Wealth Planning for the Young, Single, Debt-Laden Dentist…
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.