This is the story of 3 physicians who built a medical practice as a professional partnership, bought a medical building along the way and all decided to retire at the same time.
Our 3 physicians are Dr. George, Dr. Alex and Dr. Ed. Each are in their late 60’s to early 70’s and married. After building and maintaining a successful internal medicine practice over many years, the Doctors decided together that it would be a good time for each of them to retire. Along the way they purchased a large medical building that housed their practice and that of other doctors. They decided to try and sell their practice and the building together. The practice it turns out was worth about $3.6 million and the building about $6 million. As they worked with a broker to market and entertain offers, they spoke to their CPA who informed them that each Doctor would be forced to pay about $800,000 each in taxes on the sale, which was more than one-third of the profit they would generate after 30 years building the business.
Fortunately, the investment advisor for Dr. George knew about the Deferred Sales Trust and educated Dr. George and the Company CPA on how it could be used to help each of the Doctors defer the capital gains on both the practice and the real estate. After sharing this information with the other Doctor/partners and completing their due diligence, all 3 Doctors elected to move forward with the Deferred Sales Trust at about the time they had accepted an offer for the practice and the building.
Then about 3 weeks before the sale was about to close a tragic thing happened. Both Dr. Alex’s and Dr. Ed’s wives died unexpectedly leaving a huge hole in their families, but adding further resolve to leave their practice. In the midst of all of this they still had to work through the contractual obligation to sell their practice and the building. This also changed the tax picture for both Dr. Alex and Dr. Ed. You see, under federal law, if appreciated assets are held by a couple as community property and either of them dies, the IRS will recognize a “Step-Up” in basis on those assets, whereby for tax purposes, their adjusted basis (cost minus depreciation) is adjusted to be the market value as of the date of death of either spouse.
What this means in terms of the transaction and the tax consequences is that now, neither Dr. Alex nor Dr. Ed would be subject to capital gains taxes on the sale of the practice or the building. Dr. George, on the other hand would still be responsible for the roughly $800,000 in taxes on the sale of his share.
In this case the agreements with their buyer were adjusted such that neither Dr. Alex nor Dr. Ed would be using the Deferred Sales Trust for their portion of the sale as there was no longer any need for tax deferral for them, nor did they incur any fees for setting it up in the first place, since the agreed upon fee was conditional on actually completing the sale of the assets with the DST. Dr. George continued to use the Deferred Sales Trust and the transaction closed smoothly for all parties. Using the Deferred Sales Trust, Dr. George established a secured promissory note with monthly installments significantly higher in amount than what he could have realized from investments made after tax, that were specifically designed to allow he and his wife to travel, enjoy life more and spoil their grandchildren. Upon our latest meeting, he is still thrilled with the results.