5 critical estate planning techniques often overlooked by dentists
David J. Goodman, MST, CPA
There are more elements of an estate plan than just estate taxes. In the current tax environment, many dentists will not accumulate more than $11 million in estate taxable assets, which is the threshold for federal estate taxes. If you are married, your spouse can also accumulate an estate tax exemption of just over $11 million before being subject to federal estate taxes.
With portability of the estate tax exemption, a deceased spouse can share any remaining estate credit with the surviving spouse. That could be an estate tax exemption of over $22 million. With only 12 states having an estate tax,1 there is only a small chance that your estate will be subject to tax.
Here are five critical estate planning techniques that are often overlooked.
Not having a will
Without a will, your assets may not be distributed based on your desires. This can complicate relationships between a surviving spouse and surviving children or between surviving siblings. If you die without a will and you are the sole parent of minor children, the children will become wards of the state until a qualified care provider can be approved by the court. This person may not be the one you intended to raise your children. Having a will can resolve these issues and more. Your will should be updated periodically to make sure it aligns with your wishes, and that the wording covers current law and tax issues.
Not having appropriate disability insurance coverage
According to the American Dental Association, one out of every four dentists will be disabled long enough to collect disability income.2 Many dentists do not update their disability insurance policies throughout their careers to reflect the benefits needed for them to maintain the quality of life they would desire. It’s important for a dentist to meet with his or her insurance agent and dental CPA to determine the appropriate coverage.
Not having appropriate life insurance coverage
Dentists might think that life insurance agents offer more insurance than is necessary. This is because the dentists believe the agents are getting paid a commission based on the sizes of the policies.
It has been my experience that, in most cases, the agents are offering appropriate policies to dentists. Life insurance is not always necessary for every stage of life. It may be initially established to provide income for a family with young children, in which case it would replace the income lost upon death. It could also be established to provide funds for a child’s college education. Once a dentist’s family is no longer reliant on the income, the policy may no longer serve its purpose. A term insurance policy usually ends when someone stops making payments. Whole life insurance can be an investment vehicle with tax-free cash value accumulating over time, and then the ability to borrow the cash value to supplement retirement income. It is important for a dentist to meet with his or her insurance agent and dental CPA to review his or her coverage.
What happens if you do not make it to the office, you are not reachable by phone, and patients are waiting at your office? Unfortunately, this scenario can become reality for multiple reasons, including your death or disability. Is there an emergency backup plan for your office if you are unavailable? It is critical to have someone you can trust who will have access to the office, know the alarm access codes and banking information (and have the ability to sign checks), and know the passwords for access to all the software and practice-related websites.
Every day that a dentist is not available to work in the practice, the value of the practice significantly decreases. Having coverage from colleagues or locum tenens will help keep value in the practice. The surviving family members will want the maximum value from the sale of the practice to help support their financial needs.
Solely relying on the sale proceeds of the practice for retirement
Typically, a dental practice will sell for some percentage of revenue. After the practice is sold, the sale of the practice will be subject to income tax. The tax rate on the sale of a practice, including state tax where applicable, can be over 35%. Over one third of practice sale proceeds could go to pay income taxes.
Assuming the remaining cash is invested to provide current retirement income, a conservative 5% annual return would not provide significant monthly income. For example, a practice that sells for $1 million will net about $650,000 after taxes and selling fees. A return of 5% per year will net about $2,700 a month. This is not a significant amount for a dentist who had been earning $25,000 a month before retirement. Creating a retirement plan as early as possible in your career and continuing to fund it will create a comfortable retirement and the potential for an early retirement.
Planning your estate is an important aspect of your overall financial plan. When the unexpected happens, you will be better able to provide for yourself and your family.
1. Bell K. Estate tax: How it works and which states have one. Nerdwallet website. https://www.nerdwallet.com/blog/taxes/which-states-have-estate-inheritance-taxes/. Published October 12, 2018.
2. Disability income insurance plan. Insurance American Dental Association website. https://www.insurance.ada.org/ada-insurance-plans/disability-insurance.aspx.
David J. Goodman, MST, CPA, is managing director of Lawrence B. Goodman & Co. PA at lbgcpas.com. located in Fair Lawn, New Jersey. As a member of the Academy of Dental CPAs, Goodman provides a unique perspective on dental practices. He can be reached at firstname.lastname@example.org or (201) 791-8300.