COVID-19 NEWSLETTER #3:
ESTATE PLANNING FOR DENTISTS

Dear Past and Present Clients:

Thanks for the kind words of encouragement I received from many of you regarding the first two Covid-19 newsletters.  Today’s newsletter will focus on Estate Planning and Probate Avoidance for your Dental Practice, which I hope you will find useful.  

First a CARES act update:  The EIDL grant/loan program and the PPP program are evolving daily.  Due to immense popularity the grants of up to $10,000 within three days of submission of an application will be distributed without any timeline and with a limitation of $1,000 per employee.  As I mentioned previously, whatever amount you receive in a grant would offset against any debt forgiveness you might receive under the PPP loans. Because the money is flowing as quickly as possible, most PPP lenders are requiring a prior relationship to ease their burden of verifying your identity and compliance with Homeland Security. Many large lenders are now closing applications.  If you have yet to submit an interest form or an application, you may seek out smaller lenders that have time to verify your identity and process your application.
   

‍Topic #3 – Estate Planning
Presently, the media is saturated with stories of a health care system pushed to its brink and anecdotal stories of seemingly healthy individuals and health care providers who are taken too soon by Covid-19. While it may be unpleasant to contemplate, the present work stoppages present an excellent time to re-evaluate your present estate plans to make sure in the event of your incapacity or death you can preserve the value of the assets of your practice, minimize financial losses and avoid probate.  This newsletter will contain a basic primer of probate administration and provide suggestions for the effective transfer of your assets.

The Probate Process Explained

“Probate” is the process of transitioning the assets/property (“the estate”) of a deceased person (“decedent”). If a formal proceeding is required under the California Probate Code, a petition for probate must be filed with the Superior Court of the county in which the decedent resided. After provision of required notices and publishing notice in a local newspaper, the matter is set for a hearing regarding the appointment of an executor (if a will exists) or personal representative (if the decedent did not have a will).  After court appointment, the executor/personal representative is given letters of administration and can begin taking possession of assets of the decedent’s estate and sending notice to known creditors.  

Upon the issuance of the letters of administration, estate assets such as a dental practice may be managed and/or sold. Depending on the level of authority granted, actions taken on behalf of the estate (such as a sale of an asset or preliminary distribution) may require additional court approval.  Once assets are identified and collected, an inventory and appraisal is filed with the Court and assets are valued by an appointed probate referee.  Creditor claims are assessed and resolved or disputed through additional hearings. Upon resolution of creditor’s claims, the executor/personal representative will report to the court on actions taken and seek approval of a proposed distribution plan. While technically, the probate process could be completed within nine months, due to backlogs in the court’s docketing of matters, an uncontested probate proceeding will take within excess of one year with the final hearing often set seven months after the petition for approval of the distribution plan is filed. If there are creditor disputes or objections as to the distribution plan, the process will take much longer. Delay aside, the associated filing fees, probate referee fees, administrator fees and attorney fees make process can be quite costly and undesirable.

Presently, the California Probate Code has a relatively low threshold before triggering a formal Probate (court proceeding described above) of an estate. If the gross (market) value of assets exceeds a combined value of $150,000.00, a Petition for Probate will need to be filed to transition the assets.  

Where does your property go in Probate?  If a decedent does not have a will or a trust, then the California Probate Code has a default means for determining succession of assets called intestate succession, which allocates your estate depending on who in your family survives you.  If a decedent has a will, the will simply provides a road map for distribution of assets in a formal probate proceeding that can differ from intestate succession.

If you have assets that exceed $150,000 in the aggregate, the only way to avoid a formal probate proceeding is to establish non-probate transfers of your estate.  Assets which are transferred through beneficiary designations, transfer on death provisions, survivorship provisions (such as joint tenancy) and estate planning vehicles such as trusts would not be included in the calculation of the gross value of a probate estate for purposes of determining the necessity of formal Probate.

How Dental Practices End Up In Court

In California, a dental practice (with one owner) is owned either as a sole proprietorship or as a California Dental Corporation.  If you have a dental corporation, chances are the stock is issued to you personally.  If you have a partnership, your partnership interest in the practice will either be held by you personally or by your dental corporation for which you are likely the sole shareholder. Without further estate planning, in the event of incapacity or death, a dental practice or partnership interest in a dental practice having a value in excess of $150,000 would be exposed to a formal probate proceeding before it could legally be transferred.

I periodically learn of solo practitioner dentists who either die without an estate plan or have an estate plan that failed to contemplate the transition of assets of the dental practice. Without the sole shareholder dentist, there is often no remaining officer of the corporation to sell or transfer the assets of the practice, nor is there any language in the corporate bylaws addressing succession upon the death of a shareholder/director. Sometimes, even when a dentist has a living trust, the stock certificates for the dental corporation are issued in the name of the dentist rather than a trust, leaving the assets outside of what might be an otherwise well-crafted estate plan.  If this occurs, Judicial intervention is required to gain trust ownership of or legal authority to sell the assets of the dental practice. This is because there is no person with legal authority to sign contracts, hire locum tenens dentists or oversee the continued operation of the dental practice until it can be sold. In the instance of a probate proceeding, it can take 2-3 months before a hearing is held on the appointment of an executor/personal representative. Even if these orders are sought on an ex parte (emergency) basis, there will be delays in the days following the death of the dentist particularly in light of the current court closures. The goodwill of such a practice is quickly lost; leaving the estate with mere dental equipment to dispose with and an ongoing lease obligation for the estate to address.  

Planning For The Succession Of Your Practice In Your Estate Plan

In addition to the representation of dentists in practice transitions and transactional matters, I routinely provide estate planning services to my dentist clients. Here are some suggestions on ways you can preserve the value of your practice and minimize financial losses in the event of your incapacity or death:

1. Contemplate the possibility of your incapacity.  A properly executed durable power of attorney provides the authority to transfer assets during your lifetime when you are unable to do so yourself.  Please be advised that the powers you grant your agent under the durable power of attorney expire upon your death.   As such, the durable power of attorney is part of a greater estate plan.  If your dental practice is held in a trust, your successor trustee would assume this obligation upon your incapacity.
2. Consider forming or joining a practice coverage group.  A practice coverage group is a group of like-minded dentists who agree that in the event a member of their group is unavailable to practice due to death, disability, injury or serious illness, the member dentists will each commit to volunteer some of their time to see patients in the practice of the absent dentist.  The coverage group helps keep the practice operating, retains practice income for the absent dentist and keeps the staff employed.  Even if you are young and healthy, a coverage group could benefit you if you were unable to practice due to an injury (i.e broken bone), for which your absence wouldn’t be lengthy enough to recover benefits under your disability policy.      
3. Review your lease to consider your lease obligations upon your incapacity or death.  A lease obligation for a lease in your name can become an obligation for your estate.  Many leases have personal guaranties leaving your estate potentially liable under the lease in the event your corporation defaults.  In the event of an incapacity situation, we would use the durable power of attorney to assign your lease and transfer your practice.  In the event of your death or incapacity it is preferable to have language that would avoid lease obligations if the practice cannot be transferred or sold.  For this reason, consider requesting a death/disability provision in your lease permitting your agent or estate to terminate your lease upon your death or disability.  I try to get this type of language inserted in leases whenever landlords are open to lease edits, but many landlords are resistant to such concessions.  This is why there is a value to having business interruption insurance as well as a policy of life insurance to benefit the financial obligations of your practice.
4. Be aware that there is a law in California unique to dentists that enables dentists to minimize the loss of goodwill associated with a dental practice in the event of unforeseen death or incapacity.   California Business and Professions Code Section 1625.4 and related statutes permit an executor, personal representative or successor trustee to employ licensed dentists and other employees for purposes of continued operation of a dental practice for up to twelve (12) months from the date of death or incapacity.  Please be advised that if this is to occur, proper notifications to the patients and Dental Board must be given. In the event of an untimely death of a dentist, these statutes are instrumental to preserve the goodwill of the dental practice and continuity of patient care until such time as the assets of the dental practice can be sold.
5. Examine the bylaws for your corporation or your dental partnership agreements.   Do they have provisions that contemplate your incapacity or death?  If not, consider amending those documents.
6. Remember that upon death, only a trust can transition assets of a dental practice valued in excess of $150,000 without the need for a formal probate proceeding.  A successor trustee can immediately take action to preserve the goodwill by exercising the Section 1625.4 powers without the necessity of any court proceedings.  To comply with above sections of the Business and Professions Code, the manner in which a Dental Practice or its stock is held in trust must be specifically observed through the creation of a separate trust or subtrust. Similarly, any real property or single member LLC’s holding real property should be held by your trust to avoid probate.  

Remember, each of your respective situations and estate planning needs are unique and may require additional estate planning documents or strategies beyond what I’ve discussed above.  As always, I’m happy to be a resource to you regarding these issues. Over the years you’ve placed your trust in me and I am very grateful.  We will get through this together.

Sincerely,

J. Sean Dumm, Esq.

Law Offices of J. Sean Dumm, APC
Sean@jsdlawoffice.com
(949) 276-5095 Direct
(888) 212-DUMM (3866) Toll Free

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