The Doctor’s Business Planning Checklist, Part 2

Last week we provided part 1 of an updated list of the most common and essential legal and financial planning doctors and medical practices need; that discussion continues below. Don’t forget that we’ve covered many of these issues in close detail in previous editions of this column.

6. Asset-protection Planning. Think of it as net worth insurance, protecting and separating your assets from each other and from your personal and professional liability. This requires simple, cost-effective, and proactive planning today, while you still have well-defined legal options. You cannot legally or effectively implement this planning after something bad happens, when most doctors finally call for help. This is not traditional estate planning as found in your “family trust.” In most cases that trust is a “revocable living trust” and is not effective protection for you or your assets during your life. Think of this as life planning, while estate planning is primarily planning for your death. Both are necessary but use different tools and methods that may not be interchangeable or meet the realities of your life as business owner.

7.Estate Planning. This is the death planning mentioned above. Who gets what, when, and at what cost in estate taxes? This most often includes your will as well as provisions for the guardianship of your minor children, the disposition of your estate, and considerations for charitable and generational wealth planning. This kind of planning also provides for any family member with special needs and allows you to both plan for their care and protect what you leave them from medical bills and other expenses that might erode what you leave them before plans like Medicare and Medicaid kick in at their maximum benefit levels. Many medical professionals mistake this essential planning for the asset-protection planning mentioned above and don’t find out the difference until it is too late.

8.Coordinated Financial Planning. Make sure your money is working as hard for you as you worked for it and that the planning you have in place includes both growth and loss-prevention strategies. We’ve previously discussed some basics on picking a good financial planner as well as some specific financial strategies and types of fraud that target doctors. A good financial advisor can help you create a balanced investment portfolio, spread risk across equities and other types of alternative investments, and work with your CPA to implement significant retirement and tax planning. Common examples of plans that we always recommend professional help in implementing include: self-directed IRAs, 401(k), Section 79, and defined benefit and defined contribution plans, to name just a few. All of these are compliance heavy, have specific legal and tax-code requirements, and can subject you to significant harm if misused. I’m continually surprised by the number of successful doctors I talk to who have educated themselves about the stock market and manage their own trading because they feel safer that way or because they don’t want to pay fees to the advisor. Even the best of these self-managed portfolios are typically overly equities heavy (exposed) and you simply can’t be adequately informed about the wide range of investment options out there if you have a full-time job. They have a name for someone who does that: financial advisor.

9.Life insurance. Doctors often flee from this (see How Doctors Can Stop Hating Life Insurance, Part 1 and Part 2) when they shouldn’t or pay too much for what they are actually getting. Finding the right agent who deals with sophisticated policy structures is crucial. This frankly excludes 50 percent of the agents out there. For your family, make sure you have appropriate amounts of death benefits to cover estate taxes, generate replacement income for survivors, and pay off debts you want settled at your death. On the business side, cross-purchase and buy-sell agreements must be carefully funded. We routinely see these agreements between our business owner clients that are either unfunded or under-funded. If your partner dies with no coverage or inadequate coverage in place, you could easily find yourself across from their family in a courtroom explaining why the business should be liquidated to pay them the deceased’s share. Finally, life insurance has strategic business uses. When properly structured it can be a liquid, creditor-protected alternative to cash in a near-zero-return environment and can also be used to create retirement income from heavily funded policies that grow in a tax-advantaged way and distribute income in the form of policy cash value loans.