Why Dentists Need Specialized Estate Planning
Most estate planning attorneys focus on passing assets to heirs through wills and trusts. This approach works for stocks, real estate, and bank accounts—assets that retain value regardless of who owns them. Dental practices are fundamentally different.
The Practice Value Problem
Your dental practice may represent 50% or more of your net worth. Unlike a stock portfolio, practice value depends on factors that can deteriorate rapidly without active management: patient relationships, staff retention, equipment maintenance, lease obligations, and professional reputation. A practice without a dentist to operate it loses value daily.
Licensing Requirements
Only licensed dentists can own and operate dental practices in most states. Your spouse or children cannot simply take over unless they hold dental licenses.
Rapid Value Decay
Patient relationships and staff loyalty deteriorate quickly without an active owner-dentist. A practice in limbo during probate may lose significant value.
Operational Continuity
Practices have ongoing obligations: lease payments, staff payroll, patient appointments, insurance contracts. Someone must manage these immediately.
Regulatory Compliance
Dental practices face healthcare regulations, HIPAA requirements, and professional standards that must be maintained even during ownership transitions.
"In our dental practice M&A work, we regularly encounter families forced to sell practices under time pressure after an owner's unexpected death or disability. Without proper planning, these sales typically close at 20-40% below what the practice would have achieved with adequate preparation time. The difference between a planned exit and a forced sale can be hundreds of thousands of dollars—money that should have gone to the dentist's family."
Essential Estate Planning Documents
Effective estate planning for dental practice owners requires both standard estate documents and practice-specific arrangements that work together.
Last Will and Testament
Directs distribution of assets at death and names an executor to manage your estate. For practice owners, the will should coordinate with your buy-sell agreement and address what happens to practice proceeds.
Revocable Living Trust
Holds assets during your lifetime and distributes them at death without probate. Provides privacy, avoids court involvement, and allows seamless management if you become incapacitated.
Durable Power of Attorney (Financial)
Authorizes someone to manage your financial affairs if you become incapacitated. Critical for practice owners because business decisions cannot wait for court-appointed guardianship.
Healthcare Power of Attorney / Advance Directive
Names someone to make medical decisions if you cannot and documents your treatment preferences. Separate from financial authority.
Buy-Sell Agreement
Contract determining what happens to practice ownership upon death, disability, or other triggering events. May involve partners, family members, or pre-identified buyers.
Coordination is critical: These documents must work together. Your will should reference your buy-sell agreement. Your trust should be funded with appropriate assets. Your power of attorney should grant authority consistent with your buy-sell provisions. Inconsistent documents create confusion and potential litigation.
Practice Succession Planning
Succession planning determines who takes over your practice and how. For dentists, this involves identifying potential successors, preparing them for transition, and structuring the transfer of ownership and operations.
Succession Options
| Option | How It Works | Considerations |
|---|---|---|
| Sale to Associate | Bring in associate with path to ownership; they purchase over time or upon triggering event | Requires finding right person; building relationship takes years; associate must qualify for financing |
| Sale to Partner | Existing partner purchases your interest per buy-sell agreement | Requires existing partnership; must have funded buy-sell; partner must be able to operate solo or find replacement |
| DSO Transition | Pre-arrange DSO acquisition that closes upon triggering event | Requires advance negotiation; may involve earnout complexity; family receives cash rather than ongoing business |
| Open Market Sale | Practice sold to highest qualified buyer after death/disability | Time pressure reduces value; family cannot operate during sale process; most value leakage |
| Family Transition | Licensed family member takes over practice | Only works if family member is licensed dentist; may involve gift/estate tax considerations; requires family member interest |
Succession Timeline
Begin Planning
Establish basic estate documents. Consider practice structure and whether to bring in associate or partner. Ensure adequate life and disability insurance. Review annually.
Identify Successors
If internal succession planned, identify and develop successor. Begin transition planning. Formalize buy-sell agreements. Consider DSO alternatives. Update documents for current circumstances.
Execute Transition
Complete planned transition or begin active sale process. Coordinate with retirement planning. Ensure estate documents reflect current wishes and practice situation.
Planning Your Practice Succession?
Get guidance on structuring succession that protects your family and maximizes practice value from a dental practice transaction attorney.
Schedule ConsultationBuy-Sell Agreements
A buy-sell agreement is the cornerstone of practice succession planning. This contract determines what happens to your ownership interest upon death, disability, retirement, or other triggering events—and how the purchase will be funded.
Key Buy-Sell Provisions
- Triggering events: What events require or permit a buyout? Death, permanent disability, retirement, voluntary withdrawal, bankruptcy, loss of license, divorce.
- Valuation method: How is practice value determined? Fixed price (updated annually), formula-based (multiple of collections or EBITDA), or appraisal at time of event.
- Purchase obligation: Is purchase mandatory or optional? Who has the right or obligation to purchase?
- Funding mechanism: How is purchase funded? Life insurance, disability insurance, installment payments, cash reserves.
- Payment terms: Lump sum at closing, installment payments over time, or combination. Interest rate and security for deferred payments.
- Non-compete provisions: Does selling owner agree not to compete? Scope and duration of restriction.
Example: Cross-Purchase Buy-Sell Structure
Situation: Two-dentist partnership, each owning 50% of practice valued at $1.2 million
Structure: Each partner owns life insurance policy on the other partner for $600,000
Upon death: Surviving partner receives $600,000 insurance proceeds tax-free, uses proceeds to purchase deceased partner's 50% interest from estate
Result: Surviving partner owns 100% of practice; deceased partner's family receives $600,000 cash
Common Buy-Sell Mistakes
- No buy-sell agreement at all—leaving family to negotiate under pressure
- Unfunded agreement—contractual right to purchase but no cash to execute
- Outdated valuation—fixed price from years ago does not reflect current value
- Incomplete triggering events—disability not addressed, or definition unclear
- No mechanism for disability buyout—only death is covered
Disability Planning
Disability can be more financially devastating than death. With death, life insurance provides immediate liquidity and the practice can be sold. With disability, the practice continues incurring expenses while generating reduced revenue, and the owner may need ongoing income.
Disability Scenarios To Plan For
Short-Term Disability
Illness or injury lasting weeks to months. Practice needs coverage but owner expects to return. Focus on maintaining operations and patient relationships.
Long-Term Disability
Permanent or extended inability to practice. May trigger buy-sell provisions. Requires personal disability income plus practice transition planning.
Disability Planning Components
- Personal disability insurance: Replaces your income if you cannot practice. "Own occupation" coverage pays if you cannot perform dentistry specifically, even if you could do other work.
- Business overhead expense insurance: Covers practice operating expenses (rent, staff, utilities) during short-term disability so practice remains viable for your return.
- Disability buy-sell provision: Defines when disability triggers buyout right, how disability is determined (typically after defined waiting period with physician certification), and funding mechanism.
- Disability buyout insurance: Funds purchase of disabled owner's interest, similar to life insurance funding for death buyout.
- Practice coverage arrangement: Pre-arranged agreement with another dentist to cover your patients during disability, maintaining patient relationships and practice value.
"The disability scenario dentists most often overlook is partial or gradual disability—conditions like arthritis, vision problems, or repetitive stress injuries that reduce capacity without completely preventing work. These situations are harder to define in buy-sell agreements and harder to insure. We encourage dentists to think carefully about definition of disability in their agreements and ensure coverage addresses realistic scenarios, not just the clear-cut cases."
Life Insurance Strategies
Life insurance serves multiple purposes in dental practice estate planning: family income replacement, practice debt payoff, buy-sell funding, and estate liquidity. Understanding how much coverage you need and how to structure it is essential.
Coverage Needs Analysis
| Purpose | How To Calculate | Typical Range |
|---|---|---|
| Family Income Replacement | Annual income × years until spouse retirement or children independent | 10-15× annual income |
| Practice Debt Payoff | Outstanding practice loans, equipment financing, lease obligations | Varies by debt level |
| Buy-Sell Funding | Practice value × ownership percentage being purchased | Full value of interest |
| Estate Tax Liquidity | Estimated estate tax liability if estate exceeds exemption | 40% of taxable estate |
Insurance Ownership Considerations
Who owns your life insurance policy affects taxation and control. Common structures include personal ownership (you own policy on your life, proceeds to beneficiaries), cross-purchase ownership (partner owns policy on your life for buy-sell), entity ownership (practice or entity owns policy for key person or entity-purchase buy-sell), and trust ownership (irrevocable life insurance trust owns policy to exclude proceeds from taxable estate).
Review coverage annually: Life insurance needs change as practice value grows, debt decreases, children become independent, and circumstances evolve. An insurance amount appropriate when you purchased your practice may be inadequate years later when practice value has doubled.
When To Speak With A Dental Practice Transaction Attorney
Estate planning for practice owners involves both general estate planning and practice-specific considerations. While general estate attorneys handle wills and trusts, practice succession and buy-sell agreements benefit from experience with dental practice transactions.
When To Consult A Dental M&A Attorney About Estate Planning
- Structuring buy-sell agreements — to ensure provisions reflect realistic practice scenarios, appropriate valuation methods, and effective funding mechanisms
- Planning practice succession — to evaluate options including associate transitions, partnership structures, and DSO alternatives
- Coordinating practice sale with retirement — to optimize timing, tax treatment, and transition structure
- Reviewing existing buy-sell agreements — to ensure provisions remain appropriate as practice value and circumstances change
- Addressing partnership disputes or transitions — when existing agreements prove inadequate or partners disagree
- Integrating practice planning with personal estate plan — to ensure practice documents coordinate with wills, trusts, and beneficiary designations
Jaffe Law PLLC represents dentists in practice transactions, succession planning, and buy-sell agreements. We work alongside your estate planning attorney and financial advisors to ensure comprehensive planning. Schedule a consultation to discuss your specific situation.
When To Update Your Estate Plan
Estate plans require regular review and updating. Trigger events that should prompt review include marriage, divorce, or separation; birth or adoption of children or grandchildren; death of spouse, beneficiary, or named fiduciary; significant change in asset values including practice growth; purchase or sale of practice or real estate; change in health status; change in business structure or partnership; moving to a different state; and changes in tax law affecting estate planning.
