Patrick Craig, JD
John K. McGill, JD, MBA, CPA
Many dentists have properly executed wills that address the disposition of their assets in the event of their death. Yet too many dentists have not made adequate arrangements to protect their assets if they become unable to act for themselves (e.g., due to serious illness or accident).
In order to address this issue, we recommend a durable power of attorney for every dentist and their spouse, if applicable, as part of their estate plan. A power of attorney authorizes another person to transact business on the dentist's behalf, including the authority to sign for the dentist in order to sell stocks or bonds, enter safe deposit boxes, sign tax returns, sell and/or refinance personal and practice real estate, and carry out other necessary day-to-day actions. It is called "durable" because, though signed when the dentist is legally capable to do so, it continues in effect even if the dentist becomes legally incompetent.
Although we recommend a durable power of attorney as part of every dentist's estate plan, there are some risks involved, namely those associated with the premature use of the power of attorney and misuse of the power granted by the document. However, these risks are avoidable with proper planning, described here.
Avoiding premature use
In most jurisdictions, the person appointed as "attorney-in-fact" (the person does not have to be a lawyer) becomes authorized to act on behalf of the dentist once the power of attorney is both signed and recorded, even if the dentist is not physically or mentally disabled.
One way to address this issue is to use a "springing" power of attorney that becomes effective only upon the dentist's incapacity. This security comes with a big drawback-some proof that the dentist is actually legally incompetent becomes necessary (e.g., certification by one or more attending physicians or potentially a court determination). As a result, there may be a delay in the attorney-in-fact's ability to act when the dentist is unable to do so, which can result in major missteps when time is of the essence.
A second strategy to guard against premature use is for the dentist to direct the drafting lawyer to retain all originals of the power of attorney in the law firm safe, giving only unsigned copies to the attorney-in-fact and other family members. The attorney-in-fact is made aware of the arrangement when the documents are executed, and can be prepared to act if and when necessary. The dentist can then instruct the drafting lawyer to provide the signed documents to the attorney-in-fact only upon the occurrence of certain clearly ascertainable conditions.
Protecting against misuse
Once it is clear that the time to invoke the power of attorney has arrived, another concern presents itself-how to protect the dentist's family against financial loss due to misappropriation through the use of the power of attorney.
Two strategies can help avoid problems here. The first is to require the attorney-in-fact to make full disclosure of all transactions to the beneficiaries named under the dentist's will. In order to carry this out, the attorney-in-fact is required to provide copies of bank statements, deposit slips, cancelled checks, and investment statements to each beneficiary as long as the power of attorney remains in effect. Moreover, the power of attorney could require that the financial institutions that hold the dentist's accounts provide duplicate statements directly to the beneficiaries. Providing full disclosure of all material facts regarding transactions in which the power of attorney is used can guard against the temptation of misappropriation and eliminate misunderstandings.
The second strategy is to require the signatures of at least two people (e.g., the attorney-in-fact and the alternate) for any transaction involving more than a specified dollar amount (e.g., $5,000 to $10,000). This strategy provides an effective check-and-balance system to assure that large-dollar transactions are handled in the best interest of all parties involved.
While a durable power of attorney is a vital part of every dentist's estate plan, it does not come without risks. By implementing the safeguards recommended here, dentists can be assured that their families are protected in the event of disability or incompetency, while dramatically reducing the risk of misuse and resulting financial loss.
Patrick Craig, JD, provides legal services through McGill and Hassan PA. John K. McGill, JD, MBA, CPA, provides tax and business planning exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company Inc. Both are members of the McGill & Hill Group LLC, a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.