Estate-Planning Preserves Medical Practice Value

By Parag Patel, Esq.

SUMMARY: Exposing a medical practice to probate often costs the heirs of the assets thousands of dollars due to the practice’s diminished value since the patients find new doctors before the practice can be sold and attorneys’ fees for handling the probate. With proper estate planning, an estate can be protected from costly legal outlays. With the appropriate trust, heirs can be given immediate control of the practice and be empowered to sell the practice while it is still viable and worth its maximum value. A Professional Corporation Trust allows doctors to pass on control of the trust to their heirs. With a Revocable Living Trust, in the event of the death of either spouse, the trust continues to own the property under the control of the survivor and thus avoids probate. Revocable Living Trusts also give several income tax advantages. The main goal in estate planning should be to avoid probate. Probate is costly, time consuming, and very difficult, especially if there is no will.

Often when a doctor dies, especially a solo practitioner, the value of the practice dwindles while the business is tied up in the courts for probate. Probate is the legal process for administering one’s assets and liabilities upon his or her death. Assets subject to probate may be held frozen for months or even years. Exposing the practice to probate often costs the heirs thousands of dollars. This is due to the diminished value of the practice as the patients find new doctors before the practice can be sold and fees for the attorney handling the probate continue to mount up.

Probate can be avoided with proper estate-planning. You can protect your estate from costly legal outlays and give your heirs immediate control of the practice with the appropriate trust. By transferring control of the practice to your heirs at the time of death, you effectively empower them to sell the practice while it is still viable and worth its maximum value.

Unfortunately, doctors, like other busy professionals, often have not planned for the disposal of their estates. Even if they have a will, and most do not, the estate goes into probate. Once in probate, the court takes control of the estate. Generally, it takes one-to-two years to settle the estate at a cost between 5 to 10 percent of the gross estate value–up to $65,000 on a $650,000 estate.

There is a better way. For instance, the heirs of a radiologist received thousands of dollars more because of estate-planning that utilized various trusts. First, by incorporating the practice and placing ownership of the corporation stock in a Professional Corporation Trust, it allowed the heirs to take control of the practice immediately after the demise of the doctor. A Professional Cooperation Trust allows doctors to pass on control of the trust to their heirs. As a trustee of the corporation, they cannot practice medicine unless they are licensed, but they can sell it. In this case, the heirs were able to sell the business quickly for $40,000 more than they could have if they were required to wait two years for probate to settle the estate.

Second, the heirs avoided probate cost. The total estate was worth $1,000,000, so the savings was thousands. A Revocable Living Trust was designed that covered both the husband and wife to protect this client’s home, cars, stock investments and personal possessions. In the event of the death of either one, the trust continued to own the property under the control of the survivor and thus avoided probate. When the doctor died, the Revocable Living Trust also gave the surviving spouse the maximum marital deduction for estate-tax purposes.

Ordinarily, an estate valued at over $600,000 will be subject to a federal estate tax, but by putting it in a trust, it enjoys a $1,200,000 federal estate-tax exemption. Yet, the surviving spouse still has the right to live in the home, use income in the stocks and dispose of any of the assets. When the surviving spouse dies, the estate is passed on to the heirs tax-free without being subject to probate.

Often, doctors think that estate-planning is for the well established, successful doctors. That is wrong. Even the heirs of a new doctor who is deeply in debt will benefit from being provided for by a Revocable Living Trust. If the doctor should die, at least the estate is organized in writing as to how things should be handled. Whatever has been accumulated will be available to the heirs without going through probate.

Besides the benefit of maintaining control of the practice with a professional corporation, this trust gives you several income-tax advantages. You can take lease deductions for purchasing equipment and office furniture by buying them and leasing them to your Professional Corporation Trust. You can also have the trust pay for your family’s medical-reimbursement plan. If your practice is licensed as a sole proprietorship, you will not enjoy these tax advantages.

It is critical for doctors who have larger estates to provide for some liquidity so the heirs can take care of things without being penalized with additional tax. One of the best ways of doing this is with a Life Insurance Irrevocable Trust. It is set up so that the trust owns the life insurance, but it can pay the beneficiary without adding tax value to the estate when the trust is designated for meeting taxes.

Professionals should take steps to protect their wealth. Once you have decided that you need to take action, the first thing that you need to do is list all of your assets. Write them down–the equity in your home, the amount of your bank account and the value of stocks, bonds, insurance policies, IRAs, jewelry and automobile. As a doctor, you also should include the fair market price of your practice. Large medical equipment suppliers may evaluate your practice and provide this information as a courtesy for doing business with them. The market valuation need not be exact.

Then write down what you want to happen to these items should you die. How do you want them to be distributed? Do you want everything to go to your spouse, your children, your temple or your government? Ask yourself, ‘Do I want to reduce my taxes? Do I want to reduce the settlement cost? Do I want to provide a special fund for my children’s education?’

If you answered yes to these questions, then you may need a Revocable Living Trust that will avoid probate and reduce the taxes. As a doctor, you need to incorporate and own that professional corporation in a Professional Corporation Trust. If part of your estate is going to be taxable upon your death, you may need to have an Irrevocable Life Insurance Trust. If you have an extremely large estate, other alternatives such as gifts to charities or other methods allowing you to get funds out of your estate without tax can benefit you.

Your main goal should be to avoid probate. Probate is costly. It is very time-consuming for the courts to ensure that your debts are paid and your will is executed properly. Probate is even more difficult if you do not have a will.

Another reason that you should avoid probate is that you will not want to expose your beneficiaries to the schemes of “investment counselors” who search the public records of probate proceedings for new clients.

Some people think that by holding all assets in joint tenancy with the right of survivorship that they have solved the problem of passing on their estate. There are some real dangers withholding assets this way. First, each party is exposed to the debts and liabilities of the other. A lawsuit judgment against only one party could take the full jointly held property. Second, even though it avoids probate on the first person’s death, property must go through probate upon the second person’s death or if there is a common disaster and both parties are killed.

Wills and holding assets in joint tenancy do not avoid probate, but with a Revocable Living Trust you can do just that. By establishing a Revocable Living Trust, you simply retitle your assets to the name of your trust. It’s like putting your assets into a safety deposit box. The trust holds the title to your property. You are the trustee of your trust. As trustee, you can retain complete control over all your assets. You can add, subtract or dispose of assets in your trust, just as you can add, take out or empty items from your safety deposit box. You still are in full control.

When you die, your trust lives on. In your Revocable Living Trust, you name a successor trustee to administer and distribute your estate. You describe how you want your trust divided. You select the time and circumstances when your beneficiaries will receive your trust assets.

Most attorneys charge from $800 to $1,500 to establish a trust. Do-it-yourself kits also are available. Establishing a trust either way is a real bargain when you consider the legal fees for probate and the advantages that a trust gives you over a will.

The cowboy philosopher Will Rogers said, “Anyone who dies with a will ought to come back to see all the trouble he has caused.” Rogers’ statement of long ago is the truth. Nearly everyone has a horror story about probate. Generally, all of them wish they had known about trusts.