By Asher Rubinstein, JD, Guest Writer

For doctors practicing in the United States, the unfortunate reality is that a lawsuit is not only likely, it is inevitable. Doctors are viewed as “deep pocket” targets, and there are many plaintiffs’ attorneys who are eager to file medical malpractice claims on a contingency basis, with no risk to their clients. Doctors are intelligent and accomplished professionals, but the smartest may be those who protect their assets well before the malpractice claims arise, even as early as upon graduating from medical school.


Using a Family Limited Partnership (FLP) for Asset Protection

For most doctors, the Family Limited Partnership (FLP) is the most beneficial domestic structure available for asset protection, as well as estate planning and tax minimization benefits. By transferring assets to FLPs, doctors can legally and successfully protect these assets from attack by future creditors, as well as preserve the assets for their family, rather than the IRS.

Asset protection is the safeguarding of personal wealth from attack by future creditors. The assets that may be protected include homes, interests in medical practices, other business interests, investment real estate, intellectual property (including patents, books, etc.), vacation homes, cash, bank accounts, brokerage accounts, stocks, bonds, cars, boats, jewelry, art, wine, and other collections and investments.

The asset protection of an FLP is statutory, meaning that it has been codified as law by state legislatures. The Revised Uniform Limited Partnership Act (RULPA) has been adopted in all 50 states and provides that the assets owned by a limited partnership are not owned by the individual partners. Therefore, those assets cannot be attached by the personal creditors of an FLP partner (the doctor). If a person contributes assets to an FLP, those assets are no longer owned by that person (although, as explained below, the person may still control those assets). A creditor may not seize those assets merely because the creditor may have a judgment against a partner of the FLP.


You Can Control Everything but Own Nothing

A family limited partnership is, by definition, a joint venture between family members. The partnership is comprised of both general and limited partners. Typically, spouses are the general partners. The general partners control the partnership and the disposition of the assets within the partnership. The general partners decide and implement all decisions of the partnership, such as whether to buy or sell an asset in the partnership, what investments the partnership should make, and whether to make a distribution of profits from the partnership to the partners. The general partners control the assets in the FLP and make the decisions regarding those assets, just as they did before the FLP, when they owned the assets in their personal names. Although they transferred legal ownership or “title” to those assets to the FLP, they retained control by virtue of their general partnership interests. The limited partners in the FLP are similar to “silent” partners or passive investors, without a voice in the affairs of the FLP.

Limited partners have equity interests in the partnership, but they have no decision making authority over the partnership or the assets owned by the FLP. Limited partners are not entitled to demand distributions from the FLP. Limited partners may not sell or assign their partnership interests without the consent of the general partners, nor force the liquidation of the FLP. The general partners are in complete control of the FLP, although they do not own the assets in the FLP.


Practice Point: Structure the Asset Protection Plan by Segregating High-Risk Assets

Successful physicians typically have varied multiple assets–homes, investments, real estate, business interests, equity in their practices, intellectual property from patents to books, bank accounts, brokerage accounts, and a great many collections and toys.

A solid asset protection plan would begin with an inventory of the assets. Each asset should be examined individually and evaluated for the likelihood of being attacked, based on the chances that the asset would generate a liability. Thus, a rental property should be owned by its own parent entity (an FLP or an LLC) so as to limit the creditor threat (i.e., from a tenant) to that entity alone. Each rental property should be owned by a separate FLP. The reason for treating each real estate asset individually and placing each one in its own FLP is to minimize the litigation exposure of each asset.

physician asset protection

In general, high-risk assets or those prone to litigation, such as rental property, should be kept separate from low-risk assets, like bank and brokerage accounts. One's home should be owned by a separate FLP. One’s medical practice should be registered as a professional corporation. The stock of the professional corporation should be owned by another FLP. A physician’s assets may thus be protected from each other and from any future personal attack against the physician.

Plaintiffs’ lawyers are frequently deterred from taking a case against a doctor when they learn that the target doctor has no attachable assets. They are usually better off taking the insurance company’s offer, rather than litigating with a slim chance of collecting. There is little sense in litigating when even if they get a judgment from the court, the judgment is uncollectible.

If a patient refuses to settle, pursues the lawsuit and wins a judgment, the patient is limited to a “charging order.” A charging order is a type of lien that entitles the judgment creditor to receive the judgment debtor’s share of any distribution of funds made by the FLP. The judgment creditor is not entitled to take the assets owned by the FLP. Distributions are made in the sole and absolute discretion of the general partners. The general partners may determine not to distribute. There is IRS precedent which obligates the judgment creditor with the charging order to pay tax on the distribution that it may never receive. This is yet another incentive for the plaintiff to settle.


Fraudulent Conveyances: Set Up Your Asset Protection Plan Long Before Claims Arise

It should be noted that the establishment of an asset protection plan solely to protect assets from pre-existing creditors may be construed as an improper attempt to hinder such creditors. Pre-existing creditors include a patient who has already filed a lawsuit, as well as a patient who has been injured but hasn’t yet filed a lawsuit. Such a creditor may challenge an FLP plan as having been established fraudulently, for the specific purpose of evading debts due to that creditor.

Thus, doctors should establish their asset protection plan long before any claims arise. It is never too early to anticipate the threat from a future patient and protect against that threat ahead of time.

Moreover, it is important to implement an FLP plan as part of a complete estate and tax planning. Readers of The White Coat Investor already know about integrated planning: tax planning, insurance planning, retirement planning, estate planning and asset protection planning. If the FLP plan is included as part of a comprehensive tax, estate, and financial plan, creditors will have far less likelihood of successfully arguing that the FLPs were established solely to avoid creditors. Indeed, there are excellent tax, estate planning and family succession benefits to FLPs.


Additional Benefits of Family Limited Partnerships: Succession Planning and Minimization of Estate Taxes

FLPs save estate taxes and accomplish succession planning by the combination of (a) discounting the value of limited partnership interests, and (b) gifting the discounted limited partnership interests to family members. The two principals work together. First, the value of a limited interest in the FLP is discounted, due to certain FLP realities recognized by the IRS. Once discounted, more limited partnership interests can be gifted tax-free to the next generation, which results in more assets passing out of the doctor's taxable estate. The doctor’s general partnership interest is retained and not given away, which is how the doctor continues to administer and control the FLP and its assets, even while the doctor may have gifted all of his or her limited partnership interests.

The principal of discounting recognizes two inherent reductions in the value of a limited interest in a family limited partnership. One reduction in value is due to the fact that a limited interest in an FLP is a non-controlling interest in a family enterprise. A purchaser of such a limited interest would be an outsider, would have no right to control the FLP, nor expect any distributions from the FLP (unless the general partner decided to make a distribution or unless all general partners died and the FLP liquidated).

A second discount in FLP value is due to the fact that, unlike publicly traded stocks or other securities, there is no ready market for the purchase and sale of limited interests in a family limited partnership, and therefore no liquidity. The IRS routinely accepts discounts in values of limited interests in FLPs varying from 30% to as high as 50%, depending, among other things, on the liquidity of the FLP's assets, the likelihood of a distribution or liquidation and the profitability of the FLP.

It is important to understand that the discount applies to the value of the limited partnership interest; the value of the asset held in the FLP remains the same. After discounted gifting of their limited partnership interests, while keeping each of their 1% general partnership interests, a couple can remove 98% of the value of their estate. In addition, future appreciation of the value of the limited partnership interests given to the children will be excluded from their taxable estate.

Discounted, or leveraged, gifting of FLP interests is in addition to annual gifting of FLP interests valued up to $15,000 to any person (usually children), tax-free.

Doctors may thus achieve minimization of estate taxes and preservation of family wealth for one’s heirs, while at the same time controlling those assets, efficiently and completely via FLPs. FLPs also allow for income tax minimization through the concept of “income spreading.” If children are limited partners, distributions from the FLP to limited partners may be taxed at the children’s lower tax rates.


Family Limited Partnerships can be tremendously useful to doctors to achieve wealth preservation goals. Foremost, doctors may protect assets from future litigants and creditors and discourage a variety of potentially severe lawsuits. In addition, FLPs may eliminate estate taxes and preserve wealth for children or other beneficiaries rather than paying estate taxes to the IRS. However, timing is important. If FLPs are funded as a response to a pre-existing threat, their effectiveness may be compromised. The best planning is prophylactic and preemptive.


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!


[Editor's Note: Well, that was an excellent description of the positives of a Family Limited Partnership. Now you're probably wondering why you and everyone else you know doesn't have one, or better yet, three. There's nothing in this article that is untrue, but there are four facts that should be mentioned any time that an advanced asset protection/estate planning technique/product like an FLP is discussed:

  1. A physician is very unlikely to ever have a judgement above policy limits
  2. Many of your assets are already protected from creditors
  3. Under current law, a physician is very unlikely to die with an estate large enough to owe federal estate tax and most states either have no estate tax or an exemption higher than the net worth of most physicians
  4. FLPs are not free. They require time and money (think $5K-$10K) to set up and maintain. How do you think asset protection attorneys get paid? An FLP is a business. A partnership. Filed a partnership return lately? I have; it wasn't so fun. Also, just like a trust assets have to be transferred in and out. Don't underestimate the hassle factor here. There's a reason the attorney hands you a two inch binder in exchange for your $10K. 

Once you know those four facts, it's time to consider how much time, money, and hassle do you want to spend on something you probably aren't going to need? Does it make sense for some docs? Sure. In fact, it may even make sense for me at some point given the success of WCI. But all docs? Not even close. This is also an excellent time to get a second (and even a third) opinion before implementing this strategy.]

What do you think? Do you have an FLP? Why or why not? Do you think you'll get one later? Comment below!

[Editor's Note: Asher Rubinstein is a partner at the law firm of Gallet, Dreyer & Berkey in New York City and provides legal representation to clients on issues including the preservation and protection of assets and private wealth. We have no financial relationship.]