By Brandon Rains, J.D.
From the Spring 2022 Journal of the Colorado Dental Association
The last two years have highlighted how fragile life can be. Of course, COVID is not the only dynamic over this time, and each of us has dealt with unique hardships regardless of how connected they are to COVID. While the topic is grim, it is far more tragic to avoid these tough questions regarding the future:
- What would our loved ones have to do if something happened to us?
- How do we prepare for the unexpected or unimaginable?
- How can we provide for our families to help them during a traumatic experience?
What Has to be Done
If something happens to you, whether a car accident, skiing accident, or severe illness, what do your loved ones have to do to pick up the pieces? This would be a traumatic time, regardless of whether it was unexpected or anticipated. The very last thing your loved ones will want to do is figure out how to take care of your affairs, when really all they want to do is grieve and remember. Below is a list of some of the things that your loved ones will need to do if you become incapacitated or pass away, listed in no particular order:
- Contact other family members
- If you are incapacitated, get you the medical care you need and interact with doctors
- Find out if you have an estate plan, and then find the estate plan documents
- Search through your office, in addition to mail and e-mail to find your different assets
- If you are a practice owner, contact a professional to help prepare to sell the business, if desired
- If you are a practice owner, contact other dentists to treat your patients
- Keep the practice going
- Notify employers and employees, as needed
- If you pass away, make final arrangements
- Notify disability, long-term care, life insurance carriers, etc. as needed
- Begin application to government benefits, if needed
- Find an attorney to help with legal matters
- Contact an accountant, financial advisor, and other financial professionals
- Contact known creditors
- Request copies of your death certificate
- Terminate credit cards
These are some of the actions that your loved ones will need to take and does not include the things they should refrain from doing, like withdrawing money from bank accounts, retirement accounts, making loans, and other actions.
Getting Prepared
Legal documents are a formal expression of our wishes in the event that something happens to us. While none of us want to think that way, being prepared is of utmost importance to protect your loved ones and legacy. There are varying levels of preparation in the event of passing away or becoming incapacitated. Each triggers a different scenario. Specifically, what happens if a dentist has no estate plan at all, has a will or an “unfunded” trust, or has a fully-funded trust. The comparisons below are for informational purposes only and are not a recommendation. Additionally, we will highlight differences between a dentist who is a practice owner and a dentist who is not.
Situation #1: Dentist Has No Estate Plan at All
If a dentist owning a practice becomes incapacitated and has no documents, who will run the practice? Who will retain patients? An associate can surely help, but are they able to handle the workload and address more complex problems? A co-owner can probably handle the more complex situations, but the workload may still be too high for even them to handle. Friends and colleagues will surely jump in, but this ad hoc arrangement has many potential problems and hiccups, and their ability to take care of all patients and prevent attrition is certainly not 100%.
If a dentist who owns a practice dies, this similar dynamic is created again, but with even more of a dire situation because there is no hope that the dentist can recover, like incapacity. Further, the dentist’s spouse is often the one saddled with attempting to sell the practice as quickly as possible instead of mourning or fulfilling their own responsibilities. Surely studies have established the potential loss of the practice’s value in this situation, and it is without a doubt greater than 0%, which means less money for the deceased dentist’s family.
For an associate dentist, this situation is simpler from a business perspective, but the personal side comes to the fore. (These personal consequences apply for a practice owner as well). If the associate becomes incapacitated, who will pay the associate’s personal bills? In effect, who will keep the lights on? Who will make the associate’s medical decisions to take care of them? If the associate dies, who pays final expenses and who distributes their assets in accordance with Colorado law instead of their wishes?
Creating an estate plan with the needed documents can answer all these questions and more.
Situation #2: Dentist Has a Will or an Unfunded Trust
For a dentist owning a practice, having a will or a trust allows the practice owner to say what they want to happen with their personal assets and the dental practice. Wills and revocable living trusts that do not own the dental practice (this is what an “unfunded” trust is) goes through probate, which is a court-supervised and public process to pay debts and distribute assets. That public process replicates some of the dynamics of not having a will at all; the only difference is that the dentist is able to express their wishes rather than not. The dentist’s Personal Representative (otherwise called the Executor and is often the spouse) has to sell the practice, and the reality of diminished practice value and client attrition are very real. This ultimately means less money for the dentist’s family as they confront a new reality and try to pick up the pieces.
For an associate, again, there are by definition no business assets to pass on to loved ones, but an associate may still have a home, investments, personal bank accounts, a car, etc. These assets are controlled by a will or an unfunded revocable living trust upon passing, which again passes through probate to distribute these assets to their loved ones. (Life insurance and retirement accounts are distributed according to the beneficiary designations and do not go through probate).
If you care where your assets go, having at least something in place allows your wishes to be carried out.
Situation #3: Dentist Has a Funded Trust and Buy-Sell Agreements
A revocable living trust is an estate planning strategy that allows for the private transfer of ownership of both personal and business assets. For a practice owner, an individual trust may either be the owner, subject to DORA, or be designated to become the owner immediately upon the passing of the practice owner. Either set-up avoids the public nature of probate as the family seeks to sell the business and allows the dentist to name a specific person to manage the dental practice to maintain the practice’s value until the date of sale. A funded trust allows personal assets to be distributed without going to probate and ensures a private way to give those assets to loved ones while also potentially controlling the timing of those distributions to fit an individual’s life situation and needs.
A buy-sell agreement is arguably the most effective manner to transfer ownership of a dental practice. As a sidenote, a buy-sell agreement is usually a contract between multiple part-owners, but I will use that same term for simplicity’s sake even if there is only one practice owner. A buy-sell agreement allows multiple individuals to agree to immediately transfer ownership of a dental practice for a certain price upon certain life triggers like long-term incapacity or death. The “immediate-ness” of this transfer prevents client attrition and a decrease of practice value while compensating the family left behind for the value of the practice. It is necessary to update the agreed price so that it reflects the dental practice’s current value.
If done correctly, generally speaking, a buy-sell agreement combined with a funded trust is the most effective way to address ownership of the dental practice and distribute assets to loved ones.
Conclusion
Life is uncertain and fragile. Dealing with death is mandatory. Adequately planning for death and having a positive impact in loved ones’ lives is optional and requires planning. There are many options, and all the options described above have strengths, weaknesses, and considerations that go beyond this article. I highly encourage you to speak with qualified legal counsel to help walk you through these options and what is the best for you, your family, and your dental practice.
Brandon Rains, J.D., is the owner of The Rains Law Firm, located in both Denver and Fort Collins. He is an estate planning attorney with a J.D. from the University of Utah. His estate planning practice is centered on values, focuses on clients, and is based on relationships. Contact him at 720-528-4227 or brandon@rains-law.com.