Physician Buy-Sell Agreements

Posted on January 7, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Federal Estate Tax Implications

Staff Writers

According to some tax experts, the US Tax Court suggests several generally accepted factors for making a medical practice buy-sell agreement valuation price binding for Federal estate tax purposes. 

Acceptable Factors

For example, among other items, the medical practice buy-sell agreement must include the following factors for Federal estate tax purposes: 

  • The price must be fixed or determinable;
  • The agreement must be binding on the parties during life and after death;
  • The buy-sell must have been entered into for bona fide business reasons;
  • The buy-sell must not be a substitute for testamentary disposition.

Reasons for Rejection

Yet, the courts have occasionally rejected using the price specified in a
buy-sell agreement to establish value for Federal estate tax purposes. Reasons for rejection may include:  

  • The purchase price was not subject to any re-evaluation;
  • The payment terms were too generous (indicating the testamentary nature of the agreement);
  • The price was not supported by a professional fair-market valuation at the time the agreement was created. 

Assessment

Of course, the courts are likely to scrutinize any buy-sell agreement if the specified value does not reflect a current fair market value for the medical practice/clinic business entity. 

Conclusion

Physicians must make sure that their medical practice buy-sell agreements are backed by sound valuation principles that are acceptable in US Tax Court. 

And so, what are your experiences – if any – with this emerging and important situation?

NOTE: For comprehensive institutional information on this topic, please subscribe to our premium, 1,200 pages, 2-volume quarterly print subscription guide: Healthcare Organizations [Financial Management Strategies]  http://www.stpub.com/pubs/ho.htm OR www.HealthcareFinancials.com

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Exchange Traded Funds (ETFs)

Posted on January 7, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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A New Type of Index Fund Hybrid

[By JD Steinhilber]

ME-PExchange-traded funds (ETFs) are perhaps the most exciting and innovative investment products to be developed by the securities industry in the past 20 years. ETFs, which are essentially index funds that trade on the major exchanges, can enable the physician-investor or financial-advisor to add value to client relationships, by addressing the key issues of diversification, tax efficiency and investment costs.

Definition 

More formally, ETFs are defined as securities that combine essential elements of individual stocks and index funds. Like stocks, ETFs are traded on the major U.S. stock exchanges and can be bought and sold through any brokerage account at any time during normal trading hours.

Also like index funds, ETFs are pools of securities that seek to replicate the performance of specific market indices, or benchmarks, in a low-cost, tax-efficient manner. ETFs give physician investors the opportunity to buy or sell an interest in an entire portfolio in a single transaction.

In short, ETFs provide the advantages of traditional index mutual funds, including low annual fees, diversification and tax-efficiency, with the liquidity and ease of execution of stocks. 

ETFs trade throughout the day and allow investors to buy and sell them at stated market prices, unlike traditional open-end mutual funds, which are only bought and sold at their net asset value (NAV) determined at the end of each day. ETFs can also be bought on margin and sold short. 

ETFs were developed by large institutions, such as: Barclays Global Investors, State Street Global Advisors and Vanguard.In 2003, approximately $90 billion was invested in U.S. exchange-traded funds; that figure has more than doubled by 2008. 

ETF Asset Classes

ETFs provide exposure to a wide range of asset classes defined by various equity and fixed income indexes. At launch, available ETFs fell into multiple major categories, including:

  • Small-, mid- and large-capitalization
  • Growth, value and core
  • International (broad-based and country- or region-specific)
  • U.S. industry sectors
  • Fixed income

Of course, there are many more tranches or slices today, and for almost any asset class type imaginable. The indexes upon which ETFs are based are from Dow Jones & Company, Inc., Frank Russell Company, Goldman, Sachs & Co., Lehman Brothers, Morgan Stanley Capital International (MSCI), Standard and Poor’s, Cohen & Steers Capital Management, Inc. and the NASDAQ Stock Market, Inc; etc; among many others asset class benchmarks.

Sponsors and Types

The two principal initial sponsors of sector ETFs were State Street Global Advisors and Barclays Global Investors. State Street’s sector ETFs are termed Sector SPDRs (Standard & Poor’s Depositary Receipt), because they are based on the S&P 500. 

The nine original Sector SPDRs collectively encompassed all 500 companies of the S&P 500. Barclays’ iShares sector funds differ from the Sector SPDRs in that they are based on the Dow Jones classification system, which segments the U.S. economy and stock market into 10 sectors encompassing 1,625 companies.

There were iShares ETFs for each of these 10 sectors as well as certain industries, such as biotechnology which are components of broader and/or narrower sectors.  Today, they are almost TNTC.

Assessment 

Continuous information about sector and industry ETFs is available at www.ishares.com.  Information about Sector SPDR ETFs is available at www.spdrindex.com.

Conclusion

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