Expert Insights

Physician's Money DigestOctober 2007
Volume 14
Issue 10

Our Expert Insights section was developed to address the specific financial and practice management questions of our readers. This month’s expert is Jim Lunney, a Certified Financial and Estate Planner located in Littleton, Colorado. For more information, visit To submit your own questions to our Expert Insights panel, please visit

Q:What is the best way to gift to my kids and what are the limits?

A: A trust is simply a legal document that declares your objectives. You can insert a spendthrift clause into the document with stipulations of your choosing. For instance, you can specify that an heir has no access to the corpus, but has a right to any interest or dividends. You and your spouse are permitted to gift up to $12,000 per year to each of your children (ie, $24,000 total). You can set up a trust stipulating that the money is for education purposes, or whatever you wish. Perhaps you want to design the trust so that your children receive half of the money at age 25 and the other half at age 31. But you must designate someone other than yourself as trustee, otherwise the money could be attacked by creditors.

Q: What does an irrevocable life insurance trust do?

A: The following example will illustrate how an irrevocable life insurance trust (ILIT) functions. Max Brendon is an emergency department physician who has $3 million in life insurance owned by an ILIT. On Dr. Brendon's death, the proceeds of his insurance policy would go to his trust. There would be no taxation on the death benefit, because the ILIT is the owner and beneficiary of the life insurance policy, not the doctor. His wife, Bernice, as trustee, would have access to the interest, dividends, and, to a certain extent, the corpus. On her death, the remaining principal (ie, death benefit) would pass to their beneficiaries (ie, their children) without federal estate tax. On a $3 million life insurance policy, that simple strategy could save the Brendons approximately $1.5 million in estate taxes. If Dr. Brendon shared his practice with partners, and for any reason they were to default on the office building mortgage after his death, Bernice would still be protected because the assets owned by the ILIT are not considered part of Dr. Brendon's estate. An ILIT could cost $600 to draw up, which is inexpensive relative to the value it adds in potential tax savings.

Q: What is the best way to market my medical practice?

A: Here are five tips to help get you started: 1) Set up a booth at a local health fair to let people know who you are.

3) Join a local physicians' group. Most doctors are really good about referring to each other.

5) Submit an article to your local newspaper and/or trade magazine. Don’t write something that sounds like an advertisement; instead write a short case study in lay terms. Begin by posing a common medical problem (ie, one that you specialize in, of course) and write out the solution. Don't forget to add how the reader can contact you. P.S.: Direct mail doesn't usually work—especially for medical offices.

Q: Should I set up a marital trust?

A: Yes. The marital trust, sometimes referred to as an AB trust, is a basic estate planning structure that does two things: A) It protects assets, because assets owned inside the trust cannot be attacked by creditors or lawsuits. B) It protects against federal estate taxes, because taxation to a nonspouse beneficiary is eliminated, up to the current estate tax exemption dollar amount of $2 million in 2006. The marital trust protects assets from creditors in the event of the owner's passing by putting assets in their spouse's name. When one of the owners passes away, the money goes to the trust, and the surviving spouse has the advantage of being able to use the income and dividends from the corpus. Then, on the second spouse's passing, the assets in the trust go to the beneficiaries (eg, children). This type of structure takes full advantage of the current $2 million in federal estate tax unified credit. It is relatively inexpensive to set up—a marital trust could cost approximately $1500.

Q: What is the best way to set up a retirement plan?

A: The best way to set up a retirement plan is to first decide on the structure. Usually, a medical practice will be set up as an S-corporation. The best way to set up a retirement plan under an S-corporation would depend on the number of employees you have and what their ages are relative to yours. A profit-sharing plan (PSP) has some advantages over the traditional money purchase pension plan (MPPP). One advantage of a PSP is that you don’t have to contribute in any given year if you don't have the money. An MPPP requires that you designate an amount to be contributed, and every year you must put that money in whether you have it or not. If you currently have an MPPP, you might want to consider changing it, which can be done for a nominal charge (around $1000) through your custodian. Once you're in the PSP, you can have one aggregate account, which is less expensive to manage. Unlike a pension or so-called defined-benefit plan, with a PSP you have choices. If you have a bad year and want to skip the contribution, you can.

Q: How can I use demographics to locate my practice?

A: Do what any marketing person does before beginning a marketing campaign to unveil a new product or service: Research the marketplace. The following is a true story: A pediatric dentist whose practice was located in an older suburb near downtown Denver (Lakewood) was not doing well. He complained about how terrible the practice of dentistry was financially and said he was thinking of retiring. A lifestyle and demographic analysis discovered that the lowest concentration of children 15 years old and younger was in Lakewood where he had set up his practice and the highest concentration of his target patients was in two nearby suburbs: Lonetree and Arvada. The dentist sold his practice in Lakewood and opened two separate offices in the two target-rich environments—and his business exploded. Today he can't keep up with business and has had to take on partners. Don't be in the dark about target marketing. We can provide you with data through ZIP code analysis. Our database provides information on age and population down to the ZIP code and neighborhood block throughout the United States. You can decide if you're in a good area for your type of practice or if there’s a nearby community where you would do better.

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