Medical Practice Series: Estate Planning Considerations

In our last article, we explained how thoughtfully-prepared buy-sell agreements can be instrumental in planning for the eventual transfer of your practice.  Buy-sell agreements are contracts you create during your lifetime with others in your practice to govern in the event that one of you wishes to voluntarily leave the practice, becomes disabled, loses one’s license to practice medicine or otherwise engages in conduct that triggers a buy-out, or wishes to retire and sell his or her interest in the practice to other partners or members of the practice or to the legal entity formed to conduct the practice.  The buy-sell agreement may also be drafted to govern the transfer of a practice from a deceased owner’s estate to his or her surviving partners or to the practice legal entity. 

While best practices dictate the preparation of a definitive buy-sell agreement, if for some reason you have not planned for the transfer of your practice by executing a proper buy-sell agreement with your partners during your lifetime, or if you practice solo, you may wish to include provisions in your Will directing your Executor – the individual or corporation you designate to handle the affairs of your Estate – how to handle the sale or transfer of your practice if you should die while still owning an interest in the practice. 

For example, you can indicate which individuals (either a specific person or a class of persons, such as those who are your partners at your death) shall have the first right to purchase your practice and under what terms.  You can direct the methodology to be used by your Executor to determine the value of your practice and thus the purchase price.  You can direct the method of payment from the purchasing party, such as a cash purchase, or partly in cash and partly with a promissory note payable over time in installments to the beneficiaries of your Estate.  If promissory notes are contemplated, it is also important to ensure as part of your plan that there are other liquid assets available that will immediately pass to the beneficiaries of your Estate to provide for their benefit.  Life insurance is one important – and (depending on your health and age when the policy is purchased) relatively inexpensive way to ensure the ready availability of liquid assets to support your beneficiaries, typically your family, at your death.  You can also provide your Executor with specific powers in your Will to carry on the administration of the practice during the period of Estate administration until the practice is sold or otherwise transferred. 

Ideally, your business attorney and your estate planning attorney should work as a team.  When you meet with your attorneys, they are likely to ask you for very detailed information regarding the individuals you wish to designate to benefit from your Estate, and also very detailed information regarding the value of your assets and the nature of the accounts in your Estate (for example, whether they are retirement assets with beneficiary designations or non-retirement brokerage accounts).  Such information is always treated by your legal counsel as extremely confidential.  The reason for the level of detail required is that the legal recommendations that will be made are based directly on the information you provide.  If the value of your Estate is near or above the estate tax exclusion thresholds, then your attorney will advise you that estate planning advice is required to minimize taxes to the extent possible and to ensure that beneficiary designations on retirement accounts and insurance policies tie in squarely with the terms of your Will.  Most people do not realize that accounts and polices with beneficiary designations do not pass under the terms of your Will; rather, the designations govern, and therefore the attorney will need to advise you accordingly to ensure that the assets flow out as you wish.  For example, if you establish trusts for young beneficiaries under your Will, a beneficiary or contingent beneficiary designation will need to refer to those trusts if the beneficiary is under a specified age. 

Your attorneys will also be likely to ask you for information about your family, even if they are not your intended beneficiaries.  That is because state law provides certain family members with the right to review your Will when it is being submitted for probate after your death, to give them an opportunity to pass on the Will’s validity and the competency of the Executor you have nominated. 

Once you have provided the necessary information to your attorneys, you should have an in-person consultation to discuss your objectives and legal counsel’s recommendations.  This is the time to bring up any questions you have about the transfer of your practice after your death, to have your existing buy-sell agreement reviewed, or if you don’t have one, to consider having one prepared and executed and to determine whether you should include any provisions relating to the transfer under your Will.  If you are married, your spouse should also attend the meeting so that your attorneys can ensure that the recommendations made fit both of your needs.  Once you and your legal advisors have a comfort level with the recommendations, they can draft the legal documents and agreements required, including your Wills and other documents relating to your advanced directives, such as Powers of Attorney, Health Care Proxies and Living Wills.  Your legal counsel should always provide you with draft documents to review, and give you time to ask any questions or make any changes before you meet again to formally execute the documents.  You must keep in mind that the documents must be fully executed in the exact manner mandated by New York law for them to have the intended legal effect.  Unexecuted drafts and Wills that are not properly witnessed are not regarded as valid estate planning documents. 

The relationship you have with your attorneys should be a cooperative one.  Owing to the nature of the information shared and the discussions that occur, you will need skilled business and estate planning legal counsel with whom you are compatible and whom you view as your trusted advisors.  The quality of the recommendations you receive (and thus your resulting estate plan) is dependent both on the skill-set and the level of communication you share with your legal advisors. 

In our upcoming articles, we will present you with a case-study of an individual in the medical field who navigates her way through the business and estate planning processes relating to her medical practice. 

Republished with the permissioin of Western New York Physician Magazine.

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