Dr. Marcinko Interviewed on Physician Retirement and Succession Planning

Posted on October 13, 2024 by Dr. David Edward Marcinko MBA MEd CMP™
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Physicians Have Unique Challenges and Opportunities

ENCORE PRESENTATION

http://www.MarcinkoAssociates.com

By Ann Miller RN MHA CMP

[Executive-Director]

Medical Executive-Post Publisher-in-Chief, Dr. David Edward Marcinko MBA CMP™, and financial planner Paul Larson CFP™, were interviewed by Sharon Fitzgerald for Medical News, Inc. Here is a reprint of that interview.

Doctors Squeezed from both Ends

Physicians today “are getting squeezed from both ends” when it comes to their finances, according Paul Larson, president of Larson Financial Group. On one end, collections and reimbursements are down; on the other end, taxes are up. That’s why financial planning, including a far-sighted strategy for retirement, is a necessity.

Larson Speaks

“We help these doctors function like a CEO and help them quarterback their plan,” said Larson, a Certified Financial Planner™ whose company serves thousands of physicians and dentists exclusively. Headquartered in St. Louis, Larson Financial boasts 19 locations.

Larson launched his company after working with a few physicians and recognizing that these clients face unique financial challenges and yet have exceptional opportunities, as well.

What makes medical practitioners unique? One thing, Larson said, is because they start their jobs much later in life than most people. Physicians wrap up residency or fellowship, on average, at the age of 32 or even older. “The delayed start really changes how much money they need to be saving to accomplish these goals like retirement or college for their kids,” he said.

Another thing that puts physicians in a unique category is that most begin their careers with a student-loan debt of $175,000 or more. Larson said that there’s “an emotional component” to debt, and many physicians want to wipe that slate clean before they begin retirement saving.

Larson also said doctors are unique because they are a lawsuit target – and he wasn’t talking about medical malpractice suits. “You can amass wealth as a doctor, get sued in five years and then lose everything that you worked so hard to save,” he said. He shared the story of a client who was in a fender-bender and got out of his car wearing his white lab coat. “It was bad,” Larson said, and the suit has dogged the client for years.

The Three Mistake of Retirement Planning

Larson said he consistently sees physicians making three mistakes that may put a comfortable retirement at risk.

  1. The first is assuming that funding a retirement plan, such as a 401(k), is sufficient. It’s not. “There’s no way possible for you to save enough money that way to get to that goal,” he said. That’s primarily due to limits imposed by the Internal Revenue Service, which allows a maximum contribution of $49,000 annually if self-employed and just $16,500 annually until the age of 50. He recommends that physicians throughout their career sock away 20 percent of gross income in vehicles outside of their retirement plan.
  2. The second common mistake is making investments that are inefficient from a tax perspective. In particular, real estate or bond investments in a taxable account prompt capital gains with each dividend, and that’s no way to make money, he said.
  3. The third mistake, and it’s a big one, is paying too much to have their money managed. A stockbroker, for example, takes a fee for buying mutual funds and then the likes of Fidelity or Janus tacks on an internal fee as well. “It’s like driving a boat with an anchor hanging off the back,” Larson said.

Marcinko Speaks

Dr. David E. Marcinko MBADr. David E. Marcinko MBA MEd CPHQ, a physician and [former] certified financial planner] and founder of the more specific program for physician-focused fiduciary financial advisors and consultants www.CertifiedMedicalPlanner.org, sees another common mistake that wreaks havoc with a physician’s retirement plans – divorce.

He said clients come to him “looking to invest in the next Google or Facebook, and yet they will get divorced two or three times, and they’ll be whacked 50 percent of their net income each time. It just doesn’t make sense.”

Marcinko practiced medicine for 16 years until about 10 years ago, when he sold his practice and ambulatory surgical center to a public company, re-schooled and retired. Then, his second career in financial planning and investment advising began. “I’m a doctor who went to business school about 20 years ago, before it was in fashion. Much to my mother’s chagrin, by the way,” he quipped. Marcinko has written 27 books about practice management, hospital administration and business, physician finances, risk management, retirement planning and practice succession. He’s the founder of the Georgia-based Institute of Medical Business Advisors Inc.

ECON

Succession Planning for Doctors

Succession planning, Marcinko said, ideally should begin five years before retirement – and even earlier if possible. When assisting a client with succession, Marcinko examines two to three years of financial statements, balance sheets, cash-flow statements, statements of earnings, and profit and loss statements, yet he said “the $50,000 question” remains: How does a doctor find someone suited to take over his or her life’s work? “We are pretty much dead-set against the practice broker, the third-party intermediary, and are highly in favor of the one-on-one mentor philosophy,” Marcinko explained.

“There is more than enough opportunity to befriend or mentor several medical students or interns or residents or fellows that you might feel akin to, and then develop that relationship over the years.” He said third-party brokers “are like real-estate agents, they want to make the sale”; thus, they aren’t as concerned with finding a match that will ensure a smooth transition.

The only problem with the mentoring strategy, Marcinko acknowledged, is that mentoring takes time, and that’s a commodity most physicians have too little of. Nonetheless, succession is too important not to invest the time necessary to ensure it goes off without a hitch.

Times are different today because the economy doesn’t allow physicians to gradually bow out of a practice. “My overhead doesn’t go down if I go part-time. SO, if I want to sell my practice for a premium price, I need to keep the numbers up,” he noted.

Assessment

Dr. Marcinko’s retirement investment advice – and it’s the advice he gives to anyone – is to invest 15-20 percent of your income in an Vanguard indexed mutual fund or diversified ETF for the next 30-50 years. “We all want to make it more complicated than it really is, don’t we?” he said.

QUESTION: What makes a physician moving toward retirement different from most others employees or professionals? Marcinko’s answer was simple: “They probably had a better shot in life to have a successful retirement, and if they don’t make it, shame on them. That’s the difference.”

More:

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™
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Marriage – The Second Time Around

Posted on July 25, 2016 by Dr. David Edward Marcinko MBA MEd CMP™

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Or … Third Time Around!

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By Dan Timotic CFA
[Managing Principal]

Roughly four in 10 new marriages in 2013 included at least one partner who had been married before, and altogether about 42 million Americans have been married more than once [1].

A second marriage can create numerous estate planning challenges, especially when you wish to provide for both your current spouse and your children from a previous marriage. If you remarry later in life, your spouse and your adult children may not develop a close relationship, which could complicate matters when you die.

With a traditional family, estate assets are often inherited by the surviving spouse and eventually passed down to the couple’s children. Blended families, however, may require a more detailed strategy.

Start by having an honest conversation with your spouse (or fiancée) about your separate and shared finances and goals for the future.

Think Ahead

A prenuptial agreement is a written contract between prospective spouses that states how assets will be owned and distributed during the marriage, in the event of divorce, and at death. Each spouse’s financial rights and responsibilities are predetermined and clearly spelled out, and the contract can be altered or broken only with the consent of both parties.

Prenuptial agreements are not for everyone, but they could help reduce conflict between a surviving spouse, your adult children, and other family members.

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heart

[Broken Heart]

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Useful Trusts

Placing assets in a properly structured living trust makes it more difficult for someone to contest your will and also avoids probate. The assets would be available to your heirs more quickly, and your private information would be kept out of the public domain.

A qualified terminable interest property (QTIP) trust is a marital trust typically used in conjunction with a bypass trust. When you die, your spouse receives a lifelong income from the assets in the trust. After your surviving spouse dies, the remaining trust assets are distributed to your children, or other designated heirs, according to your specific instructions.

A QTIP trust might be a viable option if you’re certain that a permanent financial relationship between your spouse and adult children will not be a constant source of tension and frustration. If you are uncomfortable making your children wait until your spouse’s death to receive an inheritance, it might make more sense to eliminate the financial connection between your surviving spouse and your children.

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[Divorce Decree]

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Pick Your Approach

One common arrangement is simply to designate a specific percentage of estate assets to be distributed outright for the spouse, each child, and any other heirs. This way, everyone shares in the appreciation or depreciation of the assets.

Another method involves allocating assets to various heirs based on specific financial needs or benefits. For example, a surviving spouse might inherit the home and retirement accounts, while the children might receive other financial assets such as shares of a business, family heirlooms, or the proceeds of a life insurance policy.

The beneficiary designations on all your retirement accounts, brokerage accounts, and insurance policies should also be updated and consistent with your overall estate plan. If your children are adults, you may want to keep them informed about your decisions so that everyone knows what to expect.

Assessment

Remember – Trusts incur up-front costs, often have ongoing administrative fees, and involve complex tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing a trust strategy.

Citation: Pew Research Center, 2014

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

 Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Much More Ado About Healthcare Business Buy–Sell Insurance Agreements

Posted on October 21, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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HOW THEY SHOULD BE STRUCTURED?

By Dr David Edward Marcinko MBA CMP™

Dr. DEMwww.CertifiedMedicalPlanner.org

A buy–sell agreement provides a ready market for the sale of a medical practice or healthcare business interest, provides liquidity on a timely basis, and provides for a smooth transfer to the desired successors.

A buy–sell agreement may be funded to insure retirement, disability, and death protection. A properly designed agreement may help provide for a smooth financial and managerial transition.

The buy–sell agreement should also include the method for determining the value of the medical office or healthcare business-entity; and the payment terms. A buy–sell agreement may be structured in one of two ways: [1] redemption or a [2] cross-purchase agreement.

Redemptions

A redemption is an agreement between the medical business owner in which insurance proceeds, or other corporate funds, are used to buy out the deceased or retired physician owner’s interest. If life insurance proceeds are to be used to fund the buy-out of a deceased owner, the potential risks that need to be considered include:

  • The possibility of alternative minimum tax (AMT) that would only affect a C corporation.
  • The potential for insurance proceeds to be exposed to corporate creditors.
  • The possibility that undesirable dividend treatment may occur if the constructive ownership rules of Code Section 318 are met. (This requires close scrutiny of Sections 302, 303, and 318 when structuring a plan.)

Private medical business owners who currently have redemptions in their estate plans may desire to switch to a cross-purchase agreement. This modification prevents exposure of the insurance proceeds to corporate creditors and the potential for corporate AMT.

Cross-Purchase Agreements

A cross-purchase agreement between or among the parties, unlike the redemption agreement, provides a stepped-up outside basis. It may be cumbersome to coordinate funding with many shareholders because life insurance policies must be acquired on each particular life. Some CPAs, financial advisors, insurance agents and attorneys suggest that a business insurance trust can solve this, but the current popular solution is a partnership.

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Buy-Sell

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Example:

Drs. Jon, Bob, and Brent are three unrelated physicians who are shareholders in a professional corporation. They sign a cross-purchase buy–sell as shareholders, agreeing to purchase the outstanding stock of a deceased shareholder based upon a formula including the prior year’s earnings and the current net worth. They purchase life insurance policies on one another so that they have a way to fund the purchase of the shares from the decedent’s estate. The policies are an approximation of the required funds and are reviewed annually to verify that sufficient insurance exists to cover the needs. They have created a funded cross-purchase agreement.

The shareholders considered having a disability buy-out clause also, but have been unable to agree upon appropriate dollar amounts and have had problems selecting disability insurance coverage. They felt that it was best to have a signed contract on the portion that they could agree on, rather than tie the whole process up seeking agreement on everything.

“Wait and See” Buy–Sell Agreements

The less frequently used option of the “wait and see” buy–sell agreement postpones the decision on how to transfer the business until after the death of the business owner, when more information is available. The purchase price and funding are established currently, but the identity of the purchaser is left open. Typically, the business has the first option to buy. Then, after a set period, the owners have the option to buy. Finally, to protect the heirs of the deceased, if neither of the first two options is exercised, the business must purchase the stock.

Estate Valuation

Certain criteria must be met for a buy–sell to fix the value of the medical business interest for estate tax purposes. For agreements entered before October 9, 1990, that have not been substantially modified, the values established in the buy–sell agreement should serve to establish the value for estate tax purposes, unless the agreement was a device to transfer the business to a family member below fair market value or if the agreement is not a bona fide business arrangement.

For agreements substantially modified after October 8, 1990, or those entered into after that date, the value of the property is determined without regard to any option, agreement, or right to acquire or use the property at less than fair market value or any restriction on the right to sell or use such property, unless the option, agreement, right, or restriction:

  • Is a bona fide business arrangement, and
  • Is not a device to transfer such property to members of a decedent’s family for less than full and adequate consideration in money or money’s worth, and
  • The terms of the option, agreement, right, or restrictions are comparable to similar arrangements entered into by persons in an arm’s length transaction.

If the buy–sell option meets these requirements, its terms may be utilized in the valuation of the interest transferred for estate or gift tax purposes. [IRC § 2703]

If these specific tests are not satisfied, the buy–sell agreement will not establish the value for estate tax purposes and the valuation factors of Revenue Ruling 59-60 probably would prevail. This may leave the estate in the position of having to litigate if the taxing authorities set a value higher than the actual sale value.

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Business

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To assist in meeting the three criteria, advisors should not encourage the use of formulas as in the past; but individual appraisals and personalized valuations. Some practices or entities even fix the value of the business annually and justify this by pointing out that nobody knows whether there will be a purchaser or a seller. They have every incentive to try to make a fair valuation. But, the advisor should keep in mind that such a valuation could be used against an owner in the event of a divorce or separation, so he or she should use prudence before publishing a stated value.

In most cases, the IRS will argue that the agreement doesn’t meet the requirements of Code Section 2703 because of the need for the agreement to be comparable to similar arrangements. This means the buy–sell agreement may not be solely determinative in valuation issues, regardless of how carefully it is constructed.

Assessment

A buy–sell between unrelated parties who are not the “natural objects of each other’s bounty” is deemed to have met the three tests for exclusion from Code Section 2703. This means that the new rules generally only apply to intrafamily transfers, although some experts believe that this term may be broad enough to include any potential heir.

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Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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