Today’s physicians and other medical professionals must navigate a rapidly changing environment – and a lot of this transformation is beyond their control. Getting a good grasp on their financial situations is more important than ever.
Dr. Smith*, a long-time client of ours, is a great example. She began her private practice more than two decades ago and, during that time, she’s seen major changes in Medicare, insurance and cash-pay reimbursements. In addition, her practice margin has declined and the only way to maintain a similar income level is to work longer hours and see more patients.
After reviewing all of Dr. Smith’s existing finances and taking the changing professional environment into consideration, we charted a well-rounded plan of action for her:
We gave her tax advice on her business structure. She was a single-member LLC, which means she was paying Social Security and Medicare taxes on all her earnings. We suggested changing to an S-Corporation status and helped her create an optimal strategy to pay herself a salary versus business distribution. (S-Corporation distributions aren’t subject to self-employment taxes, whereas all profits in a single-member LLC are subject to self-employment taxes.) This “simple” restructure saved her almost $30,000 per year in taxes! It also dramatically reduced her audit risk.
Dr. Smith has a CPA of her own, but like most, her CPA didn’t give proactive tax advice. We showed Dr. Smith how she could use tax credits to lower her tax liability. By taking advantage of them, she created additional savings of more than $10,000 per year.
Dr. Smith has a diversified, tax efficient portfolio consisting of low-cost mutual funds, ETFs and other securities. We put the higher-tax investments in her retirement accounts, which lowered current taxation. We also maximized the savings in her regular investment account to create only long-term capital gains, which are taxed at less than half of the normal tax rate.
Dr. Smith has three children, including one from a previous marriage. She wanted to leave money equally to her children, but at the same time, protect her current husband in the event of her pre-mature death. We incorporated irrevocable trusts and living trusts, and worked with her insurance agent to come up with the right strategy. We also provided suggestions on how to distribute the money from her trusts to her husband and kids, and advised her on ideal trustee characteristics. As a result, she retitled all her assets to mimic her estate planning.
As part of our analysis, we conducted a detailed review of her home and auto insurance coverage. In doing so, we learned she had a lake home and a number of jet ski/wave runners that her teenagers often used with their friends. We also noticed that boats and watercraft were specifically excluded from her policies; any accident on the lake would have been a personal liability to her and her life savings could have been jeopardized. We introduced her to a suitable home/auto insurance agent, helped her get the right coverage, and recommended an umbrella liability policy to protect her no matter where she and her family were.
We helped Dr. Smith design an in-depth retirement plan that included: tax considerations, where to divert her savings, and a detailed distribution strategy for retirement. Most advisors mention investment diversification only, but at Bluerock, we talk with our clients about tax diversification as well. By diversifying, you form a blend of pre-tax, post-tax and tax-free assets; the creation of that leads to a lower tax bracket in retirement and flexibility depending on future tax rates. The latter is critical, but often missed by planners who don’t understand tax and the importance of tax planning like we do.
* fictional name, but actual client, specific financial advice references provided herein are for illustrative purposes only and are not representative of decisions that have been made since the case study was published nor of decisions that would be made in the future