Physician Creditor Protection for IRAs, Annuities and Insurance for 2014-15

Posted on September 17, 2014 by Dr. David Edward Marcinko MBA

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Asset Protection Planning for Qualified and Non-Qualified Retirement Plans, IRAs, 403(b)s, Education IRAs (Coverdell ESAs), 529 Plans, UTMA Accounts, Health/Medical Savings Accounts (MSA/HSAs), Qualified and Non-Qualified Annuities, Long-Term Care Insurance, Disability Insurance and Group, Individual and Business Life Insurance [Ohio Focus]

By Edwin P. Morrow III; JD LLM MBA CFP® RFC®

[©2007-12-14. All rights reserved. USA]

EDITOR’S NOTE:

Hi Ann,

A couple years ago you posted an earlier version of the attached Asset Protection Outline. I updated it to include quite a bit more discussion of different protection levels for various kinds of accounts, and included more discussion of states other than Ohio, including a 50 state chart with IRA/403b protections.

So please delete the old one and replace with this one which contains more topics, including some substantial discussion of issues regarding current class action litigation jeopardizing asset protection for Schwab and Merrill Lynch IRAs.

Regards
Ed

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The Importance of Asset Protection as Part of Financial and Estate Planning for Doctor’s and Medical Professionals

Asset Protection has become a ubiquitous buzz-word in the legal and financial community. It often means different things to different people. It may encompass anything from buying umbrella liability insurance to funding offshore trusts.

What is most likely to wipe out a client’s entire net worth? An investment scam, investment losses, a lawsuit, divorce or long-term health care expenses? “Asset Protection” may be construed to address all of these scenarios, but this outline will cover risk from non-spousal creditors as opposed to risk from bad investments, divorce, medical bills or excessive spending. Prudent business practice and limited liability entity use (LP, LLP, LLC, Corporation, etc) is the first line of defense against such risks. Similarly, good liability insurance and umbrella insurance coverage is paramount.

However, there is a palpable fear among many of frivolous lawsuits and rogue juries [especially among physicians and medical professionals]. Damages may exceed coverage limits. Moreover, insurance policies often have large gaps in coverage (e.g. intentional torts, “gross” negligence, asbestos or mold claims, sexual harassment).

As many doctors in Ohio know all too well, malpractice insurance companies can fail, too. Just as we advise clients regarding legal ways to legitimately avoid income and estate taxes or qualify for benefits, so we advise how to protect family assets from creditors. Ask your clients, “What level of asset protection do you want for yourself?

For the inheritance you leave to your family?” Do any clients answer “none” or “low”? Trusts that are mere beneficiary designation form or POD/TOD substitutes are going out of style in favor of “beneficiary-controlled trusts”, “inheritance trusts” and the like.

Table of Contents

While effort is made to ensure the material is accurate, this material is not intended as legal advice and no one may rely on it as such. Sections II(d), II(i), V, VI and XI were updated Feb 2012, but much of the material and citations have not been verified since 2010. Permission to reprint and share with fellow bar members is granted, but please contact author for updates if more than a year old.

T.O.C. [Page Number]

I. Importance of Asset Protection 2

II. State and Federal Protections Outside ERISA or Bankruptcy 4

a. Non-ERISA Qualified Plans: SEP, SIMPLE IRAs 5

b. Traditional and Roth IRAs, “Deemed IRAs” 7

c. Life Insurance 9

d. Long-Term Care, Accident/Disability Insurance 13

e. Non-Qualified Annuities 13

f. Education IRAs (now Coverdell ESAs) 16

g. 529 Plans 17

h. Miscellaneous State and Federal Benefits 18

i. HSAs, MSAs, FSAs, HRAs 18

III. Federal ERISA Protection Outside Bankruptcy 20

IV. Federal Bankruptcy Scheme of Creditor Protection 26

V. Non-Qualified Deferred Comp – Defying Easy Categorization 30

VI. Breaking the Plan – How Owners Can Lose Protection 32

(incl Prohibited Transactions and Schwab/Merrill Lynch IRA problems) 35

VII. Post-Mortem – Protections for a Decedent’s Estate 51

VIII. Post-Mortem – State Law Protections for Beneficiaries 52

IX. Post-Mortem – Bankruptcy Protections for Beneficiaries 54

X. Dangers and Advantages of Inheriting Through Trusts 56

XI. Piercing UTMA/UGMA and Other Third Party Created Trusts 59

XII. Exceptions for Spouses, Ex-Spouses and Dependents 61

XIII. Exceptions when the Federal Government (IRS) is Creditor 62

XIV. Fraudulent Transfer (UFTA) and Other Exceptions 68

XV. Disclaimer Issues – Why Ohio is Unique 69

XVI. Medicaid/Government Benefit Issues 71

XVII. Liability for Advisors 72

XVIII. Conflicts of Law – Multistate Issues 73

XIX. Conclusions 75

Appendices

A. Ohio exemptions – R.C. §2329.66 (excerpt), §3911.10, §3923.19 78

B. Bankruptcy exemptions – 11 U.S.C. § 522 excerpts 80

C. Florida IRA exemption – Fla Stat. § 222.21 (note-may be outdated) 85

D. Sal LaMendola’s Inherited IRA Win/Loss Case Chart 86

E. Multistate Statutory Debtor Exemption Chart 88

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Assessment

This outline will discuss the sometimes substantial difference in legal treatment and protection for various investment vehicles and retirement accounts, with some further discussion of important issues to consider when trusts receive such assets.

Beware of general observations like: “retirement plans, insurance, IRAs and annuities are protected assets” – that may often be true, but Murphy’s law will make your client the exception to the general rules. The better part of this outline is pointing out those exceptions.

2012 WHITE PAPER LINK:

Creditor Protection for IRAs Annuities Insurance Nov 19 2010 WC CLE Feb 2012 update

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2014 WHITE PAPER LINK UPDATE:

Optimal Basis Increase Trust Aug 2014

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ABOUT THE AUTHOR:

Mr. Edwin P. Morrow III, a friend of the Medical Executive-Post, is a Wealth Specialist and Manager, Wealth Strategies Communications Ohio State Bar Association Certified Specialist, Estate Planning, Probate and Trust Law Key Private Bank Wealth Advisory Services. 10 W. Second St., 27th Floor Dayton, OH 45402. He is an ME-P “thought leader”.

Constructive criticism or other comments welcome.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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5 Responses

  1. Ivan Green (@gfs4debt), on July 12, 2012 at 9:45 PM said:

    Great topic and well put together

    When we talk about what are annuities, we start off by pointing out the fact that in most states, they are protected from bankruptcy and lawsuits. We are a local insurance agent in Houston, TX so we are not sure about Ohio specifically.

    The other benefit to doctors is that you do not have a limit to the amount that you can contribute to an annuity. We had a client at the end of last year decided to put $200,000 in his annuity. They are a great vehicle for doctors.

    Thank you for the information.

    Ivan Green

    Like

  2. Sam, on July 14, 2012 at 12:26 PM said:

    Annuity Inflows Increase, Overall Activity Declines
    [Survey]

    Although overall activity in the annuity market has been down over the past 13 months, inflows in May increased by slightly more than 1% to $7.5 billion from $7.4 billion in April, according to the Depository Trust & Clearing Corp.

    http://www.financial-planning.com/news/annuity-inflows-increase-overall-activity-declines-2679776-1.html?ET=financialplanning:e8924:2248552a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Weekend__071312

    Sam

    Like

  3. Ann Miller RN MHA, on June 13, 2014 at 5:00 PM said:

    U.S. Supreme Court Rules Inherited IRAs Aren’t Protected From Bankruptcy

    A recent U.S. Supreme Court ruling provides some much needed guidance on the issue of whether bankruptcy protection is afforded to inherited individual retirement accounts.

    http://wealthmanagement.com/retirement-planning/us-supreme-court-rules-inherited-iras-aren-t-protected-bankruptcy?NL=WM-08&Issue=WM-08_20140613_WM-08_263&YM_RID=marcinkoadvisors%40msn.com&YM_MID=1471398&sfvc4enews=42&cl=article_2

    Good news for creditors.

    Ann Miller RN MHA

    Like

  4. Michael Zhuang, on April 1, 2015 at 10:29 PM said:

    For physician asset protection, leverage qualified retirement plans

    Medicine is a profession fraught with legal risk. According to an AMA survey for the period 2007-2008, for every 100 doctors, there were 95 lawsuits.

    The survey also reveals that physicians 55 years and older are eight times more likely to get sued than physicians 40 years and younger. Not that they make eight times more medical errors, just that they are richer lawsuit bait.

    That reminds me of a joke. Why won’t a shark attack a lawyer? Professional courtesy.

    Back to the topic at hand, many physicians in solo or small practice simply use a SEP IRA as their retirement plan. It is very simple to set up, and the contribution limit is a generous 25% of earned income or an annual limit of $49,000. What is there not to like about it?

    Well, from an asset protection perspective, they are not as ironclad as retirement plans qualified under the Employee Retirement Income Security Act (ERISA).

    ERISA applies to all employer-sponsored plans, including 401(k) plans, 403(b) plans, profit sharing plans, defined benefit plans, etc. ERISA states that the employee benefits under qualified plans “may not be assigned or alienated.” This puts assets in these plans out of reach of claimants and creditors.

    IRAs, including SEP and SIMPLE, are not covered by ERISA; they do not enjoy blanket federal protection. They are protected by state laws which vary greatly. Therefore, for asset protection purpose, physicians should put their retirement assets in ERISA-qualified plans as much as possible.

    Unlike IRAs, setting up a qualified plan is not as easy as walking into a brokerage. There is much paperwork involved, and physicians should only do it themselves when their patients can treat their own disease.

    Many insurance companies exploit this by pushing pre-packaged qualified plans that have high hidden expenses and limited investment options. Avoid them. Instead, look for an independent fiduciary plan administrator.

    Michael Zhuang

    Michael Zhuang is founder of MZ Capital, an independent wealth management practice specializing in helping physicians achieve financial freedom.

    Like

  5. Editor-in-Chief, on February 3, 2022 at 1:03 PM said:

    Annuities

    The Obama administration created a rule that aimed to crack down on brokers who offered unsuitable products to investors, but the rule was struck down in court in 2018. When this rule was partially in effect, annuity sales fell sharply, according to The Wall Street Journal. As soon as the rule was wiped out, annuity sales surged.

    Mike

    Like

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