Top 10 Steps to Protect Your Assets

Increasing Litigation

As doctors’ wealth increases, their primary focus shifts from accumulating to protecting their hard-earned assets from the increasing perils of frivolous lawsuits. Unfortunately, increased busyness has also raised the odds of being targeted for a lawsuit. Furthermore, managed care’s restrictions on patient clinical care and reduced fees has resulted in a tremendous increase in medical malpractice litigation and bodes the same for participating dentists as well. Contractual disputes have also increased litigation between doctors and managed care plan companies. Finally, the declining fortunes of physician and dental publicly traded management companies promises increased litigation between those companies and affiliating doctors looking for an "out".

Given these increasing threats of litigation, it’s more important than ever for doctors to be forewarned and forearmed in order to protect their personal assets. Waiting until a lawsuit has been threatened or commenced is usually too late to protect the doctor’s assets.

As part of Blair McGill & Hill Group’s comprehensive tax and financial planning service, they analyze the doctor’s assets to consider ways to hold, transfer, and invest in order to protect them from creditors’ claims. Below are the top ten strategies they recommend to protect the doctor’s assets from this growing threat:

Be nice and communicate effectively – A recent medical study sought to determine why only 6% of the nation’s obstetricians accounted for 85% of the malpractice claim payments. Interestingly enough, the study determined that the quality of clinical care provided by doctors who had a high rate of malpractice claims did not significantly differ from those who had no malpractice claims, and thus there was no relationship between malpractice claims experience and technical quality.

What they did find was that the highest number of malpractice claims cam from those physicians who had also had the highest number of dissatisfied patients. These dissatisfied patients remarked that their doctor spent less than ten minutes on average with them during their visit, ignored their questions and comments, did not keep them adequately informed, and generally showed no concern for their well-being. In fact, some patients indicated that they had been yelled al by their physician. The study concluded that many physicians were sued simply because they were not nice to their patients, and had problems communicating and establishing rapport with them.

Maintain adequate insurance coverages – Proper insurance coverages are a second line of defense. Doctors should maintain adequate malpractice insurance coverage (generally $1,000,000/ $3,000,000), adequate general liability coverage ($1,000,000) to protect against non-clinical practice risks, as well as adequate automobile and homeowner’s insurance coverages. Finally, we recommend that doctors buy a $1,000,000 umbrella liability insurance policy, providing additional coverage beyond automobile and homeowner’s limits at a cost of only a few hundred dollars per year.
Operate as a professional corporation (PC) or limited liability company (LLC) – Operating as a professional corporation or an LLC is a must in any group practice setting, in order to protect the doctor from liability for the acts of the other doctors within the practice.

As a general rule, a limited liability company is not available in solo practices in most states; accordingly, a solo professional corporation will help protect the doctor’s personal assets from corporate tax and other practice liabilities, excluding his own malpractice.

Transfer assets into spouse’s name – We’ve long recommended transferring assets to the non-doctor spouse in order to "even-up" asset values between them, thereby assuring that each spouse can fully utilize the $625,000 unified transfer tax exemption equivalent now in effect. These transfers can generally be accomplished without any gift tax paid during lifetime and can provide substantial estate tax savings as well.

However, doctors considering this strategy should have a stable marriage, and take action before there has been any non-renewal of liability insurance, or before a lawsuit has been threatened or commenced. If doctors shift assets to their spouse, or another party, after events have occurred that would give creditors an actual or potential claim, the transaction may be rescinded as a "fraudulent conveyance".

Use joint asset ownership – Maintaining joint ownership of assets, particularly real estate held as tenants by the entirety, is an effective asset protection strategy in some states. While these assets are still subject to creditors who have a claim against both spouses, they are generally beyond the reach of a malpractice claim only against one spouse (the doctor). While it may be important to transfer assets into a single spouse’s name to take advantage of the $625,000 unified transfer tax exclusion referred to above, the remaining assets, especially real estate, should continue to be held jointly.
Maximize use of qualified retirement plans – In addition to the benefits of tax-deductible funding and tax-deferred compounding, qualified retirement plans offer a tremendous asset protection benefit. In 1992, the U.S. Supreme Court ruled that the anti-alienation provisions contained in all retirement plans subject to ERISA (corporate and Keogh profit-sharing, 401(k), money purchase pension plan, target benefit, defined benefit, and cross-tested plans covering doctors and staff) provide complete protection from all types of creditors, whether arising from malpractice, tax claims, bad investments,or other sources of liability.
Use individual retirement accounts (IRAs) – Neither traditional IRAs nor SEP/IRAs, Simple/IRAs or SARSEP/IRAs are subject to ERISA, and thus the Supreme Court’s ruling does not provide protection from the claims of creditors. However, many states have enacted laws that specifically exempt doctor’s IRA balances from creditors.
Establish a family limited partnership (FLP) or limited liability company (LLC) – Even when creditors threaten to sue, a transfer of assets to an FLP of LLC can be successful in minimizing the doctor’s liability exposure. Under this approach, the doctor transfers assets into the limited partnership in exchange for general and limited partnership interests. As general partner, the doctor retains control and management over the assets owned by the partnership. As a general rule, creditors cannot reach assets within the partnership, nor can a limited partnership be dissolved due to a suit against an individual partner. Rather, an individual creditor is restricted to getting a "charging order" against the doctor’s partnership interest. If the doctor’s creditor attaches his interest, the creditor must pay tax on the income earned by the partnership interest, whether or not it is distributed.

In summary, the doctor’s creditor has no vote, on voice in management, no ownership interest, and can receive income if and only to the extent it is distributed as permitted under the partnership agreement. This makes a family limited partnership interest particularly unappealing for attachment by a judgement creditor.

Finally, all fraudulent conveyance problems are avoided since the doctor is receiving an asset of equal value (partnership interest) in exchange for the assets transferred into the partnership. The doctor is simply benefiting from the fact that the assets are being converted from a form which is easily reachable by creditors to one which is most difficult for creditors to attach and seize.

All jurisdictions have now enacted statutes permitting the formation of limited liability companies (LLCs). While being taxed similarly to family limited partnerships, limited liability companies offer one important advantage. While a general partner in the family limited partnership is subject to unlimited liability for claims made against the partnership (but not the doctor), all members holding ownership interests in a limited liability company are fully protected from liability. Accordingly, where the partnership engages in one or more hazardous activities, use of a limited liability company (LLC) is generally preferable.

Purchase life insurance or annuity contracts naming the spouse and children as beneficiaries – In many states, creditors cannot attach or have access to the cash surrender value of life insurance policies, or the proceeds of annuity contracts, provided that they are not paid to the insured’s probate estate. While these generally make poor investments, doctors in those states can protect substantial amounts from the claims of creditors by investing assets in these policies.
Irrevocable trusts – Transferring assets into an irrevocable trust for the benefit of the doctor’s spouse or children can be an effective estate protection strategy, provided the transfers are made while the doctor is solvent, and before any lawsuit is filed or threatened. In most cases, assets held by an irrevocable trust will not be subject to the claims of the doctor’s creditors, nor will they be subject to the claims of the beneficiaries’ creditors if the trust contains the standard spendthrift provisions.

Life insurance trusts are the most common form of irrevocable trusts used. However, foreign asset protection trusts may be appropriate for doctors who have significant risk, and are willing to pay the significant fees necessary to gain maximum protection. The situs of a foreign asset protection trust is generally in a debtor-friendly jurisdiction such as the Channel Islands, the Isle of Man, Gibraltar, the Bahamas, the Cayman Islands, or the Turks, Caicos or Cook Islands. These jurisdictions provide several favorable benefits including not enforcing judgements by U.S. Courts, relatively short statutes of limitations, substantial limits on fraudulent conveyances, permitting use of trust assets to defend suits, and allowing change of situs, trustee and governing law provisions so that the trust becomes a "moving target" for creditors.

Recently, Alaska and Delaware sought to bring the benefits of these trusts "on shore." While the idea is appealing, there are significant disadvantages since asset protection trusts in those states may be required to respect a judgement entered against the doctor in his home state, provide longer statutes of limitations (generally four years), a lower burden of proof to attack the trust, and more restrictions on transferability.

Reprinted with permission from the Blair McGill Advisory. The Blair McGill & Hill Group, LLC specializes in financial consulting for the dental profession. For information on subscriptions or consulting, call (704) 424-9780.