The Professional Corporation Trust – Preserving the Value of Your Practice
September 5th, 2007 |When he died unexpectedly of a heart attack, an orthodontist’s wife became trustee of the stock in his professional corporation. Because she was successor trustee of the professional corporation trust that owned the practice she was able to sell the ongoing practice at full monetary value within two weeks after her husband’s death.
If the orthodontist’s practice had gone into probate, the practice could have quickly lost half its value-or more-for one simple reason: If the dentist isn’t there when the patients need their braces adjusted, the patients, out of necessity, will take their business elsewhere.
Professional Corporation Trust Holds the Stock
Licensed professionals have a specific reason for establishing a revocable living trust and naming themselves as grantors and sole trustees. Doctors, lawyers, accountants, and other professionals who own their own professional corporations can set up their trusts to satisfy all legal requirements and still avoid probate in the event of their deaths thus allowing it to be sold or liquidated while it has value.
The stock in a professional corporation must be owned by the individual with the professional license, for example, the doctor, the lawyer, or the orthodontist. The law makes an allowance for the “professional corporation trust” to hold the stock owned by the licensed professional in the professional corporation.
Successor Trustee May Sell…Not Practice
The professional corporation trust is simply a revocable living trust with a specific purpose: to keep a licensed individual’s interest in a professional corporation out of probate in the event of the death of its owner. This trust has certain restrictions. The successor trustee may administer the trust to sell its asset-the stock in the professional corporation-but not to practice the specific profession (e.g., medicine, law, or dentistry).
Preserving the Value of Your Business
With this planning, a business won’t be subject to a dramatic loss in value upon the death of the professional. Should the grantor meet an untimely demise, a successor trustee can have the authority to immediately liquidate the corporate assets or sell the ongoing business. In this way, the professional practice won’t be too badly disrupted-as it most certainly would be if the practice had to go through probate. The monetary value of the practice can remain basically intact.
The orthodontist established a revocable living trust and named a successor trustee. This planning greatly benefited his family and buffered the shock of his untimely death. His foresight and planning preserved the value of his practice for his family and the continuity of his practice for his patients.
Imagine if you were in his place, with your present estate plan what would happen to your practice?
