By Steven Podnos, MD, MBA, CFP®, Guest Writer
We worked hard to get where we are! The thought of losing it all to a malpractice or accident leads to many sleepless nights (or should). In both my medical career, and now as a fee-only financial advisor, I have either made mistakes or have seen many that jeopardized a lifetime of savings. Entire books exist on asset protection issues, but let’s cover some of the big items.
The 6 Big Asset Protection Mistakes
#1 Not Having Enough Umbrella Liability Insurance
Not having enough liability insurance is crazy. Every physician should have a large “umbrella liability” insurance policy. These policies pick up after your underlying homeowner’s and auto policies end in terms of liability. Most of our clients have $2 Million-$5 Million dollars of coverage at a cost of $400-$1200 a year. That’s cheap.
#2 Titling Assets Correctly
In many states (especially my own, Florida), assets owned by a married couple can be titled “as tenants by the entireties.” This titling implies that each of the couple owns the “entire” asset. So, if either is sued individually, the other spouse can claim that the sued spouse has no real interest in the asset. This works very well in the right states. Conversely, I’ve seen several physicians put all their assets into their non-physician spouse’s name to avoid malpractice lawsuit exposure. Unfortunately, now the asset is exposed to all kinds of the spouse’s creditors and with no inherent protection. Again, in many states, assets owned by both of a married couple can’t be taken by any lawsuit against either of the spouses.
#3 Assets in Living Trusts Are Not Protected by Creditors
Another mistake commonly made is believing that assets in a Living Trust are somehow protected from creditors. Living Trusts are created during your lifetime to hold assets that can then pass without probate at death. They used to help segregate assets to maximize estate tax savings, but this feature is no longer necessary. In any event, a Living Trust is “revocable,” i.e., it can have assets move in and out of the trust at the whim of the “grantor” (the person forming the trust). Since you can move assets in and out of your living trust, a judge can also compel you to do so to pay off a creditor. Only Irrevocable trusts provide asset protection. These are usually trusts that hold inherited money—they are now irrevocable as the grantor is dead. As long as you are not the sole trustee of the trust, you probably have excellent asset protection.
There is a movement toward “self-settled” irrevocable trusts in some states-meaning that you can form your own irrevocable trust to protect your own assets. The jury is out on how well they will work as there has been little litigation against these vehicles. A major worry is that a demand for funds from a state court (in which you are sued and which does not recognize self-settled trusts) to another (where your trust exists) will be honored as a matter of state-state cooperation.
#4 Protection of 401(k)s and IRAs
Understand that 401(k) and defined benefit plans are protected by Federal law from creditors. However, protection of IRAs (Roth and Traditional) are governed by state law. Federal protection (usually bankruptcy) extends to any size IRA that contains only rollover qualified retirement funds but has a $1 Million dollar limit on traditional IRA assets. Mixing the two types of IRAs may expose assets unnecessarily. You should find out how your state treats these vehicles, especially before rolling over a large pension plan into an IRA. Inherited IRAs are also only protected in some states, so keep this in mind if you plan to either leave a large IRA to someone in an “unprotected” state, or expect an inherited IRA while you live in such a state. For example, in Florida, Inherited IRAs are granted the same strong protection from creditors as are regular and Roth IRAs.
#5 Leaving Assets to Your Heirs
There are many ways to protect assets you leave your heirs. Trusts with at least one trustee that is not the beneficiary and the absence of mandatory distributions are a good start. Leaving such assets in trust also protects a future ex-spouse from taking some of the money you left for your child. There are also ways to provide for a second spouse while protecting assets after they pass for your children from the first marriage.
#6 Get Your Name Off the Title of Things You Can't Control
A major asset protection mistake I commonly see is when a physician owns at least part of something out of their control. Commonly, I see adult children of physicians who still have their parent’s name on a car title. Guess who gets included in a lawsuit triggered by the adult child’s driving? We also see high liability vehicles like snowmobiles, jet skis, and boats either co-owned with other families or used by “friends.” Again, guess who gets sued when something bad happens?
Think of asset protection as a process. Avoidance of risk comes first (do you really want to have a trampoline in your backyard that the neighbor’s kids use?). A careful review of how the title of ownership works in your state is important. Understanding the assets that provide either universal vs. state-specific legislated protection is crucial.
Having a skilled attorney familiar with your state law and/or a savvy financial advisor can help you sleep at night before a creditor threat becomes real.
As you accumulate wealth, you need a way to protect your assets. WCI’s newest book is The White Coat Investor's Guide to Asset Protection, and it provides the techniques you can use to safeguard your money AND the most comprehensive list of state-specific asset protection laws ever published. Pick up the book today and protect your wealth!
What do you think? What does your asset protection plan consist of? Comment below!
[Editor's Note: Steven Podnos, MD, MBA, CFP® is the principal of Wealth Care LLC. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
Any chance you can list (or link) the states that allow “tenants by the entireties” titling (my understanding is that Ohio does not). Also, is there any advantage to holding your checking/savings at an out of state (local or regional) bank that allows this titling? Thanks for another good article.
There is no outstanding list that I know of. Attorney Jay Adkisson used to have one, but took it down. You need to check on the laws in each state with an attorney that is knowledgeable-usually an estate planning attorney.
Seriously? I’m not sure why people are having trouble finding this information, but I do consider myself a Google expert.
https://www.assetprotectionplanners.com/planning/tenancy-by-the-entirety-states-and-community-property-states/
https://www.assetprotectionattorneys.com/documents/TBE.pdf
https://www.assetprotectionplanners.com/planning/tenancy-by-the-entirety-states-and-community-property-states/
Sure, a google search is a start, but I’d caution against basing an asset protection strategy on what you find from the search. It’s a simple question to an expert advisor.
Basing the safety of your asset protection strategy on the google search is like deciding what to do about your abdominal pain from the search.
We do asset protection planning with clients all over the country and I always insist on having a local expert on board. Steve
+1 you need to consult an attorney in your state for an answer on this. This article is a great guide to identify potential hotspots but the laws very tremendously state to state.
Of course a Google search isn’t an asset protection strategy, but figuring out whether your state is a tenants by the entirety state or not is pretty easy. Unless you’re suggesting those lists aren’t very accurate. I don’t have any reason to believe they’re not.
http://bfy.tw/FQBz 🙂
States Tenancy by the Entirety Real Property PersonalProperty CommunityProperty State
Alabama No
Alaska Yes Yes Yes
Arizona No Yes
Arkansas Yes Yes Yes
California No Yes
Colorado No
Connecticut No
Delaware Yes Yes Yes
District of
Columbia Yes Yes Yes
Florida Yes Yes Yes
Georgia No
Hawaii Yes Yes Yes
Idaho No Yes
Illinois Yes Yes No
Indiana Yes Yes No
Iowa No
Kansas No
Kentucky Yes Yes No
Louisiana No Yes
Maine No
Maryland Yes Yes Yes
Massachusetts Yes Yes Yes
Michigan Yes Yes No
Minnesota No
Mississippi Yes Yes Yes
Missouri Yes Yes Yes
Montana No
Nebraska No
Nevada No Yes
New Hampshire No
New Jersey Yes Yes Yes
New Mexico No Yes
New York Yes Yes No
North Carolina Yes Yes No
North Dakota No
Ohio No
Oklahoma Yes Yes Yes
Oregon Yes Yes No
Pennsylvania Yes Yes Yes
Rhode Island Yes Yes Yes
South Carolina No
South Dakota No
Tennessee Yes Yes Yes
Texas No Yes
Utah No
Vermont Yes Yes Yes
Virginia Yes Yes Yes
Washington No Yes
West Virginia No
Wisconsin No Yes
Wyoming Yes Yes Yes
I don’t know the answer to the question. I’m not sure whether the state’s laws where the bank is located or the state’s laws where you live would apply.
Thanks for this very informative article. We are not physicians but we do worry about most of these issues especially #5 : Leaving assets to your heirs.
We want to be able to protect our kiddo (and grandkids) in case her marriage doesn’t work out.
Nice list. Agreed that avoidance is key which includes removing your name directly from a lot of assets. This way your wealth is also less searchable which may make lawyers less apt to come after you. Then again an MD behind your name is enough to be a target.
Umbrella insurance is a simple and cheap backup in case you are sued.
Car titles can be a real pain, especially if two states are involved. Don’t forget the auto insurance policy will need to be a new policy too.
If by chance any vehicle loan is on the car, that will need to be paid too.
trust to make sure if your child gets divorced the ex cannot touch your money
I’ve had a few thoughts on this topic now that student loans are paid off and I can focus on paying down home mortgage vs. building taxable Vanguard investment accounts. I am part of a dual physician household, and while I recognize that malpractice lawsuits above policy limits are rare, the worry about one certainly affects how we choose to allocate our income…
1. My state does not allow “tenants by the entirety”, but apparently protects 240k of home equity for a married couple (homestead). My interest rate is 4.5% but is effectively a little lower given that there is an interest tax deduction. Am I right to assume that as long as my home equity is under 240k, the house will likely not be taken away in a lawsuit, because there is nothing for the creditor? Don’t get me wrong, I dont want to drag out the mortgage forever, but this would at least be reason enough to go slowly with it for awhile while building up Vanguard accounts.
2. I know non- qualified Vanguard accounts are not “protected”, but I would assume that it is best to open two separate non-qualified investment accounts…one for me and one for my wife…as opposed to one joint account. This would apply to our emergency fund too…2 separate accounts. I assume if a suit were claimed against one of us, then only half of assets are at risk?
1. Yes, you can do that. You can also “strip” the equity out with HELOCs/new mortgages and put it somewhere protected in your state (retirement accounts, annuities, whole life insurance etc.) If letting the tax tail wag the investment dog is bad, letting the asset protection flea wag the dog is even worse.
2. Depends on the state. If it’s a community property state or if you were both sued it wouldn’t make a difference.
Once you realize how low the risk is, especially if you carry plenty of insurance, you’ll probably limit how much hassle and expense you go through for that additional protection.
Dual physician couples in states that don’t have “as tenants by the entireties” protection are a problem. Having enough umbrella liability is essential, but doesn’t avoid the issue of malpractice judgements that exceed your coverage (which is hard and expensive to get in large amounts).
You can consider putting funds into protected structures like delayed annuities. I used these myself during a lawsuit many years ago. Vanguard and Fidelity (and others like Jefferson National) have extremely low cost annuity wrappers that you can invest in with excellent asset protection (again, check your specific state protection).
Another option is to form a Family Limited Partnership or multi member LLC to hold your after tax investments. You need a state specific estate planning attorney to do this right, but it can work well.
Wait. You used one DURING a lawsuit? Doesn’t that violate the first tenet of asset protection- that you can’t do anything once the lawsuit begins? I assume you just mean you had one in place prior to a lawsuit and it was protected in your state.
Right, I should clarify. I put two kinds of money into the annuity during the suit. Some was on going income which my attorney thought was ok to put there (not a fraudulent conveyance of existing funds). Second, I moved some of our protected “as tenants by the entireties” money over to the annuity (Vanguard by the way-no load, no surrender, etc). The one fault of ATBE ownership is IF the spouse that is not being sued dies during a prolonged lawsuit. Then the previously jointly held property becomes solely held by the spouse at risk.
Thanks for this great advice. It is a good reminder that physicians can have a target on their back.
Last year I discovered I had let my umbrella insurance lapse. I’m not sure why the insurance company didn’t let me know and apparently, I didn’t manage the dates well. I was “bare” for quite some time. I had a lot of workers in my house too, but fortunately, nothing happened during that gap. I’m more careful about that now.
#6 Not as straight forward and state dependent. We had inquired about putting our 18 yo car under his own name…where we live doesn’t matter because if he still is dependent for a percentage of finances (which college basically qualifies above and beyond that percentage, health insurance, etc.) the parent is still liable.
Thanks for the comment. I’ve inquired about whether a parent is responsible for a financially dependent adult child who does not have the parent’s name on their car title with several attorneys. The response has been that they don’t see how just financially supporting someone makes you responsible for their actions/accidents (short of handing them alcohol at a party).
Agree, but it is state dependent (and what the court would decide). Otherwise it would make sense (risky but do-able) just to title cars under your close friends or non-dependent family members. Which is why financial dependency is what the courts take into consideration is what we were advised. When your high schooler turns 18 their senior year, switching a title to them is also an insurance financial consideration. While the insurance is expensive period, their own car titled to them increases rates with most insurers (if that matters to anyone). My guess is insurers think when the parents “own” the car they tend to oversee the driving, maybe have the car monitored, etc.. I think the advice from attorneys depends on what they have seen and where I live dependent children have been liabilities to physician assets…….
Small claims would not be a problem.
Large claim is the problem. Both insurance companies would be looking to avoid payment.
How did he buy it?
What address on the DL?
Was the info “fraudulent”, zero coverage?
Not listed on your policy?
Is he a dependent on your tax return?
My point is, an 18 yr old that is still a dependent, might need to be on your policy. Just changing the paperwork could be viewed as a shame and leave you with no coverage. Depends on the judge regardless what the attorney says.
Your insurance agent can “legally bind coverage “. That protects you. If you just ask for a quote, that is insufficient.
Disclosure of the assets and how to insure the risk puts them on the hook.
Excellent information by Dr. Podnos. I’d like to offer the following comments.
First, with respect to tenants by the entireties:
“So, if either is sued individually, the other spouse can claim that the sued spouse has no real interest in the asset.” I approach this from the other perspective, which is that if the husband is sued, for example, the wife can claim that she has a full interest in the real estate, equal to the interest of the husband with the lawsuit, and that the wife’s interest cannot be prejudiced by the husband’s creditors. Of course, if the wife then dies, then the husband’s creditors take his interest and get the full property. For this reason, tenancy by the entireties, while offering some benefits, is not optimal. An FLP or LLC for the real estate may be better.
With respect to titling assets property in a spouse’s name:
“I’ve seen several physicians put all their assets into their non-physician spouse’s name to avoid malpractice lawsuit exposure. Unfortunately, now the asset is exposed to all kinds of the spouse’s creditors and with no inherent protection.” Yes, that is completely true, plus the fact that if the marriage goes awry, the doctor now has an uphill battle of trying to claim an asset that is fully in the other spouse’s name. Merely titling real estate in the name of a spouse is shaky asset protection and pretty dubious pre-divorce planning and should only be considered in the healthiest of marriages.
Thanks. I mentioned the issue of a spouse dying above in another comment. It is a possible fault of using ATBE titling for asset protection in appropriate states. But, ATBE titling is free and easy and the risk of both a spouse dying and a concurrent lawsuit is pretty small. Most of the families I work with opt for the ATBE titling instead of the more complex FLP structure. LLCs are highly recommended for rental real estate.
On living trusts:
I agree that they offer little asset protection.
“They used to help segregate assets to maximize estate tax savings, but this feature is no longer necessary.” I assume that the author is referring to portability of the unused exemption from estate tax from the first-to-die spouse, which Congress passed as law in 2012. Note that (a) portability is not automatic; (b) inserting portability language into a living trust is a good idea to empower the trustee to make the portability election; (c) there is no portability on the state level in many states, and (d) as we can see in the current debate over the proposed federal tax law changes, portability can always be revisited and changed by Congress.
Thanks. Looks like the new tax law will increase even an individual’s ability to leave untaxed assets of 11M dollars. That’s great news.
Silly question, but how does one title their Vanguard taxable account?
We just title ours in both of our names, but we’re also not in a tenants by the entirety state.
it also depends if it is in a trust or not, because to put it in a trust it has to be registered to the trust.
Joe Smith and Mary Smith, trustees of the Smith2017 Trust
Another HUGE mistake people make is they set up a trust, and never register/title the assets to the trust. Many financial institutions actually have “trust accounts”. You need to open up the trust account, correctly titled, and then transfer the current standing account into that trust account. Kind of a pain and actually registering/titling/changing beneficiaries was the most work of getting a trust in order.
Where do you guys buy Umbrella insurance from?
I cant seem to find anything!
Thanks
Wherever you get your auto or homeowner’s insurance from should be able to help you
Mine is at USAA, same as my home and auto.
Some employers offer Umbrella election at employee cost. Most of those have better rates and are transportable when you move on.
1) Check your employer.
2) Check any Insurance carriers you have.
Umbrella sits on top of an existing policy. An employer plan will have homeowners minimums.
Steve,
Great article and it is great to see you and read your thoughts! I still remember your teaching!
Thanks Claibe!
I’ve often heard of this recommendation to get umbrella liability coverage, but the main argument I’ve seen put forward is that it’s cheap. Generally speaking, cheap insurance isn’t very valuable to the insured for the simple reason that if the risk were substantial and likely to occur, the coverage wouldn’t be cheap. In the case of physicians, who often need as much coverage in the event of a malpractice suit as they can get, I think that this might make more sense, but I still think that the argument should not be based on the price of the insurance; it should be based on the risk of the event and the consequences of its occurrence.
Umbrella insurance doesn’t do anything to protect against malpractice.
I disagree that the main argument is it is cheap. The main argument is that liability can wipe you out. It’s just a nice side benefit that that risk is low and so cheap to insure against. Wish it were the same with malpractice.
Physicians are fat targets for plaintiff’s attorneys. I have had at least three families dragged into large lawsuits caused by adult children’s car accidents (parents left their names on car title). In every case, umbrella liability insurance saved the day.
I find that explanation far more compelling.
Morning, Steven.
Where does titling the house in a land trust fall for you?
It’s an alternate strategy for many of the states that don’t offer the tenants in entirety approach. Unfortunately, many assets with both spouses on the title are actually doubling their liability exposure by jointly titling property.
Chris, every state is different in how they protect home equity. Not all states have land trusts either. I have one client in GA who used a Personal Residence Trust to protect their home, which is an option in states that offer otherwise little protection Steve
Interesting strategy but what you gain in asset protection you may be giving up in taxes. You lose the step-up in basis at death when you give your home away.
Right. I don’t suggest it necessarily-depends on the circumstances. I find it shocking that many states can allow a creditor to force a sale of your primary residence to get at the equity inside.
Good point. That’s actually the first time anyone has mentioned that to me.
Now I’m wondering what happens when it gets pulled out of the land trust for refinancing before being re-trusted. Same thing happens regularly after stuffing rental property into an LLC when you’re working with residential financing options that prohibit ownership by an entity.
if there is a way to protect ones assets then why have malpractice insurance ( assuming you live in a state where that is o.k.)?
Only assets protected at the time of the judgment would be protected.
The judgement now enters a collection phase.
You have a debt, future earnings usually can’t be effectively hidden. For any substantial judgement, it can get extremely messy. The only way to erase the judgement is bankruptcy or a settlement.
Things like petitioning for a conservator would hand control to a trustee and limit the future control of earnings. Keep in mind, collection expenses will also be claimed.
First line of defense is liability insurance- malpractice and personal. It’s a key part of any asset protection plan. Remember when people talk about “protected assets” you may be required to declare bankruptcy before they’re protected! But if you have insurance, life goes on with only hassle and lost sleep.
So future earnings can be garnished?
What lawyer is going to sue a doc with protected assets and no malpractice insurance?
If filing for bankruptcy discharges the judgment then that is another option.
Medal mal costs millions over the life of a physician.
Not chump change like an umbrella policy
Not garnished, future earnings can be liquidated. Any future earnings can be assigned to paying the judgement. Prohibition of hiding earnings etc. can result in criminal charges. You won’t legally be allowed to spend new income and will need to use protected assets to pay legal fees.
Big fish bring out big guns for collecting. Malpractice claims don’t go to robocall debt collectors. An attorney with court orders show up in person and liquidate any bank accounts or investments. They “will collect “ if you continue to practice. Without malpractice, you are self insured. Everything not protected including future earnings are at risk. It’s expensive insurance but the claims can be huge as well. For big judgements, payment or bankruptcy are the options. Even in bankruptcy, protected assets and future income would be considered. Repayment could be required. If you need income to maintain a protected asset, the protection of the creditors is superior to your needs. Bankruptcy is ugly and you won’t like the results.
Malpractice insurance is needed from a risk and financial viewpoint. It’s a cost of doing business although expensive. Before you self insure, check with an attorney. Preferably one you would use if you needed to use for defending and then lost.
I’m not actually thinking about going naked.
Was just wondering why we pay for expensive insurance if their r other ways.
Having medmal ins also paints a bullseye on u.
Why would a lawyer go after a doc with no assets and no insurance ?
I guess that’s a good plan if you don’t intend to acquire any assets or make any money down the road.
Hi, what a wealth of information! For the State of a Florida….Wondering if an investment property purchased with a small mortgage with other non-physicians can be placed in an S-Corp that does not include the physician to protect it from malpractice claims? Or, if the physician is a member of the S-Corp, is this property “protected “ from malpractice claims since it is a “community property”?Thank you!
As a general rule, you DO NOT want rental real estate inside corporations. If you want liability protection, put it in an LLC.
So you probably CAN do this, but you probably SHOULD NOT do this.