Estate Planning For Dentists

Protect Your Loved Ones with Trust-Based Planning

If you own a dental practice, you’ve put years of hard work into obtaining your education and building your business. With all of the real estate interests, dental equipment, and patient goodwill wrapped up in your business, it is likely one of your largest assets.  Have you done enough to protect that investment in the case of your incapacity or death?

Your dental business, whether or not it is structured as a Professional Corporation, should be included in your estate plan.  A thorough estate plan protects you in case of disability, and it provides for your family after you pass away.  Holding your business interest in your Revocable Living Trust allows you to maintain all control while providing invaluable benefits.

Can I put my dental business in my Revocable Living Trust?

Yes, your Revocable Living Trust can hold your dental business.  This is possible even if you are married and creating an estate plan that includes your non-dentist spouse.  Your Trust will include provisions requiring that you, as the licensed dentist, maintain all control of the business, but your spouse can have a beneficial interest in the business’s value. If your business is structured as a partnership, your interest in the business can be held in your Trust without dissolving your partnership.

What happens to my sole proprietorship dental business if I become incapacitated?

Being medically incapacitated means that a physician has deemed you incapable of making your own decisions or caring for yourself.  This can be the result of a severe injury (ex: coma) or serious physical or mental illness (ex: dementia).

Without estate planning, your business may fall into a state of limbo if you become incapacitated, with no one having the immediate authority to access your business checking account, complete payroll for your employees, or deal with insurance providers.

If you hold your business in your trust, handling these concerns is much simpler.  In the case of incapacity, the management of your trust passes to the person that you have named as co-trustee (such as your spouse) or successor trustee.  Because you hold your dental business in the name of your trust, that successor trustee has immediate authority to hire a licensed dentist to keep your dental business operating.  While your trustee cannot interfere with the professional judgment of the practicing dentist, he or she can use the business income for your support until you recover. 

What happens to my sole proprietorship dental business when I pass away?

If you pass away without any estate planning, your dental business will enter a probate court proceeding.  This is the process by which the court oversees every minute transaction in order to settle your affairs and pass your assets on to your children or other beneficiaries.  It takes nine months to two years, and a percentage of the fair market value of your business, your house, and all your other assets is paid to a probate lawyer.  With even a small dental business and a house in California, your estate is likely to pay a minimum of $30,000 to the lawyer.   

Avoiding probate in this situation is critical, and not just because of the legal cost.  Probate courts take a minimum of six weeks to appoint a personal representative who would have the authority to manage your business during the probate process. The longer your business sits without a dentist, the faster your patient base shrinks, devaluing the business you worked so hard to build.  Just as in the case of incapacity, if your dental business is held in your trust, your trustee will have immediate authority to maintain your business for up to a year after your death to ensure that your business sells for its peak value.

What if I want to leave my sole proprietorship dental business to my dentist spouse/child?

If your spouse (or another beneficiary, like a child) is a dentist, he or she is able to take over your dental business at your death.  If you have structured your business as a Professional Corporation, your beneficiary could also continue to own up to 49% of the business if he or she is a licensed physician or surgeon, dental hygienist, or dental assistant. If there are other beneficiaries who will not be inheriting the business, consideration should be given to structuring an equitable inheritance scheme.

What happens to my interest in our partnership dental practice when I pass away?

Having a partner in your dental practice can provide continuity of care for your patients in the event of your incapacity or death.  However, some planning is needed in order to ensure that your beneficiaries can access your portion of the business value at your death.  It is important to consider a formal succession plan for your business.

For closely-held business partnerships like a dental office, buy-sell agreements can offer a lot of benefits.  Buy-sell agreements give the other partner(s) or the business (or some combination) the right or obligation to purchase the interests of the deceased partner.   The agreement allows the living partner to avoid being trapped in business with a new partner that he or she didn’t want, while allowing the interest of the deceased partner to be cashed out of the business.

The use of life insurance policies in connection with a buy-sell agreement can be especially beneficial.  In this context, the dental business purchases a life insurance policy on the lives of the partners.  Alternatively, each partner can hold a life insurance policy on the life of the other partner.  When one partner dies, the life insurance proceeds are used to buy out the interest of the deceased partner.  How this succession plan is structured will have tax consequences, including whether excess insurance payouts are treated as taxable dividends, and whether the business will receive a step-up in basis.    

Be aware that buy-sell agreements can be drafted to include “triggering events” other than the death of a partner.  Permanent disability can act as a trigger.  In this situation, the purchase can be funded by disability insurance. 

In all of these situations, the key is planning ahead.  When your estate plan is properly prepared, the dental business you have spent a lifetime building will be able to support you through incapacity and provide the greatest possible inheritance to your family after your death.

If you’re ready to protect your loved ones future by adding your dental practice to your estate plan, click the button below to schedule an initial call today.