Saturday, October 01, 2005
By Daniel J. Schulte
MDA Legal Counsel
Published in the October 2005 issue of the Journal
Question: What happens when a dentist dies and the ownership interest passes to a non-dentist, such as the surviving spouse?
Answer: The Michigan Professional Service Corporation Act ("Act") specifically provides that all shareholders of the corporation shall be licensed and legally authorized in Michigan to render the same professional service if the professional corporation renders a professional service that is included within the Code.
This restriction is unique to health care professionals. If no health care services are rendered by a professional corporation, it may render one or more non-health care professional services so long as each shareholder is licensed in one or more of the multiple non-health care professional included in the act. This limitation on health care professional corporations was the result of strong lobbying by the MDA and other health professional organizations, so as to preclude non-dentists from owning dental professional corporations. It was feared that non-dentists who owned professional corporations would have entrepreneurial objectives that could detract from quality of care and professionalism.
Upon death, the dentist’s personal representative assumes ownership and control of the stock in the professional corporation until it is passed on to the heirs. Typically, the personal representative would be the deceased dentist’s spouse or child, or in some instances, a bank or other corporate fiduciary. Since neither the personal representative nor the heirs are dentists, they are not legally qualified to own stock in the dental professional corporation. The act specifically precludes the shares from being transferred to the personal representative or estate of a deceased shareholder, but provides that the personal representative may continue to own the shares for "a reasonable period but shall not be authorized to participate in any decisions concerning the rendering of professional services."
The statute does not define "reasonable period"; nor have there been any helpful court decisions to follow. Although a violation of the act could lead to forfeiture of the articles of incorporation of the professional corporation and ultimate dissolution of the corporation, this would be an unlikely result so long as the personal representative and the family of the deceased dentist acts in good faith to expeditiously sell or liquidate the corporation.
Question: What can a dentist do to plan ahead for the disposition of the practice upon death?
Answer: Although this subject is far too involved to cover in this brief column, a few important points can be made. Certainly, a will is critical, to inform the surviving spouse and family, along with the personal representative, regarding the disposition of the practice. It is wise to have a practice appraised periodically. The personal representative and/or surviving family members should be aware that prompt action is important, as a practice loses its value quickly. The practice should have a patient record policy documented, which should include the specific legal requirements that treatment records must be retained for a period of not less than 10 years after the performance of the last service upon the patient. "Tail" coverage, which insures that the estate will have professional liability insurance coverage for claims asserted after the expiration of the policy covering acts that occurred during the practice years, is essential. If the existing professional liability policy does not have "tail" coverage, it should be provided for, or some written direction to immediately obtain such coverage should be available to the personal representative, surviving spouse or family members.
If the deceased dentist practiced in a professional corporation with another dentist stockholder, the transition can be made much easier. In this event, it is always advisable that some form of buy-sell agreement be worked out between the deceased dentist’s estate and the surviving practitioner. — With Richard Weber