Management
For physicians, business interests are often a significant part of their wealth and legacy. Whether you’re employed in a W2 role at a hospital system or running your own private practice, handling your business interests in your trust requires careful consideration. This section will help you think through how your business should be transferred, how income should be distributed, and how ownership should be handled to protect your heirs and ensure business continuity.
1. Do You Have Business Interests to Include in the Trust?
Physicians often have a variety of business interests beyond their medical practice, from real estate holdings to partnerships or sole ownership of healthcare-related businesses. It’s essential to document all of these interests in your trust and clearly state how they should be managed after your passing.
Common types of business interests:
Private medical practices: Do you own or co-own your practice?
Real estate: Do you own the building where your practice operates or other commercial properties?
Healthcare-related investments: Are you invested in startups, medical technology companies, or pharmaceutical ventures?
Other ventures: Do you hold shares in non-healthcare-related businesses or family-owned companies?
Scenario: You might own a private practice, hold shares in a healthcare startup, and own the building where your practice operates. Each of these interests will need clear instructions in your trust to ensure they are properly managed or transferred.
2. How Will Business Ownership Be Transferred?
The method of transferring ownership depends on whether you own the business outright, have partners, or are part of a larger organization. Here are some options for transferring business ownership in a way that aligns with your estate planning goals.
100% ownership (Holding LLC): If you own the business outright, you might consider setting up a holding LLC (Limited Liability Company) to own the business. The LLC can then be transferred into your trust.
Pros: The LLC simplifies management of the business assets within the trust and offers liability protection for your heirs. It also allows flexibility in transferring ownership shares to beneficiaries without directly involving them in day-to-day operations.
Cons: Setting up and maintaining an LLC requires legal and administrative costs, though these are often outweighed by the benefits of protection and control.
Scenario: You own a private practice and the real estate where it operates. By transferring both into a holding LLC, your trust can retain ownership of the practice and property, generating income for your heirs while protecting the business from personal liability issues.
Buy-Sell Agreements: If you’re a partner in a practice or another business, a buy-sell agreement outlines how your share of the business will be handled upon your death.
Cross-purchase agreement: In this type of buy-sell agreement, the remaining partners agree to purchase your share of the business from your estate or trust. This ensures that your heirs receive the value of your ownership, while the business remains with the surviving partners.
Entity purchase agreement: In this scenario, the business entity itself buys back your share and distributes it among the remaining owners. This is often funded by a life insurance policy on each partner, ensuring the necessary funds are available without burdening the surviving owners.
Pros: Buy-sell agreements ensure that your heirs are compensated for your ownership, while protecting the continuity of the business for surviving partners. They avoid the potential conflict or operational disruption that can occur if ownership transfers to someone unfamiliar with the business. Cons: Buy-sell agreements need to be well-funded and structured in advance, with legal and financial planning to ensure a smooth transition.
Scenario: You’re a partner in a three-physician practice. Your cross-purchase agreement ensures that your co-owners can buy your share from your trust, ensuring the practice remains operational, while your family receives the financial value of your share.
3. Distribution of Business Income
Even if your business interests are transferred to your trust, they may continue to generate income, such as dividends, rent, or business profits. You’ll need to decide how this income will be handled:
Regular distributions: Do you want the trustee to distribute income generated by the business or investments on a regular basis (e.g., monthly, quarterly)?
Reinvestment: Should some or all of the income be reinvested into the business or held within the trust to grow the estate for future generations?
Specific instructions for minors: If your heirs are minors, you may need to direct how income should be used for their benefit, such as for education or living expenses.
Scenario: Your medical practice generates significant profits. You could instruct the trustee to distribute a portion of those profits as regular income to your spouse, while reinvesting the rest into the business to maintain its growth.
4. Real Estate Tied to Your Business
Many physicians own the real estate where their practice is located or have other commercial property holdings. These real estate assets can generate income and require specific management instructions within your trust.
Sell or retain: Should the property be sold upon your passing, or retained as a rental property for income generation?
Property management: If you retain the real estate, who will manage it? You can assign the trustee to manage the property or hire a property management firm.
Separate from the business: If the real estate is owned separately from the business (e.g., by an LLC), you can direct that the rental income continues to benefit your heirs while the business itself may be sold or transferred.
Scenario: You own the building where your practice is located, but plan for the practice to be sold after your passing. You could leave instructions for the building to remain in the trust, allowing your heirs to collect rental income from the new tenants.
5. Valuation and Tax Implications
Business assets, especially those with partners or substantial growth potential, must be accurately valued to ensure fair distribution and to manage tax liabilities.
Business valuation: Before your passing, it’s essential to have your business professionally valued. If the valuation isn’t up to date, you can instruct the trustee to get an updated appraisal.
Tax strategies: Transferring business interests can trigger estate or capital gains taxes, especially if the business has appreciated significantly in value. A comprehensive tax strategy can help reduce the tax burden on your beneficiaries, potentially using mechanisms like irrevocable trusts or gifting.
6. Planning for Business Continuity
Ensuring business continuity is crucial if your business continues after your passing, especially if you employ staff or manage complex operations.
Trustee or business manager: If your heirs are not involved in the business, consider appointing a business manager to oversee operations, while the trustee manages financial decisions.
Employee retention: You may want to include provisions to offer key employees incentives (e.g., bonuses or contracts) to remain with the business after your passing, ensuring stability.
Scenario: Managing Business Interests – Deciding the Future of a Medical Practice
Meet Dr. Emily Shaw, a successful physician who owns a thriving medical practice. Over the years, Dr. Shaw has built her practice into a cornerstone of her community, with a loyal patient base and a dedicated team of healthcare professionals. Her practice has become one of her most significant assets, both financially and in terms of the impact it has on the community.
However, as Dr. Shaw begins estate planning, she’s faced with a difficult question: What will happen to her medical practice after she’s gone? She has no children involved in the medical field, and while her business partner, Dr. Ahmed, is capable of running the practice, they’ve never discussed the long-term future of the business. Dr. Shaw wants to ensure that her family benefits from the value of her practice, but she also wants to ensure that her patients and employees are taken care of.
Reflection
In Dr. Shaw’s situation, she must weigh several options for managing the future of her practice:
Selling the Practice: Dr. Shaw could instruct the trustee to sell the practice upon her passing and distribute the proceeds to her family. This could involve giving Dr. Ahmed the first opportunity to buy out her share, ensuring continuity for patients and employees. This option would allow her family to receive the financial benefit of her hard work without needing to manage the business themselves.
Buy-Sell Agreement with Dr. Ahmed: Another option would be to put a buy-sell agreement in place with Dr. Ahmed now. This agreement would ensure that if Dr. Shaw passes away or becomes incapacitated, Dr. Ahmed would buy her share of the practice, using funds from the practice’s cash flow or a life insurance policy. This would guarantee that Dr. Shaw’s family receives fair compensation for her ownership without needing to run the practice.
Keeping the Practice in the Family: If Dr. Shaw wants to maintain the practice within her estate, she could leave instructions for a professional manager or medical administrator to run the practice while her family retains ownership. This would allow her heirs to continue receiving income from the business, but they would need to trust the appointed manager to handle day-to-day operations. This option requires careful planning, as managing a medical practice is complex and would require finding someone with the right expertise.
Placing the Practice in a Holding LLC: Dr. Shaw could also transfer the practice into a holding LLC, allowing her estate to retain ownership of the business. This would provide her family with liability protection and give them flexibility. They could choose to sell the practice, maintain it as a passive investment, or even allow Dr. Ahmed to buy in gradually over time.
Questions to Consider
As a business owner, think about these key questions to help plan the future of your business:
Do you want your business to continue operating after you’re gone, or would selling it be in the best interest of your family and the practice?
Who could manage your practice effectively? If you want to keep the business in the family, do you need to appoint a professional manager or administrator?
Do you have a business partner or other key individuals who might want to buy out your share? If so, would a buy-sell agreement or life insurance policy ensure a smooth transition and fair compensation for your family?
Would transferring your practice into a holding LLC provide flexibility and protection for your heirs?
How will your employees and patients be affected by your passing, and are there steps you can take now to ensure the continuity of care and stability of your business?