The Ladder Of Success For Physicians And Dentists

Over the years I have had the privilege and honor of representing several physicians and dentists. I have found them to be bright, intellectually grounded and strongly committed to the welfare of their family and the preservation and transfer legacy of their assets. However, the real difference between a physician/dentist and other business owners is the amount of risk that physician/dentist face in their profession because of potential malpractice claims.

Physicians sacrifice and spend a lot of time and effort on their education and training. Moreover, physicians/dentists are usually very busy because of the schedule that they keep with respect to their practice and medical services. In dealing with them one has to be cognizant of the time factor and make things as easy as possible for them to take the time for their estate planning and other related asset protection and tax planning.

Step One: Business Planning

I have often referred to the Ladder of Success for physicians/dentists because it has different steps that have to be climbed and addressed. The first step is to make sure that the operating entity under which they practice is set up properly. There are many variations of practice for physicians/dentists. Some practice as sole proprietors, others practice as partners, others are independent contractors working for another practice or medical facility or clinic. Whatever way they practice, they have to make sure that this practice is properly set up and structured.

Many physicians/dentists incorporate and operate as a professional corporation. If this is the case, they must make sure that they are properly incorporated and set up, and that they maintain the integrity of the corporation by complying with all of the requirements and housekeeping measures that have to be taken into account for a professional corporation to legally stand up. These measures include proper stock issuance, and by-laws and minutes dictating the authority of the officer to act upon major financial matters.

A corporation normally has a board of directors that elects officers. The officers then carry out the business of the corporation. If the professional corporation has a sole owner, normally the sole owner appoints himself or herself to be the sole director who then elects the owner physician to be the president of the professional corporation. The sole director also approves major financial decisions such as leases, loans and purchase of expensive equipment. The director authorizes the officers (usually the owner physician) to carry on the business of the corporation and to take the action that the director has resolved to be taken. For example, if the corporation enters into a loan arrangement, the president has to be authorized to sign the loan documents and to carry out the logistics relative to the loan.

Many times when we are retained to review a physician’s estate and tax situation we find that they don’t have the proper documents of organization and operating process. They don’t have stock certificates issued and they don’t have by-laws or minutes. In these cases we have to formulate these documents on behalf of the physician/dentist. It should be noted that physicians/dentists are not the only business people who fail to take care of these particulars. Many small closely held businesses also fail in this regard.

There are many issues involved with respect to a physician/dentist medical practice. The different kinds of arrangements in which the doctor/physician practices have to be carefully analyzed and reviewed. At some point, the doctor/physician may be interested in purchasing another practice. It is critical that proper legal and tax advice be obtained with respect to this purchase. Also, the doctor/physician may at some point in time want to sell the practice. Again, the proper legal and tax advice is essential with respect to the sales arrangement.

If the physician is in practice with either a medical facility or other physicians, then their independent contractor agreement and/or partnership agreement needs to be reviewed by an experienced attorney. It is generally not wise for a physician to enter into a partnership without being a professional corporation him or herself. The exception is the limited liability partnership which does provide the same protection as if the partners were corporations in that partnership. The limited liability partnership is state chartered, usually limited to licensed professionals and certain formalities have to be undertaken in order to preserve its existence.

At this point, it is appropriate for us to discuss the nature and benefits of the LLC. These are carefully and particularly reviewed. With respect to the physicians/dentists, if they own real property, it is appropriate to place these assets into an LLC to isolate any liability that the real estate may have to the particular parcel of real estate that is placed into the LLC. This protects the other personal assets of the physician/dentist. The LLC is also beneficial because it is more difficult for a creditor to access the assets of the LLC with respect to a personal judgment or claim against the LLC owner (physician/dentist).

If the physician owns equipment or real estate in association with his or her practice, it is wise to form a limited liability company (“LLC”), to hold title to the equipment or the property. The LLC then, in turn, leases the equipment and or the real property to the practice. This can be very beneficial to separate the expensive equipment and real estate from the practice itself.

Step Two: Estate Planning

Step two on the Ladder is basic estate planning. Everyone should have a Will and, in most cases, a Revocable Living Trust. . It is not difficult to set up this Trust and Pour Over Will and any physician should be able to make the time to do this. It is obvious and appropriate for a doctor to have a Living Trust to place his/her residence and his interest in the practice into the trust. The doctor should, obviously, have Wills and Powers of Attorney much like the set up that is recommended previously.

Step Three: Debtor Exemptions

The third step on the Ladder is to take advantage of any debtor exemptions. Contributions to a Pension Plan under ERISA are asset protected. Contributions to an IRA will be asset protected as long as the amounts set aside are reasonable. A reasonable amount will be determined by age and the actuary tables and the standard of living that the individual must have in order to be fully functional in the future, taking into account his/her assets and pension and retirement plan assets. In California, a private retirement plan (outside of the rules and restriction of an ERISA Plan) is protected and is a very viable strategy.

Step Four: Asset Protection Planning

Step four on the Ladder is Asset Protection Planning. Many doctors become involved with a surgical center. The surgical center can be held in a separate LLC owned jointly by the physician, other physicians and non-physician investors. The surgical center then leases its property and leasehold to the doctors who are members of the LLC. Normally, the surgical center is operated by a professional medical corporation with a chief operating physician at its head. Usually, the LLC is a turnkey operation that owns the medical operating equipment and building. If it does not own the equipment and the building, it leases the equipment from a third party and, in turn, subleases it to the doctor.

Obviously, physicians/dentists are at much greater risk because of the possibility of malpractice claims. Because they have significant income and many times assets from their practice, they are able to leverage their income by purchasing real estate investment properties and setting up security accounts for more liquid investments. Accordingly, because of the threat of malpractice and various assets that they own, doctors are extremely high risk. Over several decades, expanding theories of liability and aggressive plaintiff lawyers have markedly increased the chances of adverse medical malpractice judgments. This combined with the victim-oriented society we live in and with the perverse nature of the deep-pocket theory, enables plaintiffs to loom as menacing predators against the physicians/dentists. Moreover, because of the internet there is an increased media and social awareness of the high notoriety created for malpractice lawsuits. Accordingly, physicians/dentists are likely targets for claims whether or not those claims have strong merit.

Step Five: Asset Protection Trusts

Many of the physicians that we represent set up a Domestic or Offshore Trust in the modular system that we referred to previously. The Trust then sets up LLCs that own their assets. LLCs are more protected if they are owned by an Asset Protection Trust which provides a major firewall that is more difficult for creditors to penetrate. This difficulty at the very least gives the physicians/dentists more leverage in dealing with creditors who assert a claim against them.

Step Six: Advanced Planning

The last step on the Ladder is the review and possible implementation of more sophisticated estate planning strategies. These are discussed in Irrevocable Trusts and Charitable Giving. Many physicians/dentists set up Charitable Lead Trusts during their lifetime in order to obtain the benefits that are specifically set forth. Moreover, almost all of our physicians/dentists have established a TCLAT in their Revocable Living Trust which, again, is described in detail. The TCLAT involves contributions at death to a Charitable Lead Annuity Trust that eventually revert back to the heirs. There may be other estate and income tax planning techniques that are available for a physician/dentist that require an examination of the particular situation.


Most physicians would agree that obtaining the best legal advice is mandatory, just as a patient would want the best medical advices from a doctor or dentist; experience, skill and successful track record is “Just What the Doctor Ordered” for physicians/dentists with respect to their business, estate and asset protection planning.

For more information on Ladder Of Success For Physicians And Dentists, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (714) 384-6500 today.

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