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APPRECIATING THE RISKS
By J. Chris Miller JD cmiller@northfultonwills.com
Physicians and medical professionals share a unique disadvantage when it comes to asset protection. They are constantly haunted by the prospect of being sued for malpractice.
Most have solid malpractice insurance coverage in force, but if that pool runs dry, the courts may look to the professional individually to compensate patients for injuries suffered while under the professional’s care.
Malpractice insurance itself may not be sufficient to completely protect a physician against professional liability claims. As verdicts increase in size, policy limits may become inadequate.
Likewise, insurance companies have a strong incentive to deny coverage by arguing that a claim falls outside the scope of coverage. Preparing for these possibilities will leave you much more financially sound than if you had not planned ahead.
The Risks
Aside from the professional risks you take merely by agreeing to examine and treat a patient, dangers to your assets surround you. As discomforting as it may sound, your practice partners, your family, and even your neighbors are in fact potential adversaries. Unfortunately, your position as a medical professional in today’s society subjects you to elevated risks of a nasty lawsuit if you are negligent in your personal conduct.
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An accident while driving to the hospital in response to a call, or a simple slip-and-fall incident on your home’s sidewalk, will more likely find its way into a courtroom because plaintiffs (and their lawyers) perceive you as a deep pocket.
Personal Risks
On a more personal level, there may come a time when your marriage fails, and you are faced with equitably dividing property between you and your spouse. Asset protection strategies act differently in the context of a divorce, and family-oriented claims need to be treated differently in the scope of creating a plan.
Assessment
In the event that a claim arises from outside your professional activities, or if you find yourself swallowed by consumer debts, several asset protection methods will help you to prevent your assets from slipping away.
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Conclusion
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Filed under: Risk Management | Tagged: Asset Protection for Physicians, J. Christopher Miller |
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Some Basics of Good Asset Protection Planning
1. Realize your value as a physician target and do something now, this is pre-planning. You cannot do any effective or legal planning after a lawsuit has been filed or a demand has been made. The time to act is now when waters are calm. Hoping that that it won’t happen to you is not a plan.
2. Be realistic about the possibility of exposure and about the effect that a six or seven figure judgment would have upon the financial plan you have in place. The most common mistake made by financial advisors is telling clients who are worth “only” a few million dollars that they are not big enough to justify doing this kind of planning. This is possibly the worst advice possible. Of course a client worth five or ten or even $100 million needs this type of planning. But, who will be affected more? The ten million dollar client can take a hit for a million or two and keep the cars, house, lifestyle and the kids in college, but your more average client would be financially devastated. They need it even more.
3. Use the right tools. Asset Protection is part art part science, just like your medical practice or healthcare business. There are certain proven methods and tools that work and others that do not. Be wary of promoters, do it yourself kits and promises of domestic jurisdictions that will make you safe and save you money on taxes. Each tool has a specific business purpose that protects specific types of property, they are not all interchangeable.
4. No, Nevada Corporations do not usually work. In fact, they are increasingly viewed as presumptively fraudulent due to a long history of abuse and tax fraud. Thousands of consumers have purchased them under false promises of secrecy, bearer share anonymity and tax advantages. Almost all these promises are completely fictional. Most information shows us that the term “bearer shares” does not even exist in the statutes of the state of Nevada. Unless you or your client live there, do business primarily from or in the state of Nevada and have the assets in question housed in the state, a Nevada LLC will not help you, especially if it lacks a real business purpose as explained below.
5. Maintain a legitimate business purpose for all legal tools. We commonly see good tools misused by clients and inexperienced planners which do more harm than good. In order to take advantage of the full protection the law affords we must maintain an essential business purpose for the tools we use. The use of limited partnerships for investment management and LLCs to hold investment or commercial real estate are two examples of well proven and tested business usages.
6. No, transfers to a spouse, child or relative are not effective. This is especially true if the transfer is made after an exposure has occurred. A thinly disguised “gift” will easily be reversed and the property seized by the court in the event of a judgment. Further, these types of transfers are rarely legitimized by the appropriate recording and tax reporting formalities. If you gave your 17 year old your $1 million home at full equity you better have a gift tax return illustrating that, and it better have been done well in advance of the harm complained of. Even if the gift is effectively made, all you have done is given away something you want to protect and exposed it to another person’s liability.
7. “Just” an S-corp. or an LLC is not enough. Single member or closely held corporations with just one or two owners are exactly they type of entity you commonly hear referred to when you hear the phrase “piercing the corporate veil”. If a business has only one or two owners who closely manage and control the operations of the business on a daily basis, or even worse, who are also directly responsible for a harm or injury, it is relatively simple for a court to pierce the veil and grant access to the owner’s personal assets. This is especially true with successful small businesses and family businesses that often don’t maintain the formalities of keeping personal and business expenditures completely separate, bolstering the argument that the person and the corporation are one and the same.
8. Get professional, individual help. There are a wide variety of skill levels in every profession, including the law. Many so called “Asset Protection” professionals are not attorneys, or are attorneys who apply bits and pieces of knowledge from other fields of practice that may actually diminish legal protections in existence. Every plan must be uniquely tailored to the individual, their activities and the unique nature of their assets. There is no one size fits all solution, even though clients with similar assets may have similar looking plans.
9. The legal tools used are typically tax neutral. Don’t try to combine tax planning and Asset Protection. In most cases, the tools used are taxed neutral and do not provide tax advantage or tax liability. Many times abusive tax structures are disguised as Asset Protection, often promising tax free growth offshore in various trusts or captive insurance plans.
As a financial professional we already know that putting money into a plan tax free, growing it tax free and pulling it out tax free is rarely if ever possible. The one general exception to this rule is in the application of certain receivables protection plans.
10. Don’t forget about income and receivables – protect the source. Very often we see MDs and individuals that are concerned about protecting everything they have been fortunate enough to accumulate while ignoring ways to protect their future income. We find that many clients, even those with a very high net worth, often have fixed business and personal overhead commitments based on the expectation of a certain income level. If many of them suddenly had that cash flow tap turned off, they would not be able to sustain their current monthly expenditures. This scenario would force them into a situation where they were either selling off assets or going into qualified plans early and making substantial lifestyle changes. There are options available for qualified clients that can securitize that income stream.
11. Don’t draw liability in. In many cases clients unintentionally escalate their value as a target. For instance, how many MDs or your clients have vehicles that they or their spouse drive titled in the name of their business? Which of the following three defendants is most exciting to a plaintiff: John Smith; Dr. John Smith, or Smith Chiropractic? As you can see the corporate defendant is often the most exciting, deepest pocket. In order to fix this we simply transfer the vehicle back to the client’s name and have them take a car allowance from the business. Remember, with a good plan in place your client won’t have substantial exposed assets anyway.
This diatribe just scratches the surface of Asset Protection and provides some generally applicable rules and issues to be aware of. When you are ready to explore the solutions available, seek qualified counsel that has a proven record of experience in this specific field and that works with clients on a national level and can provide some outstanding guidance.
Chris – Many hanks for your chapter contribution to our new book.
We can all learn much from you.
Dr. David Edward Marcinko MBA
http://www.CertifiedMedicalPlanner.org
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More on Asset Protection
Besides helping you build wealth, your financial planner should also offer ways to help you protect it. Yet one aspect of comprehensive financial planning that doesn’t always get a lot of attention is asset protection.
The most common ways to lose assets are divorce, bankruptcy, and judgments filed against property as the result of a lawsuit. Putting assets beyond reach of a judgment resulting from a frivolous lawsuit is a basic asset protection strategy. It includes owning assets in trusts, LLCs, or corporations that are located in multiple jurisdictions.
Yet when I suggest asset protection strategies to clients, they often respond with ambivalence or reluctance. I now realize these reactions may be tied to the beliefs clients hold about money and wealth. If you respond negatively to the idea of asset protection, you may want to consider whether you hold some beliefs that may keep you from protecting yourself.
Here are a few common beliefs, or money scripts, around asset protection:
1. “Liability insurance is all you need.” While it’s a good start, liability insurance only protects you if the claim doesn’t exceed your insurance coverage, your policy is in force, your company doesn’t deny the claim, and your company doesn’t go bankrupt in the middle of a lawsuit. Three of those four exceptions have happened to me.
2. “If you are ‘lucky’ enough to have a lot, it’s petty and selfish to want to protect it.” Asset protection isn’t just about the owner of the asset. It also safeguards others, such as employees, tenants, or family members.
3. “Asset protection is only for the very rich.” You may have a small investment portfolio, some rental property, or a small business. That may not represent great wealth, but whatever you have is all you have. For that very reason, asset protection may be especially important for those without a lot of wealth.
4. “Asset protection is shady and unethical.” Many people associate asset protection with hiding assets illegally. This is not what any reputable professional will advise you to do. Ask advisors to discuss the ethics as well as the strategic value of the approaches they suggest.
5. “People in general can be trusted, so asset protection isn’t necessary.” Just ask anyone who’s ever been through a nasty dissolution of a partnership if they fully trusted their partner when they went into business and how strong that trust was at the time of the breakup.
6. “You won’t be sued unless you do something wrong.” In an ideal world, this would be true. In the world we live in, it’s surprising how often people of perceived wealth are the targets of frivolous lawsuits. Most cases are without merit and are eventually dismissed or decided in favor of the defendant, but it takes a lot of time, energy, and money to defend against them. Plaintiffs hope to gain a settlement from a defendant unwilling to go to that trouble and expense.
7. “It’s wrong to prevent people from collecting damages if they have been hurt.” If you have genuinely injured someone, of course you have an obligation to make that right. Strong asset protection includes provisions, like adequate liability insurance, that allow you to take care of legitimate obligations without bankrupting yourself.
Ethical asset protection strategies are not a way of avoiding responsibility. Asset protection is not intended to protect you from the consequences of your own wrongdoing. Its primary purpose is to protect you from the wrongdoing of others.
And the first phase of implementing that protection may be to identify and get past your own money scripts about asset protection.
Rick Kahler MS CFP™
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ASSET PROTECTION
I completely agree with Rick’s comments above. When asset protection or surprisingly enough insurance in general come up in the financial planning conversation you can get a multitude of reactions. The average investor and physicians that I’ve worked with are early in their careers differ wildly when it comes to asset protection because it’s hard to imagine a scenario where you may have your assets wiped out …. UNTIL YOU’RE IN THE SITUATION and of course it’s too late at that point.
I think planners and advisors have a very valuable role to play as it relates to asset protection in ensuring that our clients are educated and aware of the risks they face and how to protect themselves against it. I know that this isn’t the fun and sexy part of financial planning but without a good foundation of ensuring risks you really don’t have much of a financial plan at all.
JOE
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