When you own a family-run dental practice, a well-drafted estate plan becomes your most valuable tool for a smooth and secure transition to the next generation. A comprehensive estate plan takes a holistic approach to your family’s financial needs and the future of your practice. It provides:

• Clarity and Control: Imagine a scenario where you pass away unexpectedly. Without a clear plan, your ownership in the practice could be thrust into probate, a lengthy and public court process. A good estate plan avoids probate, ensuring your wishes are followed promptly and efficiently.
• Family Harmony: When family members are left guessing about your intentions, conflict can easily arise. A comprehensive plan clearly outlines who inherits what, minimizing confusion and potential disputes.
• Business Continuity: You’ve poured your heart and soul into building your practice. A well-crafted estate plan guarantees a smooth handover to your child, safeguarding the legacy of your practice and ensuring continued care for your patients.

To create such a comprehensive estate plan, consider the following best estate planning practices. 

1. Business Succession Planning for a Family Legacy

A comprehensive estate plan for your family-run dental practice goes beyond simply identifying heirs. It needs to incorporate a well-defined business succession plan, ensuring a smooth and successful transition of ownership and management to your child’s dentist. Here’s why succession planning is crucial within your estate plan:

• Structured Handover: Without a clear plan, your child might face challenges taking over the practice. Succession planning outlines a step-by-step process, allowing them to gain experience, build relationships with patients, and demonstrate their readiness to lead.
• Financial Security: Integrating a buy-sell agreement within your estate plan establishes a fair price for your ownership stake. This ensures your family receives appropriate financial compensation while providing your child with a clear path to owning the practice.
• Employee and Patient Stability: A well-defined succession plan minimizes disruption for staff and patients. Knowing who will be taking over instills confidence in the future of the practice, fostering continued loyalty and patient satisfaction.

2. Legal Considerations

Estate planning for a family-run dental practice requires going beyond standard estate planning strategies. There are unique legal considerations specific to the dental industry that must be addressed to ensure a seamless transition. Unlike traditional family businesses, you need to be a dentist to continue to operating the business. If your heirs are not, they will need to find a dentist to keep the practice going. An estate planning attorney can help you navigate these regulations and develop a plan that complies with state licensing laws.

The legal structure of your practice (sole proprietorship, partnership, LLC) has implications for ownership transfer. An LLC offers the most flexibility for succession planning within the family, allowing you to specify ownership percentages for your child in the operating agreement. 

In addition, the value of your dental practice hinges on your reputation, patient relationships, and your child’s skills as a dentist. This “perishable” aspect requires careful planning:

• A well-defined succession plan that involves your child working alongside you fosters patient familiarity and trust. This helps ensure a smooth transition and minimizes the risk of patients leaving the practice.
• If you have associates or partners, consider non-compete agreements as part of your estate plan. This can prevent them from setting up a competing practice nearby, safeguarding your patient base for your heirs.
• Life insurance can play a crucial role in funding your child’s purchase of the practice through a buy-sell agreement. This ensures your family receives fair compensation while mitigating the financial burden on your child.

3. Letter of Direction

A Letter of Direction, though often overlooked, can be a powerful tool for ensuring a smooth transition for your family-run dental practice. It’s a non-legally binding document where you express your wishes, preferences, and additional details that may not be included in your formal estate documents. A Letter of Direction:

• Provides a roadmap, clarifying your preferences for managing the practice during the transition period
• Outlines a preferred timeline for your child to fully take over the practice
• Guides your executor on how to best communicate the transition to patients
• Expresses your vision for the future of the practice, emphasizing the values you want your child to uphold

4. Will and Revocable Living Trust

While a will is a cornerstone of estate planning, it’s not the most efficient tool for family-run dental practices.

A will acts like a roadmap, outlining how you wish your assets, including your ownership stake in the dental practice, to be distributed after your passing. It names your beneficiaries (who inherits what) and your executor (the person responsible for carrying out your wishes).

However, a major drawback of a will is probate. Probate is a court process that validates your will and oversees the distribution of your assets. This can be time-consuming, expensive, and public, potentially delaying the inheritance process for your family.

A revocable living trust offers a more efficient solution. You transfer ownership of your assets, including the dental practice (or its membership units if it’s an LLC), to the trust while you’re still alive. You, however, retain control during your lifetime, managing and benefiting from the assets.

The key advantage? The trust avoids probate upon your passing. Since the assets already belong to the trust, they bypass the court process, ensuring a faster and more private inheritance for your child. This is especially beneficial for your family practice, minimizing disruption and ensuring a smooth transition of ownership. While a revocable living trust offers significant advantages, you must consult with an estate planning attorney to determine the best fit for your specific situation. They can guide you through the process of creating a trust and ensuring it aligns seamlessly with your overall estate plan and business succession goals for your family dental practice.

5. Real Estate Considerations

If your dental practice owns the real estate where it operates, you need to carefully consider the potential tax implications and the impact on the selling dentist’s capital gains in estate planning. Important tax implications to consider include:

• Capital Gains Exemption: Selling the real estate after your passing could trigger capital gains taxes for your child. Consulting with a tax advisor can help you explore strategies to minimize this tax burden.
• Sale or Lease: Decide whether it’s more advantageous for your child to own or lease the real estate. Owning offers long-term control, while leasing can free up capital for other needs. A tax advisor can analyze which option minimizes tax liabilities.
• Estate Planning Coordination: Ensure your estate plan and business succession plan are coordinated regarding the real estate. This avoids confusion and potential conflicts over ownership and usage.

Secure Your Family Legacy and Your Thriving Family-Run Dental Practice

Now that you understand the best practices for comprehensive estate planning for your family-run dental practice, it’s time to take action. Partnering with an experienced estate planning attorney who works with family businesses gives you peace of mind knowing that your family’s financial future and practice’s legacy is safe.

Don’t wait until it’s too late. Schedule a consultation with Brenden Kelley Law today to discuss your specific situation and create a comprehensive estate plan that protects your family and ensures the continued success of your dental practice.