Tax and Trust Issues for Physician Owners

pain practicePlanning ahead is essential to achieving success in almost any venture.  However, in a healthcare M&A transaction, planning is even more important, especially when talking about pre-sale tax planning on both buy and sell sides, and preparing trusts for later years in life.

Pre-transaction Tax Concerns

Daniel Rubin, partner at law firm of Moses & Singer LLP says the major tax concern at the high level is the income tax consequences of the transaction.

“Because  it is early December, one would consider whether or not they want to enter into a transaction in the next month and have it be a tax event for 2016, or whether they want to defer the transaction if possible, to 2017 in order to defer the income tax in connection with that transaction into a later tax year,” Rubin says.

Also, with the election of a new President, and control of Congress in the President’s party, Rubin says a seller might take seriously the President’s and Republican party’s suggestions regarding how they would have the tax code re-written.  So, if tax rates are going to go down, and may be retroactive to January 1 2017, they would probably want to be even more inclined to defer a transaction to the 2017 tax year.

Grant Grayson, shareholder and partner at the law firm of LeClairRyan says that merely the structure of the acquired business is something that needs to be taken into account when analyzing the taxes of a business in the field before a sale.

Grayson says buyers need to pay attention to the two main corporations that can be formed; C-Corporations and S-Corporations. 

“Any company can be a C-Corporation, but the problem with the C- Corporation oftentimes with professional firms or small companies is that the corporation pays tax on its income and then if it makes distributions to its shareholders, then those are also taxable.  The C-Corporation subjects the owners basically to double taxation,” Grayson says.

Grayson continues to explain that there are certain corporations that can elect “Sub Chapter S Status, which means there is no tax at a corporate level and the shareholders are deemed to have earned the income that the corporation made. 

That is reported to them on a form K-1.  Each shareholder would receive his share of the income earned by the corporation and then pay those taxes at their personal tax rates.  That’s on the corporate side,” Grayson says. 

Rubin says the biggest mistake that can be made on either side is to not focus on the tax.  In other words, what people are most focused on in a transaction is the gross sales price of the business.

“They look at different offers that they might receive and they go for the offer that has the highest gross sales  price.  They don’t consider that this might also carry the most significant tax bill.  At the end of the day they might wind up with less, than if they would have chosen some alternate structure to their transaction,” Rubin says.

“Corporate counsel is probably very good at structuring the transaction to affect the sale, but they need to coordinate with tax counsel to make sure that the sale is structured in a way that is going to be most tax efficient.  I think the biggest mistake is to simply not focus on the taxes, and look at it as an after thought, and not as an integral part of the transaction itself.”

Rubin stresses that the idea of planning is that one is considering issues ahead of time.  If one is not planning, then they are improvising.

“As an example of selling a business, it might be the one time someone sells their business, it might be the one opportunity to secure for themselves the financial future that they want to have.  If you are not planning, you are improvising and you should ask yourself if that is the way you want to go into a transaction that is going to either secure your financial future or not,” Rubin says.

Trusts and Why We Need Them

James Cunningham, Owner of CunninghamLegal, an estate planning trust and probate law firm in California, explains that there are different types of trusts that physician owners could possibly invest in.

“The basic estate planning vehicle is a revocable living trust.  That is the foundational estate planning vehicle that most people are going to use as a baseline plan.  This says, “Hey, if I get sick, this is who handles the assets of the trust,” that would be the successor trustee.  That is the basic trust.  You could go towards other types of trusts that are really more specialized,” Cunningham says.

Cunningham adds that a popular trust lately is an IRA Inheritance trust.

“This means that after you die, your entire accounts are put into trusts so that the people who inherit the IRAs or 401ks, don’t pull out all of the money at once and pay half in taxes.  Rather, it is doled out to them over their lifetime,” he says.

Rubin adds that there are a couple of fairly common trust structures for people that want to avoid estate taxes in connection with a business interest.

“One is a Grant or Retained Annuity Trust (GRAT); that type of a trust affects what is called an estate freeze.  It basically, without any gift tax exposure, freezes the value of a client’s interest in his business for estate tax purposes and allows any appreciation of the value of the business above a certain hurdle rate to be captured outside of this taxable estate, inside this GRAT,” Rubin says.

The other type of trust is a dynasty trust, but the transaction is called a sale to an intentionally defective grant or trust.  It is a different type of estate freeze transaction where the client sells an interest in his business to the trust in exchange for a promissory note.  This freezes the value at the current value, together with the interest on the note.

On the subject of why a business owner would want to organize a trust for their future, Cunningham adds that in many states trusts allow the grantor to avoid probate, which depending on the residing state, can be a significant tax break.

The other reason is privacy.  Cunningham says Wills are typically public documents and a trust is a private document.

“As a general rule, a trust can last for the lifetime of the person who created the trust, plus all of the people who were named in the trust, plus 21 years.  That is called the rule against perpetuities,” Cunningham says.

Cunningham says some states have changed that rule and will allow a trust of a 365 year duration.  Some are a thousand years, and some are forever.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or

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