By Douglas Segan, MD, JD, Guest Writer
The subject of asset protection triggers a range of emotions and thoughts for the average physician including curiosity, fear of unscrupulous sharks trying to separate them from their money, elaborate offshore schemes for the ultra-rich and wishful thinking that they can postpone protecting their assets for another day. The purpose of this article is to debunk some of the commonly held myths about asset protection and to motivate the reader to take some basic, inexpensive steps to learn how to protect their nest egg.
Is Asset Protection Only for the Very Wealthy?
If you practice medicine and you have any savings, then you should learn about asset protection. Even a modest nest egg is worth protecting. The experience of being a defendant in a serious medical malpractice case is very stressful for the average physician. While the odds are low that a doctor will face a judgement in excess of the insurance policy limits, the fear of this outcome is a major contributor to litigation stress. The fear of losing one’s life savings is behind some cloudy thinking in the lawsuit settlement negotiation process. If you work on protecting your assets now, you will have one less thing to worry about in the future if you become a defendant.
I Have Good Insurance, So My Assets Are Protected.
Having solid professional liability, health, auto, homeowners and umbrella insurance is the critical first step in protecting your assets. While insurance provides the foundation of your asset protection plan, there are monetary limits to your coverage. If you become a defendant, you will sleep better at night if you are not worried about losing your shirt in the event that a judgement against you exceeds your policy limits. In addition, some companies are eager to end your policy if you are late paying your insurance bill. You do not want your life savings lost due to an accident in your home because you went on a long trip or you misplaced the bill for your homeowners insurance and your company cancelled your policy.
Brand New, ‘Cutting Edge' Trusts in the Caribbean Are Judgement-Proof and Worry-Free!
The internet is filled with folks who want you to turn over your life savings to an overseas trustee with the assurance that you will then be judgement-proof. One of the primary goals of asset protection planning is to help you sleep at night if you should become a defendant. Having your money in the hands of an offshore trustee that is not subject to US financial rules sounds like a recipe for insomnia. This area is filled with sharks, so take great care in finding ethical local counsel in this field. The goal of your asset protection plan should be a plan that is simple, traditional, and low cost. Congress and your state legislature can change the rules of the asset protection game at any time. Therefore, avoid the latest fads in this area because those are the ones that will most likely to be the subject of new laws that can make your cutting edge “bulletproof” plan worthless.
My Asset Protection Planning Can Wait
The time to set up the basics for protecting your assets is now. It must be done before you find out you have been named as a defendant in a medical malpractice or other civil suit. No matter how small or large your net worth is currently, it deserves protection from the broad range of folks who would like to take your life savings away from you.
How Expensive Is Asset Protection Planning?
If you have accumulated great wealth then it is true that you will need expert legal help to develop a sophisticated plan. However, for the vast majority of physicians, a basic asset protection plan can be set up for little or no cost. If you are willing to spend a couple of hours on the internet, you can learn the basics of this topic on your own. The first step is to learn what assets are insulated from creditors in your state. Every state has unique rules, so you must find out what specific assets are protected and the limits of protection for these assets that are insulated from creditors in your state. If you do not want to do this on your own, an ethical lawyer should be able to advise you on what you need to know about the rules in your state in a couple of hours. If you are motivated to learn about this area on your own, Nolo is a great online resource. If you enter the name of your state and the words “bankruptcy exemptions” and “nolo” into your favorite search engine, you will see which assets are given special protection from creditors in your state. Hopefully, the types of assets that are given protection from creditors in your state will be the same asset classes that are already part of your overall investment plans. For most physicians in most states, a good plan will focus on maximally funding IRAs and other retirement plans. You will also want to look at the pros and cons of certain life insurance policies, annuities and building equity in your home.
Should I Put All My Assets in Spouse's Name?
Hope springs eternal, but the odds of getting divorced are much higher than than the odds of losing a malpractice suit that exceeds your policy limits. In addition, a key rule of asset protection is to not put all of your eggs in one basket (or one member of the family). While the non-medical spouse may not have to worry about a malpractice suit, another civil suit (such as one arising from a car accident) could occur.
Every physician would benefit from knowing the basics of asset protection. Learn how the laws in your state give special protection from creditors to certain types of assets. Ideally, these protected assets will fit well with your overall financial plan. Having an asset protection plan in place will reduce the stress of litigation if you become a defendant in a lawsuit. Seek ethical counsel and develop a plan that is simple, traditional, and understandable.
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 have you done to protect your assets? Have you met with an asset protection attorney? Comment below!
[Editor's Note: Douglas Segan, MD, JD, is an emergency physician and an attorney who enjoys educating physicians about asset protection through his writing and lectures. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
My financial plan includes maxing out my retirement accounts and throwing huge amounts of money towards my student loans. Once that is done, I had planned on investing in taxable accounts and/or real estate in my city. Since I live in Florida which according to Nolo has unlimited home equity protection, perhaps paying down my mortgage would be a safer bet than taxable investments?
Safer? Yes. Better? Perhaps not. It depends on a lot of factors.
Keep in mind that Florida residents can protect unlimited equity via the homestead exemption provided they purchased the residence 40 months or more prior to filing bankruptcy (assuming the worst case scenario).
The best asset protection plan is one that has financial planning benefits coupled with asset protection. If something is too complicated or difficult to explain to a judge, the odds are the strategy will not work in terms of asset protection.
You can always move to Texas where there is a cap on liability. I sleep very well at night.
Honestly I thought this article was going to be about asset allocation and what is a good stock:bond ratio.
Don’t sleep too well. I live in Missouri, and we also had caps on noneconomic damages that were in place for several years. Then a lawsuit went to the state supreme court and they threw the caps out. They were gone overnight.
Asset protection, asset allocation, it’s all the same, right? 🙂
In Texas, it was an amendment to state constitution. No state court can overturn it.
Here is a link to an article that I co-authored with well-known asset protection attorney Jay Adkisson.
http://www.physicianfinancialservices.com/files/7760/Asset%20Protection%20Oncology%20Practice%20Management.pdf
I also use “tenants by the entirety” here in Illinois. But you also say you don’t pay down the mortgage. Is that title method not very iron clad then?
If we both get sued then it doesn’t do any good to have tenants by the entirety.
It is probably obvious, but the same is true in the event of a divorce or if one spouse dies.
We already max out retirement space for wife (17.5K TSP +5.5k backdoor roth) and myself (51k profit sharing + 5.5 backdoor roth). My state has a (relatively) small homestead exemption. For people like us, who aren’t interested in insurance products, the main question is this: What is a safe way to invest in a taxable account? I have looked at domestic asset protection trusts and charging order protected entities (family limited partnership, LLC, etc) – and I am uneasy. They seem expensive, with no real guarantee that they offer the desired protection. Our taxable investing accounts are 50% in my name, and 50% in my wife’s name (we are not a community property state) – is there something better we should be doing? This is the main question that a lot of physicians need answered – the basic taxable account is where we have our “vulnerable” assets. My state has caps for non-economic damages, but if you had a bad patient outcome where a child required long term care for decades you could still easily have a judgement against you for well in excess of the limits of malpractice coverage. Suggestions?
That money is at risk. You have to weigh the benefits of additional asset protection with the costs. Truthfully, the chance of going over your limits is pretty low, but if you’re really worried about it, then life insurance products, overseas trusts, LLCs etc might be worth the cost to you. At a certain point, you just have to live life. Life is risky.
You put away in retirement, just less than half of my pay. Good job. But I am a bit jealous. Don’t forget to refer back to your primary care brethren. Oh, and we like wine as holiday gifts. Please no more coffee mugs.
WCI,
What kind of insurance do you have for your rental property? If a tenant gets injured, does your property insurance covers it, or do you have an umbrella policy that protects your assets if legal recourse is taken by the tenant? A lot of folks in the services presume that homeowners insurance will suffice.
I have both. If you really want to be careful, you stick it into an LLC too.
For someone who has already maxed their retirement accounts, and has reasonable term life/disability/home/auto/umbrella/medmal insurance, what are other asset protection options for an employed physician being paid by W-2?
Does a 529 plan offer asset protection?
Any other insurance products offer protection (sometimes the argument for some of the more expensive life insurance products)?
What assets do you put in the LLC if you are an employed physician?
You can put real estate or a small business in an LLC. It gets a little more tricky after that, as there is supposed to be a business purpose for the LLC, but some try to put their recreational vehicles and taxable investments in there. I’d meet with an attorney in my state before doing that.
529s offer asset protection, so do irrevocable trusts, HSAs, UTMA accounts etc. Remember this is all state specific.
Great post!
I found this page to have more detailed state by state information: http://www.assetprotectionsociety.org/state-asset-protection-laws/
I recommend not losing sleep over this issue. I am an OB/GYN who has been through a medmal trial. I recommend that you use the carrier in your area that is not the cheapest but the one who has the best reputation and contracts with the best defense lawyers. If you do this you will sleep fine at night. A trial is traumatic but survivable. Very few docs will lose at trial. In my area almost every OB has been to trial but nobody has lost the case. No one that I know has had a payment above their coverage. You are much more likely to lose assets in a divorce than at a malpractice judgement.
The ACEP news link seems broken
Sorry about that. I have had more trouble with that link than any other. It looks like the entire publication has disappeared from the internet. It has been replaced by ACEP Now, which at least has an article from me!
The asset protection site must not be updated regularly. Ohio’s Homestead exemption has recently gone up to 125k.
Limited Partnerships may have more settled law than LLC’s. Also easier to value and gift assets.
Every physician should have a HELOC to protect their Home equity. A UCC loan will always be superior to a unsecured debt.
Wage garnishment is always a slam dunk. You simply cannot protect W-2 income.
Question: are contributions made to Retirements exempt from garnishment?
Why should a physician in Texas or other state with strong homestead laws have a HELOC? Take it out of the home and put it in your bank account and all of a sudden it is available to creditors where it wasn’t before.
If you’re asking about FUTURE contributions to retirement accounts, then I think the answer is no, they’re not exempt from garnishment. Past contributions, however, usually are but check your state’s laws.
A HELOC is contingency financing. The HELOC is recorded as a UCC lien whether it is utilized or not.
Interesting. I see the strategy now. You pay a low HELOC fee, it’s recorded, but you don’t actually borrow out the money. I would still argue you don’t need it in Texas or Florida, but I see why it could make sense for someone like me. I’ve got a 6 figure amount of home equity exposed to creditors.
Can you clarify the benefit of the HELOC and the UCC from an asset protection standpoint?
BTW, new here and thanks a TON to WCI and other active members here for helping us to keep our heads above water. It is appalling how little most of us know about this stuff…
Interesting comments. I did estate planning with an expert attorney who was not even interested in discussing “asset protection” approaches. He said that the elaborate trusts were extremely expensive, unreliable, located of necessicity in sketchy domans that do not enforce legitimate judgements, and peddled by sketchy lawyers from whom I should keep my distance. In fact, he suggested that many judges viewed defendents who had such plans as having tacitly conceded that they were up to no good. Some viewed breaking the plans as a personal challenge.
He said that I had good malpractice and umbrella coverage, but if I was worried, then excess malpractice on top of that from work would be far less expensive, and more reliable than distorting my estate and property ownership. I recall a case on which I consulted in which a very high income surgeon had carried his own excess malpractice coverage, on top of that through his group. That provided him with another malpractice defense lawyer, and would have paid the balance if the judgement had exceeded his base coverage. He won the case, so it was never tested.
Ed-
He’s saying the UCC lien (Uniform Commercial Code) is recorded so that it looks on paper like there is a loan on the property, when in reality, there is no loan you’re actually paying interest on. I don’t think I’d like to actually try it in court.
Interesting. That’s kind of what I figured. If one were to draw the HELOC out, it would be exposed anyway, unless you had invested it in some sort of protected retirement account or something along those lines, and I wouldn’t exactly draw on a HELOC to invest…
I have heard, however, of people taking loans from family on a home so that the family member (such as a parent or adult sibling) has the 2nd lien (after the bank) on a home. If you are sued, you stop paying the 2nd loan and the family member can take the house before the malpractice creditor can. Have you heard of this, and do you have any thoughts? Kind of along the same lines in terms of asset protection. Obviously, you still lose the asset, but it stays in the family and you may be able to live there for a period of time…
Look at : http://markjkohler.com/6-ways-to-protect-your-home-from-a-lawsuit/
Excellent synopsis
1. Is an LLC for my 1099 IC work worthwhile or is this transparent for malpractice purposes? Should my 1099 contracts list the LLC as the party to the contract- seems like that potentially passes off malpractice burden to the LLC (whereas otherwise the hiring party provides my coverage)?
2. I have a NV license and some 1099 work there- does this protect my IC work in other states, such that establishing a residence in NV is worthwhile?
3. I have 80% taxable stock/bond, 10% IRA/401k, 10% cash/AR/property, no house now (good)- help?
4. Author and WCI stated exceeding limits is unlikely. I do CC, ER, corrections at times and $1M doesnt seem like much even to someone with zero lawsuits. What are the stats?
5. Is buying extra coverage worth it/feasible- I work in 4-5 states a year sometimes!
Thanks!
1. Transparent. N/A. Malpractice is always personal.
2. Protect it from what? Malpractice? No.
3. Max out retirement accounts. See what your employer offers, get an individual 401(k) for the 1099 work, do backdoor Roths, +/- HSA.
4. The stats are that paying from personal assets is exceedingly rare. Docs win most suits, those they lose are usually less than policy limits, those that are above are usually marked down to policy limits on appeal. But another great reason to max out retirement accounts.
5. My attorney laughed at me when I asked that question and then offered to sell me as much as I wanted to buy but said he couldn’t in good faith recommend more than the standard $1M/$3M in my area.
Great Post on asset protection strategies for business owners and doctors. I particularly agree on the points that one should always use insurance as a first defense, but one should never rely on it 100%. We have a great article that outlines all of the asset protection strategies for business owners here: http://www.ultratrust.com/asset-protection-strategies-for-business-owners.html but we have many articles on the subject as well. http://www.ultratrust.com
All too often I think Docs over-focus on malpractice risk but I’ve yet to find someone who has lost personal assets in a malpractice case. Typically even a bad case will settle for limits. The occasional over limit verdict you hear about is always appealed and then once again, typically settles for limits. There are far greater risks for most Physicians. Anyone heard of a Doc who has lost their license and ability to practice over drugs, alcohol, fraud, harassment, etc, etc? I get a mailer from the state about once a month with a list of all those poor souls. Granted, they may have had a hand in their own destruction, but good grief! Have a great Umbrella liability policy, put risky assets in LLCs (rental property being the most common), once your kid turns 18, title the car in their name (speaking of which, teenage drivers are probably as great or greater risk than malpractice) and invest in couples therapy, much cheaper than divorce. If you have millions in assets, get professional help from a reputable attorney. My .02