Over the next series of blogs, I’ll be discussing the importance of estate planning for dentists. In this particular blog, I’ll be talking about the single, young, debt-laden dentist. They just graduated and they have big dreams. But they’re probably got about $200k in debt. Why would they be thinking about wealth planning? Isn’t the primary objective to get out of debt and start / buy a practice? Yes, but that doesn’t mean that they should ignore wealth and succession planning. Specifically: they need to watch out for disasters that could render the financially disadvantaged when they are just starting out. Let’s get into it, shall we?
When should a new associate start to think retirement? The moment they start working! That’s right. Read that again. This way, you know where you’re heading, have set up goals for yourself (1 year, 5 year, 10 year, etc.). And you have a short-term strategy to achieve your long-term vision.
Be Prepared for Disaster…
First, save some money. How much? About 4 months worth of living off of. You need an emergency fund in case you need to: get a new car, pay for a new roof, fend off a lawsuit, etc.
Life insurance – especially when you’re young and healthy – is cheap. Get some. Make sure to designate a beneficiary of your life insurance policy (e.g. parent, girlfriend, fiance, etc.). Because dentistry is labour-intensive (I know this having seen dentists in action in Jamaica as part of our outreach program), make sure to have disability insurance. If you’re driving around in a clunker, try to upgrade your car. This was the advice an dental insurance guy (Ken Barth) told me. So I upgraded to the safest car in the world: a Tesla Model S. Make sure your insurance suits your needs. If you’re making $20k / month, then you’ll need to disclose your income to your insurance broker so that you get an equivalent in disability insurance should you need it. If you stay healthy – for example, for 7 years in my particular case – you’ll get back 50% of your premiums. Not too shabby! And if they offer to increase your disability insurance (because you make more money over time), taken them up on their offer. Also think about getting critical illness insurance too.
Wills and Powers of Attorney – a definite must have! Without a Will, you leave it up to your family / close friends to apply to be your estate trustee (a sometimes daunting task for the average person). And your property might end up going to someone less than ideal. It all comes down to a government formula, which you can read about here. A Power of Attorney is necessary if you’re still alive and incapacitated. Do you really want to force your family to apply to the court to become your guardian? That’s a time-consuming and expensive process. Why burden them when you could have (for a few extra bucks) prepared a Last Will and Testament AND Power of Attorney for Personal Care AND a Power of Attorney for Property on www.DentistLegalForms.com?
I’m Making Too MUCH MONEY!
If you’re making too much money, I don’t really feel bad for you. But there are some ways you can reduce your tax bill. For starters, you can contribute to an RRSP (registered retirement savings plan). The money that you contribute results in a tax deduction on your income tax return, but the money that you eventually pull out when you retire is taxed at your marginal tax rate (hopefully only when you’re not making that much and can pull it out and pay less marginal tax). You should also contribute to a TFSA (tax free savings account). The money that you put in must be after-tax dollars. You don’t get a deduction when you contribute to a TFSA. That part sucks. But here’s the great part: any income derived from your TFSA account (dividends, interest, capital gains, etc.) can accumulate in your TFSA tax-free and be pulled out tax-free! Totally awesome! If you’re over 18, you can contribute $5500 annually into a TFSA (from 2009-2012, the annual limit was $5,000) and each year that limit will increase by $500 as allowed. Any unusued contribution room can be carried forward indefinitely. In the 2015 Federal Budget, the limit for TFSAs is indexed and they were trying to get the annual limit up to $10,000, but that’s likely not going to happen now that the Liberals are in power).
Using a Corporation to Defer Taxes
Let’s also talk about deferring taxes through the use of a corporation. If you’re a young associate working at multiple practices OR if you have your own practice and you’re incorporated, then there are lots of ways to save money by having a professional corporation.
For starters, you can DEFER taxes by leaving money in the corporation – to be taxed at a lower rate. Currently, the top marginal tax in Ontario is 49.53 per cent for an individual; but for a dentistry professional corporation, the first $500,000 of active business income is taxed at only 15.5%. And keep in mind that the previous federal government promised to reduce the small business tax rate by 2% over a 4-year period. This will make it even more advantageous to leave taxable income in your dentistry professional corporation.
A dentist’s spouse, children and parents can receive dividends and, overall, the family can pay less tax than had the dentist collected the full amount of income alone. For example, an adult child with no income from any other source can receive just over $40,000 in dividend income from the corporation and pay no federal tax! That income would have only been taxed at the corporate level (i.e. 15.5%) and that child would only have to pay some Ontario employer health tax. Just keep in mind the kiddie tax rule (which attributes income back to the parent shareholder where the child is not an adult).
Employment Agreement with $10k Death Benefits
You, your spouse and your children can, if you are employees of the corporation, have an employment agreement with the corporation. That agreement can include a provision requiring the corporation to pay out $10,000 to a beneficiary upon the employee’s death (which is a tax deduction for the corporation and received tax free by the beneficiary). Make sure to have it properly worded in the agreement (i.e. have a lawyer prepare it!).
Corporate / Non-Corporate Will
By having a corporate Will (dealing only with your shares in a dentistry professional corporation upon your death) and a non-corporate Will (dealing with all of your other assets), you can avoid paying estate administration tax on the value of your shares when you die. If those shares are worth $3-million at the time of your death, you will have saved roughly $43,500 in estate administration tax, which can be passed down to your beneficiaries.
Lifetime Capital Gains Exemption
When you go to sell your practice, you can sell the shares of your dentistry professional corporation and take advantage of lifetime capital gains exemption. This could save you about $185,000 in capital gains tax if done properly. You can read this article I wrote about the topic and everything dentists need to know.
Please note that the information in this article is not meant for legal advice, but is provided for educational purposes only. If you require help with setting up a dentistry professional corporation or preparing Wills, Powers of Attorney and Employment Agreements with Death Benefits, contact me (Michael Carabash), David Mayzel or Ljubica Durlovska.
Do you have a valid and up-to-date Will? If not, now is the best time to get your affairs in order. Without a Will, you risk leaving behind a mess: your estate may not be administered in a timely fashion or by someone you would have selected, your property may not be distributed to beneficiaries you selected (and perhaps not in the most tax advantageous manner), and you may not like who ends up being responsible for your minor children. So let’s talk about Wills, shall we?
1. What is a Will?
It’s not a contract. It’s not something that can bind your spouse. It’s an expression of your final wishes concerning your property and financial affairs when you die. It lets you name someone to be responsible for administering your estate. It allows you to make specific gifts of cash, real estate, and personal property to particular individuals. And it lets you name someone to be responsible for your minor children.
2. What if I don’t have a Will?
If you’re a dentist and you have a practice and you pass away without a Will, you are said to have died “intestate”. This is a problem. Most likely, a locum will need to enter the scene. This does not generally bode well for the team (i.e. staff and associates) or the patients. They need certainty and continuity. They want to see a new dentist enter. And they may abandon ship if it takes too long for the practice to be sold. What could cause the delay you ask? Well, if there is no Will, someone will need to apply to court to be the Administrator of the Estate (without a Will). This could take some time as there may be infighting, delays, and problems with all of the paperwork (trust me, it’s a lot of paperwork). Finally, the Administrator may need to get all of the beneficiaries onside to sell the practice. The longer this takes, the more likely that the goodwill of the practice will start to drop (along with the overall purchase price).
3. What information do I need to complete my Will?
If you are a dentist, you can create your Will online NOW using your smartphone (e.g. blackberry, iphone, android phone, etc.). Just go to www.DentistLegalForms.com and use the Will-O-Matic wizard to create your Wills. It takes between 30-60 minutes to create a Will. What kinds of questions will the software ask you? Things like: personal information (e.g. your name, age, city, etc.), who you want to name as your Estate Trustee (the person responsible for administering your estate), what specific gifts you want to make (e.g. cash, real estate, charitable, personal property, etc.), what is to happen with your leftover assets after specific gifts have been made, what age you want your children to receive their inheritance, and a lot more. You can go through the entire questionnaire and see a partial preview of your Will right now, so what are you waiting for?
4. What do I do when I’m done my Will?
After going through the questionnaire, you’ll be able to purchase your Will online. From here, you need to read the detailed signing instructions at the back of the Will. It will tell you how to sign and have your witnesses sign, where to keep your Will, and what kinds of other documents you need to complete your estate (e.g. Powers of Attorney and Personal Information, Assets and Liabilities checklist). Make sure that your Estate Trustee knows where your Will is and has access to it. You should also update your Will every few years and when you experience a significant change in your life (e.g. birth, death, divorce, inheritance, new job, new property, etc.). You should also update your Will before you travel or go in for surgery.
If you want to talk Wills (how to get them done in a cost-effective, convenient, and easy-to-understand manner), then go to DentistLegalForms.com now. After you’re done, you can have DMC LLP review everything for you.
Every dentist should have one, but they don’t. Why? Because people don’t want to be pro-active; they typically want to take care of things when there’s a problem. Also, dentists think that when they write their Will, they’ve essentially signed their own death certificate (nothing could be further from the truth; death and taxes are certain, but for the most part no one really knows with certainty when they’re going to pass away). Finally, dentists think that they can simply write something down on a piece of paper near their final hours that will be their Will; the problem here is that it might not be valid or comprehensive enough or even followed if it’s not drafted properly to understand.
So, with these things said, the next few blogs are all going to educate you, my fellow dentist, on all things involving legal Wills. So let’s get started with some important concepts, shall we? Yes, let’s start off with: The Estate.
What the heck is an Estate?
When we pass away, our assets form something called an “Estate”. And these assets (typically cash, real estate, personal belongings like jewelry, art, furniture, securities, vehicles, etc.) are used to pay off our debts, testamentary expenses and the leftovers distributed to our beneficiaries. Now, it’s important to keep in mind that NOT ALL of our assets go into our Estate. Certain assets – like jointly held property, proceeds from life insurance, property subject to division under family law, property subject to an equitable claim, gifts of property that are conditional on death, or a refund of premiums contributed to an RRSP, RRIF or pension plan, etc. – do not fall within our estate. In other words, these types of assets can be transferred outside of our estate. Why is this good / bad? Think of it like this: there are tax, debt, and ownership issues that come up when you’re dealing with assets that are transferred outside or inside your estate.
If assets form part of your estate, then they can be sold to pay off your creditors. If assets do not form part of your estate, then they may go straight to your beneficiaries or some other person pursuant to some other mechanism (e.g. family laws, jointly ownership, etc.). Assets that do not form part of your estate cannot be used to pay off your liabilities, taxes, or testamentary expenses.
So here’s the thing about revoking a Will: a properly executed Will is revocable EVEN IF it says it isn’t. That’s right: all Wills are inherently revokable. A Will is not a contract. It’s an expression of someone’s wishes. And there’s nothing that can be said or done to bind someone to their Will. Now, with that said, if a Will is revoked but there was a separate agreement with a term or condition that says that the Will cannot be revoked, then the Will CAN STILL be revoked but the estate may be on the hook for any damages or penalties for breaching that term or condition.
Now, there are certain situations in which a Will can be revoked – either on purpose or inadvertently. In some provinces, for example, unless the Will says otherwise, preparing a Will and then getting married will automatically revoke the Will. Destroying a Will also revokes a Will. A Will that is destroyed by someone in the presence of a Testator and by his or her direction and with the intention to revoke it will also revoke a Will. A Testator / Testatrix who writes something that purports to revoke a Will, with an intention to revoke a Will, and executed in accordance with provincial legislation (e.g. signed in front of 2 appropriate witnesses, etc.) will also revoke a Will.
Once a Will is executed (signed and witnessed, etc.), it cannot simply be altered by the Testator / Testatrix taking a blue pen and making changes. To legally alter a Will, there are a few ways to make this happen. First, the Testator / Testatrix can execute a new Will. Second, the Testator / Testatrix can execute a Codicil. A Codicil is an amending instrument to the existing Will which is prepared and executed like a Will but only refers to those parts that are being amended. Finally, a Testator / Testatrix can take a blue pen and make changes right on the Will, but must sign near the changes in the presence of witnesses (who must also subscribe as witnesses). These kinds of attestations are usually made in the corner of the page where the changes are made or some of the part of the Will near the changes. Keep in mind that there is a presumption that any changes made to a Will were made after it is executed; in order to rebut this presumption, the changes must be attested to in the presence of witnesses.
And if you don’t have an up-to-date and comprehensive legal Will, you can get one now by using our proprietary Will-O-Matic Wizard on DentistLegalForms.com:
Just CLICK “Get Started” button now…
So, if you’re a dentist looking to write your own Will, you can do so using the Will-O-Matic Wizard. This Wizard takes you through an online questionnaire. There’s loads of questions, tips, options, and guidance along the way. At the end of the process, you’re able to download your own .pdf Will.
A Will is simply a declaration of your wishes concerning your property and assets when you die. You can do things like appoint a representative of your estate, appoint someone to be responsible for your minor children, and explain how you want your assets to be divided when you pass (i.e. not according to government rules, but according to your own wishes).
Once you’ve made the Will using the Will-O-Matic, you must sign it properly in the presence of appropriate witnesses. Then, we suggest you keep the Will in a safe place and give your Estate Trustee access to know it and let him or her know where it is.
When we present to study clubs (as we just did last week), we often ask dentists to identify 5 good reasons why they need to have a Will (and perhaps even a corporate / non-corporate Will if you have a professional corporation). They invariably say things like: so the government doesn’t get my stuff, to save taxes, to exclude the black sheep from getting anything, and to make specific gifts to specific people. I wanted to shed some light on these and other issues, as there is often lots of confusion around them.
1. So the Government Doesn’t Get My Stuff
If you don’t have a Will or if you have a Will but all your beneficiaries are unable / unwilling to receive their inheritance, then there is a legislative order of individuals who receive all or some of your estate. Just check out Myth #1 in this article I previously wrote in Ontario Dentist magazine. Only if all these individuals (e.g. spouse, children, grandchildren, parents, siblings, nephews / nieces, etc.) are unable / unwilling to receive their inheritance will the government get it. This is pretty rare.
2. Save Taxes
When you die, your Estate Trustee may be required to submit your Will to probate to prove that they have the legal authority to deal with your property and administer your estate. As part of the probate process (now called “getting a Certificate of Appointment of Estate Trustee With a Will”), an ESTATE ADMINISTRATION TAX (about $14,500 on the first $1-million) is required to be paid. By having a corporate Will and a non-corporate Will, you can actually have your estate avoid paying those taxes on the value of your corporation’s shares. You can read more about this in Myth #6 in this previously mentioned article. Keep in mind that there are various ways in which your estate can pay less INCOME taxes – such as by transferring property to your spouse or dependant children or dependant grandchildren through your Will or taking advantage of the lifetime capital gains exemption on the sale of shares of a small business corporation. You are assumed to have sold off all of your assets on the date of your death.
3. Exclude the Black Sheep of the Family
You may want to give your spouse nothing in your Will. But you need to remember that, under family law (which trumps Wills and estates laws), your spouse can elect to receive what they are entitled to under the Will (i.e. nothing) or what they would be entitled to under family law (which, absent a marriage contract or prenup agreement, is 1/2 of the increase in net worth of the couple during the course of their marriage). Also, if you had a legal obligation to support a dependant at the time of your death and your Will did not provide for their adequate maintenance and support, then they can challenge your Will and receive an inheritance from your estate through the courts (by applying under section 58 of the Succession Law Reform Act).
4. Naming Someone to Care For Your Minor Children
You can name someone to be the custodian for your minor children and guardian of their property in your Will. This person can act in those capacities for up to 90 days after you pass away, but will need to apply to the court for that formal recognition. While someone other than that person may also attempt to apply for that position, the courts will generally look at what is in the best interests of the minor child and give consideration to your final wishes in your Will.
5. Make Specific Gifts
That’s right: without a Will, you CANNOT make specific gifts of property to specific individuals or organizations (like a Charity). Your estate simply gets divided as per the legislative breakdown discussed in point #1 above. This means that your property may not go to the person(s) you wished to receive them.
Bottom line: you need a Will now. You need one before you travel, go in for surgery, or after you experience a significant change in your family or financial situation. If you’d like to get started creating your Will, just go to www.DentistLegalForms.com, click on the Will-O-Matic and get started. You can create your legal Will(s) now and we will review them for FREE. This method allows you to save big bucks by doing some of the input yourself.
I’m pleased to announce that Laura Fava (counsel to DMC LLP) and I have co-authored an article to be published in Ontario Dentist this December entitled “6 Steps to Administering an Estate“. As usual, we will post a version of it on this website once it becomes available. The article breaks down and simplifies the process that an Estate Trustee must take in order to properly administer a Will. It’s a long and difficult process with lots of pitfalls; this article is a must-read for dentists!
And if you are a Dentist who DOES NOT HAVE a Will, then you need to go to www.DentistLegalForms.com RIGHT NOW and create a Will or TWO WILLS (a corporate and non-corporate Will). And don’t forget to create your Powers of Attorney afterwards!
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.