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Tips for saving/paying for buy into partnership

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  • jfoxcpacfp
    replied


    99% of the time I would agree with you but this is a unique situation in that the partner I am buying out is my father.
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    Well, that changes the whole conversation. You should have mentioned that in the beginning. There is a lot more at play here and I think you are being shortsighted by emphasizing tax savings to the possible detriment of other issues - estate planning, your dad's financial situation, other siblings, basis in the business you are purchasing.

    Your dad owns a business. He has basis in it. If he sells the stock to you (assuming it is a corporation), he pays LTCG tax, reduced rates, on the gain only. You can structure the sale in increments over several years. You will have basis in the business which will lower your tax on any future sales. If your dad is selling to you at appraised FMV and needs the $$ (or wants to be fair to other siblings or a future surviving spouse), why not at least consider an outright sale? Dad is wanting to fully retire? Work part time? There are ways to set up a transfer to allow him to have cash flow and for you to have eventual control.

    Does Dad want to sell to you at a discount? A Self Cancelling Installment Note may work (SCIN). Again, you need to consider other heirs, including your Mom. I believe this is too complex an issue for you to hop into a high-commission insurance product without a comprehensive plan to integrate all aspects of the transfer of the business. That said, I admire your integrity and loyalty to your father.

    Leave a comment:


  • Zaphod
    replied













    I thought it was mentioned but the obvious way to do so is to just take a salary cut and 100k/y of it goes towards your equity buy in, this is pretty standard.
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    But then that would be fully taxed at 50% for my partner as income wouldn’t it?. Out of consideration for him wouldn’t the restricted property trust be better where he’d be paying no taxes on 70% of the 500k then only long term capital gains on the last 30% which is significantly less than 50% of all 500k? Either way would be pre-tax for me but just trying to be nice to my outgoing partner. Any other ideas out there that would benefit both myself and my partner for minimizing tax burden on each of us for a 500k buy out?
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    Sounds like a good way to get not the best deal possible. Maybe your partner is the nicest guy in the world and deserves everything coming his way, but how the money comes to him is his problem not yours. He should worry about his side of it not you. I am sure you are over thinking a way to be nice while the other party is really not so much. This is part of the reason doctors get poor deals, they fail to think of it as business. I would be as business like and as shrewd as reasonably possible, you’re probably already getting the short end of the deal anyway.
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    99% of the time I would agree with you but this is a unique situation in that the partner I am buying out is my father. Seeing how he’s responsible for my entire existence and has been kind enough to support me throughout my education the least I can try to do is save him some taxes too! So again, if anyone has any tax advantaged ways to buy out a partner that would be beneficial for both parties I would appreciate it. I would prefer to keep my promise to myself that I would never buy a whole life policy but so far a restricted property trust seems to be the only option that wouldn’t force both of us to pay 50% taxes.
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    LOL, thats hilarious. Well then I would probably have no issue with whatever scheme you guys can come up with. If you can find a good reason for it another great way to transfer wealth is to set up a captive insurance company, thatd be something to look into in your particular case. I do not recall if it will be great on both ends of the taxing sides, but I'd at least look into it. You can have the profits go to all kinds of entities that should give you lots of leeway.

    Leave a comment:


  • Realestatedoc
    replied










    I thought it was mentioned but the obvious way to do so is to just take a salary cut and 100k/y of it goes towards your equity buy in, this is pretty standard.
    Click to expand…


    But then that would be fully taxed at 50% for my partner as income wouldn’t it?. Out of consideration for him wouldn’t the restricted property trust be better where he’d be paying no taxes on 70% of the 500k then only long term capital gains on the last 30% which is significantly less than 50% of all 500k? Either way would be pre-tax for me but just trying to be nice to my outgoing partner. Any other ideas out there that would benefit both myself and my partner for minimizing tax burden on each of us for a 500k buy out?
    Click to expand…


    Sounds like a good way to get not the best deal possible. Maybe your partner is the nicest guy in the world and deserves everything coming his way, but how the money comes to him is his problem not yours. He should worry about his side of it not you. I am sure you are over thinking a way to be nice while the other party is really not so much. This is part of the reason doctors get poor deals, they fail to think of it as business. I would be as business like and as shrewd as reasonably possible, you’re probably already getting the short end of the deal anyway.
    Click to expand...


    99% of the time I would agree with you but this is a unique situation in that the partner I am buying out is my father. Seeing how he's responsible for my entire existence and has been kind enough to support me throughout my education the least I can try to do is save him some taxes too! So again, if anyone has any tax advantaged ways to buy out a partner that would be beneficial for both parties I would appreciate it. I would prefer to keep my promise to myself that I would never buy a whole life policy but so far a restricted property trust seems to be the only option that wouldn't force both of us to pay 50% taxes.

    Leave a comment:


  • Zaphod
    replied







    I thought it was mentioned but the obvious way to do so is to just take a salary cut and 100k/y of it goes towards your equity buy in, this is pretty standard.
    Click to expand…


    But then that would be fully taxed at 50% for my partner as income wouldn’t it?. Out of consideration for him wouldn’t the restricted property trust be better where he’d be paying no taxes on 70% of the 500k then only long term capital gains on the last 30% which is significantly less than 50% of all 500k? Either way would be pre-tax for me but just trying to be nice to my outgoing partner. Any other ideas out there that would benefit both myself and my partner for minimizing tax burden on each of us for a 500k buy out?
    Click to expand...


    Sounds like a good way to get not the best deal possible. Maybe your partner is the nicest guy in the world and deserves everything coming his way, but how the money comes to him is his problem not yours. He should worry about his side of it not you. I am sure you are over thinking a way to be nice while the other party is really not so much. This is part of the reason doctors get poor deals, they fail to think of it as business. I would be as business like and as shrewd as reasonably possible, you're probably already getting the short end of the deal anyway.

    Leave a comment:


  • Realestatedoc
    replied




    I thought it was mentioned but the obvious way to do so is to just take a salary cut and 100k/y of it goes towards your equity buy in, this is pretty standard.
    Click to expand...


    But then that would be fully taxed at 50% for my partner as income wouldn't it?. Out of consideration for him wouldn't the restricted property trust be better where he'd be paying no taxes on 70% of the 500k then only long term capital gains on the last 30% which is significantly less than 50% of all 500k? Either way would be pre-tax for me but just trying to be nice to my outgoing partner. Any other ideas out there that would benefit both myself and my partner for minimizing tax burden on each of us for a 500k buy out?

    Leave a comment:


  • childay
    replied
    I would be hesitant to buy into any partnership without hard assets, real estate etc.  Agree with zaphod's comments above.

    Leave a comment:


  • Zaphod
    replied
    I thought it was mentioned but the obvious way to do so is to just take a salary cut and 100k/y of it goes towards your equity buy in, this is pretty standard.

    Leave a comment:


  • Realestatedoc
    replied













    Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
    Click to expand…


    I’m not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

    All ptr agreements are different. To me, what’s even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
    Click to expand…


    I was wondering about a tax advantaged savings process like a restricted property trust for putting my pre-tax dollars into funding a whole life policy on my partner I’m buying out such that he can start withdrawing the buy out money tax-free (at least for the first 70%) that way we both benefit from a tax standpoint. Any experience with these or thoughts on other ways to not have to pay with after tax dollars?
    Click to expand…


    Sounds like a good way to sell whole life insurance to me. Just because there is a tax benefit doesn’t mean it is a good idea.
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    I agree I swore I would never buy a whole life policy but this seems like it may make sense with a restricted property trust to buy out my partner. If a 100k/year of pretax money is funding the policy over 5 years that would allow me to buy him out with 500k of pretax dollars rather than having to use 875k gross income to pay him the 500k in after tax dollars (considering my tax rate of 43%). Sounds like he would benefit from a tax standpoint as well not being taxed on the first 70% of the 500k he takes out then taxed only at 30% on that last 30%. Again, I promised myself I'd never buy a cash value life insurance policy but anyone have any other alternative ideas to use pretax dollars and thus a 43% discount on buying out my partner? Thanks!

    Leave a comment:


  • Josh0731
    replied
    Great topic for discussion. Interesting to hear people's experiences.

    I wonder if a decent analogy might be how the most impressive investment gains are buying into a growing business on the way up, but if you are buying a large, established blue chip you shouldn't expect those kind of impressive gains.  Similarly, it may have been lucrative to be a partner when the practice was growing aggressively, but a young person buying into an established practice with low/medium growth may not see an impressive return on that capital, especially with current directions healthcare reimbursement and operating expenses are trending.

    And what happens when several older partners start wanting to divest into retirement or for estate planning?

    Leave a comment:


  • The White Coat Investor
    replied










    Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
    Click to expand…


    I’m not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

    All ptr agreements are different. To me, what’s even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
    Click to expand…


    I was wondering about a tax advantaged savings process like a restricted property trust for putting my pre-tax dollars into funding a whole life policy on my partner I’m buying out such that he can start withdrawing the buy out money tax-free (at least for the first 70%) that way we both benefit from a tax standpoint. Any experience with these or thoughts on other ways to not have to pay with after tax dollars?
    Click to expand...


    Sounds like a good way to sell whole life insurance to me. Just because there is a tax benefit doesn't mean it is a good idea.

    Leave a comment:


  • Realestatedoc
    replied







    Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
    Click to expand…


    I’m not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

    All ptr agreements are different. To me, what’s even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
    Click to expand...


    I was wondering about a tax advantaged savings process like a restricted property trust for putting my pre-tax dollars into funding a whole life policy on my partner I'm buying out such that he can start withdrawing the buy out money tax-free (at least for the first 70%) that way we both benefit from a tax standpoint. Any experience with these or thoughts on other ways to not have to pay with after tax dollars?

    Leave a comment:


  • Realestatedoc
    replied
    I am a fellow derm and we have one productive NP that generates significant profits for the office and this is essentially what I've already bought into but it's more so the buy out to own the practice completely when my partner retires in 4 years. My buy out is a similar total to yours, 550k, so I have 4 years to start making these large payments. My advice to you would be to buy in to your practice if there are any mid-levels since they could generate 100-200k of profit for the practice a year that would justify the large buy in getting a piece of that pie as a return on your buy in investment. If it is only physicians and you're getting a high percentage of collections in 40s then may be best to pass or ask for higher percent collections.

    Leave a comment:


  • Zaphod
    replied




    A little off topic but could use some of your input. The partnership track for my practice is 20% of deferred compensation for 5 years, which is essentially one year’s salary. To me, that seems awfully expensive. Because I get paid a percentage of net collections, the main incentive of being a partner would be to receive whatever is left over after overhead rather than having the practice skim some off the top of what I’m actually generating. Since a full time dermatologist at the practice can generate anywhere from $400-500k annually, is buying into the partnership a good investment? Seems like an awful lot of money to have tied up and maybe I’m better off just investing that money into a well-diversified, low cost, indexed portfolio. Thanks!

     

     
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    A lot of practice buy ins have out dated valuations, and most have a hard time showing you what you're actually getting and its consistency. A lot of us younger folks arent really into it, especially if the practice does not have a lot of hard assets that would be difficult to fund for a single person. I think Vagabonds story illustrates that. I have a hard time considering such a buyout myself, you cant really purchase patients anymore, especially if youre in a less hospitalized specialty and more cash based like derm can be. If you dont have much say over the budgets and how to make the overhead more efficient, I certainly dont want to have my income stream subject to someone elses decisions that maybe arent that wise. Tough situation as it has in the past been lucrative, I think the value proposition is falling in general and harder to find good ones. Its definitely good to be an owner, but due diligence is certainly required.

    Leave a comment:


  • PNWskindoc
    replied
    A little off topic but could use some of your input. The partnership track for my practice is 20% of deferred compensation for 5 years, which is essentially one year's salary. To me, that seems awfully expensive. Because I get paid a percentage of net collections, the main incentive of being a partner would be to receive whatever is left over after overhead rather than having the practice skim some off the top of what I'm actually generating. Since a full time dermatologist at the practice can generate anywhere from $400-500k annually, is buying into the partnership a good investment? Seems like an awful lot of money to have tied up and maybe I'm better off just investing that money into a well-diversified, low cost, indexed portfolio. Thanks!

     

     

    Leave a comment:


  • jfoxcpacfp
    replied




    Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
    Click to expand...


    I'm not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

    All ptr agreements are different. To me, what's even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.

    Leave a comment:

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