The One Contract Your Practice Must Have

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Buy-Sell Agreement

The One Contract Your Practice Must Have
Though the odds of a premature death of a practice partner are not high, the same cannot be said about a life changing disability. Because both of these risks can have such devastating effects on the finances of the practice and the future income of the remaining healthy partners, we find it troubling that so few Doctors properly address this risk.
A medical practice is a business. As such, it is created for the purpose of generating financial benefit for its owners. Practice CEOs are supposed to take calculated risks and manage these risks to maximize long-term after-tax income. There is no excuse for them to completely ignore the potentially devastating risk of disability or death of physician-partners. Are you the de facto CEO of your practice? If so, how are you protecting against these risks?
Most states prevent non-Doctors from owning professional medical practices. This is certainly true in California. California Business and Professions Code Section 2052 provides that “any person who practices or attempts to practice, or who advertises or holds himself or herself out as practicing… [medicine] without having at the time of so doing a valid, unrevoked, or unsuspended certificate…is guilty of a public offense, punishable by a fine, by imprisonment in the state prison, by imprisonment in a county jail not exceeding one year, or by both the fine and either imprisonment.”
Additionally, California Business and Professions Code Section 2400 provides that “corporations and other artificial legal entities shall have no professional rights, privileges, or powers.” The policy expressed in Business and Professions Code section 2400 against the corporate practice of medicine is intended to prevent unlicensed persons from interfering with, or influencing, the physician’s professional judgment.
This means that, as compared to a regular business owner, a Doctor building a medical practice is not generally building wealth for his or her family. If you want to ensure that you do build wealth for the family through your practice and actually turn your practice into a “wealth building engine” for your family, you must draft, fully-execute, and fund a Buy-Sell agreement.
In this chapter, we will discuss the reasons why a premature death or disability of a partner is such a big risk and what the financial repercussions are of failing to address this issue. We will then discuss the “medicine” for such an ailment—the Buy-Sell Agreement. We also address the importance, and method, of funding the agreement and how to work with the right team of advisors. With all of this knowledge, you should be motivated and prepared to address this important issue in your practice.

Always Expect The Unexpected
As owners of a professional practice, Doctors can spend 10 hours per day, six or seven days per week getting their practices to the point where the practice provides a measure of security for their families. We know, because we have been there ourselves. Nonetheless, those who ignore one fundamental legal contract jeopardize all of their hard work. This very important legal contract is the Buy-Sell agreement. This is an agreement that all owners sign, agreeing how the practice will be valued at the time of one partner’s death or disability, and how the purchase of the shares will be paid.
Without a Buy-Sell agreement, partners and remaining families have no guidelines as to how a practice will deal with an early death or the disability of a physician-owner. At a time when the family is grieving or caring for a disabled family member and possibly struggling to pay their bills, they will look to the remaining partners’ practice to help them in their time of need. At the same time, the remaining partners may be struggling to get by without the services of a valuable partner. The last thing either of these two groups need is a struggle over money. In too many cases, the absence of a Buy-Sell agreement at the time of death or disability can cause bankruptcies for the families of all of the partners. More

Using Qualified & Non-Qualified Plans

Posted by & filed under Business Owners, Doctors, Healthcare, Legal.

Asset Protection

Using Qualified & Non-Qualified Plans
This section discusses two topics which are related and can contribute to the practice being both a Fortress and an Engine. However, the article is unique in that almost every Doctor takes advantage of the first option—qualified plans—while almost none utilize non-qualified plans. We will discuss both popular qualified retirement plans and less common non-qualified plans here, so that you can be aware of options that are available to you and, hopefully, get more out of your hard work, build greater wealth and enjoy the fruits of your labor.

Use Qualified Retirement Plans
A “qualified” retirement plan describes retirement plans that comply with certain Department of Labor and Internal Revenue Service rules. You might know such plans by their specific type, including pension plans, profit sharing plans, money purchase plans, 401(k)s or 403(b)s. Properly structured plans offer a variety of real economic benefits, such as:
· The ability to fully deduct contributions to these plans.
· Funds within these plans grow tax-deferred.
· Funds within these plans are protected from creditors.
In fact, these benefits are likely the reasons why most medical practices sponsor such plans.
For this chapter, we will include IRAs as “qualified plans” even though, technically, they are not. We are doing this because IRAs have essentially the same tax rules as qualified plans and have the same attractions to Doctors who can use them.
As you will learn in Lesson #6 on asset protection, qualified plans and IRAs enjoy (+5) protection in bankruptcy—for asset protection purposes.
You can learn more about their tax benefits (and drawbacks) in Lesson #7. You will see that the obvious tax benefits may be outweighed by the less obvious tax drawbacks.
With qualified plans (not IRAs), they must be offered to all “qualified” employees (within certain restrictions). For a Doctor owner, there may be some economic costs to having a plan which you must offer to, and contribute for, everyone at the office or at related businesses. With these mixed benefits and drawbacks, it is surprising how many Doctors (nearly 100%) use qualified plans and ignore their cousins, non-qualified plans, which are far less restrictive. Review the following chart so you can better understand the pros and cons of qualified plans.

Benefits & Drawbacks of Qualified Plans
Benefits
Tax deductible contributions
Highest level of asset protection (+5)
Tax-deferred growth Drawbacks
You must contribute to plan for all
eligible employees
All withdrawals subject to ordinary income tax rates
Penalties for access prior to age 59
Must take minimum distributions at age 70
May be taxed at 75% or more at death

post 10Your Qualified Plan “Bet” on Future Tax Rates
In other parts of the book, we cover most of the benefits and drawbacks of qualified plans in more detail. Here, we want to make sure you understand the bet you are making on future tax rates when you rely on qualified plans heavily for your retirement. Since all amounts that come out of qualified plans (and SEP and roll-over IRAs, of course) are 100% income taxable, there is no way to know how good (or bad) a financial deal such a plan could be for you until you know the tax rates when you withdraw funds.
In other words, if you contribute funds to a qualified plan today (when the top federal income tax rate is 35%) and withdraw funds when income tax rates are at the same or a lower level, the deduction today and tax-free growth over time is likely a “pretty good deal” for you. However, if you withdraw funds from your plan and the top federal tax rates are 40%-50% or higher, then the qualified plan/IRA may be a “bad deal” for you. Certainly, future federal income tax rates of 50% or more could make qualified plans a very negative long term investment proposition for you.
[Clarification Point: Some folks may argue that, in retirement, doctors are likely to have less income and thus the plan distributions will be taxed at lower rates. While this may be likely for 95% of taxpayers, many doctors will build enough wealth in retirement and non-retirement assets to be in the top marginal tax rates in retirement. The second highest marginal income tax rate (2% less than the highest rate) goes into effect when a married couple earns TOTAL income of only $200,300 in 2008. If you are single, divorced or widowed, that second highest rate applies to income above $164,550. Do you think that your total income will be less than $164k or $200k when you add in retirement distributions, Social Security, rental income, and any investment gains from non-pension assets? In many cases, doctors are going to retire only when their retirement assets will generate incomes equal to their last year’s salary. For most of our clients, this is the retirement game plan—retire only when they can maintain the lifestyle to which they have become accustomed]
With this is mind, review the history of US income tax rates chart below. Putting aside politics, you must understand that it is certainly a possibility that tax rates can return to the levels they were for most of the 20th century. If they do, qualified plans utilized today by most doctors may turn out to be “losing bets” in the long run. Since we cannot know what future tax rates will be, we need to at least acknowledge the bet we are making and ask how we can reduce our risk and perhaps hedge against such a losing bet.

A New Concept for Investing—Tax Treatment Diversification
Does the fact that our qualified plans today may turn out to be losing bets mean that we should abandon them? In most cases, the answer is “no.” These plans generally have the strongest asset protection available and provide significant incentives for employees. We would strongly recommend, however, that EVERY doctor make investments that offer a hedge against potential tax rate increases.
The concept here is that you should have various More