Charles Blair, DDS and John McGill, MBA, CPA, JD
I am 55 years old and plan to practice for another 10 years or so. Unfortunately, my assets accumulated for retirement dropped by 50 percent as a result of recent stock market losses. My personal living expenses are relatively low and I need to sock away as much money as possible for retirement. Which type of retirement plan would you suggest for my corporation?
In general, older doctors with younger staffs and who are looking to maximize contributions for retirement should investigate a defined-benefit pension plan. Under the new tax law, doctors can accumulate more than $2.2 million in new retirement assets at age 65 by funding a defined-benefit pension plan. These assets are in addition to any accumulations in prior retirement plans and/or IRA accounts.
In your situation, you may be able to dramatically reduce the salary taken from your incorporated practice to just the amount necessary to meet your personal living expenses. The additional funds available may be used to fund increased defined-benefit pension plan contributions, according to Jason Arnold, East Coast district manager of PenSys, Inc. — (888) 440-6401 — a retirement-plan firm specializing in assisting dentists nationwide.
While taking a reduced salary would ordinarily result in lower retirement plan contributions, Arnold says defined-benefit pension plans enjoy a little-known advantage. These plans can base retirement plan contributions on the highest three-year average salary drawn by the doctor while incorporated. Arnold emphasizes that doctors should have a retirement plan actuarial study performed first to determine if this type of plan will prove cost-effective for them.
My current net worth is approximately $3 million, and virtually all of the assets are in my name alone, or in joint names with my spouse. Under each of our wills, all assets pass to the surviving spouse at the death of the first spouse.
Recently, I spoke with my CPA, who recommended I make some changes to my estate plan. I thought that since each spouse had a $1.5 million exemption beginning this year, we would owe no death taxes. What's going on here?
You are correct in pointing out that the current tax law allows a $1.5 million exemption per spouse beginning this year, says Blake W. Hassan, a tax attorney and CPA specializing in estate planning with McGill and Hassan, P.A. — (704) 424-5450. Nevertheless, under your current estate plan, your family will be able to use only one of these exemptions, meaning that you could pay a substantial amount in unnecessary federal death taxes. At the death of the first spouse, all assets will pass to the surviving spouse, resulting in no assets left to use the exemption against. Then, when the second spouse dies, only one exemption will be available.
To remedy your situation, Hassan recommends two strategies. First, assets should be split fairly evenly between husband and wife to allow each spouse to use the exemption, regardless of which spouse dies first. In addition, you need to modify your current will and possibly add a revocable living trust with two subtrusts. At the death of the first spouse, the maximum tax-free exemption amount would pass into a family credit shelter or bypass trust. Under the provisions of this trust, the surviving spouse would receive all of the income plus whatever principal is necessary to maintain his or her standard of living.
The balance of the assets remaining in the estate of the spouse who died first would pass into a marital deduction trust, with similar dispositive provisions. The assets passing into this trust would qualify for the estate-tax marital deduction, eliminating any death taxes at the death of the first spouse.
When the surviving spouse dies, his or her estate would include the assets in his or her name, as well as any assets remaining in the marital-deduction trust. The second spouse also would be able to fully utilize his or her own exemption amount. By taking these steps (splitting assets equally between spouses and revising wills and trusts), you can be assured that your family will pay the minimum death taxes under the new law, says Hassan.
Dr. Blair is a nationally known practice-profitability consultant and is a member of the American Academy of Dental Practice Administration. Mr. McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($195 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.
