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HomeBest Practices → Avoid Financial Gridlock When Partners Disagree

Avoid Financial Gridlock When Partners Disagree Print E-mail
Written by David B. Mandell, JD, MBA & Jason M. O’Dell, MS, CWM   
Friday, 30 March 2012 00:00

Financial Planning Gridlock

In our practice, we have addressed potential strategies that doctors can use to reduce income taxes, increase benefits, or build retirement savings.  We have also had the opportunity to consult with hundreds of medical groups on how to implement these strategies for their practices.  However, the outcomes of such consultations can occasionally be less than fruitful because of office politics related to the age-related perspectives of practice partners.

Generally, the younger members of medical practices are very motivated to reduce their income taxes, while the older doctors may have other priorities.  The result of such situations can be practice planning gridlock.  The long-term costs of these gridlocks can be significant, causing younger physicians to have to work more years to reach the same retirement goals as their older partners.  Within this new world of medical practice, more creative methods of practice planning and asset growth are necessary, as are alternatives for managing planning gridlock.

Hybrid Benefit Plans

Hybrid benefit plans, in addition to traditional qualified plans (e.g., 401(k), profit-sharing plan, defined benefit plan), are good options because each physician can choose the amount of money to contribute in the plan formula.  This amount can vary from $150 to $100,000 per year, and because participation levels can be individualized, hybrid plans can be successfully implemented in larger medical groups.  Other benefits to this type of plan include:

·         The plan can be utilized with a qualified plan such as pension, profit-sharing plan/401(k) or SEP IRA;

·         Contributions can qualify for current tax deductions.

·         The plan acts as an ideal “tax hedge” technique against future income and capital gains tax increases.

·         Balances can grow in a top asset protected environment.

·         Employee participation requires a minimal funding outlay.

·         There are no minimum age requirements for withdrawing income (no early withdrawal penalties).

Flexible Corporate Structures

Another way to address gridlock is to alter the practice’s legal structure so that it accommodates planning flexibility on the part of individual physicians.  In the typical medical group structure, there is one legal entity – a corporation, LLC, or professional association (PA).  Physicians are either owners of the entity (informally referring to themselves as partners) or non-owner employees. In all such cases, the physicians have no ability to separate themselves from the central legal entity.  If the central entity does not adopt a planning strategy, no individual doctor has any flexibility to adopt one on his or her own.

An alternative structure is a central entity that is neither owned by, nor the employer of, the doctors directly.  Rather, it is structured through individual professional corporations (PCs) or PAs.  In this way, the central entity pays the physicians’ PCs as 1099 independent contractors after it receives payments.

From a tax standpoint, there is almost no downside to the central entity or the doctors who are not motivated to engage in any additional planning.  However, the physicians who want to implement planning strategies may do so through their individual PCs, leaving the central entity unchanged.  This structure can avert conflict with partners, as well as enable individual physicians to save $10,000-$50,000 more for retirement each year.

Outside Consultants

Many practices that rely on internal resources to tackle financial gridlocks will end up identifying no solution to their dilemma.  In such situations, outside consultants can help physicians realize their financial planning goals.  Outside consultants with expertise in the fields of taxation, accounting, benefits planning, or corporate law can present additional information to facilitate more productive discussions that can help practice members reach more informed group decisions. 

Conclusion

If your practice is grappling with financial gridlock and difficulties with advanced planning options, it may be that the differential needs of the various partners are at odds with each other.  This article has presented some basic methods for dealing with such gridlock.  Nothing can take the place of a professional with experience in the fine points of financial planning for physicians.  The authors welcome your questions, and can be contacted at (877) 656-4362 or at http://www.ojmgroup.com.

David Mandell is an attorney, lecturer, and author of five books for physicians.  Jason O’Dell is a financial consultant, lecturer and author of two books for physicians. They are both principals of the financial consulting firm OJM Group.

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Last Updated on Monday, 30 April 2012 06:11
 


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