Is your estate plan in order? You may already have certain elements in place, like a will, insurance and power of attorney. Beyond those basics, don’t overlook another critical part of estate planning for dentists: your professional corporation.
Estate planning ensures that your assets are safeguarded for your future and your designated beneficiaries. This isn’t a single task and involves multiple approaches.
It’s also about balance, says Meghan Davis, a consultant with Cumberland Private Wealth, who has worked on estate plans for dentists. The goal is to meet your own needs during your lifetime, while maximizing what you leave for others. That’s where your dental corporation can play a key role.
Davis says this strategy serves both wealth transfer and tax efficiency. Consider the after-tax profits that are sitting invested in your dental corporation. You’re the shareholder and have accumulated more money than you’re likely to spend. The problem? “When you die, your estate will pay tons of taxes on the value of those shares,” says Davis.
One solution is an estate freeze. That can be smart when you anticipate the corporation will increase in value, and you want to leave those assets to beneficiaries without them being hit so hard by the capital gains.
An estate freeze means that you exchange existing common shares of the private corporation, held by the original shareholder, for preferred shares. Your preferred shares won’t grow in value from that point in time. Now, you can set up a family trust and have it buy (for a nominal sum) newly issued common shares in the corporation.
How does this help? The preferred shares are the “freeze” shares, and the common ones sit in the family trust as the “growth” shares. You can still be a trustee and control the common shares without owning them directly.
Let’s say you do the estate freeze on the day your corporation holds $1 million, which you expect will grow to $2 million. Years down the road, your shares and the estate will still sit at $1 million. The other $1 million will sit in the family trust.
“The family trust separates out a chunk of the value of the company,” says Davis.
Another option for estate planning is a capital gains strip. Here, you create a second holding company, and sell all shares in the first one to the new one. Essentially, it’s an artificial sale. You voluntarily take the capital gains and will pay taxes accordingly, and in exchange you get a promissory note on the transaction to “strip” the funds from the company.
“It’s almost like dealing with the estate tax in advance at capital gains tax rates,” says Davis.
Dentists often have to overcome a couple of hurdles when considering estate planning with a corporation. One is financial, the other is psychological. Of course, you need to have your own financial needs covered. But even if you do, some dentists remain hesitant, unsure if they’ll need the corporate assets themselves. So they put off estate planning.
That’s why it’s important to run through scenarios with your financial advisors that show if you have enough, giving you the confidence to talk about legacy. Davis adds that some clients want to know that estate plans have an “escape hatch”. That can provide peace of mind too, knowing that you can unwind and take back assets if required.
Estate planning with a dental corporation is complex, so seek advice from legal, accounting, tax and financial professionals. And root these discussions in your financial big picture. Everything starts with a solid financial plan. With that, income, investments and legacy assets can all be managed as appropriate.
The information in this article should not be considered tax or financial planning advice. You should consult professional advisors to obtain advice about your individual situation. None of CDSPI, CDSPI Advisory Services Inc., Cumberland Private Wealth or any other person accepts any liability arising out of any use of such information.