Over the years we have seen countless examples of physicians and their families suffering needlessly due to poor planning, poor execution of planning or no planning. Here are a few examples that we’ve seen in our practice recently.
The Wreck of the Anesthesiologist
I was asked to repair and revise a plan which had backfired on its well-intentioned participants. The situation that presented was:
- anesthesiology group
- 17 owners; three associates
- “Up or out” practice — you worked there two or three years is to reduced rate of pay, and that’s your “buy-in.” After that you are an owner and participate in the success of the practice
- The practice purchased a $2 million life insurance policy on each owner. The firm is the owner, premium payer and beneficiary of these policies. The plan was to use the $2 million death proceeds to “buy out” any owner who died while working there.
- The policies contained a cash value provision which allowed the practice to buy out any owner who stayed until retirement.
- The policies included a custom “change of insured” provision which allowed the practice to remove a policy from the life of someone who left the group and reuse it to insure the life of an incoming partner. This saves the group thousands of dollars of commissions and fees associated with buying a brand-new policy.
Unfortunately the worst thing that could happen did happen. One of the doctors died suddenly. The life insurance company paid the $2 million tax-free life insurance proceeds to the practice. The practice turned right around and paid the $2 million to the doctor’s widow. Parenthetically, I am not sure what they were thinking as too many tax consequences of that payment. Rather than digress on this point I’ll get on with the rest of the story.
Everyone went on their merry ways and for three years everything was business as usual. Then came the unintended consequence of trying to set up a good plan without counsel. Another doctor in the practice found himself on the receiving end of a divorce. He was told to disclose the value of his medical practice. Being an anesthesiologist he stated the value was zero because he didn’t have any patients or an office.
Have you guessed what happened? The partner’s wife knew that the firm had paid a widow $2 million for a 1/17 interest in this practice. There was a paper trail to this effect, too. In short, his interest in the anesthesia group was deemed to be a marital asset and he had to buyout her one-half interest for a cool $1 million.
There are numerous ways to have avoided this disastrous consequence and still accomplish the objectives of the firm’s owners.
Doctor, Doctor: Here’s the News – You’ve Got a Bad Case of IOU’s
A 34-year-old medical oncologist had worked for a large (200 physicians) multispecialty medical group for two years. Upon successful completion of this probationary period the group offered him an opportunity to become a shareholder. The buy-in cost is $80,000 paid in over an eight-year period. The buyout at age 65 was to be $1,250,000. He asked me as his financial advisor to review this investment opportunity.
I reviewed the purchase agreement, the income statement and balance sheet. I was stunned to discover that with nearly 200 physicians expecting to receive a buyout at retirement, the firm’s balance sheet did not disclose any of that future liability.
Obtaining census data from the group’s CEO and CFO it became clear that this Professional Corporation was carrying a $100 million unfunded liability — which was also undisclosed on its financial statements. The group had obtained lease agreements, bank loans, mortgages etc. from FDIC insured banks without mentioning its obligation to the shareholders.
A number of professional practices expect younger shareholders to buyout older shareholders, and the younger shareholders have to get other younger shareholders to buy them out and so on. It’s as if they are running their own little privately-held Ponzi scheme.
There are numerous solutions when a group presents with this history, even if the problem has persisted for some time. If you are a member of a medical group with an unfunded liability, or an underfunded liability, to buyout senior owners this may be a good time to call in a professional financial representative to look at some funding alternatives.
Saving is Different from Investing.
One of the biggest lessons that intelligent, well-educated somewhat aggressive and perhaps even little bit arrogant people like us need to learn about financial security planning is the difference between saving and investing. People seem to think that saving is boring and investing is exciting. The hard lessons that come from life’s experience teach us that when it comes to our finances, boring is good!
I say it kind of jokingly, but we are all day laborers, aren’t we? Most physicians do not earn enough money to be able to make significant investments out of their earned income. Instead, like the rest of us day laborers, you need to save a percentage of your income until you have accumulated enough capital to make some realistic investments. For now, let’s focus on savings plans.
The most effective capital accumulation mechanism you can use will have the following characteristics:
- Systematic. Your plan needs to have a specific methodology that involves your putting away a certain number of dollars or a certain percentage out of your income on a regular basis.
- Permanent, or At Least, Long-Term. This system you establish needs to be one which you expect will last a long time.
- Ready access. The funds you place in your financial vehicle need to be accessible by you, but not too accessible. For example, if the ATM machine or your bank debit card is too tempting for you, that’s the wrong place to keep this kind of money.
- Emergency and opportunities. This vehicle is not for your short term needs such as saving up money for a down payment on a house or to buy a car. This money is to be considered a long-term savings vehicle, not a “deferred spending vehicle.”
- Tax favored. Some financial vehicles which pay interest to the account owner are not taxed during the accumulation phase. Indeed, certain ones are not even taxed upon withdrawal of your principal many years later. These are remarkably effective tools.
- Dual purpose — multipurpose — dollars. If it’s possible, choose a vehicle that allows you to spend the same dollar twice. An example of this is a life insurance policy which will  protect your family if you die,  waive your premiums if you become disabled. (This is an additional benefit that is selected and paid for by the policyowner),  provide funds to pay for your children’s college education, and then, if you didn’t die and didn’t become disabled and didn’t use all the money on the kids college, you can use the same dollars you paid in premiums to help supplement your retirement income. (Use of cash value may result in decrease of death benefit).