Asset protection is one way to shield your practice and savings from lawsuits. It is a small, but rapidly expanding, legal specialty that focuses on protecting a client’s wealth from all types of threats, including lawsuits, creditor claims, and taxes. The attorney practicing asset protection must be familiar with many legal areas such as corporate law, estate planning, income tax planning, creditor rights, partnership law, and the law of foreign countries and trusts to safeguard a client’s assets effectively.
For a physician, the goal of asset protection planning is to gain the greatest degree of financial security, in terms of his or her practice and personal financial affairs. This is achieved through a plan that uses existing state and federal exemptions, employs particular joint ownership forms, and creates protective legal structures, such as corporations, limited partnerships, and trusts. This is undertaken with one objective in mind — to shield the physician’s medical practice and personal wealth from all types of claims. Asset protection planning has an attractive side benefit: It can result in significant estate and income tax savings, as well.
Because the threat of medical malpractice and business-related lawsuits is so high, the primary focus of asset protection for a physician is to legally secure his or her wealth from such threats. This means owning one’s practice and other personal wealth in legal forms that make it extremely difficult, if not impossible, for others to “get at” them. Such a legally defensible position has a corollary benefit. Once potential laimants see that a physician’s wealth and practice are protected, they are much more likely to drop the claim or settle for “pennies on the dollar.” Either way, the physician aves the time, expense, and stress involved in defending claims and costs that would be incurred even if the case was ultimately won at trial or was covered under an insurance policy. In my experience, the costs of setting up an asset protection plan can be recouped by discouraging or settling only one lawsuit. The following is one example.
Dr. Nathan, Neurosurgeon
Dr. Nathan operates a hospital-based practice with his partners, Doctors Stephano and Janko. Dr. Nathan is married, and the couple’s principal assets are their home equity and a mutual fund portfolio. Both their home equity and the funds are worth approximately $300,000 each, for a total of $600,000 of marital wealth.
Dr. Stephano and the partnership were sued for $800,000 for sexual harassment. (The same principles would apply for any non-malpractice claim or for malpractice claims in excess of coverage limits.) What could Dr. Nathan expect if he had not engaged in asset protection planning?
The partners’ malpractice insurance policy probably would not cover them for the alleged sexual harassment. Most medical malpractice policies specifically exclude coverage for behavior in violation of state law, which sexual harassment is, by definition. Because the practice is operated as a general partnership, all partners share equal financial responsibility for the suit and any resulting judgment. Dr. Nathan’s, personal savings are completely vulnerable to this lawsuit threat, as are Doctors Stephano’s and Janko’s. Without prior asset protection planning, Dr. Nathan could lose hundreds of thousands of dollars if the suit is successful. His only option to recoup these dollars would be to sue his own partner, Dr. Stephano, for reimbursement — an unappealing option, at best.
Preventative Measures
The unfortunate part of this hypothetical scenario is that Dr. Nathan could have easily protected himself from lawsuit threats like this one by implementing simple, inexpensive asset protection strategies. To insulate himself from claims against his partners, he could have established a professional corporation or association (in those states that allow it) to be the partner in the partnership. This would have shielded his wealth from all claims other than those arising from his behavior. In this situation, his practice and personal equity would have been protected by such a legal entity.
Second, he could have protected his home equity by establishing a variety of home ownership options, as discussed in the April edition of NeuroPractice.
Third, to protect his mutual funds, Dr. Nathan could have established a joint ownership for tenancy. If his state recognizes tenancy by the entirety ownership, and affords high protection to it, all $300,000 of the funds would have been shielded using this ownership form. Even if Dr. Nathan lived in a state where tenancy by the entirety does not exist, most states would grant protection for half of the funds ($150,000) had he owned them in joint tenancy with his wife.
A second option to safeguard the funds, which is available in all 50 states, would have been to own the funds through a family limited partnership (FLP). Through an FLP, the funds would be almost untouchable because they would be protected from any lawsuit against Dr. Nathan professionally or personally, as well as any suit filed against his wife or the couple. Moreover, through the FLP, Dr. Nathan and his wife would retain 100 percent of control over the funds at all times. If Dr. Nathan and his wife had children, they could lower their income taxes through the FLP. This is accomplished by “sharing” income with the children on paper, thereby making use of their lower tax brackets. (This is a more advanced technique that requires expert guidance.)
Finally, Dr. Nathan could have protected his mutual funds by using an irrevocable trust, also called an “asset protection trust.” The trustee of the trust (usually a trust company or responsible advisor) is the legal owner of the funds and would control them. Yet the trustee would be required to follow the terms of the trust as specified initially by Dr. Nathan and his wife. These terms might have included the creation of a college fund for their children, support fund for their parents, or even a plan for charitable gifts. In this type of a trust, Dr. Nathan and his wife would have to “irrevocably” give up control of the funds, and the funds would be unavailable to any of their creditors, including those involved in lawsuits. Despite such benefits, using this tactic must be seriously considered because ownership and control of the funds are given away forever.
Using these maneuvers, Dr. Nathan could have limited his lawsuit exposure to all types of lawsuit risks, including this potentially devastating sexual harassment claim. It would be imperative, however, that Dr. Nathan implement these strategies before trouble (like this lawsuit) arises. Courts look down on transfers made when there is already a “probable creditor” lurking. Nonetheless, the costs involved in these strategies would have been minimal when compared to the potential loss.
Attorney and CME author David B. Mandell and financial consultant Christopher Jarvis speak frequently to medical groups and advise physicians throughout the country on asset protection, retirement and estate planning issues. Mandell and Jarvis are affiliated with TriArc Advisors LLC (1-888- 317-9895). AANS Bulletin readers can receive audiotape on asset protection by calling TriArc at (800) 554-7233.