Asset protection is the murky underbelly of personal finance. Most personal finance blogs never talk about it, and most people really don't spend much time worrying about it at all. Doctors, however, worry about using the best asset protection strategies a lot. In fact, a ridiculous percentage of Continuing Medical Education credit is extended each year for what really boils down to risk management techniques rather than actual patient care or practice improvement. How many times have you heard in a lecture about how and why you should document a visit in a particular way? Exactly. Is that really helping the patient in any way? No, it's just CYA medicine.
There is no concrete definition of asset protection, but you will see its practitioners, primarily attorneys, use the broadest possible definition—including tax saving, estate planning, and even investment strategies. You will also see a great deal of fear-mongering. Just like with tax preparation, financial planning, investment management, and insurance, their products (primarily trusts, limited liability companies, and partnerships) must be sold. The key to selling these products well is to first create a sense of need. Stoking fear of losing everything to a malpractice suit will certainly do that. With all the marketing going on, it is VERY difficult to separate fact from marketing here.
Let’s go over what physicians need to know about asset protection. Once you have a grasp of the basics, you can decide if you wish to spend tens of thousands of dollars on the services of an asset protection attorney doing a deep dive.
Doctors have three big fears when it comes to malpractice lawsuits.
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When it comes to protection, we all like 100%. We like to know we're “protected” from anything bad happening to us. However, when you talk to its practitioners, none of them will ever promise that any given technique is 100% effective. It's all about risk reduction, making you less attractive to a potential plaintiff, and trying to stay out of court where a jury or judge may produce an unexpected result. To make matters worse, nobody really knows what will work until it actually goes to court.
It is also frustrating to doctors looking for an easy solution that there is no step-by-step guide to follow. You can't just “Do this, this, and then this and you'll be fine.” It comes down to your own unique risks and exposures, your state of residence, your wealth level, and your own risk tolerance. This makes it very hard to give specific advice.
It is really important to understand your state laws with regard to asset protection. These laws are HIGHLY variable, and while you can't necessarily run and hide in another state, protections available in one state may not be available in another.
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There are three main benefits of asset protection.
An adequate asset protection plan and strategies for you may be very simple and inexpensive. Once you have an appropriate asset protection plan in place, you can spend less time worrying and more time taking care of those you care about most: your family and patients.
Some might argue that asset protection, at least as much as it decreases the likelihood of you paying for damage you actually caused, is immoral. Well, one aspect of asset protection that makes it easier to pay for damage you caused is to have insurance.
Asset protection works best if set up before any damage occurs, much less a lawsuit is filed. Otherwise, any asset protection maneuvers you do can be considered a “fraudulent transfer.” If you move money from a non-exempt asset to an exempt asset at that point, you should expect a judge to reverse it.
Many asset protection techniques—such as forming a business entity like a corporation, Limited Liability Company (LLC), Family Limited Partnership (FLP), or trust—are done for business purposes or estate planning purposes. It is less likely that the judge will “pierce” the structure if you have a good reason for forming it besides trying to hide your assets.
Speaking of piercing corporations or LLCs, a frequent argument that is made by prosecuting attorneys is that there is no significant difference between you as a person and you as a business. This is an easy argument to make if you don't keep the finances of the two strictly separate. Do not spend business money on personal expenses, and do not spend personal money on the business. Do not use business assets for personal reasons.
If you are married, in many states you can title a real estate property and perhaps even bank and brokerage accounts as “Tenants by the Entirety.” The idea here is that each spouse owns the entire property or account so a judgment against just one of them cannot take any of it. While it is more gray than it at first appears, I see little reason not to use tenants by the entirety titling if it is available to you.
Retirement plans in general and in most states are completely exempt from creditors in a bankruptcy proceeding. ERISA plans such as 401(k)s, 403(b)s, and Cash Balance/Defined Benefit Plans are protected under federal exemptions.
Non-ERISA plans like IRAs, Roth IRAs, individual 401(k)s (yes, we know that's unfair), and the fancy California non-qualified retirement plans are governed by state law.
One of the best asset protections you can have is to simply give assets away. If you don't own it, nobody can take it from you. Obviously, you have to avoid fraudulent transfers (and sometimes they can reach back a year or two before the injury). You should also be careful “titling everything in my spouses's name” because the risk of divorce is dramatically higher than the risk of losing assets in an above policy limits judgment.
One of the stronger asset protection moves is a spendthrift trust. These grantor trusts have you as both the grantor (person who funds the trust) and the beneficiary.
Limited Liability Companies are designed to be cheaper and easier to manage than corporations while offering similar protections (i.e., the entity is separate from its owners). This provides both external (personal judgments like malpractice can't get your assets in the LLC) and internal (judgments from the LLC can't get your personal assets) protection. LLCs, like corporations, are at risk of a judgment “piercing the corporate veil” so keep them strictly separate from your personal assets.
Medical school may not have taught you about money, but we will.
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