Death Planning: A Must for Small Business Owners

July 11, 2017
Palmer Price

Death is an inevitable part of life that requires planning ahead. For small business owners, including dentists, that plan is especially imperative. To be sure your wishes are met after death, there are several steps you will need to take. Continue below to find out what you need to do secure your estate.

Without planning, your assets could end up in the hands of the state or federal government .

No one wants to think about their own death, but like taxes, you can't avoid it.

If you care about those you leave behind and you want your business to survive, you need an estate plan. It doesn't matter how much money you have. If you don't create a plan, the laws of the state where you live will govern what happens to your property.

Estate planning is more than just a will. Here's what you need to know.

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THE BASICS

A will is a document that directs what should happen to your property upon your death, and it appoints an agent, called the executor, to follow your wishes.

Beyond a will, everyone should have an advance healthcare directive, also called a healthcare proxy or living will, and a document that authorizes the release of protected health information.

These can be all in one document or separate documents.

"Their purpose is to state your wishes with respect to medical care should you be unable to communicate your intent, and further, to name an agent to make medical decisions on your behalf consistent with your stated intent," said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park, N.J.

Romania said the directive can be general, such as that you would not like to be kept on life support should you suffer irreversible brain damage and are comatose, or it can include specifics, such as refusing food and hydration in certain situations.

To make sure you have someone to handle your financial affairs should you be unable to, you need a general durable power of attorney.

ESTATE TAXES

Estate taxes are the next concern.

Without planning, a big chunk of your assets could go to Uncle Sam or to your state's taxation department.

Your estate would be subject to federal estate taxes if your assets are worth more than $5.49 million and you die in 2017. Many states have lower thresholds, so check this chart by the Tax Foundation to see where your state stands.

But there are ways to save.

One of the most overlooked strategies is good old-fashioned, plain vanilla gifting, said Thomas Katz, an estate planning attorney with Katz Baskies & Wolf in Boca Raton, Fla.

You can gift $14,000 per year to any number of individuals, or $28,000 for a married couple.

You can also gift an unlimited amount for educational expenses as long as the funds are paid directly to the educational institution, or for healthcare as long as the funds are paid directly to the medical provider, Katz said.

"While the amount in any given year might not be significant, over time that gifting can really add up," he said.

Another strategy is a life insurance trust.

If a policy is owned in the trust and if death occurs at least three years after a transfer of a policy to a trust, the proceeds will escape taxation both when the insured dies and when the spouse of the insured dies, Katz said.

Another way to leave tax-free assets to your heirs is through an IRA conversion.

With this strategy, you'd convert a traditional IRA to a Roth IRA, paying taxes on the conversion now. Then your heirs will receive the funds tax-free.

Romania said she sometimes recommends this strategy to older clients who are in a lower tax bracket as long as the client has significant liquid resources outside of their retirement accounts to pay the taxes due.

If you have young children, your will would name a guardian, but you also need to plan for who will manage the assets inherited by the child.

Romania recommends you incorporate a trust into your estate plan so that any funds inherited by minors are managed a responsible adult.

You would name a trustee to manage the funds, and payouts can be made at the trustee’s discretion and/or when the child reaches specified ages or at specific events, Romania said.

Don't forget about charitable contributions. These would be deductible for your income and estate tax purposes, Katz said.

CONSIDERATIONS FOR YOUR BUSINESS

While everyone worries about how an estate should be structured to benefit their family, you have an extra burden as a business owner — planning for your company's future without you.

Start by creating a team of advisors, including an estate planning attorney, a financial advisor, an accountant and a business attorney.

List your assets and meet with these professionals to discuss your financial position and goals and to review your estate plan.

Then, plan a smooth transition for the business.

You need to be aware of the federal and state rules governing the sale or closing of a medical or dental practice.

In New Jersey, for example, the transfer of a medical or dental practice can only be to another duly licensed person, Romania said.

"Transfer or closing of the practice must also address the custody or transfer of medical/dental records, which are subject to privacy rules and thus patient consent must be obtained before transfer," she said.

As part of all this, you need to analyze how selling your practice to a younger partner or to a completely unaffiliated dentist will impact your estate.

Romania said succession plans are generally set forth with a buy-sell agreement or a partnership or shareholders’ agreement. These will create certain contractual obligations and/or rights with respect to your estate.

For example, she said, the succession plan may require the surviving partner to buy the deceased partner’s business interest for an agreed upon formula price and require the estate of the deceased partner to sell at that price, she said.

Your estate planning attorney needs to know all the details so they can be part of your overall estate plan.

Life insurance is another popular tool for succession plans, but you must make sure to do it right.

Katz said one frequent mistake practitioners make is to value a practice based solely on the amount of life insurance that can be obtained to fund a buy-sell arrangement.

"Sometimes, the better estate plan for clients that worry they may have taxable estates is to value the practice for its `true' value, and then own the insurance through an irrevocable life insurance trust," Katz said.

And, Katz said, asset protection should always be part of the conversation.

"Malpractice insurance is a first line of defense," he said. "Other possibilities include holding assets in a spouse’s name, as tenants by the entirety in jurisdictions (such as Florida) where that provides protection, in a limited liability company because of the limits (in general) on the rights of creditor to a charging lien, and taking advantage of other statutory or common law protections."

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