For many dentists, the golden parachute at the end of their career is having the opportunity to sell the practice tax-free. Structured correctly, the bigger the practice, the bigger the savings. The largest tax savings are achieved by multiplying the lifetime capital gains exemption with other family members by utilizing a family trust in your corporate structure.
Currently, the lifetime capital gains exemption (“LCGE”) is $1,250,000 per individual and is indexed for inflation, meaning the future savings are even more. The amount you save depends on the value of the practice and the number of family members included in your family trust, each having access to the lifetime capital gains exemption. Here’s an illustration:
However, a common mistake is not implementing the trust in the corporate structure early enough, which results in having to delay the sale for many years, or simply missing out on the tax savings altogether. The trust cannot simply be introduced a short time before the practice is sold. The trust’s shares need time to grow in value from the time it is added to the structure to the time of sale. As an example, at the inception the trust will have to subscribe for shares for a nominal amount, quite often $10. You will need to rely on practice growth and practice earnings for those shares to increase in value, which will take time. If the practice is already valued at $3 million and earning $500,000 after the dentist’s salary and corporate tax, it may take 4 to 5 years before the trust shares have increased in value enough to fully utilize the lifetime capital gains exemption of the trust beneficiaries.
For some, they may not plan on selling the practice for many years. However, in the unfortunate event they become disabled or pass away unexpectedly before they have the opportunity to sell the practice, their family is left with the burden of selling the practice without the time to create a trust to multiply the exemption, potentially costing hundreds of thousands of dollars of tax. You would not spend your career practicing without the protection of disability or life insurance, nor should you jeopardize the tax savings of selling your practice tax-free by waiting too long to set up your family trust.
If you want to know more about adding a family trust to your corporate structure, contact a Purtzki Johansen & Associates advisor.
