Retirement Buy Out

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Creating Your Practice’s $1 Million Retirement Buyout
One of the most common complaints we hear from Doctors is that they are frustrated that their decades of hard work are not building anything of concrete financial value. In other words, Doctors are frustrated that their practice will not be “worth anything” when they retire. As a result, they cannot “sell it” and enjoy a lucrative exit from the practice of medicine the way other business owners can with their non-medical businesses.
It is certainly true that the days of an outside practice management firm coming in and purchasing a Doctor’s practice for millions of dollars are long gone. On the other hand, there are a number of tactics a Doctor can employ to create a $1 million “buy-out fund.” We are not talking about the funded Buy-Sell arrangement that applies to unforeseen circumstances such as a disability or premature death of a partner. The buy-out funds we will discuss here are mechanisms to exit a practice at the Doctor’s chosen retirement time and take over $1 million out at that point. Of course, this would also be in addition to whatever the Doctor has in qualified retirement plans and other personal assets.

Buyout Funding Options
As you will see below, each of these tools require periodic funding over time. With the compound growth over an entire career, a Doctor can create significant retirement buy-out funds over 10, 20, or 30 years. A nice bonus is that the funds can grow on a tax-deferred or tax-free basis in most of these arrangements. With all of these tools, Doctors have two potential ways of funding them:
A. Solo Practice Model
Here, the Doctor in question simply takes advantage of one or more of the tools below and funds them from the practice. This approach is certainly better than not funding them at all, thanks to the asset protection and potential tax benefits that many of these tools afford. These options force the Doctor to build the buy-out fund with dollars that might otherwise be spent on personal consumption. Therefore, any and all of these tools can be used in the one-Doctor model.

B. Group Practice Model
In this model, in addition to the potential tax, asset protection, and forced savings benefits, Doctors enjoy another crucial benefit described earlier on in the book. They get to use other people’s money (OPM) to achieve a long-term goal. OPM is involved here because each of these tools can be Leveraged in a way that older Doctors of the practice require the younger Doctors (partners or not) to contribute into these vehicles. While the contributions go partly to their own buy-out fund, part of it could also fund the buy-out of older Doctors. When these younger Doctors become more senior, they too will benefit from this arrangement and the funding by younger Doctors at that time. This “pyramid” model is common in professional firms outside medicine, such as consulting or law firms.

Buyout Funding Toolspost 18
As you will see below, all of the major buyout funding tools are arrangements that we have already described earlier in this Lesson. Let’s examine each of them again briefly and review how they apply to the goal of creating a buyout retirement fund.
1. LLC Lease Back
A valuable piece of equipment or the practice’s office can be transferred to an LLC and then leased back to the practice entity. As explained before, this provides asset protection for the practice (vis-à-vis claims from the property or equipment), the property/ equipment (from claims against the practice), and for the Doctors (from both).
The LLC lease back works as a buyout funding tool through the rent paid by the practice to the LLC. Each month the practice will pay tax-deductible rent to the LLC. In the solo practice model, the Doctor could utilize a gifting program for the LLC interests and, over time, get the benefit of lower tax bracket “borrowing” of children or grandchildren. Proceeds remain inside the LLC, asset protected at a (+2) level. They can be managed by professionals in a tax-favored way and build up over time to create a buyout fund. More

Captive Insurance Companies

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Captive insurance Companies — The Ultimate Practice Tools
Many Doctors will build their wealth primarily through their professional practice. Typically, the practice is not only the vehicle that allows the client to use Leverage, but also the vehicle which creates the bulk of the client’s annual income and long-term wealth accumulation. Given this fundamental importance, it is essential that Doctors do everything possible to protect the practice and maximize its Leverage potential. The best tool for achieving such protection and Leverage is the one we will discuss in this chapter—the captive insurance company (CIC). In this chapter, we will discuss what a CIC is, what benefits it offers, and how Doctors can use it to maximize the benefits they get from their practice planning.

The CIC
Early in the book, we stressed the importance of using tools that have multiple benefits. By using tools that offer multiple benefits, Doctors can compound their Leverage and achieve a number of planning goals more efficiently than if they tried to reach their goals one at a time. Of all the tools discussed in this book, the CIC can be the most efficient. For clients who own successful businesses or professional practices, the CIC often becomes the cornerstone of the ascent to a desired level of affluence. This is because the CIC affords the following benefits:
· Superior risk management for the practice.
· Reduction in the practice’s insurance expenses to third-party insurers.
· The ability to capture profits on insurance policies.
· Highest levels (+4 and +5) of asset protection for CIC assets.
· Superior income tax treatment for CIC income (when the CIC is properly structured and maintained).
· Significant estate planning benefits (when the CIC is properly integrated with estate planning tools).

· Creation of a potential buy-out mechanism for older owners of the practice upon retirement.
The CIC we will discuss here is a fully-licensed insurance company domiciled either in one of the states that has special legislation for small captive companies or in an offshore jurisdiction which has similar captive legislation. Whenever a CIC is established offshore, it is critical that the CIC be compliant with all US tax rules and must be handled by captive managers, tax attorneys, or CPAs experienced in these matters.

CIC As A Risk Management Toolpost 19
The CIC must always be established with a real insurance purpose—that is, as a facility for transferring risk and protecting assets. The transaction must make economic sense. Beyond this general rule, there is a great deal of flexibility in how the CIC can benefit its owner(s).
First, clients can use the CIC to supplement their existing insurance policies. Such “excess” protection gives the client the security of knowing that the company and its owners will not be wiped out by a lawsuit award in excess of traditional coverage limits. As Doctors, you should be concerned with all types of lawsuits—from medical malpractice to practice risks to employment liability—and this protection can be significant. Further, the CIC may even allow the client to reduce existing insurance, as the CIC policy will step in to provide additional coverage if needed. More