Doctors betrayed by traditional financial strategies

June 18, 2014

Before you can understand why many strategies and services are not appropriate for doctors, you must understand the dynamic of the “Average American,” for whom these products and services are designed.

Editor's note: This is the first part of a two-part series on financial strategies. Part two will focus on tax, investment and insurance mistakes doctors make when following advice that is designed for tens of millions of average Americans.

 

Before you can understand why many strategies and services are not appropriate for doctors, you must understand the dynamic of the “Average American,” for whom these products and services are designed. 

Most legal, accounting, insurance and investment strategies have been created for:

  • The average American family whose annual income tax liability is less than 12 percent.

  • The 98 percent of American families who will never owe any estate taxes.

  • An employee, not an employer, who will likely never be sued and who has no control over the choice of legal entity or type of retirement vehicles the employer will utilize.

  • Someone whose income is based on productivity, not government regulation.

If the four statements above sound like your life, then “off the rack” planning at most firms is likely sufficient for your needs. For many doctors, most if not all of these characteristics are not true. 

As authors of books and articles, we regularly interact with publishers, editors and talk show hosts. Radio and television stations, book and magazine publishers, and Internet content editors are looking for content for their “average” reader. In general, they fear that providing content generated for few high-income readers will alienate their average readers and the advertisers who pay good money to reach a specific audience. Practically, what this means for physicians is that many financial and legal advice you get from print and online media and from large national firms is generally not appropriate for physicians.

Doctors who follow advice that is generated for the masses and doesn’t take into consideration their unique challenges should see themselves as the patient who focuses on the results of his own 10-minute Internet search over the specialist’s educated diagnosis based on decades of experience and the results of a personal exam and test results.

There is no profession with as large a set of unique challenges as physicians face. For this reason, it is imperative that doctors look for advisers who spend the majority of their time working with physicians. To take it a step further, if you are a high-liability or high-income specialist, you will want to work with a team of advisers who are acutely aware of these additional challenges. For example, an obstetrician has a much greater need for asset protection than a pediatrician, and a surgery center owner has much greater tax challenges than a primary care doctor. 

Conventional wisdom is not your friend

In the beginning of the article, we pointed out what characteristics are common for U.S. taxpayers. Solutions that are widely-accepted in the media and by advisers are generally tools that work for these people. One hurdle that advisers who specialize in helping high-income doctors face is the fact that the solutions we (as a group) espouse are appropriate for less than 1 percent of the families in the country.

For that reason, doctors who insist on only implementing strategies they have heard over and over again in the media and from their colleagues will miss out on valuable opportunities. Once you embrace the fact that you are different and require “different” planning than your neighbors, you will have taken one very significant step to significantly improving your financial situation. 

In the rest of this article, and in part two of this article (which will be published next month or can be requested via email at Mandell@ojmgroup.com), we will share a few examples of common mistakes physicians make when listening to bad, but common, advice. These include:

Mistake 1 - “You don’t need a corporation for your medical practice.” Despite what some CPAs may say, in most cases the cost and aggravation of creating and maintaining a corporation (or in many cases, two corporations for most medical practices) are insignificant relative to the asset protection and tax benefits corporations offers physicians. With recent tax law changes and with many new proposals we will see over the next year, the benefits will be compounded. Though these corporate solutions can reduce taxes by $5,000 to $50,000 per year for the doctor, these particular strategies are outside the scope of this two-part article. 

Mistake 2 - Owning assets in your name, spouse’s name of jointly with your spouse. We acknowledge that owning assets in your own name or jointly with a spouse are the most common ownership structures for real estate and bank accounts. This is OK for 95 percent of Americans. Hopefully, by now, you realize that you are not in that common group. You have potential lawsuit risk, probate fee liability, and estate tax risks that more than 95 percent of the population do not have. That’s why, in most states, owning assets jointly can be a mistake. Something as simple as a living trust or a limited liability company can often solve these problems.

Mistake 3 - Making a questionable bet on qualified retirement plans. This is perhaps the single most important area of planning for doctors to address once they understand that they are different. Typical retirement plans are great for rank-and-file employees because they force employees to put away funds for retirement. Employers may match some percentage of employee contributions (which is free money for the employee). The investment grows tax-free until funds are accessed in retirement (when the employee is living on modest Social Security and these retirement plan funds. 

As “the employer,” there is no “free money” for you as all the money that ends up in your plan account was yours to begin with. In fact, you are responsible for those matching contributions so the retirement plan does have some “friction” for you if you want to make any reasonable contribution on your own behalf. On top of that, you will not be living on $25,000 to $50,000 in retirement like your employees will. You will have taxable investments, much larger retirement plan contributions and greater Social Security income (maybe). In any case, you will be paying very significant tax on your retirement plan withdrawals. Do you think that tax rates will be lower than they are now when you retire? 

With rising costs for employees and a possibility that you may actually withdraw funds from your retirement plans at a HIGHER tax rate than the one you received for the original deduction, the real benefit of retirement plans comes into question.  When you add the potential costs and aggravation of complying with ERISA, Department of Labor and tax laws surrounding retirement plans, AND the fact that any unused retirement plan balances will be taxed at rates up to 80% (see chapter on IRD in For Doctors Only book), you may find that retirement plans are not all they are cracked up to be.  A growing trend among successful doctors is to implement non-qualified planning alternatives instead of traditional retirement plans.

Suggestion: Use a better retirement plan to support your retirement. Nontraditional planning can offer higher income physicians opportunities to contribute significantly larger annual contributions. Whether you are using nonqualified plans, “hybrid” plans, fringe benefit plans or even a tool primarily designed for risk management benefits - such a captive insurance company - you could potentially enjoy tax benefits up to $100,000 to $1,000,000 or more annually. Most of these tools allow you access to the funds before age 59 1/2, will not force you to take withdrawals at age 70 1/2 if you don’t need the money, and will not be taxed at rates up to 70 or 80 percent when you pass away. For these reasons, savvy doctors utilize nontraditional plans more than traditional retirement plans.

Note: Non-qualified or “hybrid” plans vary significantly in their design, their scope, and their applicability. Some plans work great for smaller practices with one or two partners. Others work best in practices with three to 20 partners. Still others may work best for the larger practices. To determine which one is right for you, contact the authors for a free no-cost consultation offered to readers. 

Up next

This is the first of a two part article. More tips on tax reduction and other elements of financial planning that are specific to physicians and unnecessary for Average Americans will come in the subsequent part of this continuing article. The author welcomes your questions. You can contact them at (877) 656-4362 or through their website, www.ojmgroup.com.

SPECIAL OFFERS: For a free (plus $10 S&H) hardcopy of "For Doctors Only: A Guide to Working Less & Building More," please call (877) 656-4362. If you would like a free, shorter eBook version of For Doctors Only, please download our “highlights” edition at www.fordoctorsonlyhighlights.com.

David B. Mandell, J.D., M.B.A., is an attorney, author of five books for doctors, including "FOR DOCTORS ONLY: A Guide to Working Less & Building More," and principal of the financial planning firm OJM Group (www.ojmgroup.com), where H. Michael, C.F.P., serves as director of Financial Planning. They can be reached at (877) 656-4362 or mandell@ojmgroup.com.

Disclosures:

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This article contains general information that is not suitable for everyone.  The information contained herein should not be construed as personalized legal or tax advice.   There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances.  Tax law changes frequently, accordingly information presented herein is subject to change without notice.  You should seek professional tax and legal advice before implementing any strategy discussed herein.