Notes From the Editor: Stress Management RALPH CRAWFORD BA., DMD (Editor)
Some Musings About Wills BARRY SPIEGEL LL.M., Q.C
Retirement Spending Confirmation MARK McNULTY BA, CFP, CIM
What Type of Life Insurance Do I Need? DR. IAN WEXLER
Leasing Frustrations IAN TOMS B.Sc. (Hons)
Sequential Buy-In: An Effective Strategy DR. RON WEINTRAUB
Income-Splitting Opportunities That Avoid Attribution Rules and Tax Traps (Part 3 of 4) DAVID CHONG YEN CFP, CA
Discussion on Digital X-rays GRAHAM R. TUCK H.B.A. C.A
Advisory For Dental Professionals
The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different field. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.
Stress Management RALPH CRAWFORD
BA., DMD (Editor)
In January I attended the Manitoba Dental Association’s 123rd annual meeting and convention. It was my 45th consecutive - except missing one in the 1980s for family reasons - and I find these meeting/conventions are consistently outstanding events with ample opportunities for learning. And of course the tremendous camaraderie is always a bonus. This year the learning was indeed exceptional and one of the highlights for me was the all day session Work Smart Live Smart presented by Beverly BeuermannKing of Toronto. Beverly - a stress and wellness specialist - kept her standing-room-only audience enthralled with stress and wellness information directed to self, your business and your team. As I sat there listening to Ms. Beuermann-King inform us that “stress management is not an event, it is a lifelong process” my mind flitted back to how I handled stress over 40 years of practice. The realization of the moment of course is that I could have done better but after all those years and events it wasn’t too late to learn and I came away from Beverly’s presentation hopefully a smarter individual. As we were putting together this particular issue of
The Professional Advisory I suddenly realized that our seven contributors are actually in the stress management business. Their particular individual expertise and columns of advice are targeted to help their readers manage stress in reaching meaningful dental practice decisions. Look at the words we’ve underlined within their titles. Do they not relate to stress management? Sequential Buy-In: An Effective Strategy, by Ron Weintraub; David Chong Yen’s Avoid Attribution Rules and all about Leasing Frustrations by Ian Toms. Mark McNulty takes the stress out of retirement with Retirement Spending Confirmation and Barry Spiegel does likewise with his Musings About Wills. And who has not gone through the stress of dealing with What Type of Life Insurance Do I Need? as outlined by Ian Wexler. There isn’t a dental practice in the world that hasn’t faced the stress of technical advancement and if you are in the market of upgrading radiology you can reduce your stress with Graham Tuck’s Discussion on Digital X-rays. Whether it’s the daily dealing with self and loved ones, operating a dental practice, planning our future or contemplating world events, Beverly Beurermann-King seems to sum it all up. “Stress management is not an event, it is a life-long process.”
Some Musings About Wills BARRY A. SPIEGEL
Many people do not like to discuss the topic of Wills, finding it somewhat morbid. Nevertheless, there are some aspects of making a Will in Ontario that you may find interesting. You probably know that to have a valid Will you must sign it in the presence of two witnesses, present at the same time, and they must sign in your presence. But did you know, that if a witness, or the spouse of a witness, is a beneficiary under the Will, the bequest to that witness, or to his or her spouse, is void?
If you have a Will, it will be revoked by a subsequent marriage except where the Will declares that it is made in contemplation of marriage. Furthermore, in the event of divorce, the appointment of your spouse as an executor is revoked as is a bequest to your spouse of a beneficial interest in property. Your Will will be treated as if your former spouse had predeceased you. Did you know that if you die without a Will, your spouse is entitled to the first $200,000 of your assets? If your estate is larger than $200,000, and there is no Will, your
spouse will be entitled to one-half of the excess if there is only one child, and one-third of the excess if there is more than one child. The balance of the estate, if undisposed of, will be distributed to the next-of-kin in a prescribed order, based on blood relationships. Finally, in this area, your descendants (such as grandchildren), if conceived before your death and born alive thereafter, will inherit as if they had been born during your life. If you like one Will, you may love two! Why would anyone want two Wills? The answer lies, in my opinion, in the outrageous “probate” fees that your estate must pay after your death. Those fees are, basically, 1.5 per cent of the assets you are required to declare to the government. If your estate is, say, $3,000,000, the probate fees will be slightly less than $45,000. The fees are paid to the Ontario government in order to simply file your Will with them. In my opinion, the fees should be a fixed amount of, say, $50 or $100 but, no, the government wants a percentage of your assets. However, not all assets are required to be included in the list of assets attracting probate fees. With only one Will, most of your assets will have to be included in the government filing and you will pay the fees on the
total of that amount. But, if you have two Wills, one can deal exclusively with assets which must be probated and you will pay the fees on this amount only. Assets might include, for example, your stock market portfolio where your brokers will demand a Certificate of Appointment of an Estate Trustee before they can transfer the account. The other Will can deal exclusively with assets where probate is not required and no one requires proof of the appointment of the executors. For example, shares of a private corporation, such as your Professional Corporation, could fall into this category. There are many ways of rearranging your affairs so that much, if not most of your estate, can be dealt with in this second Will. In the example above of a $3,000,000 estate, if $2,000,000 of the assets can be dealt with in the second Will, a real saving of $30,000 can be achieved. Please note that this discussion of double Wills is, of necessity, very brief and not detailed. You should only embark on such a plan with the advice and guidance of a knowledgeable accountant or lawyer. Barry Spiegel Q.C. is a senior lawyer with Spiegel Rosenthal Professional Corporation whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 865-0330; or fax to (416) 203-8592 or e-mail to email@example.com
Retirement Spending Confirmation MARK McNULTY
BA, CFP, CIM
In this article we will address a critical component of transition planning that in my experience is so often overlooked. It’s the confirmation of your retirement spending estimates. Sound transition planning is not just about strategies to sell your practice. It certainly includes how you get out of practice, but that’s only one aspect of the overall strategy. Another key component is making sure you have the asset base to support the right post-transition lifestyle for your individual needs. This means accumulating the asset base now that will support those retirement spending needs. We call it building your “pension.” It can take many, many years to build the right “pension.” The assumptions used to identify what you must do every year in order to build that “pension” includes estimates about taxation, investment returns, practice productivity, practice value and a host of others. One of the key assumptions is an estimate of retirement spending. Actually, for most people it winds up being a guesstimate as opposed to an estimate. As you get closer to transition it becomes absolutely critical to
confirm that this number is appropriate. All too often the initial estimate/guesstimate, made years in advance, changes or is no longer appropriate. Why is this so important? If you retire at, say, age 60 with an estimated lifespan of 90 years - not an unrealistic expectation in today’s modern world - a difference of $30,000 per year after-tax in your spending needs, or even $10,000 for that matter, means that your “pension” could be drastically under funded. Believe me, as much as no one wants to go through the hassle of figuring out what they are spending, it is far better to confirm this number well in advance of your transition when you can adjust your strategies, than to find out in your retirement years that your guesstimate was wrong. There are a number of ways to confirm your posttransition spending. One simple method is to use two separate bank accounts. Into one account deposit your income. Call this one your main or Clearing Account. Into another account deposit the amount you have estimated you will need for post-retirement spending. Call this account the PRS account. Only use the PRS
account to pay those expenses that would be appropriate to simulate retirement. All other costs, such as insurance that might not be needed in retirement, RRSPs, education costs, and so on, should be paid through the Clearing Account. By the way, make sure your PRS account has overdraft protection. Also, if you are running any expenses through your practice that you would have to pay in retirement (such as gasoline or dinners), pay those through the PRS account during this period. Operate like this for a year. If during that period of time you have to add additional funds to keep the PRS account from going
into overdraft, then you will know: a) that your estimate/guesstimate was low, and b) by how much. My recommendation is that you confirm this key assumption at least three to four years prior to your intended transition date. Mr. Mark McNulty, BA, CFP, CIM is a financial advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. This is for informational purposes only. The opinions expressed by the author are not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222ext 209 or firstname.lastname@example.org
What Type of Life Insurance Do I Need? DR. IAN WEXLER & JEFF CAIT A week does not go by without an existing or a prospective client inquiring about purchasing life insurance. These inquiries are usually initiated by one of the following: • The birth of a child • A new practice or home mortgage loan • Estate planning issues • Wealth/asset protection • Marriage • A recent death of a friend or family member • The desire to save for retirement in a tax efficient fashion In performing a comprehensive life insurance needs analysis, after a reasonable amount of coverage is determined, the next step usually involves answering the question: “what type do I need”? The answer is most often contained in the answer to a second question “how long is the plan meant to remain in effect”? As a rule insurance plans are distinguished as either temporary or permanent. Although there are numerous types and structures for each, this article will highlight the main advantages and disadvantages of temporary and permanent life Insurance.
MBA, CLU, CHFC, CFP
Disadvantages • Coverage often expires prior to life expectancy • No ability to create a tax sheltered reserve • No extension of coverage if you stop paying premiums • No flexibility to change or skip premiums Permanent Insurance Permanent insurance comes under a variety of different names (i.e., Term to 100, Universal Life, Whole Life participating and non-participating) Permanent insurance provides protection for your lifetime and many of these plans provide the ability to create a tax-sheltered reserve. The plan can be structured so premiums and the payment period, as well as the coverage amounts, are flexible.
At the end of the day, the temporary/permanent decision is more reflective of the personal preferences of the purchaser...
Temporary Insurance Temporary insurance is used for one of several purposes 1. To cover a temporary need (i.e., a loan) Advantages 2. To cover a permanent need temporarily, (i.e., as • Lifetime coverage part of a transitional plan to purchasing permanent • Guaranteed expenses and mortality costs insurance) • Interest earned is linked to an outside index • Opportunity to access the tax sheltered reserve This coverage usually provides a level amount of insurance efficiently with premiums increasing at various durations (e.g., 5, • Flexibility to change or skip premiums 10, 20, or Term to 65) Advantages • Inexpensive to start • Easy to understand
Disadvantages • Initial cost is higher • Additional flexibility and options can result in
greater complexity • Requires ongoing monitoring from an insurance advisor At the end of the day, the temporary/permanent decision is more reflective of the personal preferences of the purchaser than it does any absolute truth about the appropriateness of one type versus the other. Given that one cannot predict the future, in many cases the optimal decision is one that gives consideration to a combination of both types after a careful review of the
specific needs and the relative costs of the alternatives. Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect-a-dent and Protect Insurance Agencies Inc. in Toronto which provides life, disability, critical illness, and healthcare insurance products and services to professionals, executives, and business owners across Ontario. He can be reached at (416) 391-3764 or email@example.com. Jeff Cait is a life insurance specialist. He spent the first 20 years of his career as a “behind-the-scenes” specialist designing products and implementing life-insurance related strategies. For the last five years he has been Protect Insurance Agencies’ life insurance specialist. He is recognized as one of Canada’s leading authorities on life insurance products and their applications.
Leasing Frustrations IAN TOMS
B.Sc. (Hons) -
It’s tough to be a tenant in this economy. Commercial real estate values have progressively increased over the past 15 years, significantly outpacing inflation. Many properties have been considered “investment grade” and have traded and re-traded as investors take profit, and then reinvest. For example, one well known Toronto landmark property that has traded several times over the past decade, sold in 2005 for $22 million, and resold barely a year later for over $30 million. The vendor made $8 million, and the tenants of the new owner will pay the 30 per cent increase in debt service on the property through their rent! Many experienced landlords have taken their profits and withdrawn from the market, leaving the landlord community primarily to large landlords (pension funds and real estate investment trusts), and new inexperienced landlords – both of whom have very significant debt service obligations. The large landlords are “institutional”. They are budgeted for and expect a certain vacancy rate, and have certain rigid operating policies which are not negotiable. Small tenants such as dental practices have a negative leverage position when negotiating with these landlords because leasing managers are too busy dealing with large tenants to spend the time.
Landlord behaves outrageously. Landlord demands arbitrary and unilateral changes to the tenancy, contrary to lease provisions, for no reason except landlord wants to. Examples include proposed huge rental rate increases or an attempt to introduce new and landlord friendly lease provisions. Landlord exercises early termination or relocation option. Landlord decides to redevelop or re-tenant a property, and tenant receives notice they need to move their practice to an alternate suite, or a different property, and be open to practice within 90 days! Then landlord changes its mind… Landlords refuse to abide by lease provisions. Landlord ignores lease obligations related to repair and maintenance issues, and/or demands outrageous overcharge in additional rent. So what are you as tenant going to do? 1. Know your lease. Know your rights, privileges and obligations. Be prepared. Don’t cave in if you don’t have to. Don’t get pushed around. 2. Pick your battles. Don’t spend more time and energy than an issue is worth, even if you are right. Life is too short.
Inexperienced landlords often have unrealistic and in 3. Wait the landlord out. Landlord’s lack of a response some cases absurd expectations of both their investment is a response. Wait the landlord out if that works in your and their tenants. All they care about is making more favour, otherwise move on. Don’t waste your time. money to cover the expenses of their new investment. 4. Be prepared with a “Plan B”. Know your liabilities, and The practical implication for you as a tenant is that rent be prepared to deal with them if the occasion arises. is very expensive and landlords are very difficult to deal with. Some common examples are listed below. Landlord refuses to communicate. Letters, phone calls, faxes, e-mails and personal visits - all ignored or even ridiculed, especially when landlord owes tenant money.
Based on more than 20 years business experience Mr. Toms, B.Sc. (Hons) acts as a tenant advocate on behalf of select retail and professional tenant clients primarily in the Greater Toronto Area. Mr. Toms is licensed as a Real Estate Broker and can be reached at (705) 743-1220, by e-mail at firstname.lastname@example.org, or through his web site at: www.iantoms.com
Sequential Buy-In: An Effective Strategy DR. RON WEINTRAUB
Sequential buying is a valuable strategy to gain access to ownership in an otherwise unavailable practice. Understanding the concerns, future value, and vision of the process are precursors to proceed. What Is A Sequential Buy-in?
Sequential buying of a dental practice, characterized by a sequence of steps for prospective purchasers or associates, has the objective of obtaining equity in a practice with the ultimate goal of owning the whole practice at a designated and agreed upon time. What Are Some Of The Concerns? Let’s look at some of the concerns about initiating a sequential buy-in. 1. Previous negative experiences sometimes bias participants against partnerships: (In Professional Advisory 22, see the pros and cons of partnership and note that some successful partnerships enjoy significant advantages but oftentimes these advantages get little recognition.) In fact, most partnership problems are rooted in unclear contracts that neglect to align partners’ philosophy, time commitments, and division of responsibility. 2. A lack of equal division of profits is a concern: Contracts must define what the profits are for a clear understanding of associate and host dentist’s position. 3. Some perceive purchasers as not having the same control in daily business operations as the lead partner: Actually, purchasers have similar problems of minority shareholders in any other business. The vendor and purchasers address this objection in their partnership agreement. Requiring unanimous agreement on significant changes in the practice such as major purchases, staff allocations, or moving locations surmount the objection and give minority shareholders equal control over decision-making. A good partnership agreement accommodates purchasers even if they own a small portion of the practice. 4. Younger, more energetic practitioners might be more active than the more mature host dentist is and might generate greater productivity without apparent compensatory benefit: Assigning providers the same percentage for remuneration of their personal production, however, compensates productivity. For example, using forty percent as the base for their personal output and allocating the remainder of all other productivity within the office equalizes remuneration for work expended.
How Do You Deal With Future Value of the Practice? At Innovative Practice Solutions (IPS), when a new associate joins as partial owner, we often address questions about the future value of the practice. New associates might think their productivity increases the value of the practice, consequently, adding to their final cost at buy-in time. On the contrary, considering growth in business by a new associate a disadvantage is short term, small thinking. Vendors can address this concern by capping the increase in the practice’s value. New associates and host dentist benefit by growth and both have a significant stake in each other’s achievements. In addition to the associate’s success, the practice maintains its patient base; thus, the real value of the practice increases. In this scenario, minority and majority equity owners reap financial benefits. What Vision Is Necessary For Successful Sequential Buying? The advantages of sequential buy-in show vision by purchasers and vendors. Some advantages are the following: 1. Purchasers expose themselves to debt at a lower level when just starting out. 2. Purchasers have access to a practice that would otherwise be unavailable because it might be too early for the vendor. 3. Vendor enjoys the advantage of guaranteeing a succession plan while holding on to a valuable practitioner and removes uncertainty in the final disposition of the practice. 4. Vendor guarantees purchaser support in maintaining the existent patient base as the practice moves forward in the cycle. Exploring the possibility of an equity associateship requires taking carefully planned steps, defining the relationship, and writing a clear, comprehensive contract so host dentists and associates benefit. Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-five years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have benefited from his insight. As a consultant to Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contacted at (905) 4706222 Ext. 221 or email@example.com.
Income-Splitting Opportunities That Avoid Attribution Rules and Tax Traps (Part 3 of 4) DAVID CHONG YEN CFP, CA This is the third of a four-part series. In this article we will outline the benefits and applications of a trust.
or no income may receive approximately $49,000 of dividends and pay virtually no tax.
A trust is a legal arrangement where legal title of property is transferred to trustees who control and administer the property on behalf of beneficiaries. Since it is a distinct tax entity, trusts are required to file annual tax returns. Letâ€™s review how inter-vivos and testamentary trusts can reduce your tax bill.
Another use of the trust is to transfer properties (for example, a house or cottage or investments) to a trust to eliminate or minimize the probate fees levied on your death. However, the initial transfer might result in a tax bill unless you are 65 or over. In Ontario, the probate fees are $5 on each $1,000 for the first $50,000 and $15 per $1,000 thereafter. That means, if you have assets of $1M, your probate fee could be $14,500.
Inter-vivos Trust An inter-vivos trust is between living persons. Establishing an inter-vivos discretionary family trust while you are alive may protect your assets (e.g., house, cottage and hygiene goodwill of your dental practice) from creditors and lawsuits and at the same time incomesplit with your family. Although you no longer own the assets, you can direct who gets what if you are one of the trustees. A discretionary family trust provides flexibility in distributing income amongst beneficiaries in different tax brackets. In addition, by restructuring the shareholdings of your company using a family trust, you can cap or freeze your future tax bill. All future growth of the business can be channeled into the shares held by the family trust. This is ideal for estate planning purposes as your tax bill, upon death, can be minimized. As income of an inter-vivos trust is always taxed at the highest personal tax bracket, it is best to distribute all income to beneficiaries. A practical example in using an inter-vivos trust is to transfer your hygiene/technical goodwill to a hygiene or technical corporation (H/TSC). The common shares of this H/TSC are then owned by a trust. The trust would receive dividends from the H/ TSC and then pay the same to its beneficiaries (spouse, children, parents, cousins, nephews, aunt and uncle) who are at a lower tax bracket. Beneficiaries could be anyone selected by you. The bottom line is to achieve tax savings. In addition to dividends, when you sell shares of your H/TSC, any capital gains realized can be channeled to the hands of the beneficiaries. Beneficiaries can utilize their lifetime capital gains exemption to shelter any possible taxes from the sale. It is no longer beneficial to pay dividends to children under 18. Hence, income splitting works best with individuals 18 or over. Beneficiaries can receive up to $35,000 of dividends from the trust virtually tax-free if they have no other income. With the new dividend rule proposed by the federal government in November 2005, an individual with little
Testamentary Trust A testamentary trust is incorporated into your will and takes effect upon your death. It ensures that property is held and managed for your beneficiaries long after your death. A testamentary trust saves taxes as it is taxed in the same way as an individual, unlike an intervivos trust where every dollar is taxed at the top rate. Each dollar is taxed at the graduated tax rates starting with the lowest tax rate and going up. You might achieve a tax saving by creating multiple testamentary trusts. Consult with your legal advisor when drafting/ updating your will. Other tax saving ideas will be covered in the final installment of this four-part series in the next issue. David Chong Yen, CFP, CA with an international firm background and more than twenty-six years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or E-mail firstname.lastname@example.org. This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advice.
Discussion on Digital X-rays GRAHAM R. TUCK
I have been trying to understand the different digital Xrays that are available today. Which one is best? I have compiled some notes for consideration. 1) Both the scanned photo phosphorous plate method (Scan X type) and the direct digital sensor systems (Schick type) require computer and monitors in the operatories to view the digital X-rays. Typically when adding computers in the operatories one should consider the whole dental computer system in the practice (this could have an additional cost). It is not only the cost of the computers and monitors but there could be software and such other hardware costs as the mechanical arms that hold the TFT (flat-panel) monitors. Please do not use the cathode ray type monitors. 2) When a practice goes digital for X-rays, one must check to ensure that the existing X-ray units are compatible for digital regardless of which system you purchase. 3) If there is a panoramic system in the practice, to be totally digital (i.e., no film processor), you should purchase a digital pan or use the Scan X type system which scans pans. This unit costs more than a standard bite wing type scanner. With the Schick type bite wing system a digital pan would be necessary and complementary to the Schick system. A new digital pan is about $35,000 and up. 4) Both systems eliminate the film processor and one would be seen as being GREEN friendly by removing the film processing chemicals.
If the fair market value of your equipment, leasehold value and inventory of supplies is less than 25% of your billings, you have the scope to put in digital X-rays. If you are noticeably over 25% for the assets to billings ratio, you have less scope to get involved with digital X-rays.
5) The reduction of the X-ray wave strength for the wired sensor type units to about 10 per cent of a standard film setting is a positive perception for the patient. The Scan X type system is about 20 to 30 per cent of the film setting, which is also very positive. 6) I understand that the photo phosphorous plate of the Scan X type system can deteriorate over time and are more apt to be damaged but their replacement is quite inexpensive (i.e., four for $100.). The Schick type system is more durable and I understand that they can be purchased with a five year warranty. After that the replacement would necessitate the purchase of a new sensor which in todayâ€™s cost would be in the $8,000 range. 7) Dentists tend to be more comfortable with the photo phosphorous plate as it is more like the film that they have been using. I have heard that the wired sensor is perceived to be too thick. 8) The Scan X type system requires the additional step of scanning the image off the photo phosphorous plate whereas the Schick system is electronically transmitted directly to the monitor for an instant image. 9) I believe that film processing for X-rays will go the same way that digital cameras are eliminating film in family photography. I believe that patients will expect their dentist to use digital X-rays to reduce the X-ray exposure regardless of the limited exposure that X-rays give off. 10) If the fair market value of your equipment, leasehold value and inventory of supplies is less than 25% of your billings, you have the scope to put in digital X-rays. If you are noticeably over 25% for the assets to billings ratio, you have less scope to get involved with digital Xrays. This 25% is not magical but it is a good indication of a balanced practice that I have mentioned before. It is called investing in your practice over the long run. If you are billing $1,000,000 the practice should look like a million dollar practice and digital X-rays can help. In summary each system has advantages and disadvantages and each dentist should consider which best suits their practice requirements. Understand the total cost before going into digital X-rays. Graham Tuck, H.B.A., C.A. is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sales of dental practices. He can be reached at (905) 472-6000 or 1-888777-8825 or e-mail at: email@example.com
The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your â€œprofessional advisorsâ€?.