Transitions Roundtable

Oct. 21, 2013
Selling an interest to a relative can be a costly mistake if proper tax planning is not considered.

We ask two experts the same question to give you two different answers on a complex issue

QUESTION"What do I need to keep in mind when selling my practice to a relative?"

Tom Snyder, DMD, MBA

Selling an interest to a relative can be a costly mistake if proper tax planning is not considered.

The IRS has strict rules regarding the sale of a business to a relative. Relatives are not just defined as son or daughter but also can be other blood relatives, as well as controlled corporations and partnerships.

Selling the goodwill of the practice to a related party, gives the seller ordinary income and not a capital gains goodwill treatment; however -- if the practice is organized as S Corp stock -- the assets can still be sold where the family gets to write off whatever is depreciable or amortized, as long as the assets are on the books of the corporation. Selling a depreciable asset is still okay if the related party buys the asset but the seller cannot hold a promissory note in such a transaction.

One of the most important components of a sale to a family member is considering the overall estate plan of the owner. If the buyer is a son or daughter, for example -- and if he or she has other siblings -- careful consideration must be given to how the transaction will be conducted.

Therefore, it must be at "arms length" and a fair market value of the practice has to be determined. If any special considerations are made to the son or daughter dentist, then accommodations should be considered to the non-dentist siblings in the overall estate so they are not short-changed in the overall estate plan.

Finally, having a buy-sell agreement between family members is a must because without it there can be severe tax ramifications. For example, if the seller dies during the partnership, the tax ramifications may be significant.

In the end, having good tax advice from a lawyer experienced in estate planning matters is a must.

Tom Snyder, DMD, MBA, is the director of transition services for the Snyder Group, a division of Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected] .

Preston Lovelace, JD, MS

Practice sales to relatives occur frequently in dentistry, and purchasers benefit from the familial connection to maximize patient transfer; however, these transitions come with tax consequences and the risk of disgruntled relatives.

In order to prevent people from "churning" their assets by selling to themselves (or close relatives) every 15 years to reacquire a tax deduction, the IRS forbids certain deductions for sales between related parties. The rules are complicated and also depend on when the practice was started. But related parties are parents, ancestors, siblings (including half siblings, but not step siblings), spouse, and descendants.

Parties are also considered related if their combined ownership of an entity equals or exceeds 20%. If a purchaser is closely related to the seller, the purchaser is unable to amortize the purchased intangibles (goodwill). To offset the additional tax burden on the purchaser, one solution is to reduce the sale price.

Additional problems often result from informally turning a practice over to a relative without legally transferring it. This arrangement becomes problematic when the senior doctor retires or dies. If the practice is never actually sold, it becomes part of the estate at the seller's death, even if the seller has not practiced in years. Any informal arrangement with the deceased will usually be discarded and/or renegotiated by the heirs.

Situations such as this almost always lead to familial discord. The related buyer may be forced to purchase the practice the buyer thought he or she already owned from disgruntled siblings. These situations are avoided by treating all familial transitions as arms-length transactions with proper written documentation.

Preston Lovelace, JD, MS, of ADS Lovelace and Associates (www.Lovelaceandassociates.com), can be contacted at (225) 927-8015 or at [email protected].

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