By Dr. James M. Dahle, WCI Founder
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.
What Is Asset Protection?
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 going on. 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.
Asset Protection Basics for Doctors
Today we're going to 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 on the services of an asset protection attorney doing a deep dive.
You Probably Won't Lose Money to a Patient
Doctors have three big fears when it comes to malpractice lawsuits.
- They'll have to spend all the time, lost earnings, and lost sleep that they have seen in their colleagues. It's even worse when the attorneys tell them not to talk to anyone about the case (just in case someone asks in a deposition or court if they've talked to anyone about it) because it introduces isolation, burnout, depression, and even suicide.
- They worry that people will think they're a bad doctor, even though the main risk factor for a malpractice suit is simply exposure—the more patients you see, the more likely you are to be sued.
- They fear that they will have a multi-million dollar judgment and lose everything they've worked so hard for.
I even have a former partner who stopped his career early in part because he was risking more than he would ever make practicing medicine. But the truth is that above policy limit judgments that are not reduced on appeal are exceedingly rare.
I calculate out my own risk, now practicing part-time in a relatively doctor-friendly state, at less than 1/20,000 per year. Yours may be higher or even lower than that, but it's far lower than the risk of being disabled, dying early, or being in a car wreck. Combined.
That doesn't mean you shouldn't do what you can to reduce the risk. It's not zero. But it's also not something you should lose much sleep over. While I won't say asset protection attorneys “prey on the anxious”, you and I know that anxiety may be one of the most expensive medical conditions there is!
No Asset Protection Plan Is 100% Protective
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.
There Is No Step-by-Step Instruction to Asset Protection
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.
Benefits of Asset Protection
There are three main benefits of asset protection.
- The first is in the event that things really go downhill and there is a huge judgment against you. The asset protection planning limits what the creditor can collect from you.
- The second is prior to the judgment occurring. Good asset protection planning can make it less likely for you to have a large judgment against you in the first place.
- Finally, there is a psychological benefit. You get to feel protected. You get to feel like you did what you could to minimize this. Perhaps this decreases your anxiety a bit.
How much benefit there is from each of these three categories is hard to measure and likely varies by the individual. When pressed about providing a favorable cost:value ratio given the rarity of lawsuits and judgments, a lot of asset protection will also cite better investing, tax strategizing, and estate planning and using that to justify their costs, which further obscures the financial wisdom of engaging their firm.
Asset Protection Law Varies Highly by State
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. These variations include all of the following:
- Homestead exemption
- IRA exemption
- Non-qualified retirement plan exemption
- Life insurance cash value exemption
- Annuity cash value exemption
- 529 Plan/Educational Savings Account (ESA) exemption
- HSA exemption
- LLC charging orders
- Burden of proof for malpractice
- Damage limits on pain and suffering
Know your asset protection state laws and act accordingly.
Jurisdiction Matters
Jurisdiction refers to which court system a plaintiff has to try to prove his case. The ideal jurisdiction is something like the Cook Islands, where they feel no need to reciprocate with any US state or federal court and they have a short statute of limitations. Naturally, the further away (geographically and politically) the jurisdiction where your entity (corporation, LLC, partnership, trust, etc.) is set up, the more it is going to cost and the less access you're going to have. There is a reason so many companies seem to be formed in Delaware, Nevada, and Wyoming though.
Beware the Supercreditors
There are creditors and then there are creditors. While your Cook Islands trust may be great for keeping Joe down the street from getting your assets, when the IRS or the SEC comes to call you might not want to tell them to pound sand. They might just have you sit in jail until you repatriate those assets to the US.
Asset Protection Strategies for Doctors
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.
Insurance Is Your First Line of Defense in Asset Protection
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.
Insurance not only pays for any judgments or settlements, at least up to policy limits, but it also pays for a robust defense, which can easily reach six figures by itself in many lawsuits. This includes both professional (malpractice) liability insurance as well as personal (auto, homeowners, renters, umbrella) liability insurance.
Good luck getting an attorney to give any sort of guidelines for how much of each you should carry, but widely used rules of thumb suggest that most doctors carry the same amount of malpractice insurance as other doctors in their specialty and geographic area and $1-5 Million in personal liability (umbrella) coverage. Remember that a personal umbrella policy does not provide any professional liability protection whatsoever. In fact, there are often lots of exclusions in an umbrella policy. Read it carefully to know exactly what it does not cover.
Avoid Fraudulent Transfers
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.
Establish a Business to Protect Your Assets
Many asset protection techniques, such as forming a business entity such as 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.
Don't Mix Business and Pleasure
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.
Titling Your Assets Matters
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 (see #2 above), I see little reason not to use tenants by the entirety titling if it is available to you.
Nothing is bombproof, but if you combine a nice homestead exemption with tenants by the entirety titling and maybe even equity stripping (see below), perhaps you'll get to keep some of your house in a crazy huge judgment scenario.
ERISA Plans Are Great; IRAs Not as Great
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, I know that's unfair), and the fancy California non-qualified retirement plans are governed by state law.
So while pretty much all states offer at least some protection to non-ERISA plans, in some states it is significantly less protection than for ERISA plans. Nevertheless, from an asset protection standpoint, one of the best things you can do is max out your retirement plans, especially ERISA plans, and sometimes do Roth conversions (as in effect a conversion moves money into a retirement plan, at least on an after-tax basis). In some states, an IRA rollover may actually decrease your asset protection.
Whole Life Insurance and Annuities May Increase Asset Protection
In many states, cash value life insurance and annuities receive at least some protection. They are 100% protected in some states. So while it's hard to recommend whole life insurance as good insurance or a good investment, in some states it can be a great asset protection move. If you care more about asset protection than your return AND your state offers significant protection to life insurance AND you're insurable, then you may want to consider a policy. In general, annuities offer less protection than life insurance.
Giving Away Money Still Works as an Asset Protection Strategy
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 actually dramatically higher than the risk of losing assets in an above policy limits judgment.
You can give away up to $15,000 per year to anyone you want without filing tax paperwork. Above and beyond that, you will need to fill out gift tax forms. That doesn't mean you'll actually owe any taxes, but it will reduce your federal estate tax exemption by the amount of the gift less $15,000.
Not a big deal for most of us who will never have an estate anywhere near the current exemption of $11.4M ($22.8M married). If you don't actually want your heir to get anything yet, then consider an irrevocable trust. Funding it is just like giving the money away for estate tax purposes, but you can put in provisions that delay and/or put conditions on when the heirs receive it. Remember that a revocable trust has little if any asset protection benefit because it can be revoked at any time and paid to your creditors. The purpose of a revocable trust is simply to avoid probate when you die.
Asset Protection/Spendthrift Trusts Are Effective, but Cost a Lot
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. They are available in 15 states in some form or other:
- Alaska
- Delaware
- Hawaii
- Mississippi
- Missouri
- Nevada
- New Hampshire
- Ohio
- Rhode Island
- South Dakota
- Tennessee
- Utah
- Virginia
- West Virginia, and
- Wyoming.
In addition to these “Domestic Asset Protection Trusts”, there are also Overseas Trusts such as those in the Cook Islands. It costs thousands to set up a Domestic Asset Protection Trust and tens of thousands to set up an Overseas Trust. That doesn't include the annual maintenance costs or the costs to revise it when your life or laws change.
There is also a hybrid trust available, sometimes called a “Bridge Trust” or a “Portable Offshore Trust“, where it basically starts with the lower costs and increased convenience of a domestic trust but in the event of a judgment can be converted into the more expensive, less convenient, but much harder to pierce foreign trust.
It's hard to recommend a trust for the typical doc. Not only are their risks not that high, but most of their assets are often protected simply by the exemptions in their state. Plus, even if they have a taxable account, it's probably at most only a six-figure or low seven-figure amount, where the costs of an asset protection trust are not insignificant. Perhaps if their anxiety is particularly high they would still be interested. But for a particularly successful doc who still practices in a high-risk specialty, has some businesses or risky investments on the side, and millions of dollars in unprotected assets, it isn't that hard to make a case for one of these.
Unfortunately, case law is not going well for the Domestic trusts. They're apparently not quite as strong as many clients may have been led to believe.
LLCs May Offer Cheap Asset Protection
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.
Also, be careful how much you put into a given LLC. If your rental property causes a large judgment, you could lose any other properties that were placed into the same LLC. A “serial LLC” may decrease this risk while keeping costs low. When it comes to external liability, your creditors are generally limited to a “charging order”. In many states, a charging order only allows a creditor to collect your assets when they are distributed from the LLC. Of course, there is no rule that you must distribute any assets from an LLC if you don't want to. But you are required to pay taxes on the income from the LLC. So theoretically, you could force a creditor to pay taxes on income they never actually receive! The idea here is to force them to settle for pennies on the dollar so they don't get an unwanted tax bill. Bear in mind that an LLC with a single member, or even two members if they are married, may not have the same protection as a multi-member LLC.
Family Limited Partnerships May Be Better Than an LLC for Asset Protection
Many asset protection attorneys like a Family Limited Partnership (FLP) better than an LLC, but whether that is due to their higher cost to set-up and maintain or a real asset protection benefit is a little hard to tell.
The real purpose behind an FLP is estate planning and business management, but it has pretty significant asset protection benefits as well. As an LLC, it is a separate entity from its owners, providing internal and external liability protection. An FLP also allows for “discounts” for the limited partners, which can really help lower estate taxes, however, the FLP may provide less asset protection than an LLC since only the limited partners have limited liability to internal liabilities. The general partners, usually the ones who need the asset protection, don't get any at all.
However, there are a few benefits to an FLP over an LLC when it comes to asset protection. The FLP requires unanimous consent for dissolution, whereas an LLC only requires majority consent. There is no right to a distribution in an FLP either, even if a majority of members want one. And an FLP can distribute income, gain, loss, etc. in any manner it wishes.
So maybe the asset protection attorneys are right and all those benefits outweigh the decreased internal liability. Some attorneys think combining an FLP with an asset protection trust as the limited partner is the ultimate in asset protection.
Equity Stripping Can Help Protect More Assets
The idea behind equity stripping is to “strip” the equity from a non-exempt asset (such as your home in a state with a lousy homestead exemption) and place it into an exempt asset such as a retirement account or whole life insurance policy. You do this by borrowing against the non-exempt asset. Obviously, this costs interest so you'll have to weigh that against the additional asset protection.
Asset protection techniques can be tricky, can be expensive, and may not work all that well. Be sure to do the basics well—buy insurance, title property correctly, max out retirement accounts, and know your state laws. Then you may have some difficult decisions to make before engaging in “advanced” asset protection techniques.
Don't Expect Much Asset Protection from 529s and HSAs
For quite a while, nobody was quite sure what kind of protection 529s and HSAs would get. The argument an asset protection attorney would use to try to protect your 529 was that the money was designated for someone else to use. The problem is that it is technically still your money as the owner of the 529. If you want, you can pull the money out, pay any taxes and penalties due, and buy a sailboat…or pay a creditor. There are some states that do provide some protection for 529s (for residents and non-residents) and HSAs (for residents). It's worth taking a look at my article, Delaware Bank Accounts, 529s and HSAs for Asset Protection to learn more. Case law seems to be going against 529s really getting much protection, but admittedly there aren't very many cases. Same issue with HSAs, so don't expect to keep those in bankruptcy either.
[Editor's Note: 2021 Update: 529s and Coverdell Educational Savings Accounts (ESAs) where the beneficiary is your child or grandchild now receive significant asset protection under Federal law. Up to $5,000 per beneficiary of contributions made at least one year ago are protected and 100% of contributions made at least 720 days ago are protected from creditors in bankruptcy.]
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 asset protection strategies do you follow? Comment below!
Jim, I was sued for malpractice in 1990, and the case dragged on for six years. It is hard to explain how stressful this case was (totally without merit, but a bad outcome for the patient)-with years and years of legal consultations, mediations, etc. What ultimately saved my sanity was knowing I had set up excellent protection of our assets (albeit easier in Florida than many states). At the end of six years of preparation, I had no worry of losing our savings, and then the insurance company settled anyway. I’d have to say that was the end of enjoying the practice of medicine for me however-and led to my career change a few years later. It is an incredibly life changing experience that should definitely be carefully prepared for in advance.
Lots of people pay for expensive asset protection techniques and never actually need them as your case demonstrates. Whether that’s worth it to you as a psychological comfort or not I suppose is the decision of each doc.
Of course he actually needed it! #5 Insurance is your first line of defense! That insurance (cheap or expensive) saved him! Maybe not psychologically, but it sure helped financially.
Also, politics may suck, but Texas and Florida are good places for asset protection. Just sayin 😉 My HSA and 529’s are fully funded here in Texas.
I wasn’t referring to malpractice insurance. I was referring to the more expensive, complex techniques of asset protection. The trusts and FLPs etc.
I hope you’ve got your mortgage paid off too. That’s protected in Texas. So are 120 chickens, so get yourself some of those.
Texas does offer HSA protection, but their 529 protection is less clear. Might want to discuss that with a Texas asset protection lawyer if you care.
Ha…yes, House is fully paid…no mortgage. As for the 120 chickens, my HOA won’t let me have them. Bees and cattle however offer a great “Ag exemption” on property taxes. Unfortunately I would need at least 5 acres to have bees. My property is just under an acre so alas, no Ag exemption on my taxes :(.
The link under #15 that says “it’s worth taking a look at this” does not work.
+1
My asset protection plan now is to work only with crown or rather Federal tort claim act immunity. Especially since I am working for personal satisfaction rather than necessity, I really should not take even the smallest chance of jeopardizing my husband’s and my retirement savings. Hopefully if I am ever in a malpractice claim, not having my money on the line well make the process slightly less miserable.
I recently heard that defending a case brought on via complaint to the medical board (administrative case, vs civil/criminal), where it’s your license and reputation on the line and not a financial judgment, is not covered by malpractice insurance. Meaning most attorney fees come out of your pocket (plus time off work, etc). No way to insure for this? Could still easily be 6 figures of costs!
That’s right.
No I don’t know any way to insure against it.
Given the expert witness experience I had in one of these cases last year, where both attorneys (who were both specialized to medical cases, one for the state board and the other likely generic malpractice attorney) did SO poorly trying to make their cases because they didn’t know how to properly ask medical questions, AND given how it’s become so clear that physicians seem more competent and figuring out financial stuff than trained FAs and CPAs, my temptation would be to defend myself. Yes I’d have a fool for a client, but I’d rather that than a fool of an attorney.
Maybe we should start a consortium where physicians can defend each other in court (at least for admin cases), get some basic training in legal proceedings, and likely do a better job than the attorneys, plus we can hopefully retain our savings. I would totally do this for someone if I could.
Thanks for the excellent information. Out of curiosity, how much of the need for extensive protection is mitigated when practicing in a state with non-economic caps (for instance, Colorado) assuming you have a $1M /3M insurance policy? While this won’t cover you for non-medical malpractice lawsuits, I’m curious how aggressive an approach you might advocate in your own life? Of course, the answer is always dealers choice, but trying to get a sense of what others would do. I’d say umbrella for sure but after that I don’t have a great sense of what else I really would want/need from an asset protection strategy (ie is a personal trust or LLC overkill).
Thanks again!
There’s still economic damage if you run over someone who earns $5M a year driving a Ferrari.
The truth is there is no right answer to your main question.
State law certainly does have a major impact on asset protection strategies. In Washington state, for instance, IRAs receive the same protection from creditors as ERISA plans do.
Can you provide a link to supplement below, ie, state particulars on non-ERISA protection?
Thanks
Brad
“So while pretty much all states offer at least some protection to non-ERISA plans, in some states it is significantly less protection than for ERISA plans.”
Let me google that for you.:)
Here’s one source: https://www.actec.org/assets/1/6/Survey_of_Asset_Protection_Techniques.pdf
Here’s another: http://www.assetprotectionbook.com/forum/viewtopic.php?f=142&t=1566
For example, here’s Alabama’s law:
Exemption for Tax-Qualified Retirement Plans, IRAs & Roth IRAs (Note 2): 100% for assets held in “qualified trust” as defined in IRC § 401(a). No Roth IRA protection. — Ala. Code § 19-3-1.
As someone currently on claim for private disability benefits many states provide state exemptions for disability benefits(before and after payment.)
It’s highly recommended to open a new bank account and investment brokerage accounts that solely hold disability benefits. You don’t want to commingle non asset protected money.
In that situation you can possibly get a large amount of your taxable assets protected over time such as directing all disability payments to the new account and pay down your expenses from your pre-disability account.
It’s also recommended to open new IRA and HSA accounts and fund those from income sourced and traceable to disability benefits.
I’d have no idea if solo 401k money would be protected if sourced from DI income if you’re still working in another occupation on a true own occupation claim. It’d probably be a court case as while money is fungible you’d only be able to make contributions because of the job income.
For active solo 401ks it’s probably better to see if you can hire an employee, say a personal assistant, let them participate in the 401k or intact a ERISA small business 401k, then rollover your solo 401k into it. Administration fees have significantly gone down for that. They’re now highly negotiable based on incoming asset sized and I’ve heard of fees as low as $120 annual + $5/person. Cheap “asset protection insurance premiums.” Even if you’re a solo practice you could probably get a huge ROI off hourly administrative assistance and a employer contribution to ERISA qualify your plan. I’m not a lawyer and it’s worth a $400 consult with a ERISA benefits employer-side lawyer to go over options that make sense for your situation.
Of course if you’re w2 with someone you can occasionally roll over solo 401k money into their plan if the investment options are good. Keep in mind you lose access to anything you roll into unless you quit or qualify for a hardship exception. Keep in mind if your employer goes bankrupt it could take six+ months to access your funds
Also note: Rollover IRAs from an ERISA plan is protected under ERISA as long as the account stays a rollover IRA with no additional contributions. The article should mention that.
Another interesting idea is you can possibly take more risk with the asset protected accounts like in my case. For example, if my portfolio is 50/50 stocks and bonds, my state protected disability account is 25% of my portfolio, then I could do 100% stocks there, and the non protected assets 33.33% stocks, 66.66% bonds(math: 100 * .25 + .75 * 33.33 = 50%), so overall portfolio allocation remains the same but the protected assets grow faster and quicker over a longer period of time, while the safer bonds are available for emergency withdrawals, etc., which will draw down non protected assets more. Same idea as tax weighting retirement accounts but from an asset protection viewpoint. Plus you want more access to bonds in taxable to pay lawyer fees/etc if you’re ever involved in a case. Another strong point for the bonds in taxable argument!
I also wonder if you buy a house (mortgage down payment) or in 100% cash sourced & traceable purely from DI income/Investments generated by DI Income if it’d be exempt too. It may be another interesting asset protection strategy for those of us on claim.
I wouldn’t count on that.
You can’t use DI money to contribute to a solo 401(k). Only earned income.
I suspect that even if money is protected after payment that once you buy something with it (including stocks etc) that it is no longer protected, but consult with an attorney in your state.
Does the money have to directly come out of the earned income? I’ve never contributed to a solo 401k so I don’t know the details.
In California, other states may vary, disability income is protected before AND after its received, as long as its not commingled and you can trace the money back to its source. You’d have to open up new accounts, save every statement, only deposit disability money: http://www.westcoastbk.com/blog/2012/12/how-can-private-disability-insurance-payment-be-garnished/
Let’s say you’re on claim but able to work $25,550 a year of earned income sole proprietorship (schedule C), say in consulting, and are being paid 100% DI benefits, say on a residual disability rider. That earned income qualifies you to make a solo 401k employee contribution + roth ira contribution.
Since money is fungible, what happens if you write that solo 401k contribution and roth ira contribution check from the cash of your DI money account that only contains DI money? Would the 401k and Roth IRA be more protected under the disability exemption? Or do they lose protection as both require earned income and therefore any contributions are from earned income?
As a sole proprietorship there is no other entity besides you. I don’t know how passthrough income works with a LLC/s-corp if the solo 401k contribution has to be on the books of the LLC/s-corp or the members pro-rata share. Obviously ERISA/c-corp 401k contributions must come out of payroll and on the company books, but is protected anyways.
Granted… an “employer” contribution is even more of a grey area even being a sole proprietorship.
For the Roth IRA explicitly any taxable group insurance disability benefits reported on w2 box 1 as third party sick pay does count as earned income too! So if you get $6k a year of that then the Roth contribution should be 100% protected under this exemption.
Presumably any investments purchased from 100% disability income should be protected to, including stocks and bonds. Obviously a house is more of a stretch but a doctor possibly getting max issue and participation limits of say $15k/$30k on DI would have no problem paying for a house in cash from DI sourced income.
Granted one should never be in a bankruptcy case in the first place but it’s an interesting thought exercise. Of course be sure to run it by an attorney, state laws may differ, government debt isn’t subject to state exemptions and disability income has no federal exemptions, so don’t piss off the IRS or possibly interstate commerce that could get you moved to federal bankruptcy court.
Oh and of course, starting with a $0ed brand new solo 401k account, closing the old one and rolling it over.
How much asset protection do you really need if you’re out on disability?
At any rate, you can only contribute earned income to any retirement account–IRA, 401(k), solo 401(k), DBP etc.
Realistically probably not much to worry about asset protection, especially if you have an IDI plan. However, a huge number of disabled folk DO go through bankruptcy, especially if they’re on an inferior group plan and say benefits stop at the 2 year “any occupation” period. Being disabled = huge risk of medical bankruptcy. Medical bankruptcies are the largest case of bankruptcies in America.
In my particular case my medications cost $15k/mo. Granted, I have health insurance, but I did have to go to an external board review to get the medications approved. What happens if they deny in the future? In my case it’s comforting to apply as much asset protection strategies as I can and be judgement proof in the future if they deny my medications again. It’s prudent that I take every precaution I legally can to protect myself and my assets. I just wanted to share here as it’s an unique area that isn’t covered in finance blogs. It was because of you that I bought my IDI policy and I’m sure as hell glad I did.
You CAN contribute to a roth/traditional IRA with disability reported on a w2 box-1 sick pay:
https://proconnect.intuit.com/community/proseries-discussions/discussion/can-sick-pay-shown-on-a-w-2-in-box-1-be-used-as-earned-income-to/00/26960
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income
From the IRS:
Taxable earned income includes:
Disability retirement benefits received prior to minimum retirement age;
As we know, group insurance where premiums are paid by the employer, or premiums paid by the employee through a cafeteria plan makes it taxable income. Private plans that are assigned ownership to a business entity/self employment and a deduction is taken is taxable. For cases that are a mix of pre-tax/post tax then the benefits that are taxable are the ratio of the two – ie if you take a 10% deduction then 10% of the benefits are taxable. One thing I learned that it’s helpful to have a tiny bit of taxable disability income so you can still contribute to a IRA. Being disabled = complete loss of future tax advantage contributions unless you can still partially work and collect residual benefits/etc as your policy allows for.
I’d be happy to write a guest blog post on a lot of finance topics I’ve learned about being on claim and my experience with the claims process too. Just let me know.
Interesting. Of course, the benefits of IDI are not taxable. I wonder if they count.
I do think a guest post would be great on this subject: https://www.whitecoatinvestor.com/contact/guest-post-policy/
Thanks for the link to your guest post policy! I’ll check it out!
Yeah IDI generally isn’t taxable, in my personal case I have both an IDI and a group policy, so my IDI payment is 100% tax free. Group policy is 40% taxable as my employer was smart to let employees decide to take a deduction or not on their “buy-up” plan. I personally didn’t learn that you could still make Roth IRA contributions until I was on claim.
If you want IDI to be taxable for IRA contributions you’d have to either have SE income, or assign ownership to your business entity, so either way, it can only be taxable income under those circumstances of entrepreneurship. If you’re on claim then the DI company won’t allow policy ownership reassignments until you’re off claim.
A possible strategy to get more monthly benefits on an IDI policy for those self employed is to apply for a 100% taxable plan at the beginning and make it non-cancellable, and take a deduction for the first year’s premium. The IDI company will generally give you higher monthly benefits due to the taxation (along with a higher premium). You can google undewriting guidelines to see how much higher. Then next year it’s possible that you decide to not take a deduction anymore or assign to individual ownership. I’d do a year as DI applications potentially ask broad questions like if you intend on changing employers within a year/etc. Of course I’d 100% run this by a disability lawyer to be sure everything is above board/no fraud is being committed by changing the tax status of the policy.
Then I’ve heard of CPAs/etc suggesting a strategy of waiting to to say December 31st to make a company decision on whether or not to take the deduction for premiums paid for that tax year. That way you can “have your cake and eat it too” on tax free benefits/deductions. I’d be careful though as I heard a few stories of the IRS doing multi year audits on this strategy then applying tax as the total of premiums paid pre tax to total premiums paid post tax for the life of the policy, instead of the current year if they were deducted or not. I think that’s a grey area and you may not want to go to tax court having reduced income on claim.
Generally the IRS goes off Box 1 W2 “third party sick pay” for Roth IRA contributions. If your IDI policy is taxable or a percentage of taxable I have no idea if they will report it the same as group does. They may report it on a 1099. I’ve heard some stories online (can’t confirm) that IDI may not report to the IRS even if it’s taxable, so if that’s the case and you do report it correctly, it can trigger an audit with a IRA contribution as their computer systems aren’t smart enough and flag it. It may not be worth the audit risks for $6k/year tax-advantage contributions when you’re likely in a 0% or very low tax bracket while on claim where a taxable account = a roth up to the first 50k of 0% long term capital gains tax rate. You have plenty of opportunities to tax gain harvest while on claim each year. It’s probably best to get it in writing from the DI company how they report taxable portion of income for your policy.
Just SE income isn’t enough. I looked into and basically a partner can’t pay for IDI with pre-tax dollars.
Please discuss #16 some more. I completely trust my kids (proven to handle lots of assets unselfishly) and wish to give them the home or the equity if we sell it first. What’s the best way to accomplish this to maximize what I leave for my children from a financial pov?
What’s to discuss? The best way to leave things to your kids is in a way that they get the step-up in basis to minimize any future taxes due. But if you get sued and lose the asset before then, I guess the best way is to give it to them earlier. You’re weighing one concern against another. I also have on idea if you have an estate tax problem.
Asset protection and bankruptcy do not go well together. It is one thing to take advantage of all legal exemptions prior to filing bankruptcy. It is another to go too far in trying to shield assets from creditors and commit fraudulent transfers. Trusts that might help protect you from run of the mill creditors are likely to be attacked by a Trustee in a Chapter 7 bankruptcy. You don’t want a Trustee to sue the loved ones that you transferred assets to. You don’t want to be sued to have your discharge denied. Before filing any bankruptcy proceeding, be sure to get advice from an experienced, certified specialist in bankruptcy law. I have helped many doctors, dentists, chiropractors and others to discharge millions of dollars in debts.
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Asset protection for my residence.
Is that a question? If so, you probably need to at least indicate the state the residence is in.
I have been struggling to make a decision around this issue, asset protection. I have enjoyed an unfathomably successful career as a physician and entrepreneur. We have a very high net worth. We carry 10MM in personal umbrella liability and 10MM in commercial umbrella liability on our real estate assets. And the 3 companies I started are 2 corporations and an LLC.
In our state, all retirement accounts are fully protected, but most of our real estate assets have not been placed into LLCs. Previously I was pretty comfortable with just the umbrella liability coverage, but now I am wondering if the complexity of placing all of our real estate assets into LLCs and then creating a Wyoming umbrella LLC is worth the added complexity. We own 15 real estate properties in 3 states in addition to our personal residence. Our largest real estate asset is an 83 unit apartment building near a tertiary medical center. We have nurses and residents and tech professionals as our primary tenant base.
As our wealth has exploded, I wonder if we need better asset protection.
But the risk of a major, uninsured loss is low, and we don’t really need all this wealth. We live on a tiny fraction of our income. If something catastrophic happened and we lost some of our wealth, it likely wouldn’t make much difference in the grand scheme of life.
I’m not sure if it is worth it. Should I pull the trigger on setting up a bunch of LLCs and a Wyoming parent LLC?
I think an LLC for each property is very wise. Whether you need a Wyoming umbrella LLC is a matter of opinion, but feels a lot like belt and suspenders to me. I kind of put that sort of thing into the same category as an overseas trust–expensive overkill.
What sort of liability do you have that the combination of a $10 million liability policy and the protections of an LLC aren’t enough?
All that said, you certainly have enough money to do as much asset protection as you want, but perhaps the best asset protection is selling off all those toxic assets you have, which would be REALLY expensive asset protection.
The umbrella insurance is already asset protection. And then LLCs offer another layer of asset protection.
It is really a question of how much expense and how much complexity are we willing to put up with for the belt, suspenders, and then the second belt.
Our affairs are already complex enough. WCI, you know the story as you run an active business that takes care and feeding, even if you have excellent staff. We have excellent staff, but ultimately, the buck stops with me and my decisions.