By: Edward Leach, CFP®, MBA, CEPA
As a dental practice owner, securing your business's future is just as crucial as providing quality patient care. Effective business succession planning ensures your practice continues to thrive, even in the face of unforeseen events. This comprehensive guide explores the importance of estate planning, the role of revocable trusts, and key provisions to include for a smooth transition. Whether you're contemplating retirement or preparing for unexpected incapacitation, understanding these strategies will help safeguard your legacy and protect your investment.
Introduction to Business Succession Planning for Dental Practice Owners
Hi everyone, Ed Leach here from Highland Financial Advisors. We are back with our series of videos to help dental practice owners with their planning.
Importance of Estate and Business Succession Planning
I'm here to talk to you today and follow up on our prior video on the importance of getting your estate documents in order with a critical planning topic: business succession planning. This is a conversation most practice owners often overlook. However, it's one of the most important things you can do in your planning.
A Real-Life Scenario: The Risks of Not Having a Succession Plan
I want to start today by telling you a story. Imagine Maria, a successful dental practice owner with two partners in her practice. They run a flourishing practice, and Maria is a key part of the operational running of the practice, making big decisions and handling the hiring and firing on her way to work.
One day, unfortunately, Maria gets into a car accident, leaving her incapacitated in a coma. Her husband steps into the role of her conservator and is thrust into managing her affairs, but also now as a key partner in the practice. He has no experience with dental practices, has no idea how they run, and suddenly finds himself having to make key decisions with two partners he doesn't have a close relationship with.
As a result, many operational inefficiencies occur. The practice's future is in question, risking the investments of the partners and their families. Much of this could have been avoided with some simple planning as part of their estate planning process and with a Revocable Trust tool.
The Role of a Revocable Trust in Business Succession Planning
Today, we'll dive into everything you need to know about preparing for business succession planning in case of incapacitation.
Why a Revocable Trust is Important
The first topic I want to discuss today is the importance of a revocable trust in your succession planning. Unlike a will, which goes into effect after your death, a revocable trust—often called a living trust—goes into effect immediately once it is created and funded. Initially, you are appointed trustee, so any assets you put into that trust are under your 100% control.
If something happens to you, such as passing away or becoming incapacitated, your successor trustees—often a spouse or trusted loved one—step into the role to control all the affairs inside the trust.
How a Revocable Trust Could Have Helped Maria
How could a revocable trust have helped Maria? If Maria had planned in advance, created a revocable trust, and included special trustees to take over certain aspects of her trust, she could have avoided her husband becoming a key part of the dental practice. Later on, I'll discuss some key provisions you want in your trusts. But that is how such a situation could have been avoided.
Designing a Revocable Trust for Dental Practice Owners
The Importance of Working with an Experienced Estate Planning Attorney
One of the things you want to be careful of is not just relying on a boilerplate form from an online website. Sitting down with an estate planning attorney with experience designing revocable trusts for practice owners is essential. Transferring a business or practice interest into a trust requires careful coordination with other documents, such as your governance documents and operating agreements, to ensure everything aligns.
Key Provisions to Include in a Revocable Trust
The next topic I want to discuss is the key provisions you should consider including in your revocable trust.
Special Trustee Provisions
For assets like your home or investment accounts, having a spouse or trusted loved one act as a trustee is usually fine. However, in the practice, that's likely not the best idea. By allowing your trust to have special trustee provisions, you can appoint one of your practice owner partners or another trusted dentist to manage the practice in your absence.
Exception to the Uniform Prudent Investor Act
Another critical component is including an exception to the Uniform Prudent Investor Act. This act mandates that trustees must diversify assets within the trust. However, if your practice is the primary asset, you'll need language that allows your trustee to keep it intact without violating this act.
Broad Business-Related Powers for Special Trustees
The final component is ensuring your special trustee has broad business-related powers to manage the practice. This includes handling stock decisions, voting rights, and special tax elections. These powers are essential for enabling the trustee to act effectively in your place.
Additional Tools for Business Succession Planning
Disability Insurance and Key Man Insurance
Disability and key man insurance are critical tools to ensure liquidity in case of incapacitation or death. This liquidity can either cover any shortfall in the practice due to lost production or allow partners to buy out your share, regardless of its status in the trust.
Reviewing Corporate Governance Documents
You'll also want to review your corporate governance documents to ensure they include language for how you and your partners wish to structure your practice if someone becomes incapacitated or dies. This may include rights of first refusal for buying out an incapacitated partner's shares or drag-along rights to facilitate buyouts.
How Planning Could Have Helped Maria
In Maria's case, the tools and provisions discussed here could have helped her family avoid significant issues during her incapacitation. This planning is crucial for any practice, as well as any business partnerships or real estate arrangements.
Conclusion: The Importance of Regular Reviews
It's essential to review these documents regularly, as your situation and relationships may change over time. At Highland, we focus on proactive, not reactive, planning to ensure your documents reflect your current situation.
Thank you so much for watching today. If you're enjoying these videos, make sure to subscribe to get notified about new videos. If you want to speak with us, visit our website for a free initial consultation.
We look forward to seeing you soon.
Ed Leach, CFP®, MBA, CEPA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.