J Clin Aesthet Dermatol. 2025;18(2):23–24.
by Clay Cockerell, MD, JD, MBA, and Justine Galambus, MD
Dr. Cockerell is with Cockerell Dermatopathology in Dallas, Texas. Dr. Galambus is with the University of North Texas in Dallas, Texas.
FUNDING: No funding was provided for this article.
DISCLOSURES: The authors report no conflicts of interest relevant to the content of this article.
ABSTRACT: Even though physicians often have the access and ability to generate significant wealth, many report poor financial literacy and education. They may not fully understand the options available to them for passing on their wealth to their next of kin. Options include wills, trusts, or, if one dies without a will, simply following the states intestate succession laws. There are multiple types of trusts that each confer different benefits and drawbacks. Physicians in all stages of their career should be aware of these options and strongly consider working with an estate planning attorney and financial planner.
Keywords: Financial literacy, estate planning
Introduction
Even though physicians often have the access and ability to generate significant wealth, many report poor financial literacy and education.1 Though physicians should likely consider estate planning with an attorney and/or financial planner, it is important for physicians in all stages of their career to be aware of options for passing on wealth to their next of kin.
When one dies, their estate is their financial net worth, consisting of assets and liabilities. Assets are tangible or intangible resources of value. Liabilities are financial obligations and debts. Upon death, estates without wills or trusts are subject to the state’s intestate succession laws. The division of the estate will also depend on the proportion of community property (property acquired during a marriage) versus separate property (property acquired before marriage as well as select types of property acquire during a marriage). Typically, any living spouse or children will inherit the bulk of the estate.
What is a will?
To avoid intestate succession laws, one designates their wishes for inheritance in a will. A will is a legal document that directs the disposition of property upon death. The author of a will is also called the testator. The heirs, or beneficiaries, are clearly outlined with specified allocations, and an executor is named to oversee the execution of the will. All wills must go through probate court, but if the will is uncontested, the courts involvement is minimal. By going through probate, information pertaining to the estate is recorded as public record. Probate can be costly and may delay disbursement of inheritance.
If the deceased was the guardian of minors or an incapacitated adult, a will may also outline guardians for these individuals. A conservator may also be appointed by the court to manage the financial affairs of the estate while the beneficiaries come of age or if they remain incapacitated.
What is a trust?
Trusts originally arose in England during the Crusades. When a landowner would go to fight abroad, he would transfer the title of his land with the understanding that this would be temporary and returned upon his return from war. However, the new titleholder was under no legal obligation to return the land, and so would often refuse to do so.
When the Crusader made a claim to their land, the English common law courts did not recognize their claim since they no longer held legal title. The Crusaders appealed to the Courts of Equity, where the Lord Chancellor found it “unconscionable” that the person entrusted to return the land would renege on their promise. The Lord Chancellor found in favor of the Crusaders. Thereafter, the Crusader in question was designated the “beneficiary” while the acquaintance was the “trustee,” and the agreement was the “trust.”
A trust is a “living” relationship created by a grantor, or settlor, who outlines and entrusts its management to a trustee. The trustee holds a title to the trust and manages it on behalf of the beneficiaries. The res (latin for “thing”) is the property that is placed within the trust.
There are four main requirements to establish a trust: (1) the grantor’s intent, (2) property or res, (3) trustee, and (4) a beneficiary. If a trustee is not appointed, a court can do so such that a trust will not “fail” simply because of a lack of named trustee. Of note, the grantor can be both the trustee and a beneficiary. Unlike wills, which only act upon death, a trust can take effect while the grantor is living, a so-called inter vivos trust. Thus, trusts may assist the family of the grantor if the grantor becomes incapacitated or disabled but remains alive. A will would be unable to assist in this scenario as the testator is not yet deceased.
The trust itself is a legal document that specifies what is being transferred (res), who will manage it (trustee), and who will benefit from it (beneficiaries). To create a trust, the grantor must work with an attorney, often one specialized in estate planning, with the intent to have property entrusted to a third party with a fiduciary responsibility to manage it appropriately in the best interest of the beneficiaries. The trustee must manage the trust assets according to a “prudent investor rule.” This includes diversifying assets, buying and selling assets, and distributing assets appropriately.
Because the trust is an ongoing legal relationship, even upon the grantor’s death, it does not require probate review as the operations and management are already in effect. Similarly, because the trust is already subject to legal oversight and the trustee has a fiduciary duty to manage the trust for the best interests of the beneficiaries, additional probate court supervision is not required. This keeps the assets and operations of the trust private, as opposed to a will, which is a public document.
What are the different types of trusts?
Trusts are divided into revocable and irrevocable trusts. While the grantor is living, they may create the trust in either fashion. However, when the grantor dies, all revocable trusts automatically become irrevocable. Revocable trusts offer greater flexibility as the terms can be amended after their formation. This allows for alterations in the contributions, administration, the adding or removing of beneficiaries as well as altering other terms of the trust. Because assets can be added or removed from the revocable trust by the grantor, they are still under the control of the grantor who is required to file and pay taxes on any income or realized gains within the trust. Additionally, the grantors’ creditors are able to make claims against the assets within a revocable trust as these are, effectively, still the grantor’s assets.
Irrevocable trusts cannot be amended after they are formed. Once formed, assets within the trust are transferred out of the grantor’s estate and into the trust. Because these are no longer the grantor’s assets, creditors cannot typically pursue assets sheltered within an irrevocable trust. Any non-beneficiary may gift up to $18,000 per beneficiary per year without paying a gift tax up to a lifetime gift exclusion limit of $13.61 million, which is also the minimum value required before a federal estate tax must be paid.2 The lifetime limit has increased every year for the past 15 years.3 These figures are doubled for married couples. There are state estate and inheritance taxes with significantly lower thresholds. The trust pays taxes as applicable on any income, assets, or gains realized.
A testamentary trust is a trust that is created by the will upon death of the grantor. Assets flow into the trust upon death. Because it originates from a will, it must still be reviewed by probate court and is public. There is the additional risk that the trust will not be exactly as the decedent intended. However, this tends to be lower cost than a revocable trust created during the grantor’s lifetime.
Wills may also have “pour over” provisions that provide for any leftover assets from the estate to flow into an existing trust or a newly created testamentary trust. Pour-over wills apply to assets that are not specifically delineated in the will such as those potentially acquired after the will was written but before the decedent died.
For revocable, irrevocable, and testamentary trusts, any distribution that skips a generation, such as a distribution to a grandchild from a trust established by the grandparent, is subject to a generation-skipping transfer tax (GSTT). The GSTT is equal to the highest federal estate tax rate, which is current 40 percent.4 Additionally, when any trust is terminated, the final recipients of that trust must also pay a GSTT.
A dynasty trust, also called a generation-skipping trust, is a long-term irrevocable trust that is created to pass wealth over multiple generations without incurring transfer taxes, such as gift or estate taxes, as long as the assets remain in the trust. Most notably, this trust avoids the GSTT from generation to generation. Income taxes only apply if assets produce income, so non-dividend paying stocks and tax-free municipal bonds are usually the main assets in the trust. Because the beneficiaries do not have control over the distributions, the distributions are usually not taxed. Only when the trust terminates is the generation-skipping transfer tax paid. Dynasty trusts can be limited in their duration by state laws if the “rule against perpetuities”5 applies although many states have either abolished the rule or made the time limitation very long, usually over 100 years.
The grantor can designate distribution to beneficiaries and include conditions on how assets will be used. Grantors can place limits on maximum annual withdrawals, a so-called “spendthrift” clause, or they can state that dispersals from age 18 to 24 may only be used for college tuition. There can be further provisions for the trustee on how the assets are to be managed upon the grantor’s death.
Despite the many advantages that trusts offer, there are disadvantages. Trusts are more costly than wills to set up and they require more information and documents. Additionally, it may be difficult to find a trustee who is willing to assume the fiduciary duty required. Moreover, the trustee may have to pay taxes from their personal funds if they fail to act timely on behalf of the estate. Finally, trusts may ultimately not have as many tax benefits for the grantor as expected especially if the trust is revocable.
Conclusion
Trusts can offer a valuable, tax-saving vehicle for generating generational wealth. Though they have greater cost upfront as compared to wills, they provide superior protections for creditors and offer greater control assets to the grantor even after death. It is important for physicians to consult an estate planning attorney as well as financial planner to ensure advantageous wealth management.
References
- Zubair AS, Sivakolundu DK, DeVito M, et al. Financial literacy among medical trainees and faculty: a pilot study. Cureus. 2023;15(9):e44829.
- Meyer BD, Verst LA, Bhargava P. Preserving legacies: an overview of physician estate planning. Curr Probl Diagn Radiol. 2024;53(4):442–444.
- Internal Revenue Service. Estate tax. Updated 29 Oct 2024. Accessed 11 Nov 2024. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- Intuit TurboTax. What is the generation-skipping transfer tax? Updated 16 Oct 2024. Accessed 11 Nov 2024. https://turbotax.intuit.com/tax-tips/family/what-is-the-generation-skipping-tax/L5mfqiA5z
- Cookman E. Dynasty trust explained: how to protect your child’s inheritance. 7 Jun 2022. Accessed 11 Nov 2024. https://cookmanlaw.com/dynasty-trust
He Who Wills the End Wills the Means: An Overview of Trusts for Physicians
Categories:
J Clin Aesthet Dermatol. 2025;18(2):23–24.
by Clay Cockerell, MD, JD, MBA, and Justine Galambus, MD
Dr. Cockerell is with Cockerell Dermatopathology in Dallas, Texas. Dr. Galambus is with the University of North Texas in Dallas, Texas.
FUNDING: No funding was provided for this article.
DISCLOSURES: The authors report no conflicts of interest relevant to the content of this article.
ABSTRACT: Even though physicians often have the access and ability to generate significant wealth, many report poor financial literacy and education. They may not fully understand the options available to them for passing on their wealth to their next of kin. Options include wills, trusts, or, if one dies without a will, simply following the states intestate succession laws. There are multiple types of trusts that each confer different benefits and drawbacks. Physicians in all stages of their career should be aware of these options and strongly consider working with an estate planning attorney and financial planner.
Keywords: Financial literacy, estate planning
Introduction
Even though physicians often have the access and ability to generate significant wealth, many report poor financial literacy and education.1 Though physicians should likely consider estate planning with an attorney and/or financial planner, it is important for physicians in all stages of their career to be aware of options for passing on wealth to their next of kin.
When one dies, their estate is their financial net worth, consisting of assets and liabilities. Assets are tangible or intangible resources of value. Liabilities are financial obligations and debts. Upon death, estates without wills or trusts are subject to the state’s intestate succession laws. The division of the estate will also depend on the proportion of community property (property acquired during a marriage) versus separate property (property acquired before marriage as well as select types of property acquire during a marriage). Typically, any living spouse or children will inherit the bulk of the estate.
What is a will?
To avoid intestate succession laws, one designates their wishes for inheritance in a will. A will is a legal document that directs the disposition of property upon death. The author of a will is also called the testator. The heirs, or beneficiaries, are clearly outlined with specified allocations, and an executor is named to oversee the execution of the will. All wills must go through probate court, but if the will is uncontested, the courts involvement is minimal. By going through probate, information pertaining to the estate is recorded as public record. Probate can be costly and may delay disbursement of inheritance.
If the deceased was the guardian of minors or an incapacitated adult, a will may also outline guardians for these individuals. A conservator may also be appointed by the court to manage the financial affairs of the estate while the beneficiaries come of age or if they remain incapacitated.
What is a trust?
Trusts originally arose in England during the Crusades. When a landowner would go to fight abroad, he would transfer the title of his land with the understanding that this would be temporary and returned upon his return from war. However, the new titleholder was under no legal obligation to return the land, and so would often refuse to do so.
When the Crusader made a claim to their land, the English common law courts did not recognize their claim since they no longer held legal title. The Crusaders appealed to the Courts of Equity, where the Lord Chancellor found it “unconscionable” that the person entrusted to return the land would renege on their promise. The Lord Chancellor found in favor of the Crusaders. Thereafter, the Crusader in question was designated the “beneficiary” while the acquaintance was the “trustee,” and the agreement was the “trust.”
A trust is a “living” relationship created by a grantor, or settlor, who outlines and entrusts its management to a trustee. The trustee holds a title to the trust and manages it on behalf of the beneficiaries. The res (latin for “thing”) is the property that is placed within the trust.
There are four main requirements to establish a trust: (1) the grantor’s intent, (2) property or res, (3) trustee, and (4) a beneficiary. If a trustee is not appointed, a court can do so such that a trust will not “fail” simply because of a lack of named trustee. Of note, the grantor can be both the trustee and a beneficiary. Unlike wills, which only act upon death, a trust can take effect while the grantor is living, a so-called inter vivos trust. Thus, trusts may assist the family of the grantor if the grantor becomes incapacitated or disabled but remains alive. A will would be unable to assist in this scenario as the testator is not yet deceased.
The trust itself is a legal document that specifies what is being transferred (res), who will manage it (trustee), and who will benefit from it (beneficiaries). To create a trust, the grantor must work with an attorney, often one specialized in estate planning, with the intent to have property entrusted to a third party with a fiduciary responsibility to manage it appropriately in the best interest of the beneficiaries. The trustee must manage the trust assets according to a “prudent investor rule.” This includes diversifying assets, buying and selling assets, and distributing assets appropriately.
Because the trust is an ongoing legal relationship, even upon the grantor’s death, it does not require probate review as the operations and management are already in effect. Similarly, because the trust is already subject to legal oversight and the trustee has a fiduciary duty to manage the trust for the best interests of the beneficiaries, additional probate court supervision is not required. This keeps the assets and operations of the trust private, as opposed to a will, which is a public document.
What are the different types of trusts?
Trusts are divided into revocable and irrevocable trusts. While the grantor is living, they may create the trust in either fashion. However, when the grantor dies, all revocable trusts automatically become irrevocable. Revocable trusts offer greater flexibility as the terms can be amended after their formation. This allows for alterations in the contributions, administration, the adding or removing of beneficiaries as well as altering other terms of the trust. Because assets can be added or removed from the revocable trust by the grantor, they are still under the control of the grantor who is required to file and pay taxes on any income or realized gains within the trust. Additionally, the grantors’ creditors are able to make claims against the assets within a revocable trust as these are, effectively, still the grantor’s assets.
Irrevocable trusts cannot be amended after they are formed. Once formed, assets within the trust are transferred out of the grantor’s estate and into the trust. Because these are no longer the grantor’s assets, creditors cannot typically pursue assets sheltered within an irrevocable trust. Any non-beneficiary may gift up to $18,000 per beneficiary per year without paying a gift tax up to a lifetime gift exclusion limit of $13.61 million, which is also the minimum value required before a federal estate tax must be paid.2 The lifetime limit has increased every year for the past 15 years.3 These figures are doubled for married couples. There are state estate and inheritance taxes with significantly lower thresholds. The trust pays taxes as applicable on any income, assets, or gains realized.
A testamentary trust is a trust that is created by the will upon death of the grantor. Assets flow into the trust upon death. Because it originates from a will, it must still be reviewed by probate court and is public. There is the additional risk that the trust will not be exactly as the decedent intended. However, this tends to be lower cost than a revocable trust created during the grantor’s lifetime.
Wills may also have “pour over” provisions that provide for any leftover assets from the estate to flow into an existing trust or a newly created testamentary trust. Pour-over wills apply to assets that are not specifically delineated in the will such as those potentially acquired after the will was written but before the decedent died.
For revocable, irrevocable, and testamentary trusts, any distribution that skips a generation, such as a distribution to a grandchild from a trust established by the grandparent, is subject to a generation-skipping transfer tax (GSTT). The GSTT is equal to the highest federal estate tax rate, which is current 40 percent.4 Additionally, when any trust is terminated, the final recipients of that trust must also pay a GSTT.
A dynasty trust, also called a generation-skipping trust, is a long-term irrevocable trust that is created to pass wealth over multiple generations without incurring transfer taxes, such as gift or estate taxes, as long as the assets remain in the trust. Most notably, this trust avoids the GSTT from generation to generation. Income taxes only apply if assets produce income, so non-dividend paying stocks and tax-free municipal bonds are usually the main assets in the trust. Because the beneficiaries do not have control over the distributions, the distributions are usually not taxed. Only when the trust terminates is the generation-skipping transfer tax paid. Dynasty trusts can be limited in their duration by state laws if the “rule against perpetuities”5 applies although many states have either abolished the rule or made the time limitation very long, usually over 100 years.
The grantor can designate distribution to beneficiaries and include conditions on how assets will be used. Grantors can place limits on maximum annual withdrawals, a so-called “spendthrift” clause, or they can state that dispersals from age 18 to 24 may only be used for college tuition. There can be further provisions for the trustee on how the assets are to be managed upon the grantor’s death.
Despite the many advantages that trusts offer, there are disadvantages. Trusts are more costly than wills to set up and they require more information and documents. Additionally, it may be difficult to find a trustee who is willing to assume the fiduciary duty required. Moreover, the trustee may have to pay taxes from their personal funds if they fail to act timely on behalf of the estate. Finally, trusts may ultimately not have as many tax benefits for the grantor as expected especially if the trust is revocable.
Conclusion
Trusts can offer a valuable, tax-saving vehicle for generating generational wealth. Though they have greater cost upfront as compared to wills, they provide superior protections for creditors and offer greater control assets to the grantor even after death. It is important for physicians to consult an estate planning attorney as well as financial planner to ensure advantageous wealth management.
References
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