Don’t Leave Yourself Unprotected
By Nicholas Efthemis CFP®
The largest concern facing physicians today is how to protect their wealth against the proliferation of malpractice claims and extraordinarily high jury verdicts. Malpractice insurance has become so expensive that physicians are greatly reducing their coverage.
Even worse, some carriers are dropping physicians that have poor claims history. When meeting with physicians my message is a simple one. Take action and do so now. Constructing a complete asset protection plan is the single most critical step towards attaining financial freedom. Physicians work hard and long hours to create wealth, and are potentially one medical malpractice claim or general negligence claim away from financial catastrophe. Detailing every asset protection strategy is beyond the scope of this article, however I will review some important concepts you should know.
Good asset protection will prevent lawsuits. Conversely, the more personal assets that remain unprotected the more likely an attorney is willing to go after you. In fact, a physician with very high malpractice coverage and unprotected assets has a target on his back. This can be avoided through lower policy limits and a complete Asset Protection Plan.
What is the Best Asset Protection Plan?
The best Asset Protection Plan for a physician or any high net worth client removes all assets from the client’s name. The worst plan has all the assets in the client’s name. You will need to work with a specialized attorney to find the ideal plan for you. In many cases your largest asset are the funds in your retirement plan or IRA. The good news is that creditors cannot reach ERISA qualified plan assets. Common ERISA plans include:
1. 401(k) 403(b) Plan
2. Profit Purchase Plan
3. Money Purchase Plan
4. New Comparability Plans
5. Defined Benefit Plan
Keep in mind IRAs are not considered ERISA qualified plans and have no federal protection from creditors. Many individual states have protected IRAs in part or in full. In my state, New York, IRAs are fully protected. If you live in a state where they are not you should seriously consider moving the money into an ERISA qualified plan. This can be accomplished even if you are retired.
What about my house?
It is never a good idea, from an asset protection standpoint to own property in just your name. If you get sued the property is almost entirely at risk. Owning the marital home jointly with your spouse can be effective. You will protect the home from each other’s individual creditors (though not joint creditors). You should not title many assets as tenants by the entirety for several reasons. Physicians suffer a higher divorce rate than the already high national average of fifty percent. Should a divorce occur you will have ensured the spouse will receive half of that asset. Also, you do nothing to protect the asset against joint creditors.
How should my other assets be held?
You will need to consult a specialized asset protection attorney. Most effective plans involve the use of a corporate structure, limited liability company, or family limited partnership. Keep in mind that the entity you choose will have its own unique asset protection and tax consequences.
- Sole proprietorships and partnerships are the worst way to own a business. If a sole proprietor is found negligent in his duties for the business that injures a third person, the sole proprietor is personally liable. If a product or employee harm a third person or someone is harmed on the premises, the sole proprietor is personally liable. With a partnership you have all of the above risks coupled with a partner who can cause you even more liability.
- Limited Liability Companies (LLCs), Family Limited Liability Companies (FLLCs) and Family Limited Partnerships (FLPs) are the most commonly used tools by asset protection specialists today. A creditor attempting to obtain assets of a debtor when the assets are in a LLC will likely have very limited success. In fact, a charging order is the only remedy a court can give a creditor. A charging order does not allow creditors to sell assets of the LLC or force distributions of income. It also cannot transfer interest in the LLC to the creditor. A creditor who obtains a charging order against an LLC may in fact receive a K-1 for income they never did and may never receive.
What should I consider holding in an LLC?
I advise my physician clients to consider holding rental real estate, after tax investment accounts, planes, boats and any personal assets of value in an LLC. Unless you are single and your home is titled in your name alone, the marital home may not be a good candidate for transfer to an LLC. By doing so, you forego the capital gains exemption of $250,000 per spouse. Brokerage accounts can be owned by an LLC, and when constructed correctly you will have full ability to invest as you desire. The investments within the account would then be protected. Assets such as planes and boats may be best held in their own LLCs to protect the rest of your estate from their unique risk profiles.
Example:
- Personal Residence $750,000 Tenants by the entirety
- Vacation Property $300,000 LLC #1
- Investment Account $900,000 LLC #1
- 401 (k) 2,400,000 ERISA plans are federally protected
- Boat $55,000 LLC #2
Assessment
The topic of asset protection is vast and complicated, but I hope to break out additional topics such as off-shoring, accounts receivable leveraging, fiduciary duties, and insurance in subsequent articles. My hope is that I have given you enough ideas and motivation to act now. You cannot wait until there is an issue. It is critical that your financial planner, attorney and accountant are all very knowledgeable on asset protection. Do not rely on a generalist to navigate such a complex yet critical issue.
About the Author:
Nicholas Efthemis is a Certified Financial Planner™ who helps physicians plan wisely and live fully by creating a financial plan that helps them focus on their medical practice and live a better life.
Conclusion
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Filed under: Experts Invited, Financial Planning, Insurance Matters, Professional Liability, Risk Management | Tagged: 403(b) plans, Asset Protection Fundamentals for Physicians, ERISA, financial planning for doctors, IRA, malpractice insurance, Nicholas Efthemis CFP® | 3 Comments »
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