Episode 27 – Wealth Strategies for the Investment Grade Dental Practice with Erin Scannell, CFP

“Do you know what the difference is between the noise in the marketplace and what the impact is on your business?” ~Dr. Victoria Peterson

It’s scary out there. We’ve seen massive ups and downs in our world over the past few years. COVID. The personal financial impact of shutting down our offices for 3 months and the newest developments in northern Europe. We watch the economy take a hit. We see financial markets dip. 

I get it, I’ve been there. It can be scary. It’s only natural to panic a little bit and smart business owners like you know there’s a bigger picture. You see the difference between the noise in the market and what you can control. Instead of making snap decisions, you look at how you protect your investments, assets, and set yourself up for success in the future.

Here’s what I want you to keep in mind when you feel yourself start to worry and wonder: Building an Investment Grade Dental PracticeTM is a long-term plan. It isn’t a 2, 3, or 4-year game. This is your decade-plus goal. 

Stay focused on what you can do to drive value in your practice and control the outcomes. Be dedicated to your business, your plan, and get sound advice from trusted experts and advisors.

To help you navigate some of these financial and economic waters, I have invited Erin Scannell – named to America’s Top Wealth Advisors in 2021 and Forbes Top Wealth Advisors in the State of WA in 2021 – to join us for a practical conversation on how to make smart business and investment decisions when the news looks scary. 

These are strategies that can use as you build value in your Investment Grade PracticeTM, including:

• Navigating the impact of global events on the economy (and your business)
• 3 things owners of Investment Grade PracticesTM do to craft value
• Tax code strategies that can save you thousands

Want to know if you have an Investment Grade PracticeTM? Click here to use the completely free Investment Grade PracticeTM calculator: What’s my IgP Freedom Number?

Want to have a conversation about your Investment Grade PracticeTM? Contact Brent at brent@productivedentist.com.
Never miss an episode! Subscribe to Investment Grade PracticesTM Podcast on iTunes & Spotify.

EPISODE TRANSCRIPT

Victoria Peterson
Hello, and today help me welcome Erin Scannell. Did I say this correctly? and is its canal or Scannell

Erin Scannell
Scannell rhymes with channel.

Victoria Peterson
I love it and I am so appreciative of you being here today you are with heritage Wealth Advisors. You’re part of my investing and team and wealth strategy team and I couldn’t be more excited to have you here today. Can I brag on you for just a moment? Of course. Alright, so for all my listeners, I want you to know that Erin is not only a financial planner, he was named America’s top Wealth Advisors in 2021. He hit number 89 on that list of America’s top Wealth Advisors and he was number two on the Forbes list of best in state of Washington Wealth Advisors for 2021. Erin, I’m in awe of the conversation you and I just had, and I can’t wait to share this with our listeners.

Erin Scannell
Awesome. I’m looking forward to it.

Victoria Peterson
Okay, there are some world events that are happening that I don’t want to gloss over before we get into this conversation about creating wealth through our businesses. So can you speak just a little bit about some of the global events that are happening right now? The stock markets kind of going up and down like a yo, yo, I got you here. You’re America’s best. I want to know, what are your thoughts about this? Yeah,

Erin Scannell
absolutely. It’s, it’s an interesting time with the Russia invasion of Ukraine and so naturally, we all have our attention on it all of us do and what we the conversation we’re having fairly frequently with clients is talking about how with a global event like this, unfortunately, global events like this happen every year. They’re all different and they happen every year. If you look at a calendar over the last 20 years, there’s always something scary and negative happening. So we talked with clients about how it’s important to look at to really zero in on what is the economic impact of that event and in this situation, there’s a dramatic humanitarian impact, which is horrible and from an economic standpoint, globally, there isn’t actually a significant expected impact from this set of events. So we we were calculating even if oil prices stayed really high this year, which is one of the implications of invasion, even if oil prices stayed at $120 a barrel, that would impact the GDP of the United States. So our economic growth rate would be impacted, but only by a half a percent to three quarters of a percent. So even if that happens, the growth rate of the economy is still expected to be above average this year.

Victoria Peterson
So then the metals of reservoir costs seem to be strong. Yeah. For sure. Any projections about growth? Is the supplying easing up? Are we getting back into kind of growth?

Erin Scannell
Yeah, the economy is expected both by the average economist and by the IMF International Monetary Fund to grow by close to 4%. This year, that’s the US economy, which would be above average, they’d be fairly well above average for the last 15 years, which has been largely a bull market in the stock market and quite a bit above the average long term, which is just over 3% has been the long term average. So expectations are solid this year for growth, even with difficulties with the supply chain, oil prices, and inflation. There are a lot of headlines, news, and negative news, yet the fundamentals of the economy are pretty strong right now, and the consumer, very strong.

Victoria Peterson
I love that and that’s one of the things that we love to focus on in investment grade purchases. What is the difference between cash flow and value? The difference between the noise in the marketplace and what is really happening in the real world? And what is happening, more specifically I little microcosm of my business. So can I really do to drive value and control some of the outcomes? Prior to getting our show today, you and I talked about the three things doctors can really focus on within their business, like driving the equity at time of sale, driving the value between now and then and then the 30 that we really hold on was as better tax planning so that at the time of sale, you’ve got to you’ve got a tax strategy, not simply a growth strategy or a value strategy. Do you know exactly how those are going to be to be tax? Do you mind mind if we talk out a bit today? Yeah, that sounds good. All right. So kick it off. With our texture strategy, how many are there there?

Erin Scannell
There’s a bunch of the tax code is what is it now 72,000 pages in the US, the Warren Buffett’s of the world always argue that we should have the tax code on one or two pages and lobbyists have driven a bunch of complexity into it over the years and special interest groups. That’s frustrating at one level, but it also means there is significant opportunity within the tax code for reduction of taxes and we look at it in three main buckets tax planning, especially for business owners. One aspect of it has to do with reducing taxes in the current year on your cash flow, whether that’s through large deductions, tax shelters, retirement plans, or depreciation on real estate. That’s one aspect of the tax planning, then the two other aspects of the tax planning have to do with taxes on the eventual sale of your business and one, one of that one of those two aspects on the sale of the business has to do with reducing taxes on the sale of a business and the other one has to do with avoiding taxes on it on a portion or all of the sale of a business.

Victoria Peterson
I love that. So with the reduction on current income, you know, we you talked about tax advantage. Opportunities, he’s like help since account for 1k Set cash balance plans, things like that, paying your kids having family members on there. Now, is there a point in time before the sale? That you want to start reducing those or it’s or that they added back or normalized on the p&l?

Erin Scannell
Oh, yeah, that’s a that’s a really good point. We would, you know, it’s one of those things, that level of tax planning, it’s the earlier the better would be the rule of thumb. So as soon as possible, looking at those ways to reduce taxes, so again, the HSA or the SAP or simple plan, or we’re seeing a lot of activity and cash balance plans. Because while the typical SEP or simple allows a tax deduction of 13 to 58,000. Those Those are big numbers, cash balance, excuse me, cash balance plans can result in tax deductions of over 300,000 substantially higher so if someone’s got really healthy cash flow, there’s huge opportunity for tax write offs that most people just aren’t aware of or they haven’t taken the time to go through.

Victoria Peterson
Yeah, I know. Call Colin one next splinters he goes Yes, it’s a tax deduction but pay off your debt because you get 100% of the interest back so it’s that balance but I love that because has dentistry is recession and as a career is a 20 year 30 year four year lifespan. It’s not like we’re here for a couple years using gone so I love that you’re introducing mixing the concept, do thing day that can benefit your your flow through rate and reduce your taxes for the next decade. I paid my turn and funded into their Roth IRAs and know they each got college still had 2030 $30 They’re paying 100 bucks a month when they were eight years old and it could be the bad things like that.

Erin Scannell
So that’s a good example to like when you do that simple spread cleaning of if a young person, a teenager or someone in their early 20s as even a little bit of money in a tax free account at that age, like a Roth IRA, like, what that will be worth by the time they retire. So, kudos to you for, for

Victoria Peterson
their great saves there and because of those disciplines that we had early, so thank you for speaking to that, like the discipline you have, as an owner, don’t go spend all your profits, too, I often talk about flipping the negative Nick, Nick several times before your hand. So keep that money working for you take your profits and shelter those and tax it manage ways you really pay high interest rates, though, when you set that I can use my tax hack or avoid tax completely at time of sale. So give me a couple of examples how I could reduce my taxes in this in the sale process.

Erin Scannell
Yep. So a few ways, exactly a lot of ways where we have limited time and one example that I think a lot of people are familiar with, if they were to sell a business is deferring tax through an installment sale, an installment sale is where instead of getting a lump sum, as a business owner, as a seller, you spread out your payments for your business over a number of years, and then you only pay tax, as you get the money versus all in one year. That’s a traditional installment sale and there’s a part of the code that applies to installment sales called 453. A and it allows a business owner to sell a business or a piece of real estate for that matter. Get all the proceeds upfront, so you don’t have to spread the proceeds over five or 10 years, get it all upfront, but you can defer the tax for 30 years. That is code for 53. A. So there are a few complexities to that strategy and for a few of our clients that as a result of that. Radek reduction in tax

Victoria Peterson
I looked at so I may have to look at my real estate again and that because you have some intimate installments on that there might be an incentive to have them refinance, and then still take it ooh, you give me so much to think about, I wouldn’t have any taxes. So there’s nine. I love this Erin. Kids will pay taxes. All right. So give me another example. We can defer tax through installment sale, which doesn’t mean we have to defer cash. There’s X code to help us with that be another example of how could reduce taxes it tells a tale.

Erin Scannell
Yeah, there’s also like Aesop’s, which are employee stock ownership plans, and you’re very familiar with those I know and those allow you to sell either part or all of the business and if the proceeds are invested in qualified replacement property, which can be stocks and or bonds, you have 100%, deferral of the tax. So some owners, a lot of owners, we know have actually sold only a portion of their business to an ESOP. So you don’t have to sell the whole business and they do that because they want a pile of cash, they want some liquidity. They have some stuff they want to buy, maybe it’s a house or something, and at the same time, they want to maintain control over their business. They don’t want to sell the whole thing, and they’re not ready and those are Aesop’s are really tax efficient to the owner. They’re also tax effective for the company, too, because the payments made into the ESOP are partially deductible.

Victoria Peterson
That’s right, both the principal and the interest, tax deductible. Is that right? That’s right. Yeah. versus traditional loan alone. Which loans interest? Is that all? Correct. I know we’re getting into some really deep waters here and productiveness Academy is an app company, we are 33% our employees. That’s what I love is that when consulting goes out, or our marketing group, they are not just designing a website or brochure. They are really serving our clients at a high level as if they own the company because they own the company and we love that part. So that sets up retirement plan for them. Also what happens, let’s say a doctor has an associate yet that really wants us to have ownership. There’s so many different types of partnership, right? There’s profit partnership, there’s equity partnership, there’s financial partnership, they’re silent partners, but ESOP is more of a partner partnership. So that at the time of sale, eventual sale, the associate doctors and the employees have gained that sale. Is that true? Yeah, exactly.

Erin Scannell
Exactly and that’s where what’s interesting is with Aesop’s losses around Aesop’s has evolved where the idea from the business owner standpoint is to give people in the firm skin in the game. So they feel more incentivized to treat it like their own like to treat it like they own the business and with an ESOP. That’s a way to share ownership, and get everybody participating in the upside of the company, and what’s interesting, the nationwide statistics for Aesop’s show faster growth rates for companies that have an ESOP than a comparable company that doesn’t have an ESOP and the theory is because people, you know, it’s like, my, my coach always tells me, no one ever took their rental car to a park, you’re renting something, you treat it differently than when you own it.

Victoria Peterson
That’s true. That’s true. So why don’t more small business owners know about this to set

Erin Scannell
up? I think, because a lot a lot of small business owners get most of their advice from a CPA and CPAs are really good in doing tax returns, typically, but they’re so busy doing the tax return that not as much of the time or conversation with the business owner goes into strategy, like looking at three years out, or five years out and that’s where you guys I know help a lot. That’s what we ended up doing with our business owner clients is getting out of the whirlwind of the day today, the current moment, the current tax year, and looking at three 510 years out and that’s where the needle can be moved dramatically tax wise.

Victoria Peterson
Yeah, I think husband and I are on opposite sides of the coin with this, if this is so, so complex, why do you do do these things? Why can’t it just be like, we have Hello CS for real estate and this for that and I’m like, because that’s that’s how you do it when you want to play a game.

Erin Scannell
Right? That’s a really good point, because they are strategies like that bring an extra level of complexity and then, if you can save a dramatic amount of time, a lot of times it’s worth it and that’s a that’s a process for each of us to go through and make that decision.

Victoria Peterson
Okay, so you gave us some great, anybody can do this today, deduction of tax current com, you gave it a installment sale test strategies. This happens, I think when dentists transition to another solo owner or into a group or even a guest. So there is some development that that that can happen. So if you’ve piqued our interest into looking deeper than just the offer that’s on the table. Certainly, if you want to transfer a fan wealth or brand employees into a ship and a non-traditional than the ESOP was an option there, I think we have a little bit more time. If I’m truly financially independent, I don’t need my money. Tell me tell me how to avoid taxes altogether.

Erin Scannell
That’s how it gets fun going from reducing taxes to avoiding them altogether and there are a few strategies that, in some ways can be universal, they can apply to almost any business owner, not everyone, but almost anyone. One is called a tax free reorganization or statutory merger and that’s where one company buys another company and you can sometimes structure that as a tax-free merger, I have a number of friends that have done this and I’ve done it in my own business with other partners. The number two strategy would be a capital gains bypass trust and those are trusts that allow you to avoid paying tax when something you own is sold at a profit, like a business that also works for stock, Amazon or Microsoft stock or an apartment building or real estate. The capital gains bypass trust, the money eventually has to go to charity and in some cases, you can defer that money going to charity for the entire life of the seller of the business, as well as either the kids or grandkids of that business. So the money can stay within the family, where income can be received by that trust by the family for decades, multiple decades and then again, eventually the money goes to charity and there can be so many tax benefits to that strategy, they can more than offset the money that goes to charity decades in the future. So that’s one and maybe I’ll pause there because we are getting kind of deep into this.

Victoria Peterson
Yeah, that’s what I think I love the most Erin I can see why. Forbes magazine and others are really read recognizing your talent. It is As I learned that you say, sir, our CPAs are maybe insurance agents, 401k managers, it seems like that sometimes there’s so rightfully so focused on the day to day of compliance and keeping you safe harbor harbors, that they don’t really have the bandwidth to helicopter up and look at these bigger macro strategies and when your build investment click Grade, this or any type of methods is a great business, it sounds like it really is beneficial to take a pause, go up in the helicopter and look and years out 20 years out and ask the questions, what could or should I be doing today? How would that shift as I got closer? And how do I optimize the path all through?

Erin Scannell
Yeah, I think that’s really well said, and we’re seeing this dynamic play out, where last year was the first year in the history of our country where billionaires pay a lower tax rate on average than the working class as defined as someone making $38,000 a year. So if we’re in a progressive tax system, where the more money you make, the more money you’re supposed to pay in tax, but in reality, it’s not occurring that way, where the very, very wealthy are paying a lower average rate than the working class. I mean, there’s massive complexity built into the tax code and it also means there’s massive opportunity for someone who does helicopter up I like that term, and looks out into the future and uses strategy to get ahead and into proactively reduce taxes. Because we all have a degree of control over that was a lot of people don’t take it

Victoria Peterson
and love it. Thank you so much for being with us today. Erin. I’ll make sure that in show notes, we get up your email and web address. For those listening, listening you can plan with h w a s p l, an, with, capital H W A, at M M. e f dot.com and we’ll get that in the show notes. This has been a massive education and I going to be downloading and digesting some of your your suggestions for quite a while.

Erin Scannell
Oh, awesome. Thanks for the opportunity and appreciate the chance to talk with you all.

Regan
Regan Robertson here with Productive dentist Academy get ready to join your favorite podcast host Dr. Bruce B. Baird, Victoria Peterson, Dr. Chad Johnson and myself Regan Robertson at the nation’s number one dental business course that guarantees practice growth. That’s right, full emergency ease so you can consistently produce more, and align your team for results without compromising excellent patient care. Productive dentist Academy has a special running this month that you can activate immediately. It’s called the PDA productivity bundle and we put this together so that you could attend this workshop which is happening September 22, to the 24th in Frisco Texas at the Hyatt Regency along with tools to make sure that not only are you getting great education on how to increase your productivity, how to communicate better with your team and your patients, increase your case acceptance, authentic market practice and more.

You also get a two hour business advisory session before the workshop to really get clear on what matters to you most so that you can be set up for success at the workshop and following the workshop you get 12 month access to PDA on demand. That is the entire productivity workshop on demand for you to make sure that you are doing everything you can in your power to soak up all of that see and implement it come Monday morning, the next month and the next month and the next month for 12 months down the line. Registration is now open. The tuition cost is $2,195 which is ridiculous because it’s regularly $5,528 for the productivity workshop attendance to our business advisory session and 12 months of access to PDA on demand hop on over right now to www.productivedentist.com/workshop to grab your registration today. Again that is www.productivedentist.com/workshop If you cannot wait and you have to have it right now, email Brent, brent@productivedentist.com That’s Brent, brent@productivedentist.com and we will save you a seat. I look forward to seeing you there.

Narrator
Thank you for tuning in to this episode of the Investment Grade Practices podcast. If you find value in this episode I would help us spread the word by passing it along to a dental friend subscribe and give us a Like on iTunes or Spotify learn more about building your Investment Grade Practice at productivedentist.com Today