be done separately for a parent to nominate someone to be appointed that guardian in the event or situation of incapacity or potential death.

Ryan

Yeah. I think when we did ours, and what I was, I guess, alluding to inside of it was the power of attorney to manage the funds for the children. Our kids are now two and a half and one, and if something was to happen to me, I’ve actually appointed two people. If something happened to my wife, there’s still two people behind it to be responsible for the finances of the children. The guardianship, who is actually watching the kids, is a whole separate document, correct?

Chris

Right. Now, sometimes people do include that maybe in a will, but I like to actually keep those as separate documents for a couple different reasons. One is just ease of identifying who that guardian is. The second is a will technically doesn’t come into effect until after someone does die, so if there’s a situation with incapacity, the guardian needs to be appointed, and having that separate guardianship nomination, I think is important.

Ryan

That’s interesting. I actually didn’t think about how that would actually play out with a will only being enforced when you die, and including it in your will. That’s a good point to make on why that document is needed. We have that separate document, but I didn’t actually make that distinction, so I’m happy you brought that up for everyone including myself.

Power of attorney extinguishes at the point of death during the estate planning process.

Chris

Yeah. That’s a real big distinction between wills and power of attorney as well, because your will, again, doesn’t come into effect until after death. The power of attorney is in effect before death. At death, that power of attorney extinguishes, so if you have provided power of attorney to someone, their ability to manage your property ends at the point of death. That’s where the person put down in your will, their authority would pick up.

Ryan

Yeah, perfect. I appreciate the distinction there. I want to jump over to the last of the four pillars here with revocable trust, and talk a little bit more on these because I think there’s a lot of confusion on when it’s applicable, when you should get one, how you should actually fund it, and all that. So, if you could just, like how we’ve been doing, from a high-level perspective, tell us a little bit about revocable trusts. Then we can dig a little bit deeper in going through some of the specifics.

Chris

Sure. Now, the one thing to remember is that a revocable trust is not necessarily a replacement for the other documents that we’ve been talking about. Typically, and especially through a lot of California estate plans, a revocable trust has been really popular to do in conjunction with your other documents, but it does have differences at the same time. Now, forgive me for the really simplest example, but this is how I like to think of a trust.

Ryan

Perfect.

Chris

Everyone’s been to the beach, and you know those beach pails you build sandcastles with, right?

Ryan

Mm-hmm.

Chris

Big pail, has a handle on it. Think about your trust as that pail. Now, what you’re going to use that for is you’re going to take all of your property. This might be real property, so your house, it could be your bank accounts as well, really, anything that you own. We’re going to take that and we’re going to put that all in the pail. That’s your trust. Your trust is holding your property for you. While you’re alive, while you have capacity, you’re holding on to the handle of that pail. You can put more property into it. You can take property out of it. You’re carrying that pail around with you.

Successor trustees can go ahead and make after-death decisions.

On the outside of the pail, you’ve gone ahead and you’ve written some instructions, instructions for what you want to have happen to your property in the event of incapacity, who you want to have your property passed to after death. You also have on there who you want to manage that pail for you when you can no longer carry it. So, these are going to be your successor trustees later on. When something happens to you, when you become incapacitated, after death, those people who you’ve indicated as successor trustees can go ahead and take that pail from you and hold it by the handle themselves.

Now, while they have that, they have to follow the directions that you’ve written on the outside. So, essentially what you’re doing is you’re setting up a mechanism where your property can be held. It has a detailed plan of how it should be managed, and it has the people who are going to manage it later on. The great thing about this trust, or your pail is that this doesn’t affect both before death and after death, so it covers both incapacity and after death time. We remember the will and the power of attorney didn’t cover both time periods respectively.

The great thing about a trust is it’s one instrument that really can do the functions of both. The downside of the trust is that it only manages that property that you put into the trust, essentially that property you put into the pail. I know that’s a long example. Does that make sense?

Ryan

Absolutely. When we’re looking at it … I want to just quickly summarize is that the trust only holds the assets that you put in it. So, you’ll actually have to physically go down to the bank. Say you’re banking at Wells Fargo, you’ll actually have to go into the branch and you’ll have to change the vesting, the names on the account from Ryan Inman to Ryan Inman revocable living trust, or whatever I end up naming my trust, and you’ll actually have to change assets into it. If you own your home, you’ll have to re-record the deed to your home. You’ll have to … and Chris, correct me if I’m wrong, but an estate attorney will be able to help you with recording and some of these things to change the vesting into the correct trust name, not your personal name.

Depending on the type of asset, it might not make sense to be held in a trust.

But I’m curious Chris. Do you advise clients to move everything like obviously their bank accounts and their homes, but should they move their vehicles and anything else into those?

Chris

That’s a really good question, and it’s also a very complicated question because depending on the type of asset, it might not make sense to be held in a trust. There’s a number of different reasons for that, but to touch on actually moving things into the trust, I think it’s one of the most important aspects of creating an estate plan. Creating a trust is to make sure that it does get … So, one of the things that I do with my clients is we walk through the complete funding process. Whether that’s transferring a piece of real property and drafting the deed right in my office to make sure that the titling of that vesting is correct, I go ahead and work with them to do that. Because mistakes there can be really costly later on when you have to attempt to move property into a trust when potentially someone has passed away and we don’t know whether or not their intention was to put that property in.

So, it’s critically important to work with your estate planning attorney to make sure everything is transferred correctly, whether it’s a home, whether it’s that bank account, or whether you’re just upgrading your beneficiaries through a life insurance policy that should be payable to the trust. You want to make sure that is done correctly. Now-

Ryan

Actually, I want to interrupt you real quick because I want you to go over that point one more time because I think that’s actually really overlooked. So I want you to just touch on it real quick and talk about the importance of that.

Chris

Sure. To go back to my pail example is if you don’t take your property and put it in that pail, the instructions you’ve laid out in your trust, they’re not going to apply to that property. You may find that that property now has to go through probate. It might be expensive or potentially impossible to move that property into your trust. So, after you have signed on the dotted line, your trust is printed on the documents and your next step is to make sure that that property is transferred right. So importantly, you will have to change the title.

Some banks may require opening a new account in the name of a trust.

You mentioned going down to your local bank branch and actually changing the name on the account. You will have to do that sometimes the bank does require you to close the account, open a new account in the name of the trust. Sometimes they will just allow you to change the name, but whatever their process is, you do want to make sure that you follow that to make sure the title is updated to the trust. Typically, the way the property is going to be held is your name as trustee of your trust.

Ryan

What about life insurance policies? I’ve got a term life insurance property, a million bucks on me. Do I need to change the beneficiary to my trust, or what about my IRAs? Obviously, my wife, Taylor’s going to be the beneficiary of those, but should I have it be the trust, or should I have it be my spouse, or in addition to my spouse, be the trust? How do you recommend that to clients?

Chris

Yeah. Again, it’s going to be a really specific analysis of your exact situation and what your distribution plan is going to be later on. For example, if you’re setting your trust up to support your kids after death, and your intention is to make sure that they’re inheritance is protected ad it’s there to provide for their education, you might want your life insurance be payable directly to the trust. That way, you know that money, those funds are going to be available for the purposes set out in the trust.

Now an IRA, a 401K, that might be a little bit different because there are certain advantages to leaving a spouse as a beneficiary that you would lose with transferring either ownership or beneficiary of that policy to the trust. So, it’s a really individualized analysis, and there is no one size fits all example or advice that would work for all people.

Ryan

Yeah, thanks for touching on that. I carried it a little bit, but I just wanted to stress that and have it really come from you is there is no one size fits all, and that different scenarios, that’s why personal finance is personal, right? There’s no one size fits all that truly makes sense. I actually have a follow-up question, I should say, is I asked if you should move vehicles in there, and that comes into liability. Do revocable living trusts protect you from liability or from anyone else to claim that property?

A collector of high-value vehicles may fall into a trust category.

Chris

There are different thoughts whether or not a vehicle should be transferred into the trust. Here in California, transferring a vehicle after death through the DMV is a fairly easy process, which is surprising for California, but because of that, it’s not as important to transfer that vehicle into the trust. In a lot of cases, we advise that clients actually keep their personal vehicle outside the trust. Now, if it’s a collector, a high-value vehicle, it fits more into that description, then it might be a good idea, but for your everyday driving car, usually, it’s not necessary to transfer it into the trust.

To go into the second part of your question about liability protection, that is actually a fairly improperly understood area about estate planning. When you put your revocable living trust together, there is no additional liability protection that you’re receiving. SO for example, moving your house into your trust is not going to protect your house any more than if you were holding as an individual for you as an individual. If you get sued, any of your assets that could be used to satisfy a judgment against you, just because they’re in a living trust is not going to provide protection.

Where a living trust does … and I said living trust. I’m sorry. Again, going back to others, multiple names for these types of documents, revocable trust, and living trust are sometimes used interchangeably. But where the trust does provide liability protection for you is through your beneficiaries. Now, if you set a trust up and your children are your beneficiaries after death, that trust can provide protection for their inheritance. So for example, if your child is sued later on, if they’re in a situation with a divorcing spouse, for example, those trust assets held up still in a trust do have a measure of protection where they wouldn’t otherwise be protected if they were directly given to your beneficiaries.

Ryan

That’s a great distinction to make, and I appreciate you going back and saying the difference between a revocable and living trust. It’s almost everything in the finance world and really insurance and everything, it’s almost meant to confuse the consumer. It’s frustrating how there are so many different names and so many different things that are happening, so again, I appreciate you going into it. I want to ask one follow up on this is … we haven’t really talked on it, but irrevocable trusts. Is there any? I guess just tell me a little bit about that. Then is there any liability protection from those, and when would someone look at even having an irrevocable trust?

Irrevocable trusts are used for tax planning.

Chris

Right. There a lot of different situations which might call for an irrevocable trust. The biggest distinction is really just in the name. Irrevocable versus revocable, it’s obvious why they’re different. Revocable trusts can be revoked. If I create a revocable trust today, I can revoke it tomorrow. There’s generally no negative implications for me there. If I … irrevocable trust, it’s just like it sounds. It’s irrevocable. I can’t unilaterally decide in most cases that I want to do away with this trust and revoke it.

Now, a lot of times irrevocable trusts are used for tax planning where certain assets may need to be taken out of the estate in order to minimize potential estate taxes at death, and for a number of different reasons as well. One of the important things to remember is when you do create your revocable living trust now, at death, that trust actually does transfer into being irrevocable. So, after you pass, your beneficiaries can’t unilaterally go ahead and change the terms of that trust, can’t revoke it actually because they want to.

Ryan

That’s a great point to make, and I think, a huge distinction that needs to be addressed. Thank you for that.

Now, it’s time for the curbside consult.

Ryan

This physician is just about to start working a locum’s job and is wondering if they should set up an LLC to protect themselves from liability, as well as setting up a solo 401K. Their question is, is this worth doing? To preface this, you don’t need to go too much into the solo 401K and why setting up one of those. We’re going to discuss that in a later episode, but I definitely wanted to ask you this and get this question out there because I think this is a common misconception around LLCs.

Setting up the correct type of entity matters a lot.

Chris

Sure. Going back to my answer that I use too often, it depends. It really depends on what state that physician is going to be working, and where they want to set that LLC up. No for California for example, a physician cannot actually set up an LLC under which to practice medicine. Ti’s just not allowed. The problem though is in setting up that LLC, the secretary of state which accepts LLC filings isn’t going to necessarily tell you that you can’t set up that LLC. So, you may go ahead and set that up only to find out that that’s not an allowable form of business to actually practice there.

So for professionals, physicians included, lawyers, accountants, and even veterinarians, the options for types of business entity really are a professional corporation, partnership, and sole practitioner for the most part. In other states, there could be different types of business entities that someone could set up, but the most important to remember here in California is even if you were to set up that business entity, doesn’t shield you from all the liability.

Now, for a practicing physician, one of the biggest areas of liability is likely malpractice. Setting up a business entity is not going to shield you from any professional malpractice that you might commit. It can shield you from non-medical related liability such as if you enter into a contract with a business supplier, or an employment issue, but again, it’s not going to shield you from that malpractice. So, in deciding if it’s worth to set up that business entity, what this physician might want to do is balance the cost of setting up and maintaining that entity with any potential savings they might see in taxes, and the hassle of, again, maintaining the entity for what their potential exposure is for liability.

Ryan

Yeah, it’s a perfect answer. It is definitely a common misconception on setting that up. I know I didn’t ask you more on the solo 401K, but the liability standpoint and everyone defaults to oh, we’ll just open up an LLC, and that doesn’t always apply. While it does allow you to open the solo 401K and to fund it, to lower tax liability and to help shield you from the tax side of things, it doesn’t shield you from general liability and malpractice. I think that’s a huge distinction to remember.

It makes sense to open an LLC when an owner would prefer some income to be tax-deferred.

Chris

Right, and sorry, I got carried away on the liability front, and I forgot to mention the solo 401K, but in California, if you were to decide set up a profession corporation, then that could be a route in order for you to set up a 401K or other retirement plan which you otherwise wouldn’t be able to contribute to if you were to act as a sole practitioner or as a partner.

Ryan

Yeah, and that’ll allow you to shield a ton of income and put it in a tax-deferred status. While it seems like the generic default, that might not be applicable to everyone, but if you are making a decent amount of money, and would like to have some of that be tax-deferred and are able to actually open and fund it, then opening up an LLC might make sense. But just from the protection side, it really doesn’t protect you from the liability that you might think it would, so …

Chris

Again, you really want to be careful in the state you’re opening that business entity, because if you are, say, in California and you’re a physician, and you open an LLC, that’s not an allowable business entity for you to be practicing under. So, that may not even protect you from any liability whether it’s medical practice related or not, because you’re not [inaudible 00:39:39] to have a business entity. So, it’s really important to sit down with an advisor who understands the difference, and I definitely am a believer in sitting down with a financial advisor setting this up as well to make sure you’re number one, in the right business entity to be able to put your financial plan into place as well. So really working in conjunction, I think is really important.

Ryan

Yeah, it’s a great point to make. So generally, what would your recommendation be for a physician in California if they had the ability to do maybe some moonlighting, or some locum’s work that they would open up if it wouldn’t be an LLC?

Chris

Well, the physician would have an option of operating under essentially three different business types. That’s you can operate as a sole proprietor, which is anyone who would be going out and doing work. They’re automatically a sole proprietor. If you’re working with someone else, the default, really, there is you’re in a partnership. If you want to forma business entity, really your only option is the professional corporation here in California. Now, other states might have different options, but really that’s the only three that you do get to choose from here in California.

For single physicians without kids, the amount of estate planning you need depends.

Ryan

Great. Yeah, great advice there. So, the second question here is I’m a single physician, and I don’t have any kids. How much estate planning do I really need, and should I even set up a revocable trust?

Chris

It depends. Again, you’re going to hear that a lot from me still. We’re going to look at really what your plan is. You might not have kids, but maybe you have family members that are going to depend on you later on in life. Maybe you have nieces and nephews that you really want to help with their education. In those situations, putting something together like a revocable living trust might really help for you to create that plan, where not having an estate plan really wouldn’t allow you to craft a forward thinking no what if scenario.

Without any estate plan, again, you’re going to default back to however the state says your property should be distributed. So those nieces and nephews that you might have wanted to help through college, they probably are not going to get any property if something happens to you now. Your family members that you were willing to help later in life, they’re probably not going to be beneficiaries of your property under that default plan. So, just because someone doesn’t have kids doesn’t mean they don’t necessarily have other priorities in life that may be really important for them to plan for.

Ryan

That’s good advice, Chris. Looking at it, with younger physicians that I tend to work with over physician wealth, the common question that I get around a lot of estate planning is I don’t feel like I have enough net worth to open up a revocable trust, or right now, I’m negative net worth. Why would I open up a revocable trust right now?

The “term” probate is sometimes considered a dirty word.

Chris

Yeah, absolutely. It’s really going to go back to what your specific plan objectives are. You might have a negative net worth, but you’ve also purchased a term life insurance policy, so at your death, maybe you will have an estate that you need to plan for. So, just because you don’t necessarily have the funds now doesn’t mean you won’t necessarily have them in the future.

The one thing we didn’t mention as well is probate. That sometimes people look at as kind of a dirty word that no one really wants to find themselves in, but probate is the court process that people will enter into after death. So, whether you have no estate plan, whether you have put a will together, both of those situations are going to find you in probate. In California, probate is a long process. It’s six months, potentially longer where is going to have to wait for the court to approve on any distribution of property, decide who that’s going to go to.

So, maybe you are this younger physician, and maybe you don’t have a lot of assets, but you still might find yourself in probate or … I’m sorry, you won’t find yourself there, but your family will find themselves in probate trying to settle your estate, where a revocable living trust can actually avoid the probate process for any of that property you put in the trust. So, the trust actually acts completely separately, allowing your family not to be in court for 6 months, 12 months, potentially longer because it’s completely administratively on the side of the court system, so another really great reason that someone might want to put a trust together.

Never cross anything out of your wills or estate planning documents.

Ryan

Yeah, that’s excellent. I can’t believe we forgot to skip over or that we skipped over probate, so thank you for addressing that. The last question that I have here is the husband and I are both physicians, and we have a one year old daughter with another one on the way. We have basic wills set up, but really nothing else. How do we go about updating our wills to add our next child into it? What else should we be looking at to add with respects to estate planning?

Chris

Yeah. The first thing I really want to stress is if someone does want to change any of their estate planning documents, including their will, the thing they should never do is never cross anything out, never hand write something in, because that creates all sorts of problems. In almost every state, probably every state, there are specific requirements that have to be met in order for a will or a trust to be valid. Simply crossing information out in any of those documents is not going to meet those requirements. I really want to make sure that I did mention that because I’ve seen it time and time again.

So, making that change to your will is really fairly simple. If that new child is born and you want to update these estate planning documents, you can execute what’s called a codicil, which is simply just an amendment to a will. Actually, a trust is managed in the very same way. It’s really just an additional document that says what that change is going to be, and signed in the same manner that the original document was signed, whether it’s a will or a trust. So, it’s not a complicated process to go through. Sometimes people might have multiple changes they want to make as well, so in that scenario, it might make more sense to draft a new will or a replacement trust. So, it really depends on the circumstances and the level of complexity that’s in your changes.

Now, one of the things that really stand out to me for this physician is they have or they’re going to have two very young kids. Now, with just wills in place, if both parents do pass away, they still have minor children to support with no real direction on how their assets should be used to support their children. Now, adding in a revocable living trust can really be helpful in this scenario because both of these parents can decide for what purposes trust funds should be used. Maybe it’s the education of their children, maybe it’s for medical reasons, maybe it’s for just general support. Then when those kids reach certain ages, additional funds from the trust can be released.

The biggest planning opportunity is to pass on money to children at certain milestones.

So, a popular way that people can decide to pass money on to their children is once their children become of age, they pick certain birthdays, certain milestones where they want to give gifts of whatever property is left in the estate at that point. That’s, to me, the biggest planning opportunity that these two might have, is really to beef up their estate plan, add to those wills, put a revocable living trust in place where they can have a more detailed plan if something should happen to them.

Ryan

That’s a perfect answer, Chris. I really appreciate it. I think the listeners definitely, if they didn’t know what estate planning really entailed before this episode, I think they got a great overview. Chris, where can people learn a little bit more about you if they want to reach out to you, want to work with you, or just want to get some more information?

Chris

Absolutely. I do my best to answer any questions that I can. They can find my information right online at mylawyerchris.com. That’s my website, and it has the rest of my contact information right up there.

Ryan

Perfect. Well, I’ll make sure to include it in the show notes, and thank you again so much for being on. It’s always a pleasure to talk with you, and I really appreciate it.

Chris

Absolutely Ryan. Some great questions and I appreciate the opportunity to share a little bit about estate planning. It shouldn’t be as scary as people think.

Ryan

I definitely agree, and I think the more they get educated, the easier it will be to want to reach out and to want to know what is going on, and how to basically set up their financial lives, and to protect themselves and their kid if they have some.

Set-up your financial lives to protect yourself and your family.

Chris

Absolutely. Ryan, thanks again. I appreciate it.

Ryan

Well, there you have it. That was a great show with Chris. I know that was a lot of information to cover, but I think he did a really great job of explaining what he calls the four pillars of estate planning, which are wills, power of attorneys, healthcare directives, and revocable living trusts. I know that this is a conversation that most people don’t want to have, but it really is necessary. You need to know what’s going to happen to you, your assets, your children if you were to pass.

I really want to thank Chris for being on the show. If you guys have any questions, again, join our Facebook community, the Financial Residency VIP community group on Facebook. Pop in, ask your questions, participate in the discussions, and I look forward to seeing you guys next show. Next show, we are going to have a good friend of mine, Tim Baker, who is a financial planner for pharmacists. We’re going to be talking about fee only versus fee based financial planning. It’s a super-hot topic, and it’s something I think that most people don’t really know the difference between the two, and they usually always have questions for us. So, I hope you guys enjoy next week’s show. I hope you enjoyed this week’s show, and I look forward to seeing you inside the Facebook community. Until next time.